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, 2015                                                                                 

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, 2015
Common Stock, par value $0.625	3,342,304

1

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED JUNE 30, 2015

INDEX

PART I - FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE
	Consolidated Balance Sheets at June 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014	5
	Consolidated Statement of Shareholders’ Equity for the Six Months Ended June 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014	7
	Notes to Consolidated Financial Statements	8
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	46
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	70
ITEM 4.	CONTROLS AND PROCEDURES	70
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	71
ITEM 1A.	RISK FACTORS	71
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	71
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	71
ITEM 4.	MINE SAFETY DISCLOSURES	71
ITEM 5.	OTHER INFORMATION	71
ITEM 6.	EXHIBITS	72
SIGNATURES		73
CERTIFICATIONS

2

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS

	(in thousands, except share data)
	(unaudited)
	June 30, 2015			December 31, 2014
Assets
Cash and due from banks	$	11,022		$	11,102
Interest-bearing deposits in banks		9,602			7,143
Total cash and cash equivalents		20,624			18,245
Investment securities
Trading		3,871			4,207
Available-for-sale (amortized cost $329,787 and $373,844)		330,231			375,219
Held-to-maturity (fair value $154 and $156)		146			146
Restricted investment in bank stocks		508			647
Loans held-for-sale		466			380
Loans receivable		578,256			555,282
Allowance for loan losses		(7,655	)		(8,001	)
Net loans		570,601			547,281
Bank-owned life insurance		10,803			10,658
Premises and equipment, net		9,391			9,702
Accrued interest receivable		2,324			2,568
Other real estate owned		198			3,025
Net deferred tax assets		3,192			2,925
Other assets		2,890			2,132
Total assets	$	955,245		$	977,135
Liabilities
Deposits
Demand, non-interest bearing	$	97,060		$	86,920
Interest-bearing demand		212,919			251,986
Money market		64,974			58,199
Savings		216,984			211,240
Time		142,055			148,827
Time of $100 or more		92,089			94,420
Total deposits		826,081			851,592
Short-term borrowings		32,896			35,189
Accrued interest payable		337			344
Other liabilities		7,394			3,656
Total liabilities		866,708			890,781
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,506,873 shares and 3,481,227 shares issued; 3,342,304 and 3,316,658 shares outstanding		2,192			2,176
Surplus		15,461			14,819
Retained earnings		73,067			70,928
Accumulated other comprehensive income, net of tax		293			907
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Total shareholders' equity		88,537			86,354
Total liabilities and shareholders' equity	$	955,245		$	977,135

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

3

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF INCOME

	(in thousands, except per share data - unaudited)
	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Interest income
Interest and fees on loans	$	5,965		$	5,665	$	11,846		$	11,177
Interest and dividends on investment securities (AFS & HTM):
Taxable		1,256			1,285		2,598			2,659
Tax-exempt		469			569		955			1,171
Interest on trading securities		40			44		81			67
Interest on interest-bearing balances and other interest income		16			25		73			41
Total interest income		7,746			7,588		15,553			15,115
Interest expense
Interest on deposits
Interest-bearing demand		154			148		320			308
Money market		38			28		74			55
Savings		200			193		396			382
Time		389			404		785			810
Time of $100 or more		295			277		590			540
Interest on short-term borrowings		28			31		59			60
Interest on long-term debt		-			10		-			70
Total interest expense		1,104			1,091		2,224			2,225
Net interest income		6,642			6,497		13,329			12,890
Provision for loan losses		60			-		60			-
Net interest income after provision for loan losses		6,582			6,497		13,269			12,890
Non-interest income
Net gain on sale of investment securities		214			285		717			907
Net (loss) gain on trading activites		(34	)		93		(19	)		115
Fees for services to customers		404			410		806			809
ATM and debit card		394			387		756			735
Retail brokerage and advisory income		204			149		377			315
Bank-owned life insurance		72			73		142			145
Merchant Income		81			84		151			156
Net gain on sale of loans		119			54		182			61
Other		145			90		164			194
Total non-interest income		1,599			1,625		3,276			3,437
Non-interest expense
Salaries and employee benefits		3,053			2,836		6,049			5,631
Net occupancy		455			424		909			870
Furniture and equipment		432			438		861			846
Marketing		212			222		422			440
Third party services		445			411		846			812
Telephone, postage and supplies		175			174		369			357
State taxes		173			153		347			304
FDIC insurance premiums		150			160		317			337
Other		569			496		1,071			929
Total non-interest expense		5,664			5,314		11,191			10,526
Income before income taxes		2,517			2,808		5,354			5,801
Provision for income taxes		583			636		1,284			1,333
Net income	$	1,934		$	2,172	$	4,070		$	4,468
Earnings per share - basic	$	0.58		$	0.66	$	1.22		$	1.36
Earnings per share - diltued	$	0.58		$	0.66	$	1.22		$	1.36
Cash dividends per share	$	0.29		$	0.28	$	0.58		$	0.56

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,	2015									2014
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	2,517		$	583		$	1,934		$	2,808		$	636		$	2,172
Other comprehensive income:
Net unrealized holding gains (losses) on securities:
Unrealized holding (losses) gains arising during the period		(2,674	)		(909	)		(1,765	)		3,484			1,185			2,299
Reclassification adjustment for gains included in net income		(214	)		(73	)		(141	)		(285	)		(97	)		(188	)
Other comprehensive (loss) income		(2,888	)		(982	)		(1,906	)		3,199			1,088			2,111
Total comprehensive (loss) income	$	(371	)	$	(399	)	$	28		$	6,007		$	1,724		$	4,283

Six months ended June 30,	2015									2014
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	5,354		$	1,284		$	4,070		$	5,801		$	1,333		$	4,468
Other comprehensive income:
Net unrealized holding gains (losses) on securities:
Unrealized holding (losses) gains arising during the period		(214	)		(73	)		(141	)		6,781			2,306			4,475
Reclassification adjustment for gains included in net income		(717	)		(244	)		(473	)		(907	)		(308	)		(599	)
Other comprehensive (loss) income		(931	)		(317	)		(614	)		5,874			1,998			3,876
Total comprehensive income	$	4,423		$	967		$	3,456		$	11,675		$	3,331		$	8,344

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

5

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Six months ended June 30, 2015 and 2014										Accumulated
	Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Income			Stock			Total
Balance, December 31, 2014		3,316,658	$	2,176	$	14,819	$	70,928		$	907		$	(2,476	)	$	86,354
Net income		-		-		-		4,070			-			-			4,070
Other comprehensive loss, net of tax		-		-		-		-			(614	)		-			(614	)
Cash dividends declared ($0.58 per share)		-		-		-		(1,931	)		-			-			(1,931	)
Stock issued in connection with dividend reinvestment and stock purchase plan		16,123		10		443		-			-			-			453
Stock issued for employee stock purchase plan		1,721		1		42		-			-			-			43
Stock issued for options exercised		7,802		5		91		-			-			-			96
Tax benefit of stock options exercised		-		-		20		-			-			-			20
Stock-based compensation expense		-		-		46		-			-			-			46
Balance, June 30, 2015		3,342,304	$	2,192	$	15,461	$	73,067		$	293		$	(2,476	)	$	88,537

	Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Income (Loss)			Stock			Total
Balance, December 31, 2013		3,271,658	$	2,148	$	13,747	$	65,618		$	(3,412	)	$	(2,476	)	$	75,625
Net income		-		-		-		4,468			-			-			4,468
Other comprehensive income, net of tax		-		-		-		-			3,876			-			3,876
Cash dividends declared ($0.56 per share)		-		-		-		(1,837	)		-			-			(1,837	)
Stock issued in connection with dividend reinvestment and stock purchase plan		15,144		9		367		-			-			-			376
Stock issued for employee stock purchase plan		1,572		1		34		-			-			-			35
Stock issued for options exercised		5,444		3		30		-			-			-			33
Tax benefit of stock options exercised		-		-		12		-			-			-			12
Stock-based compensation expense		-		-		43		-			-			-			43
Balance, June 30, 2014		3,293,818	$	2,161	$	14,233	$	68,249		$	464		$	(2,476	)	$	82,631

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,	2015			2014
Operating Activities
Net income	$	4,070		$	4,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		524			561
Provision for loan losses		60			-
Net gain on investment securities available-for-sale		(717	)		(907	)
Provision for repossessed assets and other real estate owned		89			-
Net loss on sale of repossessed assets and other real estate owned		(70	)		1
Net gain on sale of loans		(182	)		(61	)
Proceeds from sales of residential mortgages held-for-sale		6,487			1,542
Origination of residential mortgages held-for-sale		(6,391	)		(1,720	)
Income on bank-owned life insurance		(142	)		(145	)
Stock-based compensation expense		46			43
Net decrease (increase) in trading securities		336			(4,531	)
Deferred income tax provision		49			(80	)
Net decrease in income taxes payable		(453	)		(10	)
Net decrease in accrued interest receivable		244			130
Amortization of mortgage servicing rights and change in valuation allowance		31			30
Net amortization of premiums and discounts on investment securities		1,101			1,056
Net decrease in accrued interest payable		(7	)		(65	)
Increase in other assets		(304	)		(532	)
Decrease in other liabilities		(1,008	)		(17	)
Net cash provided by (used in) operating activities		3,763			(237	)
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale		51,926			51,788
Proceeds from the sale of investment securities available-for-sale		26,795			18,970
Purchases of investment securities available-for-sale		(30,319	)		(20,640	)
Proceeds from redemption of investment in restricted bank stock		1,318			2,005
Purchase of restricted bank stock		(1,179	)		(2,409	)
Net increase in loans		(23,595	)		(20,308	)
Net purchases of premises and equipment		(214	)		(410	)
Proceeds from sales of repossessed assets and other real estate owned		3,007			10
Net cash provided by investing activities		27,739			29,006
Financing Activities
Net increase in non-interest bearing deposits		10,140			7,291
Net decrease in interest-bearing deposits		(35,651	)		(25,167	)
Net decrease in short-term borrowings		(2,293	)		(1,056	)
Repayments of long-term debt		-			(5,000	)
Tax benefit from exercise of stock options		20			12
Cash dividends paid, net of reinvestment		(1,717	)		(1,658	)
Proceeds from issuance of common stock		378			265
Net cash used in financing activities		(29,123	)		(25,313	)
Increase in cash and cash equivalents		2,379			3,456
Cash and cash equivalents at beginning of year		18,245			16,286
Cash and cash equivalents at end of period	$	20,624		$	19,742
Supplemental Cash Flow Disclosures
Interest paid	$	2,231		$	2,290
Income taxes paid		1,650			1,410
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned		215			20
Unsettled trades to purchase securities		4,729			-

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 2014 Annual Report incorporated in the Form 10-K. Operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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

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

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

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2015, for items that should potentially be recognized or disclosed in these financial statements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was issued to help improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. QNB is evaluating the effect of adopting this new ASU.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The provisions in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. QNB does not anticipate the adoption of this guidance will have a material impact on its financial statements but may result in expanded disclosures.

On January 9, 2015, the FASB issued ASU 2015-01 Extraordinary and Unusual Items (Subtopic 225-20) which eliminates from U.S. GAAP the concept of an extraordinary item. The Board released the new guidance as part of its simplification

8

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

2. RECENT ACCOUNTING PRONOUNCEMENTS (continued)

initiative, which, as explained in the ASU, is intended to “identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.” To be considered an extraordinary item under existing U.S. GAAP, an event or transaction must be unusual in nature and must occur infrequently. Stakeholders often questioned the decision-usefulness of labeling a transaction or event as extraordinary and indicated that it is difficult to ascertain whether an event or transaction satisfies both criteria. In light of this feedback and in a manner consistent with its simplification initiative, the FASB decided to eliminate the concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. For all entities, the ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Entities may apply the guidance prospectively or retrospectively to all prior periods presented in the financial statements. If an entity chooses to apply the guidance prospectively, it must disclose whether amounts included in income from continuing operations after adoption of the ASU are related to events and transactions previously recognized and classified as extraordinary items before the date of adoption. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. QNB is evaluating the effect of adopting this new ASU.

On February 18, 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. The amendments include the following:

● Limited partnerships will be variable interest entities (VIEs), unless the limited partners have either substantive kick-out or participating rights. Although more partnerships will be VIEs, it is less likely that a general partner will consolidate a limited partnership.

● The ASU changes the effect that fees paid to a decision maker or service provider have on the consolidation analysis. Specifically, it is less likely that the fees themselves will be considered a variable interest, that an entity will be a VIE, or that consolidation will result.

● The ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Specifically, the ASU will result in less frequent performance of the related-party tiebreaker test (and mandatory consolidation by one of the related parties) than under current U.S. GAAP.

● For entities other than limited partnerships, the ASU clarifies how to determine whether the equity holders (as a group) have power over the entity (this will most likely result in a change to current practice). The clarification could affect whether the entity is a VIE.

This ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. QNB does not anticipate the adoption of this guidance will have a material impact on its financial statements.

On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). QNB is evaluating the effect of adopting this new ASU.

9

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 $25,000 and $24,000 for the three months ended June 30, 2015 and 2014, respectively. Stock-based compensation expense was $46,000 and $43,000 for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was approximately $108,000 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, 2015, there were 225,058 options granted, 60,244 options forfeited, 164,814 options exercised and no remaining options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

The 2005 Plan authorized 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, 2015, there were 184,200 options granted, 55,225 options forfeited, 43,900 options exercised, and 85,075 options outstanding under this Plan. The 2005 Plan expired March 15, 2015.

The QNB Corp. 2015 Stock Incentive Plan authorizing the issuance of 300,000 shares was approved at the Company’s 2015 Annual Meeting of Shareholders. The terms of the 2015 Plan are identical to the 2005 plan. There were no options granted, forfeited, exercised or outstanding under this Plan as of June 30, 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,	2015			2014
Risk free interest rate		1.06	%		0.69	%
Dividend yield		3.86			4.28
Volatility		26.74			28.12
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 2015 and 2014 was $4.38 and $3.81, respectively.

10

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, 2015 and 2014 is as follows:

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2014		88,375	$	23.27
Granted		21,000		29.25
Exercised		11,650		17.73
Forfeited		12,650		31.87
Outstanding at June 30, 2015		85,075	$	24.22		2.74	$	440
Exercisable at June 30, 2015		30,875	$	20.85		1.12	$	264

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2013		115,800	$	23.51
Granted		20,000		25.16
Exercised		12,950		17.28
Forfeited		15,000		33.25
Outstanding at June 30, 2014		107,850	$	23.21		2.43	$	442
Exercisable at June 30, 2014		46,050	$	23.20		0.97	$	239

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, 2015 and 2014. As of June 30, 2015, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

11

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

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,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	1,934	$	2,172	$	4,070	$	4,468
Denominator for basic earnings per share - weighted average shares outstanding		3,333,018		3,285,052		3,327,384		3,280,532
Effect of dilutive securities - employee stock options		13,515		12,390		12,734		11,560
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,346,533		3,297,442		3,340,118		3,292,092
Earnings per share - basic	$	0.58	$	0.66	$	1.22	$	1.36
Earnings per share - diluted		0.58		0.66		1.22		1.36

There were 21,000 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2015. There were 34,800 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2014. These stock options were not included in the above calculation.

12

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

6. OTHER COMPREHENSIVE INCOME

The following shows the components of accumulated other comprehensive income at June 30, 2015 and December 31, 2014:

	June 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	820		$	1,975
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(376	)		(600	)
Accumulated other comprehensive income		444			1,375
Tax effect		(151	)		(468	)
Accumulated other comprehensive income, net of tax	$	293		$	907

The following tables present amounts reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2015 and 2014:

Three months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	214		$	285		Net gain on sale of investment securities
Tax effect		(73	)		(96	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	141		$	189		Net of tax

Six months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	717		$	907		Net gain on sale of investment securities
Tax effect		(244	)		(308	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	473		$	599		Net of tax

7. INVESTMENT SECURITIES

QNB engages in trading activities for its own account. Municipal securities that are held principally for resale in the near term are recorded in the trading account at fair value with changes in fair value recorded in non-interest income. There were net realized and unrealized losses of $34,000 and gains of $93,000 recorded for the three months ended June 30, 2015 and 2014, respectively. There were net realized and unrealized losses of $19,000 and gains of $115,000 recorded for the six months ended at June 30, 2015 and 2014, respectively. Unrealized gains on trading activity related to trading securities still held at June 30, 2015 and December 31, 2014 totaled $21,000 and $24,000, respectively. Interest and dividends are included in interest income.

13

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

Trading securities, at fair value, at June 30, 2015 and December 31, 2014 were as follows:

	June 30,		December 31,
	2015		2014
State and municipal securities	$	3,871	$	4,207

The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2015 and December 31, 2014 were as follows:

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
June 30, 2015	value		gains		losses			cost
U.S. Government agency	$	42,263	$	171	$	(225	)	$	42,317
State and municipal		73,938		1,255		(328	)		73,011
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		120,943		1,464		(559	)		120,038
Collateralized mortgage obligations (CMOs)		76,738		341		(1,088	)		77,485
Pooled trust preferred		2,694		215		(1,022	)		3,501
Corporate debt		6,036		25		(7	)		6,018
Equity		7,619		448		(246	)		7,417
Total investment securities available-for-sale	$	330,231	$	3,919	$	(3,475	)	$	329,787

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2014	value		gains		losses			cost
U.S. Government agency	$	62,665	$	212	$	(472	)	$	62,925
State and municipal		72,569		1,500		(150	)		71,219
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,192		1,819		(466	)		134,839
Collateralized mortgage obligations (CMOs)		87,662		330		(1,300	)		88,632
Pooled trust preferred		2,439		160		(1,240	)		3,519
Corporate debt		6,037		30		-			6,007
Equity		7,655		1,022		(70	)		6,703
Total investment securities available-for-sale	$	375,219	$	5,073	$	(3,698	)	$	373,844

14

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2015 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.

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less	$	5,129	$	5,076
Due after one year through five years		230,192		229,515
Due after five years through ten years		64,725		64,452
Due after ten years		22,566		23,327
Equity securities		7,619		7,417
Total investment securities available-for-sale	$	330,231	$	329,787

For the three months ended June 30, 2015 and 2014, proceeds from sales of investment securities available-for-sale were approximately $19,200,000 and $6,389,000. Proceeds from sales of investment securities available-for-sale were approximately $26,795,000 and $18,970,000 for the six months ended June 30, 2015 and 2014, respectively.

At June 30, 2015 and December 31, 2014, investment securities available-for-sale totaling approximately $154,330,000 and $206,774,000, 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 (“OTTI”) 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:

	Three months ended June 30, 2015									Three months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	204	$	(23	)	$	-	$	181	$	280	$	(6	)	$	-	$	274
Debt securities		66		(33	)		-		33		74		(63	)		-		11
Total	$	270	$	(56	)	$	-	$	214	$	354	$	(69	)	$	-	$	285

	Six months ended June 30, 2015									Six months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	630	$	(23	)	$	-	$	607	$	870	$	(6	)	$	-	$	864
Debt securities		154		(44	)		-		110		137		(94	)		-		43
Total	$	784	$	(67	)	$	-	$	717	$	1,007	$	(100	)	$	-	$	907

The tax expense applicable to the net realized gains for the six-month periods ended June 30, 2015 and 2014 amounted to approximately $244,000 and $308,000, respectively.

15

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

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 2015 or 2014.

16

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

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,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,153	$	1,271

The amortized cost and estimated fair values of investment securities held-to-maturity at June 30, 2015 and December 31, 2014 were as follows:

Held-To-Maturity

June 30, 2015

December 31, 2014

Gross

Gross

Gross

Gross

unrealized

unrealized

unrealized

unrealized

Amortized

holding

holding

Fair

Amortized

holding

holding

Fair

cost

gains

losses

value

cost

gains

losses

value

State and municipal securities

$

146

$

8

-

$

154

$

146

$

10

-

$

156

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at June 30, 2015 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.

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less		-		-
Due after one year through five years	$	154	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	154	$	146

There were no sales of investment securities classified as held-to-maturity during the three and six months ended June 30, 2015 or 2014.

17

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:

June 30, 2015
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		17	$	16,484	$	(144	)	$	7,166	$	(81	)	$	23,650	$	(225	)
State and municipal		68		23,711		(267	)		4,522		(61	)		28,233		(328	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		33		38,711		(492	)		2,536		(67	)		41,247		(559	)
Collateralized mortgage obligations (CMOs)		42		20,555		(146	)		29,614		(942	)		50,169		(1,088	)
Pooled trust preferred		5		-		-			2,191		(1,022	)		2,191		(1,022	)
Corporate debt		1		1,005		(7	)		-		-			1,005		(7	)
Equity		15		3,487		(228	)		250		(18	)		3,737		(246	)
Total		181	$	103,953	$	(1,284	)	$	46,279	$	(2,191	)	$	150,232	$	(3,475	)

December 31, 2014
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		29	$	15,466	$	(30	)	$	23,941	$	(442	)	$	39,407	$	(472	)
State and municipal		39		3,452		(31	)		11,964		(119	)		15,416		(150	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		34		6,521		(15	)		38,586		(451	)		45,107		(466	)
Collateralized mortgage obligations (CMOs)		51		2,003		(205	)		35,687		(1,095	)		37,690		(1,300	)
Pooled trust preferred		5		-		-			1,978		(1,240	)		1,978		(1,240	)
Equity		7		1,303		(70	)		-		-			1,303		(70	)
Total		165	$	28,745	$	(351	)	$	112,156	$	(3,347	)	$	140,901	$	(3,698	)

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, 2015 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of interest rate fluctuations. 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.

The Company’s investment in marketable equity securities primarily consists of investments in large cap stock companies. These equity securities are analyzed for impairment on an ongoing basis. Management believes these equity securities will recover in the foreseeable future. QNB evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold those securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

QNB holds six pooled trust preferred securities as of June 30, 2015. These securities have a total amortized cost of approximately $3,501,000 and a fair value of $2,694,000. Five of the six 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.

18

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

The following table provides additional information related to pooled trust preferred securities (PreTSLs) as of June 30, 2015:

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2015)		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	$	215	$	(28	)	$	-	$	(1	)	B1/B		5		-		18.0	%		140.5	%
PreTSL XVII	Mezzanine		752		565		(187	)		-		(222	)	C/C		31		5		30.4			85.9
PreTSL XIX	Mezzanine		987		556		(431	)		-		-		Caa3/C		40		12		12.2			94.4
PreTSL XXV	Mezzanine		766		483		(283	)		-		(222	)	C/C		47		5		27.5			88.9
PreTSL XXVI	Mezzanine		465		372		(93	)		-		(270	)	Caa3/C		43		7		23.7			94.0
PreTSL XXVI	Mezzanine		288		503		215			-		(438	)	Caa3/C		43		7		23.7			94.0
		$	3,501	$	2,694	$	(807	)	$	-	$	(1,153	)

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

On January 14, 2014, Regulators released a final rule authorizing retention of pooled trust preferred securities backed primarily by bank-issued trust preferred securities which included the PreTSLs held by QNB. Due to the uncertainty invoked between the original release of the Volcker Rule and the final rule, there was a noticeable increase in trading activity. However, we believe most of these trades occurred under distress and do not represent trades made in an orderly market. Despite the trades that took place as discussed previously, the market for these securities at June 30, 2015 was not active and markets for similar securities also are not active. The new issue market is also inactive and the market values for these securities are depressed relative to historical levels. 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 previous table, 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, except for PreTSL IV which represents the senior-most obligation of the trust.

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 impairment 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 three and six months ended June 30, 2015 and 2014, 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:

19

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

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 of 1% were forecasted. In addition to the base prepayment assumption, due to the enactment of the Dodd-Frank Act 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, 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.

● 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 any 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 generate additional capital either internally or externally.

● 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 2016 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.

20

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

● 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. Based on information from various published studies, a 95% severity of loss was utilized for defaults projected in 2016 and thereafter.

Based upon the analysis performed by management as of June 30, 2015, it is probable that we will collect all contractual principal and interest payments on one of our six 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.

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.

21

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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.

22

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Major classes of loans are as follows:

	June 30,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	132,271	$	118,845
Construction		19,031		23,471
Secured by commercial real estate		212,015		203,534
Secured by residential real estate		55,984		53,077
State and political subdivisions		42,178		44,104
Indirect lease financing		9,221		7,685
Retail:
1-4 family residential mortgages		38,867		37,147
Home equity loans and lines		64,896		63,213
Consumer		3,741		4,175
Total loans		578,204		555,251
Net unearned costs (fees)		52		31
Loans receivable	$	578,256	$	555,282

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, 2015 and December 31, 2014, overdrafts were approximately $102,000 and $142,000, 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, 2015, 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.

23

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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.

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

24

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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, 2015 and December 31, 2014:

June 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	123,433	$	665	$	8,173	$	-	$	132,271
Construction		19,010		-		21		-		19,031
Secured by commercial real estate		192,524		2,047		17,444		-		212,015
Secured by residential real estate		53,038		718		2,228		-		55,984
State and political subdivisions		40,890		-		1,288		-		42,178
Indirect lease financing		9,014		-		207		-		9,221
	$	437,909	$	3,430	$	29,361	$	-	$	470,700

December 31, 2014	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	111,560	$	42	$	7,243	$	-	$	118,845
Construction		22,981		128		362		-		23,471
Secured by commercial real estate		178,339		2,418		22,777		-		203,534
Secured by residential real estate		50,172		408		2,497		-		53,077
State and political subdivisions		42,771		-		1,333		-		44,104
Indirect lease financing		7,543		-		142		-		7,685
	$	413,366	$	2,996	$	34,354	$	-	$	450,716

25

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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, 2015 and December 31, 2014:

June 30, 2015	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	38,453	$	414	$	38,867
Home equity loans and lines		64,804		92		64,896
Consumer		3,741		-		3,741
	$	106,998	$	506	$	107,504

December 31, 2014	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	36,922	$	225	$	37,147
Home equity loans and lines		63,109		104		63,213
Consumer		4,174		1		4,175
	$	104,205	$	330	$	104,535

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, 2015 and December 31, 2014:

June 30, 2015	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	$	486		-	$	11	$	497	$	131,774	$	132,271
Construction		-		-		-		-		19,031		19,031
Secured by commercial real estate		404	$	105		1,151		1,660		210,355		212,015
Secured by residential real estate		136		341		264		741		55,243		55,984
State and political subdivisions		-		-		-		-		42,178		42,178
Indirect lease financing		91		40		90		221		9,000		9,221
Retail:
1-4 family residential mortgages		-		-		199		199		38,668		38,867
Home equity loans and lines		185		-		-		185		64,711		64,896
Consumer		10		4		-		14		3,727		3,741
	$	1,312	$	490	$	1,715	$	3,517	$	574,687	$	578,204

26

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

December 31, 2014	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		-		-		-		-	$	118,845	$	118,845
Construction	$	466		-		-	$	466		23,005		23,471
Secured by commercial real estate		28	$	332	$	3,747		4,107		199,427		203,534
Secured by residential real estate		600		574		-		1,174		51,903		53,077
State and political subdivisions		-		-		-		-		44,104		44,104
Indirect lease financing		291		-		-		291		7,394		7,685
Retail:
1-4 family residential mortgages		526		-		-		526		36,621		37,147
Home equity loans and lines		66		49		-		115		63,098		63,213
Consumer		16		8		-		24		4,151		4,175
	$	1,993	$	963	$	3,747	$	6,703	$	548,548	$	555,251

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, 2015 and December 31, 2014:

June 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,526
Construction		-		-
Secured by commercial real estate		-		4,302
Secured by residential real estate		-		1,489
State and political subdivisions		-		-
Indirect lease financing	$	90		-
Retail:
1-4 family residential mortgages		-		414
Home equity loans and lines		-		92
Consumer		-		-
	$	90	$	9,823

27

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

December 31, 2014	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	2,171
Construction		-		337
Secured by commercial real estate		-		6,465
Secured by residential real estate		-		1,467
State and political subdivisions		-		-
Indirect lease financing		-		-
Retail:
1-4 family residential mortgages		-		225
Home equity loans and lines		-		104
Consumer		-		1
	$	-	$	10,770

Activity in the allowance for loan losses for the three months ended June 30, 2015 and 2014 are as follows:

Three months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,875	$	(251	)	$	(30	)	$	9	$	1,603
Construction		285		(136	)		-			-		149
Secured by commercial real estate		2,569		141			(57	)		2		2,655
Secured by residential real estate		1,666		266			(313	)		16		1,635
State and political subdivisions		253		(21	)		-			-		232
Indirect lease financing		95		25			-			1		121
Retail:
1-4 family residential mortgages		308		5			-			-		313
Home equity loans and lines		479		(12	)		-			7		474
Consumer		85		4			(23	)		5		71
Unallocated		363		39		N/A			N/A			402
	$	7,978	$	60		$	(423	)	$	40	$	7,655

28

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Three months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,308	$	55		$	-		$	44	$	2,407
Construction		391		(151	)		-			-		240
Secured by commercial real estate		2,757		(157	)		-			-		2,600
Secured by residential real estate		1,465		238			-			5		1,708
State and political subdivisions		293		(79	)		-			-		214
Loans to depository institutions		3		(2	)		-			-		1
Indirect lease financing		106		(19	)		-			5		92
Retail:
1-4 family residential mortgages		314		58			-			-		372
Home equity loans and lines		602		(127	)		(34	)		79		520
Consumer		63		22			(28	)		10		67
Unallocated		517		162		N/A			N/A			679
	$	8,819	$	-		$	(62	)	$	143	$	8,900

Activity in the allowance for loan losses for the six months ended June 30, 2015 and 2014 are as follows:

Six months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,892	$	(278	)	$	(30	)	$	19	$	1,603
Construction		297		(148	)		-			-		149
Secured by commercial real estate		2,700		36			(85	)		4		2,655
Secured by residential real estate		1,630		304			(317	)		18		1,635
State and political subdivisions		221		11			-			-		232
Indirect lease financing		93		26			(8	)		10		121
Retail:
1-4 family residential mortgages		312		1			-			-		313
Home equity loans and lines		453		9			-			12		474
Consumer		85		15			(41	)		12		71
Unallocated		318		84		N/A			N/A			402
	$	8,001	$	60		$	(481	)	$	75	$	7,655

29

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Six months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	329		$	(17	)	$	51	$	2,407
Construction		439		(199	)		-			-		240
Secured by commercial real estate		2,898		(298	)		-			-		2,600
Secured by residential real estate		1,632		68			(1	)		9		1,708
State and political subdivisions		186		28			-			-		214
Loans to depository institutions		4		(3	)		-			-		1
Indirect lease financing		103		(14	)		(6	)		9		92
Retail:
1-4 family residential mortgages		303		69			-			-		372
Home equity loans and lines		583		(40	)		(121	)		98		520
Consumer		64		50			(71	)		24		67
Unallocated		669		10		N/A			N/A			679
	$	8,925	$	-		$	(216	)	$	191	$	8,900

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.

30

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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.

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $2,177,000 and $1,897,000 as of June 30, 2015 and December 31, 2014, respectively. Non-performing TDRs totaled $3,064,000 and $3,690,000 as of June 30, 2015 and December 31, 2014, respectively. All TDRs are included in impaired loans.

The following table illustrates the specific reserve for loan losses allocated to loans modified as TDRs. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment.

	June 30, 2015				December 31, 2014
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	4,367		-	$	4,588		-
TDRs with an allowance recorded		874	$	674		999	$	813
	$	5,241	$	674	$	5,587	$	813

There were no TDR concessions made during the six months ended June 30, 2015. As of June 30, 2015 and December 31, 2014, QNB had commitments of $1,935,000 and $1,729,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were charge-offs of $0 and $35,000 during the six months ended June 30, 2015 and 2014, respectively, resulting from loans previously modified as TDRs.

There were no loans modified as TDRs during 2015 and the three months ended June 30, 2015 and 2014. The following table presents loans by loan class modified as TDRs during the six months ended June 30, 2015 and 2014. 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, 2014.

31

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Six months ended June 30,	2015						2014
	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		-	$	-	$	-		1	$	288	$	233
		-	$	-	$	-		1	$	288	$	233

The following tables present loans modified as TDRs within 12 months prior to June 30, 2015 and 2014 for which there was a payment default (60 days or more past due) during the three and six months ended June 30, 2015 and 2014.

Three months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

Six months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

32

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, 2015 and December 31, 2014 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, 2015	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	$	1,603	$	757	$	846	$	132,271	$	7,870	$	124,401
Construction		149		-		149		19,031		348		18,683
Secured by commercial real estate		2,655		-		2,655		212,015		7,810		204,205
Secured by residential real estate		1,635		43		1,592		55,984		1,489		54,495
State and political subdivisions		232		-		232		42,178		-		42,178
Indirect lease financing		121		-		121		9,221		11		9,210
Retail:
1-4 family residential mortgages		313		39		274		38,867		528		38,339
Home equity loans and lines		474		-		474		64,896		117		64,779
Consumer		71		-		71		3,741		-		3,741
Unallocated		402		N/A		N/A		N/A		N/A		N/A
	$	7,655	$	839	$	6,414	$	578,204	$	18,173	$	560,031

	Allowance for Loan Losses						Loans Receivable
December 31, 2014	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	$	1,892	$	1,095	$	797	$	118,845	$	7,115	$	111,730
Construction		297		-		297		23,471		362		23,109
Secured by commercial real estate		2,700		-		2,700		203,534		11,546		191,988
Secured by residential real estate		1,630		91		1,539		53,077		1,567		51,510
State and political subdivisions		221		-		221		44,104		-		44,104
Indirect lease financing		93		-		93		7,685		16		7,669
Retail:
1-4 family residential mortgages		312		4		308		37,147		341		36,806
Home equity loans and lines		453		4		449		63,213		129		63,084
Consumer		85		-		85		4,175		1		4,174
Unallocated		318		N/A		N/A		N/A		N/A		N/A
	$	8,001	$	1,194	$	6,489	$	555,251	$	21,077	$	534,174

33

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, 2015 and December 31, 2014:

	June 30, 2015						December 31, 2014
	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	6,987	$	7,161	$	-	$	5,894	$	6,056	$	-
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,228		1,936		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		215		246		-		225		250		-
Home equity loans and lines		117		163		-		72		93		-
Consumer		-		-		-		1		1		-
	$	16,716	$	18,233	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	883	$	1,061	$	757	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		261		315		43		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		313		314		39		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,457	$	1,690	$	839	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	7,870	$	8,222	$	757	$	7,115	$	7,475	$	1,095
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,489		2,251		43		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		528		560		39		341		366		4
Home equity loans and lines		117		163		-		129		169		4
Consumer		-		-		-		1		1		-
	$	18,173	$	19,923	$	839	$	21,077	$	22,844	$	1,194

34

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

	Six Months Ended June 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,846	$	128	$	9,305	$	331
Construction		437		12		1,050		2
Secured by commercial real estate		8,526		86		12,304		344
Secured by residential real estate		1,549		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		13		1		26		1
Retail:
1-4 family residential mortgages		398		3		460		5
Home equity loans and lines		131		1		169		-
Consumer		1		-		2		-
	$	17,901	$	231	$	25,768	$	683

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.

35

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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, 2015:

June 30, 2015	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
Trading Securities
State and municipal securities	$	-	$	3,871	$	-	$	3,871
Securities available-for-sale
U.S. Government agency securities		-	$	42,263		-	$	42,263
State and municipal securities		-		73,938		-		73,938
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		120,943		-		120,943
Collateralized mortgage obligations (CMOs)		-		76,738		-		76,738
Pooled trust preferred securities		-		-	$	2,694		2,694
Corporate debt securities		-		6,036		-		6,036
Equity securities	$	7,619		-		-		7,619
Total securities available-for-sale	$	7,619	$	319,918	$	2,694	$	330,231
Total recurring fair value measurements	$	7,619	$	323,789	$	2,694	$	334,102
Nonrecurring fair value measurements
Impaired loans	$	-		-	$	749	$	749
Other real estate owned		-	$	50		-		50
Mortgage servicing rights		-		-		60		60
Total nonrecurring fair value measurements	$	-	$	50	$	809	$	859

There were no transfers in and out of Level 1 fair value measurements during the six months ended June 30, 2015. There was one transfer for $50,000 from level 3 into level 2 fair value for the same period. This related to a property held in other real estate owned that was under agreement of sale at June 30, 2015. 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 period ended June 30, 2015.

36

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, 2014:

December 31, 2014	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
Trading Securities
State and municipal securities	$	-	$	4,207	$	-	$	4,207
Securities available-for-sale
U.S. Government agency securities		-	$	62,665		-	$	62,665
State and municipal securities		-		72,569		-		72,569
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		136,192		-		136,192
Collateralized mortgage obligations (CMOs)		-		87,662		-		87,662
Pooled trust preferred securities		-		-	$	2,439		2,439
Corporate debt securities		-		6,037		-		6,037
Equity securities	$	7,655		-		-		7,655
Total securities available-for-sale	$	7,655	$	365,125	$	2,439	$	375,219
Total recurring fair value measurements	$	7,655	$	369,332	$	2,439	$	379,426
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	3,715	$	3,715
Mortgage servicing rights		-		-		112		112
Total nonrecurring fair value measurements	$	-	$	-	$	3,827	$	3,827

37

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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
	Fair value		Valuation techniques	Unobservable input	Value or range of values
June 30, 2015 - Impaired loans	$	638	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
June 30, 2015 - Impaired loans		111	Discounted cash flow (4)	Discount rate		6.375	%
June 30, 2015 - Mortgage servicing rights		60	Discounted cash flow	Remaining term	2 - 28 yrs
				Discount rate		10% to 12	%

	Quantitative information about Level 3 fair value measurements
	Fair value		Valuation techniques	Unobservable input	Value or range of values
December 31, 2014 - Impaired loans	$	953	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
December 31, 2014 - Impaired loans		112	Discounted cash flow (4)	Discount rate		6.375	%
December 31, 2014 - Impaired loans		2,650	Agreement of sale (5)
December 31, 2014 - Mortgage servicing rights		112	Discounted cash flow	Remaining term	2 - 28 yrs
				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 the age of the appraisal. The range is presented as a percent of the initial appraised value.
(3)	Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value.
(4)	Fair value is determined using the cash flow of the borrower and the effective interest rate of the original note.
(5)	Fair value is determined by the net amount due.

38

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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, 2015:

	Fair value measurements using
	significant unobservable inputs
	(Level 3)
Balance, January 1, 2015	$	2,439
Payments received		(18	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		273
Transfers in and/or out of Level 3		-
Balance, June 30, 2015	$	2,694

The Level 3 securities consist of six collateralized debt obligation securities, PreTSL securities, which are backed by trust preferred securities issued by banks, thrifts, and insurance companies. As discussed in Note 7, despite the fact that there were some trades during 2015, the market for these securities at June 30, 2015 was 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, 2015;

● 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. Default rates are 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. The base loss severity assumption and long-term loss severity assumptions are modeled at 95%. The severity factor for near-term default 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 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 no later than 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.

39

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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 3.46% to 7.90%. 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. For a further discussion of PreTSL valuation, see Note 7, Investment Securities.

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, 2015 and December 31, 2014:

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 - trading (carried at fair value), 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 Community 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.

40

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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. Included in the fair value of impaired loans at June 30, 2015 are $131,000 of loans that had no specific reserves required at quarter end; however, were partially charged-off on June 30, 2015.

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 2 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.

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.

41

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

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, 2015	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	$	20,624	$	20,624	$	20,624		-		-
Investment securities:
Trading		3,871		3,871		-	$	3,871		-
Available-for-sale		330,231		330,231		7,619		319,918	$	2,694
Held-to-maturity		146		154		-		154		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		466		475		-		475		-
Net loans		570,601		565,261		-		-		565,261
Mortgage servicing rights		521		667		-		-		667
Accrued interest receivable		2,324		2,324		-		2,324		-
Financial liabilities
Deposits with no stated maturities	$	591,937	$	591,937	$	591,937		-		-
Deposits with stated maturities		234,144		234,954		-	$	234,954		-
Short-term borrowings		32,896		32,896		32,896		-		-
Accrued interest payable		337		337		-		337		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

42

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES (continued)

					Fair value measurements
December 31, 2014	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	$	18,245	$	18,245	$	18,245		-		-
Investment securities:
Trading		4,207		4,207		-	$	4,207		-
Available-for-sale		375,219		375,219		7,655		365,125	$	2,439
Held-to-maturity		146		156		-		156		-
Restricted investment in bank stocks		647		647		-		647		-
Loans held-for-sale		380		394		-		394		-
Net loans		547,281		544,126		-		-		544,126
Mortgage servicing rights		504		601		-		-		601
Accrued interest receivable		2,568		2,568		-		2,568		-
Financial liabilities
Deposits with no stated maturities	$	608,345	$	608,345	$	608,345		-	$	-
Deposits with stated maturities		243,247		244,152		-	$	244,152		-
Short-term borrowings		35,189		35,189		35,189		-		-
Accrued interest payable		344		344		-		344		-
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,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	220,961	$	203,496
Standby letters of credit		5,442		6,276
Total financial instrument commitments	$	226,403	$	209,772

43

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, 2015 and December 31, 2014 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, 2015, 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.

44

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

11. REGULATORY RESTRICTIONS (continued)

	Capital levels
	Actual					Minimum required					Well capitalized
As of June 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	96,010		13.05	%	$	58,844		8.00	%	$	73,555		10.00	%
Bank		88,793		12.45			57,078		8.00			71,348		10.00
Tier I capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	44,133		6.00		$	44,133		6.00
Bank		81,079		11.36			42,809		6.00			57,078		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	33,100		4.50			N/A		N/A
Bank		81,079		11.36			32,106		4.50			46,376		6.50
Tier I capital (to average assets):
Consolidated	$	88,241		9.18	%	$	38,443		4.00			N/A		N/A
Bank		81,079		8.50			38,159		4.00			47,699		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	93,927		14.06	%	$	53,425		8.00	%		N/A		N/A
Bank		86,884		13.14			52,891		8.00		$	66,114		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		85,439		12.79			26,713		4.00			N/A		N/A
Bank		78,824		11.92			26,446		4.00			39,669		6.00
Tier I capital (to average assets):
Consolidated		85,439		8.65			39,501		4.00			N/A		N/A
Bank		78,824		8.04			39,237		4.00			49,047		5.00

45

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. is a bank holding company headquartered in Quakertown, Pennsylvania. QNB Corp., through its wholly-owned subsidiary, the Bank, has been serving the residents and businesses of upper Bucks, northern Montgomery and southern Lehigh counties in Pennsylvania since 1877. Due to its limited geographic area, growth is pursued through expansion of existing customer relationships and building new relationships by stressing a consistent high level of service at all points of contact. The Bank is a locally managed community bank that provides a full range of commercial and retail banking and retail brokerage services.

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 2014 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 QNB’s business; 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.

46

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 an 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.

There were no credit-related other-than-temporary impairment charges in the first six months of 2015 or 2014.

Allowance for Loan Losses

The determination of the allowance for loan losses involves a higher degree of judgment and complexity than the Company’s 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.

47

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 collection. 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.

48

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 2015 of $1,934,000, or $0.58 per share on a diluted basis, compared to net income of $2,172,000, or $0.66 per share on a diluted basis, for the same period in 2014. For the six month period ended June 30, 2015, QNB reported net income of $4,070,000, or $1.22 per share on a diluted basis. This compares to net income of $4,468,000, or $1.36 per share on a diluted basis, reported for the six month period ended June 30, 2014.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.81% and 8.83%, respectively, for the quarter ended June 30, 2015 compared with 0.95% and 10.66%, respectively, for the quarter ended June 30, 2014. For the comparative six month periods the annualized rate of return on average assets and average shareholders’ equity was 0.85% and 9.41%, respectively, for 2015 compared with 0.98% and 11.12%, respectively, for 2014.

Total assets as of June 30, 2015 were $955,245,000, compared with $977,135,000 at December 31, 2014. Loans receivable at June 30, 2015 were $578,256,000, compared with $555,282,000 at December 31, 2014, an increase of $22,974,000, or 4.1%, with commercial lending as the largest contributor to the growth. Total deposits of $826,081,000 at June 30, 2015 decreased $25,511,000, or 3.0%, compared with total deposits of $851,592,000 at December 31, 2014, due primarily to the seasonal reduction in public funds balances.

Results for the three and six months ended June 30, 2015 include the following significant components:

• Net interest income increased $145,000, or 2.2%, to $6,642,000 and $439,000, or 3.4%, to $13,329,000 for the three and six months ended June 30, 2015, respectively.

• Net interest margin on a tax-equivalent basis decreased 12 basis points for the quarter and eight basis points year-to-date, to 3.06% and 3.07%, respectively.

• QNB recorded $60,000 in provision for loan losses for the second quarter and first six months of 2015 compared with no provisions recorded for first six months of 2014.

• Non-interest income decreased $26,000, or 1.6%, to $1,599,000 for the second quarter and $161,000, or 4.7%, $3,276,000 for year-to-date 2015, respectively, compared to the same periods in 2014.

• Non-interest expense increased $350,000, or 6.6%, to $5,664,000 for the second quarter and $665,000, or 6.3%, to $11,191,000 year-to-date 2014, respectively, compared to the same periods in 2014.

• Total non-performing loans were $12,090,000, or 2.09% of loans receivable at June 30, 2015, compared to $12,667,000, or 2.28% of loans receivable at December 31, 2014. Loans on non-accrual status were $9,823,000 at June 30, 2015 compared with $10,770,000 at December 31, 2014. Net charge-offs for the first six months of 2015 were $406,000, or 0.14% annualized of average total loans, as compared with $25,000, or 0.01% annualized of average total loans for the first six months of 2014.

These items, as well as others, will be explained more thoroughly in the next sections.

49

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

NET INTEREST INCOME

QNB Corp. earns its net income primarily through its subsidiary, the Bank. Net interest income, or the spread between the interest, dividends and fees earned on loans and investment securities and the expense incurred on deposits and other interest-bearing liabilities, is the primary source of operating income for QNB. QNB seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors

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, 2015 and 2014.

	Three months ended June 30,				Six months ended June 30,
	2015		2014		2015		2014
Total interest income	$	7,746	$	7,588	$	15,553	$	15,115
Total interest expense		1,104		1,091		2,224		2,225
Net interest income		6,642		6,497		13,329		12,890
Tax-equivalent adjustment		434		488		879		974
Net interest income (fully taxable-equivalent)	$	7,076	$	6,985	$	14,208	$	13,864

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.

50

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, 2015								June 30, 2014
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	4,162			5.88	%	$	61	$	4,429			6.08	%	$	67
Investment securities (AFS & HTM):
U.S. Government agencies		44,714			1.62	%		181		55,504			1.52	%		211
State and municipal		68,481			4.18	%		715		78,144			4.41	%		862
Mortgage-backed and CMOs		205,451			1.96	%		1,008		198,431			2.06	%		1,021
Pooled trust preferred securities		3,517			0.57	%		5		3,519			0.17	%		2
Corporate debt securities		6,009			1.15	%		17		6,009			1.11	%		17
Equities		7,174			3.22	%		58		5,925			3.20	%		47
Total investment securities		335,346			2.37	%		1,984		347,532			2.49	%		2,160
Loans:
Commercial real estate		290,608			4.44	%		3,215		263,471			4.61	%		3,027
Residential real estate		38,665			3.99	%		386		33,768			4.23	%		357
Home equity loans		57,042			3.56	%		507		54,723			3.86	%		526
Commercial and industrial		128,940			4.07	%		1,309		112,452			4.30	%		1,205
Indirect lease financing		8,921			8.98	%		200		7,866			9.84	%		194
Consumer loans		3,888			5.42	%		52		3,646			5.54	%		50
Tax-exempt loans		45,702			3.95	%		450		44,983			4.15	%		465
Total loans, net of unearned income*		573,766			4.28	%		6,119		520,909			4.48	%		5,824
Other earning assets		14,677			0.45	%		16		9,320			1.09	%		25
Total earning assets		927,951			3.54	%		8,180		882,190			3.67	%		8,076
Cash and due from banks		11,704								11,063
Allowance for loan losses		(7,956	)							(8,877	)
Other assets		29,378								32,142
Total assets	$	961,077							$	916,518
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	134,941			0.22	%		75	$	119,394			0.24	%		70
Municipals		91,989			0.34	%		79		90,933			0.34	%		78
Money market		65,287			0.24	%		38		57,983			0.19	%		28
Savings		216,598			0.37	%		200		210,122			0.37	%		193
Time		144,263			1.08	%		389		151,012			1.07	%		404
Time of $100,000 or more		92,694			1.28	%		295		89,561			1.24	%		277
Total interest-bearing deposits		745,772			0.58	%		1,076		719,005			0.59	%		1,050
Short-term borrowings		30,378			0.36	%		28		34,334			0.36	%		31
Long-term debt		-			0.00	%		-		879			4.77	%		10
Total interest-bearing liabilities		776,150			0.57	%		1,104		754,218			0.58	%		1,091
Non-interest-bearing deposits		93,814								77,527
Other liabilities		3,310								3,021
Shareholders' equity		87,803								81,752
Total liabilities and shareholders' equity	$	961,077							$	916,518
Net interest rate spread					2.97	%							3.09	%
Margin/net interest income					3.06	%	$	7,076					3.18	%	$	6,985

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

51

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.

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

	Six Months Ended
	June 30, 2015								June 30, 2014
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	4,160			5.94	%	$	124	$	3,806			5.33	%	$	101
Investment securities (AFS & HTM):
U.S. Government agencies		50,461			1.61	%		407		61,662			1.47	%		452
State and municipal		69,388			4.19	%		1,452		80,670			4.40	%		1,774
Mortgage-backed and CMOs		212,151			1.95	%		2,066		204,555			2.06	%		2,103
Pooled trust preferred securities		3,518			0.37	%		6		3,519			0.17	%		3
Corporate debt securities		6,008			1.14	%		34		6,009			1.11	%		34
Equities		7,075			3.16	%		111		5,699			3.24	%		92
Total investment securities		348,601			2.34	%		4,076		362,114			2.46	%		4,458
Loans:
Commercial real estate		287,807			4.51	%		6,433		260,339			4.61	%		5,950
Residential real estate		37,861			4.08	%		772		32,051			4.27	%		685
Home equity loans		57,217			3.59	%		1,019		54,624			3.89	%		1,053
Commercial and industrial		124,615			4.10	%		2,531		112,370			4.28	%		2,385
Indirect lease financing		8,382			9.03	%		379		8,187			9.86	%		404
Consumer loans		4,009			5.43	%		108		3,460			5.73	%		98
Tax-exempt loans		46,130			4.00	%		916		43,181			4.27	%		914
Total loans, net of unearned income*		566,021			4.33	%		12,158		514,212			4.51	%		11,489
Other earning assets		14,623			1.02	%		74		8,419			0.99	%		41
Total earning assets		933,405			3.55	%		16,432		888,551			3.65	%		16,089
Cash and due from banks		11,259								10,642
Allowance for loan losses		(8,025	)							(8,878	)
Other assets		29,565								32,075
Total assets	$	966,204							$	922,390
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	132,182			0.22	%		145	$	116,980			0.24	%		137
Municipals		104,478			0.34	%		175		103,743			0.33	%		171
Money market		62,489			0.24	%		74		57,360			0.19	%		55
Savings		215,371			0.37	%		396		209,091			0.37	%		382
Time		146,006			1.08	%		785		151,719			1.08	%		810
Time of $100,000 or more		92,673			1.28	%		590		87,890			1.24	%		540
Total interest-bearing deposits		753,199			0.58	%		2,165		726,783			0.58	%		2,095
Short-term borrowings		32,127			0.37	%		59		33,706			0.36	%		60
Long-term debt		-			0.00	%		-		2,928			4.76	%		70
Total interest-bearing liabilities		785,326			0.57	%		2,224		763,417			0.59	%		2,225
Non-interest-bearing deposits		90,332								74,919
Other liabilities		3,317								2,997
Shareholders' equity		87,229								81,057
Total liabilities and shareholders' equity	$	966,204							$	922,390
Net interest rate spread					2.98	%							3.06	%
Margin/net interest income					3.07	%	$	14,208					3.15	%	$	13,864

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

52

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

	Three Months Ended									Six Months Ended
	June 30, 2015 compared									June 30, 2015 compared
	to June 30, 2014									to June 30, 2014
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Trading securities	$	(6	)	$	(4	)	$	(2	)	$	23		$	10			13
Investment securities (AFS & HTM):
U.S. Government agencies		(30	)		(41	)		11			(45	)		(82	)	$	37
State and municipal		(147	)		(107	)		(40	)		(322	)		(248	)		(74	)
Mortgage-backed and CMOs		(13	)		37			(50	)		(37	)		79			(116	)
Pooled trust preferred securities		3			-			3			3			-			3
Corporate debt securities		-			(1	)		1			-			(1	)		1
Equities		11			11			-			19			22			(3	)
Total Investment securities (AFS & HTM)		(176	)		(101	)		(75	)		(382	)		(230	)		(152	)
Loans:
Commercial real estate		188			312			(124	)		483			628			(145	)
Residential real estate		29			52			(23	)		87			124			(37	)
Home equity loans		(19	)		23			(42	)		(34	)		50			(84	)
Commercial and industrial		104			176			(72	)		146			259			(113	)
Indirect lease financing		6			25			(19	)		(25	)		10			(35	)
Consumer loans		2			3			(1	)		10			16			(6	)
Tax-exempt loans		(15	)		8			(23	)		2			62			(60	)
Total Loans		295			599			(304	)		669			1,149			(480	)
Other earning assets		(9	)		14			(23	)		33			31			2
Total interest income		104			508			(404	)		343			960			(617	)
Interest expense:
Interest-bearing demand		5			9			(4	)		8			17			(9	)
Municipals		1			1			-			4			2			2
Money market		10			3			7			19			5			14
Savings		7			6			1			14			11			3
Time		(15	)		(18	)		3			(25	)		(30	)		5
Time of $100,000 or more		18			10			8			50			30			20
Total interest-bearing deposits		26			11			15			70			35			35
Short-term borrowings		(3	)		(4	)		1			(1	)		(3	)		2
Long-term debt		(10	)		(10	)		-			(70	)		(70	)		-
Total interest expense		13			(3	)		16			(1	)		(38	)		37
Net interest income	$	91		$	511		$	(420	)	$	344		$	998		$	(654	)

53

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin – quarter to quarter comparison

Net interest income for the quarter ended June 30, 2015 totaled $6,642,000, an increase of $145,000, or 2.2%, over the same period in 2014. When compared to the first quarter of 2015, net interest income decreased $45,000 from the $6,687,000 reported.

Net interest income and net interest margin continue to be negatively impacted by declining yields on earning assets resulting from the prolonged low interest rate environment under which banks have been operating since 2008, the beginning of the financial crisis. Average earning assets for the second quarter of 2015 were $927,951,000, an increase of $45,761,000 from the second quarter of 2014, with average loans increasing $52,857,000, or 10.1%, and average investment securities decreasing $12,453,000, or 3.5%, over the same period. Growth in the loan portfolio mitigates the impact of the low rate environment on net interest income and the net interest margin as loans generally earn a higher yield than investment securities. Average loans as a percent of average earning assets grew from 59.0% for the second quarter 2014 to 61.8% for the second quarter 2015. On the funding side, average deposits increased $43,054,000, or 5.4%, to $839,586,000 for the second quarter of 2015 with growth in all categories excluding time deposits. Customers continue to reinvest funds into non-time deposits, as the yield in time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates. During this same time period, average borrowed funds decreased $4,835,000 to $30,378,000 and in 2015 consisted solely of commercial repurchase agreements, as long-term debt matured and was repaid in April 2014.

The low interest rate environment and loan rate competition continues 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. The net interest margin for the second quarter of 2015 was 3.06% compared to 3.18% for the second quarter of 2014 and 3.08% reported for the first quarter of 2015.

The Rate-Volume Analysis tables, as presented on a tax-equivalent basis, highlight the impact of changing rates and volumes on interest income and interest expense. Total interest income on a tax-equivalent basis increased $104,000, or 1.3%, to $8,180,000 for the second quarter of 2015, while total interest expense increased slightly to $1,104,000. Growth in earning assets contributed an additional $508,000 of interest income but was offset by a decline in interest income of $404,000 resulting from lower yields. The decline in higher-costing funding (related to the repayment of long-term debt in 2014) contributed to a $3,000 decrease in interest expense, offset by the growth in average interest-bearing deposits and shift of deposits into higher rate accounts, which resulted in additional interest expense of $16,000.

The yield on earning assets on a tax-equivalent basis declined 13 basis points from 3.67% for the second quarter of 2014, to 3.54% for the second quarter of 2015 and declined two basis points from the 3.56% reported for the first quarter of 2015. The rate paid on interest-bearing liabilities decreased one basis point to 0.57% for the second quarter of 2015 compared to the same period in 2014 and remained equal to the funding rate reported for the quarter ended March 31, 2015.

Interest income on investment securities (trading, available-for-sale and held-to-maturity) decreased $182,000 when comparing the two quarters primarily as a result of a 12 basis point decline in average yield. The average yield on the investment portfolio was 2.41% for the second quarter of 2015 compared with 2.53% for the second quarter of 2014. The yield on the investment portfolio declined along with decreases in Treasury rates since the end of 2014. The current market has provided little opportunity to invest the cash flow from calls and prepayments in the portfolio in bonds with better yields from the securities being called and repaid. During the first six months of 2015, the majority of QNB cash flows from calls and principal and interest payments on mortgage backed securities funded loan growth, as well as seasonal deposit withdrawals by municipalities.

Income on Government agency securities decreased $30,000, as the $10,790,000, or 19.4%, decline in average balances reduced interest income by $41,000. This was partially offset by a 10 basis point increase in the yield from 1.52% for the second quarter of 2014 to 1.62% for the same period in 2015. The increase in the yield contributed $11,000 in additional interest income and is a result of selling some lower yielding bonds at the end of 2014 and reinvestment of cash into bonds with yields higher than the portfolio yield.

54

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Interest income on tax-exempt municipal securities decreased $147,000 with the decline in volume contributing $107,000 of the total decrease. The yield on the municipal portfolio was 4.18% for the second quarter 2015 compared to 4.41% for same period in 2014. QNB had purchased many municipal securities when rates were significantly higher. Many of 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 7-10 years with call dates between 2-5 years. The yield on this portfolio is expected to continue to decline as additional higher yielding municipal bonds are expected to be called or mature during 2015. The current yield on replacement bonds is well below the yield of the bonds being called or maturing.

Interest income on mortgage-backed securities and CMOs decreased $13,000 with an increase in average balances mitigating the impact of lower rates. Average balances increased $7,020,000, or 3.5%, to $205,451,000 when comparing the two periods and contributed $37,000 in additional income. The yield on the mortgage-backed and CMO portfolio decreased ten basis points from 2.06% for the second quarter of 2014 to 1.96% for the second quarter of 2015, resulting in a $50,000 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.

Income on loans increased $295,000 to $6,119,000 when comparing the second quarters of 2015 and 2014, with growth in average balances offsetting the decline in the portfolio yield. The yield on the loan portfolio decreased 20 basis points to 4.28% when comparing the same periods, resulting in a reduction in interest income of $304,000. When comparing the two quarters average balances increased 10.1% resulting in an increase of $599,000 in interest income. As a result of the interest rate environment and competitive pressures, new loans are being originated at lower rates, variable rate loans are repricing lower and many customers with fixed rates are requesting modifications for lower rates.

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 increased $188,000 and was impacted positively by the increase in average balances and negatively by the decline in yield. Average balances increased $27,137,000, or 10.3%, to $290,608,000 for the three months ended June 30, 2015 compared with the same quarter in 2014. The yield on commercial real estate loans was 4.44% for the second quarter of 2015, a decrease of 17 basis points from the 4.61% reported for the second quarter of 2014.

Income on commercial and industrial loans, the second largest category, increased $104,000 as average commercial and industrial loan balances increased $16,488,000, or 14.7%, to $128,940,000 for the second quarter of 2015 resulting in an additional $176,000 in income. The average yield on these loans decreased 23 basis points to 4.07% resulting in a decrease in income of $72,000. Many of the loans in this category are indexed to the prime interest rate and have floors.

Tax-exempt loan income was $450,000 for the second quarter of 2015, a decrease of $15,000 from the same period in 2014. With the decline in market interest rates many municipalities have refinanced existing debt or taken on new debt. QNB has been successful in winning some of these bids and as a result average balances have increased $719,000, or 1.6%, to $45,702,000 for the second quarter of 2015, contributing $8,000 in income. However, the rate renegotiation or bidding on these loans has resulted in a $23,000 decline in interest income as the average yield on the tax-exempt loan portfolio declined from 4.15% for the second quarter of 2014 to 3.95% for the second quarter of 2015.

55

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

QNB desires to become the “local consumer lender of choice” and to affect this QNB focused its retail lending efforts, adding new product offerings and increasing marketing and promotion. The positive impact of this renewed focus has been year-over-year growth in balances in all three categories of retail lending: residential mortgage, home equity and consumer loans. Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $4,897,000, or 14.5%, to $38,665,000 for the second quarter of 2015 compared to the same period in 2014. Over this same timeframe, the average yield on the portfolio declined by 24 basis points to 3.99% for the second quarter of 2015. The net result was an increase in interest income of $29,000. Average home equity loans increased $2,319,000, or 4.2%, to $57,042,000 while the average yield declined 30 basis points to 3.56% resulting in a decline in interest income of $19,000. Average consumer loans increased $242,000, or 6.6%, to $3,888,000 while the yield on the portfolio decreased 12 basis points to 5.42% for the second quarter of 2015 resulting in an $2,000 increase in interest income.

For the most part, earning assets are funded by deposits, which increased 5.4% when comparing the second quarters of 2015 and 2014. Interest expense on total deposits increased $26,000 when comparing the two quarters while interest expense on borrowed funds decreased $13,000, due primarily to long-term debt payoff in April 2014. While the rate paid on interest-bearing deposits declined one basis point comparing the second quarters of 2015 and 2014, we do not anticipate deposit yields to decline much further as deposit rates are close to reaching an inherent floor and may actually begin to increase as short-term interest rates begin to increase and competition for deposits increases.

The growth in average deposits continues to be centered in accounts with greater liquidity, such as non-interest and interest-bearing demand, money market, and savings deposits. Average non-interest-bearing demand accounts increased $16,287,000, or 21.0%, to $93,814,000 for the second quarter of 2015. QNB has been successful in increasing business checking accounts as average balances in these accounts have increased by $14,711,000, or 24.3%, when comparing the quarters. Average interest-bearing demand accounts increased $15,547,000, or 13.0%, to $134,941,000 for the second quarter of 2015. Interest expense on interest-bearing demand accounts increased $5,000 to $75,000 for the same period, as the average rate paid declined by two basis point from 0.24% for the second quarter of 2014 to 0.22% for the second quarter of 2015. Included in this category is QNB-Rewards checking, a higher-rate checking account product that pays 1.00% on balances up to $25,000 and 0.25% for balances over $25,000. 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 2015, the average balance in this product was $41,106,000 and the related interest expense was $62,000 for an average yield of 0.60%. In comparison, the average balance of the QNB-Rewards accounts for the second quarter of 2014 was $37,655,000 with a related interest expense of $59,000 and an average rate paid of 0.62%. 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 $81,739,000 for the second quarter of 2014 to $93,835,000 for the second quarter of 2015. The average rate paid on these balances was 0.06% for both periods.

Interest expense on municipal interest-bearing demand accounts increased $1,000 to $79,000 for the second quarter of 2015. The average balance of municipal interest-bearing demand accounts increased $1,056,000 to $91,989,000, with the average interest rate paid on these accounts at 0.34% for both the second quarter of 2015 and 2014. Many of these accounts are indexed to the Federal funds rate with rate floors between 0.25% and 0.50%. QNB was successful in increasing its relationships with several of these customers as well as adding several new municipalities and school districts over the past year, accounting for the increase in balances. Many of these deposits are seasonal in nature and are received during the third quarter as tax receipts are collected and are withdrawn over the course of the next year. It is anticipated that these balances will increase significantly during the third quarter of 2015 when taxes receipts are collected.

Average money market accounts increased $7,304,000, or 12.6%, to $65,287,000 for the second quarter of 2015 compared with the same period in 2014. Interest expense on money market accounts increased $10,000 to $38,000 and the average interest rate paid on money market accounts increased from 0.19% for the second quarter of 2014 to 0.24% for the second quarter of 2015. The majority of balances in this category are in a product that pays a tiered rate based on account balances.

56

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Interest expense on savings accounts increased $7,000 when comparing the second quarter of 2015 to the second quarter of 2014, while the average rate remained unchanged at 0.37% for both periods. When comparing these same periods average savings accounts increased $6,476,000, or 3.1%, to $216,598,000 for the second quarter of 2015 with both the statement savings and e-Savings products accounting for the growth in savings balances. QNB’s online e-Savings product is the largest category of savings deposits, with average balances for the second quarter of 2015 of $160,944,000. This product has grown successfully since its introduction in the second quarter of 2009. The average yield paid on these accounts was 0.46% for both the second quarter of 2014 and 2015. Traditional statement savings accounts, passbook savings and club accounts are also included in the savings category and average balances in these types of savings accounts increased $3,529,000, or 6.8%, when comparing the second quarter 2015 average to the same 2014 quarter.

Total interest expense on time deposits increased $3,000 to $684,000 for the second quarter of 2015. Average total time deposits decreased by $3,616,000 to $236,957,000 for the second quarter of 2015. 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. The average rate paid on time deposits increased two basis points from 1.14% to 1.16% when comparing the second quarter of 2014 to the same period in 2015.

Approximately $113,643,000, or 48.5%, of time deposits at June 30, 2015 will reprice or mature over the next 12 months. The average rate paid on these time deposits is approximately 0.95%. The yield on the time deposit portfolio may change slightly in the next quarter as short-term time deposits reprice. However, given the short-term nature of these deposits interest expense could increase if short-term time deposit rates were to increase suddenly or if customers select higher paying longer-term time deposits.

Short-term borrowings are comprised of sweep accounts structured as repurchase agreements with our commercial customers. Interest expense on short-term borrowings decreased $3,000 for the second quarter of 2015 to $28,000. When comparing these same periods average balances decreased from $34,334,000 to $30,378,000 while the average rate paid remained flat at 0.36% for both periods.

QNB had $879,000 of average long-term debt at an average rate of 4.77% for the second quarter of 2014. This term borrowing matured and was repaid on April 17, 2014.

Six Month Comparison

For the six month period ended June 30, 2015 net interest income was $13,329,000, an increase of $439,000, or 3.4%, higher than the $12,890,000 reported for the first half of 2014. For the six month period ending June 30, 2015 average earning assets increased $44,854,000, or 5.0%, to $933,405,000, with average loans increasing 10.0% and average investment securities decreasing 3.6%. Average total deposits increased $41,829,000, or 5.2%, to $843,531,000 for the six-month period ended June 30, 2015 compared to the same period in 2014. The net interest margin on a tax-equivalent basis was 3.07% for the six-month period ended June 30, 2015, an eight basis point decrease from the same period in 2014.

Total interest income on a tax-equivalent basis increased $343,000, or 2.1%, from $16,089,000 to $16,432,000, when comparing the six-month periods ended June 30, 2014 and June 30, 2015 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 $960,000 as a result of volume increases but declined $617,000 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 loan demand was funded by growth in average deposits combined with a reduction of the investment securities portfolio.

57

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The yield on earning assets decreased from 3.65% to 3.55% for the six-month periods with the yield on loans decreasing from 4.51% to 4.33% during this time. As discussed previously, the decline in yields reflects the impact of historically low levels of interest rates over the past several years and competitive pressures on loan pricing. The yield on investments, including trading securities, decreased 11 basis points from 2.49% to 2.38% when comparing the six-month periods.

Total interest expense decreased only $1,000 for the six-month period ended June 30, 2015 compared with the same period in 2014, attributable to the absence of long-term debt in 2015, which was repaid in 2014. The average rate paid on interest-bearing deposits remained the same for both periods at 0.58%.

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.

Based on this analysis, QNB recorded $60,000 in provision for loan losses in the second quarter and year-to-date 2015, while no provision was recorded in the same periods in 2014. QNB's allowance for loan losses of $7,655,000 represents 1.32% of loans receivable at June 30, 2015 compared to an allowance for loan losses of $8,001,000, or 1.44% of loans receivable, at December 31, 2014, and $8,900,000, or 1.71% of loans receivable at June 30, 2014. The allowance for loan losses at June 30, 2015 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.

Net charge-offs were $383,000 for the second quarter of 2015, comprising primarily residential investment properties. This compares with net loan recoveries of $81,000 for the second quarter of 2014. For the six month periods ended June 30, 2015 and 2014 net loan charge-offs were $406,000 and $25,000, respectively.

58

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Non-performing assets of $15,019,000 at June 30, 2015 compares favorably with $18,152,000 as of December 31, 2014 and $19,799,000 as of June 30, 2014. Included in this classification are non-performing loans, other real estate owned (OREO) and repossessed assets, and non-accrual pooled trust preferred securities. Total non-performing loans, which represent loans on non-accrual status, loans past due 90 days or more and still accruing interest and restructured loans were $12,090,000, or 2.09% of loans receivable, at June 30, 2015 compared with $12,667,000, or 2.28% of loans receivable, at December 31, 2014 and $14,573,000, or 2.79% of loans receivable, at June 30, 2014. In cases where there is a collateral shortfall on non-accrual loans, specific impairment reserves have been established based on updated collateral values even if the borrower continues to pay in accordance with the terms of the agreement. At June 30, 2015, $7,591,000, or approximately 77% of the loans classified as non-accrual are current or past due less than 30 days. In addition to the decline in total non-performing loans when comparing the second quarter of 2015 with the same quarter of the prior year, loans classified as substandard or doubtful, which include non-performing loans, also improved. At June 30, 2015 commercial loans rated substandard or doubtful totaled $29,361,000, a reduction of $6,066,000, or 17.1%, from the $35,427,000 reported as of June 30, 2014, and a decrease of $4,993,000, or 14.5%, from the $34,354,000 reported at December 31, 2014.

QNB had $90,000 and $84,000 of loans past due 90 days or more and still accruing interest at June 30, 2015 and June 30, 2014, respectively, consisting of indirect lease financing balances. At December 31, 2014 there were no loans past due 90 days or more and still accruing. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.61% of loans receivable at June 30, 2015 compared with 1.21% at December 31, 2014 and 1.10% at June 30, 2014.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more, were $2,177,000 at June 30, 2015 compared with $1,897,000 at December 31, 2014 and $1,916,000 at June 30, 2014. There were two new troubled debt restructures since June 2014; one residential borrower and one borrower rated substandard whose credit facility was renewed in 2015. QNB had other real estate owned of $198,000 as of June 30, 2015 compared with $3,025,000 at December 31, 2014 and $2,825,000 at June 30, 2014. Included in the December 31, and June 30, 2014 amount was one property with a fair value of $2,325,000, which was sold in January 2015. There was one new OREO property acquired during the second quarter ended June 30, 2015, which was subsequently sold at minimal gain in July 2015. For the six months ended June 30, 2015, a total of four OREO properties were sold at a cumulative net gain on sale of $78,000. A valuation allowance $89,000 was recorded in the first quarter 2015 for one residential property, after receiving an updated appraisal of the property, which required extensive renovation and repairs. Non-accrual pooled trust preferred securities are carried at fair value of $2,694,000, $2,439,000, and $2,393,000 at June 30, 2015, December 31, 2014 and June 30, 2014, respectively. The increase in the carrying value of these securities reflects an improvement in their fair value.

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, 2015 and December 31, 2014, the recorded investment in loans for which impairment has been identified totaled $18,173,000 and $21,077,000 of which $16,716,000 and $19,019,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $1,457,000 and $2,058,000 at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015 and December 31, 2014, the related allowance for loan losses associated with these loans was $839,000 and $1,194,000, 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.

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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,
	2015			2014			2014
Non-accrual loans	$	9,823		$	10,770		$	12,573
Loans past due 90 days or more and still accruing interest		90			-			84
Troubled debt restructured loans (not already included above)		2,177			1,897			1,916
Total non-performing loans		12,090			12,667			14,573
Other real estate owned and repossessed assets		235			3,046			2,833
Non-accrual investment securities		2,694			2,439			2,393
Total non-performing assets	$	15,019		$	18,152		$	19,799
Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	565,584		$	523,825		$	514,064
Total loans		578,256			555,282			521,979
Allowance for loan losses		7,655			8,001			8,900
Allowance for loan losses to:
Non-performing loans		63.32	%		63.17	%		61.07	%
Total loans (excluding held-for-sale)		1.32	%		1.44	%		1.71	%
Average total loans		1.35	%		1.53	%		1.73	%
Non-performing loans / total loans (excluding held-for-sale)		2.09	%		2.28	%		2.79	%
Non-performing assets / total assets		1.57	%		1.86	%		2.16	%

An analysis of loan charge-offs for the three and six months ended June 30, 2015 compared to 2014 is as follows:

	Three months ended June 30,						Six months ended June 30,
	2015			2014			2015			2014
Net charge-offs (recoveries)	$	383		$	(81	)	$	406		$	25
Net annualized charge-offs (recoveries) to:
Total loans		0.27	%		-0.06	%		0.14	%		0.01	%
Average total loans excluding held-for-sale		0.27	%		-0.06	%		0.14	%		0.01	%
Allowance for loan losses		20.06	%		-3.65	%		10.69	%		0.57	%

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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
	2015			2014		Amount			Percent			2015			2014		Amount			Percent
Net gain on investment securities	$	214		$	285	$	(71	)		-24.9	%	$	717		$	907	$	(190	)		-20.9	%
Net (loss) gain on trading activity		(34	)		93		(127	)		-136.6	%		(19	)		115		(134	)		-116.5	%
Fees for services to customers		404			410		(6	)		-1.5	%		806			809		(3	)		-0.4	%
ATM and debit card		394			387		7			1.8	%		756			735		21			2.9	%
Retail brokerage and advisory income		204			149		55			36.9	%		377			315		62			19.7	%
Bank-owned life insurance		72			73		(1	)		-1.4	%		142			145		(3	)		-2.1	%
Merchant income		81			84		(3	)		-3.6	%		151			156		(5	)		-3.2	%
Net gain on sale of loans		119			54		65			120.4	%		182			61		121			198.4	%
Other		145			90		55			61.1	%		164			194		(30	)		-15.5	%
Total	$	1,599		$	1,625	$	(26	)		-1.6	%	$	3,276		$	3,437	$	(161	)		-4.7	%

Quarter to Quarter Comparison

Total non-interest income for the second quarter of 2015 was $1,599,000, a decrease of $26,000, compared to $1,625,000 for the second quarter of 2014. Excluding net gains on investment securities, trading activities and loans for both periods, total non-interest income was $1,300,000 and $1,193,000, an increase of $107,000, or 9.0%.

Decreases in net gains on investment securities and trading activity, which declined from $285,000 and $93,000, respectively, in the second quarter of 2014, to $214,000 and a net loss of $34,000, respectively, in the same period in 2015, contributed $198,000 of the decrease in non-interest income. Trading revenue represents realized and unrealized gains and losses, net of expenses, on the municipal trading account portfolio, first established during the first quarter of 2014. This portfolio is marked to market with any change in fair value recorded as non-interest income. Interest earned on these securities during the holding period is included in net interest income. The trading investment portfolio attributes the net losses to significantly decreased activity in the municipal bond markets for the first six months of 2015 compared to the same period in 2014. The net gains on investment securities in both 2015 and 2014 were primarily gains on sale of equity securities. There were no OTTI charges in the second quarter of 2015 or 2014.

QNB originates residential mortgage loans for sale in the secondary market. Net gains on sale of loans increased from $54,000 during the second quarter of 2014 to $119,000 during the second quarter of 2015 due to increased residential mortgage activity and low interest rates. 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. Proceeds from the sale of residential mortgages were $4,554,000 and $1,411,000 for the second quarters of 2015 and 2014, respectively.

Fees for services for customers, combined with ATM and debit card fees remained flat for the second quarter of 2015, compared to the same period in 2014. Retail brokerage and advisory income was $204,000 for the second quarter of 2015 compared to $149,000 for the second quarter of 2014. This represents an increase of $55,000, or 36.9%. QNB provides securities and advisory services under the name of QNB Financial Services through Investment Professionals, Inc., a registered Broker/Dealer and Registered Investment Advisor. Assets under management at June 30, 2015 were just under $60,000,000, increasing $20,000,000 from assets under management of approximately $40,000,000 at June 30, 2014.

Net gains on the sale of OREO properties totaling $58,000 were the primary contributor to an increase in other non-interest income of $55,000 for the quarter. 

61

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Six-Month Comparison

Total non-interest income for the six month periods ended June 30, 2015 and 2014 was $3,276,000 and $3,437,000, respectively, a decrease of $161,000, or 4.7%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $2,396,000 and $2,354,000, an increase of $42,000, or 1.8%.

Net investment securities gains decreased $190,000, or 20.9%, to $717,000 for the six months ended June 30, 2015 compared to $907,000 for the comparable six months in 2015. The gains in both periods were primarily on the sale of equity securities. There were no OTTI charges in the first half of 2015 or 2014.

Fees for services to customers decreased $3,000 in the first six months of 2015 compared to 2014. Overdraft income net of waived charges, representing approximately 74% of total fees for services to customers during the second half of 2015, increased by $22,000. The increase in overdraft income reflects an increase in the volume of overdrafts as there has been no change to the fee charged to customers. This increase was offset by a $15,000 decline in internet banking fees, as the fees related to this transaction channel were reduced beginning in 2015. ATM and debit card income increased $21,000, or 2.9%, to $756,000 due to increased purchases by cardholders during the period.

Retail brokerage and advisory income was $377,000 for the first half of 2015 compared to $315,000 for the first half of 2014, an increase of $62,000, or 19.7%.

Net gains on the sale of loans increased $121,000, or 198.4%, when comparing the six months ended June 30, 2015 to the same period in 2014. As noted for the quarter, the low interest rate environment and recovery of the local housing market over the past year significantly impacted residential mortgage loan activity. Proceeds from the sale of residential mortgages were $6,487,000 and $1,542,000 for the six-month periods ended June 30, 2015 and 2014, respectively.

Other non-interest income decreased $30,000, or 15.5% when comparing the six-month periods ended June 30, 2015 and 2014, due to net losses on the sale of OREO and repossessed assets and a non-recurring sales tax refund received in 2014.

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
	2015		2014		Amount			Percent			2015		2014		Amount			Percent
Salaries and employee benefits	$	3,053	$	2,836	$	217			7.7	%	$	6,049	$	5,631	$	418			7.4	%
Net occupancy		455		424		31			7.3	%		909		870		39			4.5	%
Furniture and equipment		432		438		(6	)		-1.4	%		861		846		15			1.8	%
Marketing		212		222		(10	)		-4.5	%		422		440		(18	)		-4.1	%
Third-party services		445		411		34			8.3	%		846		812		34			4.2	%
Telephone, postage and supplies		175		174		1			0.6	%		369		357		12			3.4	%
State taxes		173		153		20			13.1	%		347		304		43			14.1	%
FDIC insurance premiums		150		160		(10	)		-6.3	%		317		337		(20	)		-5.9	%
Other		569		496		73			14.7	%		1,071		929		142			15.3	%
Total	$	5,664	$	5,314	$	350			6.6	%	$	11,191	$	10,526	$	665			6.3	%

Quarter to Quarter Comparison

Total non-interest expense was $5,664,000 for the second quarter of 2015, an increase of $350,000, or 6.6%, compared to the second quarter of 2014.

62

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Salaries and benefits comprise the largest component of non-interest expense. QNB monitors, through the use of various surveys, the competitive salary and benefit information in its markets and makes adjustments when appropriate. Salaries and benefits expense for the second quarter of 2015 were $3,053,000, an increase of $217,000, or 7.7%, from the $2,836,000 reported in the second quarter of 2014. When comparing the two periods, the increase is due to increased salary expenses of $228,000, and additional incentive accrual of $62,000. Net benefits expense decreased for the same period, due primarily to insurance reimbursements for medical claims paid in prior periods.

Net occupancy costs increased $31,000, or 7.3%, primarily branch rent. Marketing expense decreased $10,000, or 4.5%, to $212,000 for the three month period ended June 30, 2015. The decrease was largely due to expenses in prior year related to public relations for the Company’s domain name change and rebranding that took place in the fourth quarter of 2014.

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 $34,000, or 8.3%, to $445,000 for the three months ended June 30, 2015 when compared to the same period in 2014, attributable primarily to higher audit fees and third party IT services, which increased $24,000 and $21,000, respectively. These cost increases were offset in part by a decrease of $8,000 in other third-party services.

FDIC insurance premium expense decreased $10,000, or 6.3%, to $150,000, when comparing the three months ended June 30, 2015 to the same period in 2014. The lower expense reflects a decrease in the rate charged.

State tax expense represents the accrual of the Pennsylvania shares tax, which is based on the equity of the Bank, Pennsylvania sales and use tax and the Pennsylvania capital stock tax. State tax expense was $173,000 for the second quarter of 2015, an increase of $20,000 compared to the same period in 2014. The increase related to the change in the Bank’s equity capital.

Other non-interest expense increased $73,000, or 14.7%, to $569,000 for the second quarter of 2015. Contributing to the higher expenses was a $37,000 increase associated with costs for collection efforts of delinquent loans and additional check card expenses of $36,000 due to increased charge offs.

Six-Month Comparison

Total non-interest expense was $11,191,000 for the six-month period ended June 30, 2015, an increase of $665,000, or 6.3%, compared to the first half of 2014.

Salaries and benefits expense increased $418,000, or 7.4%, to $6,049,000 for the six months ended June 30, 2015 compared to the same period in 2014. Salary expense and related taxes increased $472,000 during the period to $4,625,000. There were two additional full-time equivalent employees when comparing the first half of 2015 to the same 2014 period. The total incentive compensation accrual for the period increased by approximately $115,000 compared with the first six months of 2014. The remainder of the increase is attributable to normal merit increases. Benefits expense decreased $54,000, to $863,000, related to medical claims insurance reimbursements received in the second quarter 2015.

Marketing expense declined $18,000, or 4.1%, to $422,000 for the six months ended June 30, 2015 for the same reason noted for the quarter.

63

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

State tax expense was $347,000 for the first half of 2015, an increase of $43,000 compared to the same period in 2014 due to the increase in the Bank’s equity capital for the period.

Third party services expense increased $34,000, or 4.2%, to $846,000 for the six months ended June 30, 2015 when compared to the same period in 2014. In addition to the items noted previously for the quarter, there were also decreased expenses for consultant services, which, in 2014 were engaged to evaluate the executive management team.

Other non-interest expense increased $142,000, or 15.3%, to $1,071,000 for the first half of 2015. Contributing to the higher expenses were $40,000 for additional collections expenses for delinquent loans, $39,000 related to additional expenses for properties held in other real estate owned and $37,000 of third party processing costs for a product designed to enhance cash flow for business loan customers.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of June 30, 2015, QNB’s net deferred tax asset was $3,192,000. The primary components of deferred taxes are deferred tax assets of $2,603,000 relating to the allowance for loan losses, $466,000 related to non-accrual interest income, $66,000 generated by OTTI charges on equity securities and $392,000 related to OTTI charges on trust preferred securities. These amounts are offset by a deferred tax liability of $577,000 resulting from furniture and equipment depreciation, prepaid items, mortgage servicing rights and unrealized gains on available for sale securities. As of December 31, 2014, QNB’s net deferred tax asset was $2,925,000. The primary difference in the balance of net deferred tax assets when comparing June 30, 2015 to December 31, 2014 is the decrease in deferred tax liability due to decreased unrealized gains on available for sale securities.

The realizability of deferred tax assets is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes it is more likely than not that QNB will realize the benefits of these remaining deferred tax assets.

Applicable income tax expense was $583,000 for the three-month period ended June 30, 2015 compared to $636,000 for the three-month period ended June 30, 2014. The effective tax rate for second quarter of 2015 was 23.2% compared with 22.6% for the second quarter of 2014. For the six-month periods ended June 30, 2015 and 2014 applicable income taxes and the effective tax rates were $1,284,000, or 24.0% and $1,333,000, or 23.0%, respectively. The higher effective tax rates in 2015 are due to the decreased proportion of tax-free income to total income, primarily municipal securities interest income and state income tax.

FINANCIAL CONDITION ANALYSIS

Financial service organizations are challenged to demonstrate they can generate sustainable and consistent earnings growth in a dynamic operating environment. While the economy continues to improve and strong loan demand continued from the latter half of 2014 into the first half of 2015, the low level of interest rates and the extreme rate competition for quality loans is anticipated to continue through 2015. It is also anticipated that the rate competition for attracting and retaining deposits may increase in 2015 and into 2016 as short-term interest rates are expected to begin to increase which could result in a lower net interest margin and a decline in net interest income.

QNB’s primary business is accepting deposits and making loans to meet the credit needs of the communities it serves. Loans are the most significant component of earning assets and growth in loans to small businesses and residents of these communities has been a primary focus of QNB. Inherent within the lending function is the evaluation and acceptance of credit risk and interest rate risk. QNB manages credit risk associated with its lending activities through portfolio diversification, underwriting policies and procedures and loan monitoring practices. QNB is committed to make credit available to its customers.

64

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Total assets at June 30, 2015 were $955,245,000 compared with $977,135,000 at December 31, 2014. Cash and cash equivalents increased $2,379,000 to $20,624,000 at June 30, 2015. Proceeds from the decline in total investment securities of $45,324,000 were used in part to fund the growth in loans receivable, which totaled $22,974,000 when compared to December 31, 2014. Loans receivable were $578,256,000 at June 30, 2015. Demand for loans by both businesses and consumers was strong during the first six months of 2015.

Average total commercial loans increased $42,857,000 when comparing the first six months of 2015 to the first six months of 2014. Commercial and industrial loans increased $12,245,000, or 10.9%, to $124,615,000. 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 increased $27,468,000, or 10.6%, when comparing the average balances for the six month periods while average tax-exempt loans to state and municipal organizations increased $2,949,000, or 6.8%, over the same time period.

Average residential real estate loans and home equity loans increased $8,403,000, or 9.7%, for the when comparing the first six months of 2015 to the same period in 2014. The Bank had several successful loan promotions over the past year and has initially received a strong response to the product offering.

Total investment securities, including trading securities, available-for-sale securities and held-to-maturity securities were $334,248,000 at June 30, 2015 and $379,572,000 at December 31, 2014. Despite the overall decline in investment security balances since year end, the composition of the portfolio is little changed since December 31, 2014. 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.

QNB owns 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. In most cases QNB owns the mezzanine tranches of these securities, with the exception of one that now represents the senior-most obligation of the trust. 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 six of these securities with an amortized cost of $3,501,000 and a fair value of $2,694,000 at June 30, 2015. There was no credit-related other-than-temporary impairment charge in the six months ended June 30, 2015 or 2014. 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.

Total deposits decreased $25,511,000, or 3.0% to $826,081,000 at June 30, 2015 compared to the December 31, 2014 balances. Interest bearing demand balances decreased $39,067,000 to $212,919,000 at June 30, 2015. This decrease, attributable to municipal deposits, which declined $48,209,000, was offset by growth in personal and business balances. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, depending on the cash flow needs of the school districts or municipalities. Non-interest bearing demand deposits increased $10,140,000, or 11.7%, when comparing June 30, 2015 to year-end 2014. The majority of this increase is from business deposits. Money market and savings balances increased $6,775,000 and $5,744,000, respectively, to $64,974,000 and $216,984,000, respectively. Time deposits decreased $9,103,000, declining from $243,247,000 at December 31, 2014 to $234,144,000 at June 30, 2015, 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 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.

65

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Short-term borrowings decreased $2,293,000 from $35,189,000 at December 31, 2014 to $32,896,000 at June 30, 2015. These balances are commercial sweep accounts which are also volatile based on businesses receipt and disbursement of funds.

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, 2015, the Bank had a maximum borrowing capacity with the FHLB of approximately $240,957,000. The maximum borrowing capacity changes as a function of qualifying collateral assets. QNB has no outstanding borrowings with the FHLB at June 30, 2015. In addition, the Bank maintains unsecured Federal funds lines with three correspondent banks totaling $31,000,000. At June 30, 2015, there were no outstanding borrowings under these lines. During the first six months of 2015, QNB borrowed from the FHLB to fund short-term liquidity needs to fund loan growth. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

Liquid sources of funds have declined $42,859,000, or 10.8% since December 31, 2014. Total cash and cash equivalents, trading and available-for-sale investment securities and loans held-for-sale totaled $355,192,000 and $398,051,000 at June 30, 2015 and December 31, 2014, respectively, primarily due to the principal and interest payments of mortgage-backed securities available for sale. These liquid sources should be adequate to meet normal fluctuations in loan demand or deposit withdrawals. It is still anticipated that the investment portfolio will continue to provide sufficient liquidity, even in a rising rate environment, as municipal bonds and agency securities are called and as cash flow on mortgage-backed and CMO securities continues to be steady. In the event interest rates rise, the cash flow available from the investment portfolio could decrease.

Approximately $154,330,000 and $206,774,000 of available-for-sale securities at June 30, 2015 and December 31, 2014, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The decrease in the amount of pledged securities corresponds with the decrease in municipal deposits from December 31, 2014 to June 30, 2015.

As an additional source of liquidity, QNB is a member of the Certificate of Deposit Account Registry Services (CDARS) program offered by the Promontory Interfinancial Network, LLC. CDARS is a funding and liquidity management tool used by banks to access funds and manage their balance sheet. It enables financial institutions to provide customers with full FDIC insurance on time deposits over $250,000 that are placed in the program. QNB also has available Insured Cash Sweep (ICS), another program through Promontory Interfinancial Network, LLC, which is a product similar to CDARS, but one that provides liquidity like a money market or savings account.

66

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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, 2015 was $88,537,000, or 9.27% of total assets, compared to shareholders' equity of $86,354,000, or 8.84% of total assets, at December 31, 2014. Shareholders’ equity at June 30, 2015 and December 31, 2014 included a positive adjustment of $293,000 and $907,000, respectively, 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 9.24% and 8.75% at June 30, 2015 and December 31, 2014, respectively.

Average shareholders' equity and average total assets were $87,229,000 and $966,204,000 for the first six months of 2015, an increase of 5.6% and 1.9%, respectively, from the averages for the year ended December 31, 2014. The ratio of average total equity to average total assets was 9.03% for the six months of 2015 compared to 8.72% for all of 2014.

Retained earnings at June 30, 2015 were impacted by six months of net income of $4,070,000 partially offset by cash dividends declared and paid of $1,931,000 for the same period. QNB offers a Dividend Reinvestment and Stock Purchase Plan (the “Plan”) to provide participants a convenient and economical method for investing cash dividends paid on the Company’s common stock in additional shares at a discount. The Plan also allows participants to make additional cash purchases of stock at a discount. Stock purchases under the Plan contributed $453,000 and $376,000 to capital during the first six months of 2015 and 2014, respectively.

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, 2015, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000. There have been no additional shares repurchased under the plan since the first quarter of 2009.

QNB is subject to various regulatory capital requirements as issued by Federal regulatory authorities. The final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”) became effective for QNB on January 1, 2015, with full compliance with all the of final rule’s requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019.

Under the final rules, minimum requirements will increase for both the quantity and quality of capital held by banks. The rules include a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, require a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets and increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. Strict eligibility criteria for regulatory capital instruments were also implemented. The final rules also revise the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. QNB continues to analyze these new rules and their effects on the business, operations and capital levels of the Company and the Bank.

As of June 30, 2015, QNB’s capital levels remained characterized as “well-capitalized” under the new rules.

67

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	2015			2014
Regulatory Capital
Shareholders' equity	$	88,537		$	86,354
Net unrealized securities gains, net of tax		(293	)		(907	)
Disallowed intangible assets		(3	)		(8	)
Common equity tier I capital		88,241		N/A
Tier I capital		88,241			85,439
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		7,714			8,060
Unrealized gains on equity securities, net of tax		55			428
Total regulatory capital	$	96,010		$	93,927
Risk-weighted assets	$	735,549		$	667,818
Quarterly average assets for leverage capital purposes	$	961,074		$	987,527

	June 30,			December 31,
Capital Ratios	2015			2014
Common equity tier I capital / risk-weighted assets		12.00	%	N/A
Tier I capital / risk-weighted assets		12.00	%		12.79	%
Total regulatory capital / risk-weighted assets		13.05	%		14.06	%
Tier I capital / average assets (leverage ratio)		9.18	%		8.65	%

Under the requirements, at June 30, 2015 and December 31, 2014, QNB has a tier 1 capital ratio of 12.00% and 12.79%, a total regulatory capital ratio of 13.05% and 14.06%, and a leverage ratio of 9.18% and 8.65%, respectively. The leverage ratio improved from December 31, 2014 as tier I capital increased and quarterly average assets decreased when compared to the fourth quarter of 2014. The decline in the tier 1 and total regulatory capital to risk-weighted asset ratios is a result of the adoption of the asset risk-weighting requirements of Basel III. Despite the implementation of this new standard and the decline in these ratios from December 31, 2014, the Company remains well-capitalized by all applicable regulatory requirements as of June 30, 2015.

MARKET RISK MANAGEMENT

Market risk reflects the risk of economic loss resulting from changes in interest rates and market prices. QNB’s primary market risk exposure is interest rate risk and liquidity risk. QNB’s liquidity position was discussed in a prior section.

QNB’s largest source of revenue is net interest income, which is subject to changes in market interest rates.Interest rate risk management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads and to provide growth in net interest income through periods of changing interest rates. QNB’s Asset/Liability and Investment Management Committee (ALCO) is responsible for managing interest rate risk and for evaluating the impact of changing interest rate conditions on net interest income.

QNB uses computer simulation analysis to measure the sensitivity of projected earnings to changes in interest rates.  Simulation takes into account current balance sheet volumes and the scheduled repricing dates, instrument level optionality, and maturities of assets and liabilities.  It incorporates assumptions for growth, changes in the mix of assets and liabilities, prepayments, and average rates earned and paid.  Based on this information, management uses the model to project net interest income under multiple interest rate scenarios.

68

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

A balance sheet is considered liability sensitive when its liabilities (deposits and borrowings) reprice faster or to a greater extent than its earning assets (loans and securities). A liability sensitive balance sheet will produce relatively less net interest income when interest rates rise and more net interest income when they decline.  Based on our simulation analysis, management believes QNB’s interest sensitivity position at June 30, 2015 is liability sensitive.  Management expects that market interest rates may gradually increase in the next 12 months, based on the economic environment and policy of the Board of Governors of the Federal Reserve System.

The following table shows the estimated impact of changes in interest rates on net interest income as of June 30, 2015 assuming instantaneous rate shocks, and consistent levels of assets and liabilities.  Net interest income for the subsequent twelve months is projected to decrease when interest rates are higher than current rates.

                                         Estimated Change in Net Interest Income

Changes in Interest rates	June 30,
(in basis points)	2015			2014
+300		-12.88	%		-12.17	%
+200		-8.75	%		-7.85	%
+100		-4.90	%		-4.25	%
N/A	*N/A			*N/A

* Certain short-term interest are below 1%

Computations of future effects of hypothetical interest rate changes are based on numerous assumptions and should not be relied upon as indicative of actual results.   Assets and liabilities may react differently than projected to changes in market interest rates.   The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag changes in market interest rates.  Interest rate shifts may not be parallel.

Changes in interest rates can cause substantial changes in the amount of prepayments of loans and mortgage-backed securities, which may in turn affect QNB’s interest rate sensitivity position.  Additionally, credit risk may rise if an interest rate increase adversely affects the ability of borrowers to service their debt.

QNB is not subject to foreign currency exchange or commodity price risk. At June 30, 2015 QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

69

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.

70

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

JUNE 30, 2015

Item 1. Legal Proceedings

No material proceedings.

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, 2014.

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, 2015 through April 30, 2015	-	-	-	42,117
May 1, 2015 through May 31, 2015	-	-	-	42,117
June 1, 2015 through June 30, 2015	-	-	-	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.

71

Item 6. Exhibits

Exhibit 3.1 Articles of Incorporation of Registrant, as amended. (Incorporated by reference to Exhibit 3(i) of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 13, 2015).

Exhibit 3.2	Bylaws of Registrant, as amended. (Incorporated by reference to Exhibit 3(ii) of Registrant’s Annual Report on Form 10-K, SEC File No. 0-17706, filed with the Commission on March 13, 2015).
Exhibit 10.1	QNB Corp. 2015 Stock Incentive Plan (Incorporated by reference to Exhibit A of the Registrant’s Proxy Statement filed on April 15, 2015.)

Exhibit 11	Statement Re: Computation of Earnings Per Share. (Included in Part I, Item I, hereof.)
Exhibit 31.1	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.

72

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 6, 2015	By:      /s/ David W. Freeman
	David W. Freeman              Chief Executive Officer
Date:       August 6, 2015	By:      /s/ Janice McCracken Erkes
	Janice McCracken Erkes             Chief Financial Officer

73

EX-31.1

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 6, 2015	By: /s/ David W. Freeman
	David W. Freeman        Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Janice McCracken Erkes, 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 6, 2015	By: /s/ Janice McCracken Erkes
	Janice McCracken Erkes          Chief Financial Officer

EX-32.1

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, 2015, 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 6, 2015	By: /s/ David W. Freeman
	David W. Freeman        Chief Executive Officer

EX-32.2

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, 2015, as filed with the Securities and Exchange Commission (the Report), I, Janice McCracken Erkes, 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 6, 2015	By: /s/ Janice McCracken Erkes
	Janice McCracken Erkes        Chief Financial Officer

XML

Note 7 - Investment Securities (Details) - Investment Securities Available-for-sale - USD ($)	Jun. 30, 2015	Dec. 31, 2014
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	$ 330,231,000	$ 375,219,000
Investment securities available-for-sale, gross unrealized holding gains	3,919,000	5,073,000
Investment securities available-for-sale, gross unrealized holding losses	(3,475,000)	(3,698,000)
Investment securities available-for-sale, amortized cost	329,787,000	373,844,000
US Government Agencies Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	42,263,000	62,665,000
Investment securities available-for-sale, gross unrealized holding gains	171,000	212,000
Investment securities available-for-sale, gross unrealized holding losses	(225,000)	(472,000)
Investment securities available-for-sale, amortized cost	42,317,000	62,925,000
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	73,938,000	72,569,000
Investment securities available-for-sale, gross unrealized holding gains	1,255,000	1,500,000
Investment securities available-for-sale, gross unrealized holding losses	(328,000)	(150,000)
Investment securities available-for-sale, amortized cost	73,011,000	71,219,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	120,943,000	136,192,000
Investment securities available-for-sale, gross unrealized holding gains	1,464,000	1,819,000
Investment securities available-for-sale, gross unrealized holding losses	(559,000)	(466,000)
Investment securities available-for-sale, amortized cost	120,038,000	134,839,000
Collateralized Mortgage Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	76,738,000	87,662,000
Investment securities available-for-sale, gross unrealized holding gains	341,000	330,000
Investment securities available-for-sale, gross unrealized holding losses	(1,088,000)	(1,300,000)
Investment securities available-for-sale, amortized cost	77,485,000	88,632,000
Collateralized Debt Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	2,694,000	2,439,000
Investment securities available-for-sale, gross unrealized holding gains	215,000	160,000
Investment securities available-for-sale, gross unrealized holding losses	(1,022,000)	(1,240,000)
Investment securities available-for-sale, amortized cost	3,501,000	3,519,000
Corporate Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	6,036,000	6,037,000
Investment securities available-for-sale, gross unrealized holding gains	25,000	30,000
Investment securities available-for-sale, gross unrealized holding losses	(7,000)
Investment securities available-for-sale, amortized cost	6,018,000	6,007,000
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	7,619,000	7,655,000
Investment securities available-for-sale, gross unrealized holding gains	448,000	1,022,000
Investment securities available-for-sale, gross unrealized holding losses	(246,000)	(70,000)
Investment securities available-for-sale, amortized cost	$ 7,417,000	$ 6,703,000

XML

Note 8 - Loans and Allowance for Loan Losses (Details) - Loans Disaggregated by Impairment Method - USD ($) $ in Thousands	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013
Commercial:
Allowance for loan losses	$ 7,655	$ 7,978	$ 8,001	$ 8,900	$ 8,819	$ 8,925
Allowance for loan losses - individually evaluated for impairment	839		1,194
Allowance for loan losses - collectively evaluated for impairment	6,414		6,489
Loans	578,204		555,251
Loans - individually evaluated for impairment	18,173		21,077
Loans - collectively evaluated for impairment	560,031		534,174
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Allowance for loan losses	1,603	1,875	1,892	2,407	2,308	2,044
Allowance for loan losses - individually evaluated for impairment	757		1,095
Allowance for loan losses - collectively evaluated for impairment	846		797
Loans	132,271		118,845
Loans - individually evaluated for impairment	7,870		7,115
Loans - collectively evaluated for impairment	124,401		111,730
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Allowance for loan losses	149	285	297	240	391	439
Allowance for loan losses - collectively evaluated for impairment	149		297
Loans	19,031		23,471
Loans - individually evaluated for impairment	348		362
Loans - collectively evaluated for impairment	18,683		23,109
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Allowance for loan losses	2,655	2,569	2,700	2,600	2,757	2,898
Allowance for loan losses - collectively evaluated for impairment	2,655		2,700
Loans	212,015		203,534
Loans - individually evaluated for impairment	7,810		11,546
Loans - collectively evaluated for impairment	204,205		191,988
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Allowance for loan losses	1,635	1,666	1,630	1,708	1,465	1,632
Allowance for loan losses - individually evaluated for impairment	43		91
Allowance for loan losses - collectively evaluated for impairment	1,592		1,539
Loans	55,984		53,077
Loans - individually evaluated for impairment	1,489		1,567
Loans - collectively evaluated for impairment	54,495		51,510
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Allowance for loan losses	232	253	221	214	293	186
Allowance for loan losses - collectively evaluated for impairment	232		221
Loans	42,178		44,104
Loans - collectively evaluated for impairment	42,178		44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Allowance for loan losses	121	95	93	92	106	103
Allowance for loan losses - collectively evaluated for impairment	121		93
Loans	9,221		7,685
Loans - individually evaluated for impairment	11		16
Loans - collectively evaluated for impairment	9,210		7,669
Retail Portfolio Segment [Member]
Commercial:
Loans	107,504		104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Allowance for loan losses	313	308	312	372	314	303
Allowance for loan losses - individually evaluated for impairment	39		4
Allowance for loan losses - collectively evaluated for impairment	274		308
Loans	38,867		37,147
Loans - individually evaluated for impairment	528		341
Loans - collectively evaluated for impairment	38,339		36,806
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Allowance for loan losses	474	479	453	520	602	583
Allowance for loan losses - individually evaluated for impairment			4
Allowance for loan losses - collectively evaluated for impairment	474		449
Loans	64,896		63,213
Loans - individually evaluated for impairment	117		129
Loans - collectively evaluated for impairment	64,779		63,084
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Allowance for loan losses	71	85	85	67	63	64
Allowance for loan losses - collectively evaluated for impairment	71		85
Loans	3,741		4,175
Loans - individually evaluated for impairment			1
Loans - collectively evaluated for impairment	3,741		4,174
Unallocated Financing Receivables [Member]
Commercial:
Allowance for loan losses	402	$ 363	318	$ 679	$ 517	$ 669
Allowance for loan losses - individually evaluated for impairment	0		0
Allowance for loan losses - collectively evaluated for impairment	0		0
Loans	0		0
Loans - individually evaluated for impairment	0		0
Loans - collectively evaluated for impairment	$ 0		$ 0

XML

Note 8 - Loans and Allowance for Loan Losses (Details) - Internal Risk Ratings and Payment Activity - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Commercial:
Loans and Leases receivable	$ 578,204	$ 555,251
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans and Leases receivable	132,271	118,845
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	123,433	111,560
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	665	42
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	8,173	7,243
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans and Leases receivable	19,031	23,471
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	19,010	22,981
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable		128
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	21	362
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Loans and Leases receivable	212,015	203,534
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	192,524	178,339
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	2,047	2,418
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	17,444	22,777
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans and Leases receivable	55,984	53,077
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	53,038	50,172
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	718	408
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	2,228	2,497
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	42,178	44,104
State and Political Subdivisions Portfolio Segment [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	40,890	42,771
State and Political Subdivisions Portfolio Segment [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	1,288	1,333
Finance Leases Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	9,221	7,685
Finance Leases Portfolio Segment [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	9,014	7,543
Finance Leases Portfolio Segment [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	207	142
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member]
Commercial:
Loans and Leases receivable	470,700	450,716
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	437,909	413,366
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	3,430	2,996
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	29,361	34,354
Retail Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	107,504	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	38,867	37,147
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	64,896	63,213
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable	3,741	4,175
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member]
Commercial:
Loans and Leases receivable	106,998	104,205
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	38,453	36,922
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	64,804	63,109
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable	3,741	4,174
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member]
Commercial:
Loans and Leases receivable	506	330
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	414	225
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	$ 92	104
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable		$ 1

XML

Note 8 - Loans and Allowance for Loan Losses (Details) - Impaired Loans - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Commercial:
Recorded investment-with no allowance recorded	$ 16,716	$ 19,019
Unpaid principal balance-with no allowance recorded	18,233	20,485
Commercial:
Recorded investment-with allowance recorded	1,457	2,058
Unpaid principal balance-with allowance recorded	1,690	2,359
Related allowance-with allowance recorded	839	1,194
Commercial:
Recorded investment	18,173	21,077
Unpaid principal balance	19,923	22,844
Related allowance	839	1,194
Average recoded investment	17,901	25,768
Interest income recognized	231	683
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Recorded investment-with no allowance recorded	6,987	5,894
Unpaid principal balance-with no allowance recorded	7,161	6,056
Commercial:
Recorded investment-with allowance recorded	883	1,221
Unpaid principal balance-with allowance recorded	1,061	1,419
Related allowance-with allowance recorded	757	1,095
Commercial:
Recorded investment	7,870	7,115
Unpaid principal balance	8,222	7,475
Related allowance	757	1,095
Average recoded investment	6,846	9,305
Interest income recognized	128	331
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Recorded investment-with no allowance recorded	348	362
Unpaid principal balance-with no allowance recorded	348	444
Commercial:
Recorded investment	348	362
Unpaid principal balance	348	444
Average recoded investment	437	1,050
Interest income recognized	12	2
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Recorded investment-with no allowance recorded	7,810	11,546
Unpaid principal balance-with no allowance recorded	8,368	12,198
Commercial:
Recorded investment	7,810	11,546
Unpaid principal balance	8,368	12,198
Average recoded investment	8,526	12,304
Interest income recognized	86	344
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Recorded investment-with no allowance recorded	1,228	903
Unpaid principal balance-with no allowance recorded	1,936	1,427
Commercial:
Recorded investment-with allowance recorded	261	664
Unpaid principal balance-with allowance recorded	315	748
Related allowance-with allowance recorded	43	91
Commercial:
Recorded investment	1,489	1,567
Unpaid principal balance	2,251	2,175
Related allowance	43	91
Average recoded investment	1,549	2,452
Finance Leases Portfolio Segment [Member]
Commercial:
Recorded investment-with no allowance recorded	11	16
Unpaid principal balance-with no allowance recorded	11	16
Commercial:
Recorded investment	11	16
Unpaid principal balance	11	16
Average recoded investment	13	26
Interest income recognized	1	1
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Recorded investment-with no allowance recorded	215	225
Unpaid principal balance-with no allowance recorded	246	250
Commercial:
Recorded investment-with allowance recorded	313	116
Unpaid principal balance-with allowance recorded	314	116
Related allowance-with allowance recorded	39	4
Commercial:
Recorded investment	528	341
Unpaid principal balance	560	366
Related allowance	39	4
Average recoded investment	398	460
Interest income recognized	3	5
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Recorded investment-with no allowance recorded	117	72
Unpaid principal balance-with no allowance recorded	163	93
Commercial:
Recorded investment-with allowance recorded		57
Unpaid principal balance-with allowance recorded		76
Related allowance-with allowance recorded		4
Commercial:
Recorded investment	117	129
Unpaid principal balance	163	169
Related allowance		4
Average recoded investment	131	169
Interest income recognized	1
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Recorded investment-with no allowance recorded		1
Unpaid principal balance-with no allowance recorded		1
Commercial:
Recorded investment		1
Unpaid principal balance		1
Average recoded investment	$ 1	$ 2

XML

Note 8 - Loans and Allowance for Loan Losses (Details)	3 Months Ended		6 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Bank Overdrafts	$ 102,000		$ 102,000		$ 142,000
Financing Receivable, Modifications, Recorded Investment	5,241,000		$ 5,241,000		5,587,000
Financing Receivable, Modifications, Number of Contracts			0
Loans and Leases Receivable, Impaired, Commitment to Lend	$ 1,935,000		$ 1,935,000		1,729,000
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down			0	$ 35,000
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	0	0
Performing Financial Instruments [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	$ 2,177,000		2,177,000		1,897,000
Nonperforming Financial Instruments [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	$ 3,064,000		$ 3,064,000		$ 3,690,000
Maximum [Member] | Residential Portfolio Segment [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Loan-to-value Ratio			80.00%

XML

Note 5 - Earnings Per Share (Details) - shares	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Employee Stock Option [Member]
Note 5 - Earnings Per Share (Details) [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	21,000	34,800	21,000	34,800

XML

Note 9 - Fair Value Measurements and Disclosures (Details) - Financial Assets Measured at Fair Value on a Recurring and Nonrecurring Basis - USD ($)	Jun. 30, 2015	Dec. 31, 2014
Trading Securities
Trading securities	$ 3,871,000	$ 4,207,000
Securities available-for-sale
Investment securities available-for-sale	330,231,000	375,219,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	334,102,000	379,426,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	859,000	3,827,000
Impaired Loans [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	749,000	3,715,000
Other Real Estate Owned [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	50,000
Mortgage Servicing Rights [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	60,000	112,000
US States and Political Subdivisions Debt Securities [Member]
Trading Securities
Trading securities	3,871,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	73,938,000	72,569,000
US Government Agencies Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	42,263,000	62,665,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale
Investment securities available-for-sale	120,943,000	136,192,000
Collateralized Mortgage Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	76,738,000	87,662,000
Collateralized Debt Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	2,694,000	2,439,000
Corporate Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	6,036,000	6,037,000
Equity Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	7,619,000	7,655,000
Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale
Investment securities available-for-sale	7,619,000	7,655,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	7,619,000	7,655,000
Fair Value, Inputs, Level 1 [Member] | Equity Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	7,619,000	7,655,000
Fair Value, Inputs, Level 2 [Member]
Trading Securities
Trading securities	3,871,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	319,918,000	365,125,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	323,789,000	369,332,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	50,000
Fair Value, Inputs, Level 2 [Member] | Other Real Estate Owned [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	50,000
Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member]
Trading Securities
Trading securities	3,871,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	73,938,000	72,569,000
Fair Value, Inputs, Level 2 [Member] | US Government Agencies Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	42,263,000	62,665,000
Fair Value, Inputs, Level 2 [Member] | Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale
Investment securities available-for-sale	120,943,000	136,192,000
Fair Value, Inputs, Level 2 [Member] | Collateralized Mortgage Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	76,738,000	87,662,000
Fair Value, Inputs, Level 2 [Member] | Corporate Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	6,036,000	6,037,000
Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale
Investment securities available-for-sale	2,694,000	2,439,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	2,694,000	2,439,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	809,000	3,827,000
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	749,000	3,715,000
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	60,000	112,000
Fair Value, Inputs, Level 3 [Member] | Collateralized Debt Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	$ 2,694,000	$ 2,439,000

XML

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

6 Months Ended

Jun. 30, 2015

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

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

	June 30,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	132,271	$	118,845
Construction		19,031		23,471
Secured by commercial real estate		212,015		203,534
Secured by residential real estate		55,984		53,077
State and political subdivisions		42,178		44,104
Indirect lease financing		9,221		7,685
Retail:
1-4 family residential mortgages		38,867		37,147
Home equity loans and lines		64,896		63,213
Consumer		3,741		4,175
Total loans		578,204		555,251
Net unearned costs (fees)		52		31
Loans receivable	$	578,256	$	555,282

Financing Receivable Credit Quality Indicators [Table Text Block]

June 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	123,433	$	665	$	8,173	$	-	$	132,271
Construction		19,010		-		21		-		19,031
Secured by commercial real estate		192,524		2,047		17,444		-		212,015
Secured by residential real estate		53,038		718		2,228		-		55,984
State and political subdivisions		40,890		-		1,288		-		42,178
Indirect lease financing		9,014		-		207		-		9,221
	$	437,909	$	3,430	$	29,361	$	-	$	470,700

December 31, 2014	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	111,560	$	42	$	7,243	$	-	$	118,845
Construction		22,981		128		362		-		23,471
Secured by commercial real estate		178,339		2,418		22,777		-		203,534
Secured by residential real estate		50,172		408		2,497		-		53,077
State and political subdivisions		42,771		-		1,333		-		44,104
Indirect lease financing		7,543		-		142		-		7,685
	$	413,366	$	2,996	$	34,354	$	-	$	450,716

June 30, 2015	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	38,453	$	414	$	38,867
Home equity loans and lines		64,804		92		64,896
Consumer		3,741		-		3,741
	$	106,998	$	506	$	107,504

December 31, 2014	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	36,922	$	225	$	37,147
Home equity loans and lines		63,109		104		63,213
Consumer		4,174		1		4,175
	$	104,205	$	330	$	104,535

Past Due Financing Receivables [Table Text Block]

June 30, 2015	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	$	486		-	$	11	$	497	$	131,774	$	132,271
Construction		-		-		-		-		19,031		19,031
Secured by commercial real estate		404	$	105		1,151		1,660		210,355		212,015
Secured by residential real estate		136		341		264		741		55,243		55,984
State and political subdivisions		-		-		-		-		42,178		42,178
Indirect lease financing		91		40		90		221		9,000		9,221
Retail:
1-4 family residential mortgages		-		-		199		199		38,668		38,867
Home equity loans and lines		185		-		-		185		64,711		64,896
Consumer		10		4		-		14		3,727		3,741
	$	1,312	$	490	$	1,715	$	3,517	$	574,687	$	578,204

December 31, 2014	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		-		-		-		-	$	118,845	$	118,845
Construction	$	466		-		-	$	466		23,005		23,471
Secured by commercial real estate		28	$	332	$	3,747		4,107		199,427		203,534
Secured by residential real estate		600		574		-		1,174		51,903		53,077
State and political subdivisions		-		-		-		-		44,104		44,104
Indirect lease financing		291		-		-		291		7,394		7,685
Retail:
1-4 family residential mortgages		526		-		-		526		36,621		37,147
Home equity loans and lines		66		49		-		115		63,098		63,213
Consumer		16		8		-		24		4,151		4,175
	$	1,993	$	963	$	3,747	$	6,703	$	548,548	$	555,251

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

June 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,526
Construction		-		-
Secured by commercial real estate		-		4,302
Secured by residential real estate		-		1,489
State and political subdivisions		-		-
Indirect lease financing	$	90		-
Retail:
1-4 family residential mortgages		-		414
Home equity loans and lines		-		92
Consumer		-		-
	$	90	$	9,823

December 31, 2014	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	2,171
Construction		-		337
Secured by commercial real estate		-		6,465
Secured by residential real estate		-		1,467
State and political subdivisions		-		-
Indirect lease financing		-		-
Retail:
1-4 family residential mortgages		-		225
Home equity loans and lines		-		104
Consumer		-		1
	$	-	$	10,770

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

Three months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,875	$	(251	)	$	(30	)	$	9	$	1,603
Construction		285		(136	)		-			-		149
Secured by commercial real estate		2,569		141			(57	)		2		2,655
Secured by residential real estate		1,666		266			(313	)		16		1,635
State and political subdivisions		253		(21	)		-			-		232
Indirect lease financing		95		25			-			1		121
Retail:
1-4 family residential mortgages		308		5			-			-		313
Home equity loans and lines		479		(12	)		-			7		474
Consumer		85		4			(23	)		5		71
Unallocated		363		39		N/A			N/A			402
	$	7,978	$	60		$	(423	)	$	40	$	7,655

Three months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,308	$	55		$	-		$	44	$	2,407
Construction		391		(151	)		-			-		240
Secured by commercial real estate		2,757		(157	)		-			-		2,600
Secured by residential real estate		1,465		238			-			5		1,708
State and political subdivisions		293		(79	)		-			-		214
Loans to depository institutions		3		(2	)		-			-		1
Indirect lease financing		106		(19	)		-			5		92
Retail:
1-4 family residential mortgages		314		58			-			-		372
Home equity loans and lines		602		(127	)		(34	)		79		520
Consumer		63		22			(28	)		10		67
Unallocated		517		162		N/A			N/A			679
	$	8,819	$	-		$	(62	)	$	143	$	8,900

Six months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,892	$	(278	)	$	(30	)	$	19	$	1,603
Construction		297		(148	)		-			-		149
Secured by commercial real estate		2,700		36			(85	)		4		2,655
Secured by residential real estate		1,630		304			(317	)		18		1,635
State and political subdivisions		221		11			-			-		232
Indirect lease financing		93		26			(8	)		10		121
Retail:
1-4 family residential mortgages		312		1			-			-		313
Home equity loans and lines		453		9			-			12		474
Consumer		85		15			(41	)		12		71
Unallocated		318		84		N/A			N/A			402
	$	8,001	$	60		$	(481	)	$	75	$	7,655

Six months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	329		$	(17	)	$	51	$	2,407
Construction		439		(199	)		-			-		240
Secured by commercial real estate		2,898		(298	)		-			-		2,600
Secured by residential real estate		1,632		68			(1	)		9		1,708
State and political subdivisions		186		28			-			-		214
Loans to depository institutions		4		(3	)		-			-		1
Indirect lease financing		103		(14	)		(6	)		9		92
Retail:
1-4 family residential mortgages		303		69			-			-		372
Home equity loans and lines		583		(40	)		(121	)		98		520
Consumer		64		50			(71	)		24		67
Unallocated		669		10		N/A			N/A			679
	$	8,925	$	-		$	(216	)	$	191	$	8,900

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

Six months ended June 30,	2015						2014
	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		-	$	-	$	-		1	$	288	$	233
		-	$	-	$	-		1	$	288	$	233

Three months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

Six months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

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

	Allowance for Loan Losses						Loans Receivable
June 30, 2015	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	$	1,603	$	757	$	846	$	132,271	$	7,870	$	124,401
Construction		149		-		149		19,031		348		18,683
Secured by commercial real estate		2,655		-		2,655		212,015		7,810		204,205
Secured by residential real estate		1,635		43		1,592		55,984		1,489		54,495
State and political subdivisions		232		-		232		42,178		-		42,178
Indirect lease financing		121		-		121		9,221		11		9,210
Retail:
1-4 family residential mortgages		313		39		274		38,867		528		38,339
Home equity loans and lines		474		-		474		64,896		117		64,779
Consumer		71		-		71		3,741		-		3,741
Unallocated		402		N/A		N/A		N/A		N/A		N/A
	$	7,655	$	839	$	6,414	$	578,204	$	18,173	$	560,031

	Allowance for Loan Losses						Loans Receivable
December 31, 2014	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	$	1,892	$	1,095	$	797	$	118,845	$	7,115	$	111,730
Construction		297		-		297		23,471		362		23,109
Secured by commercial real estate		2,700		-		2,700		203,534		11,546		191,988
Secured by residential real estate		1,630		91		1,539		53,077		1,567		51,510
State and political subdivisions		221		-		221		44,104		-		44,104
Indirect lease financing		93		-		93		7,685		16		7,669
Retail:
1-4 family residential mortgages		312		4		308		37,147		341		36,806
Home equity loans and lines		453		4		449		63,213		129		63,084
Consumer		85		-		85		4,175		1		4,174
Unallocated		318		N/A		N/A		N/A		N/A		N/A
	$	8,001	$	1,194	$	6,489	$	555,251	$	21,077	$	534,174

Impaired Financing Receivables [Table Text Block]

	June 30, 2015						December 31, 2014
	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	6,987	$	7,161	$	-	$	5,894	$	6,056	$	-
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,228		1,936		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		215		246		-		225		250		-
Home equity loans and lines		117		163		-		72		93		-
Consumer		-		-		-		1		1		-
	$	16,716	$	18,233	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	883	$	1,061	$	757	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		261		315		43		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		313		314		39		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,457	$	1,690	$	839	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	7,870	$	8,222	$	757	$	7,115	$	7,475	$	1,095
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,489		2,251		43		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		528		560		39		341		366		4
Home equity loans and lines		117		163		-		129		169		4
Consumer		-		-		-		1		1		-
	$	18,173	$	19,923	$	839	$	21,077	$	22,844	$	1,194

	Six Months Ended June 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,846	$	128	$	9,305	$	331
Construction		437		12		1,050		2
Secured by commercial real estate		8,526		86		12,304		344
Secured by residential real estate		1,549		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		13		1		26		1
Retail:
1-4 family residential mortgages		398		3		460		5
Home equity loans and lines		131		1		169		-
Consumer		1		-		2		-
	$	17,901	$	231	$	25,768	$	683

Troubled Debt Restructuring [Member]

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

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

	June 30, 2015				December 31, 2014
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	4,367		-	$	4,588		-
TDRs with an allowance recorded		874	$	674		999	$	813
	$	5,241	$	674	$	5,587	$	813

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Note 8 - Loans and Allowance for Loan Losses (Details) - Non-Accrual Loans - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Commercial:
Loans 90 days or more past due and still accruing	$ 90
Non-accrual loans	9,823	$ 10,770
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Non-accrual loans	3,526	2,171
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Non-accrual loans		337
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Non-accrual loans	4,302	6,465
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Non-accrual loans	1,489	1,467
Finance Leases Portfolio Segment [Member]
Commercial:
Loans 90 days or more past due and still accruing	90
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Non-accrual loans	414	225
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Non-accrual loans	$ 92	104
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Non-accrual loans		$ 1

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Note 7 - Investment Securities (Details) - Credit-Related Other-Than-Temporary Impairment - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Credit-Related Other-Than-Temporary Impairment [Abstract]
Balance, beginning of period			$ 1,153,000	$ 1,271,000
Reductions: gain on payoff			0	0
Additions:
Initial credit impairments			0	0
Subsequent credit impairments	$ 0	$ 0	0	0
Balance, end of period	$ 1,153,000	$ 1,271,000	$ 1,153,000	$ 1,271,000

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Note 7 - Investment Securities (Details)	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) [Line Items]
Trading Gain (Loss)	$ (34,000)	$ 93,000	$ (19,000)	$ 115,000
Trading Securities, Change in Unrealized Holding Gain (Loss)			21,000		$ 24,000
Available-for-sale Securities, Gross Realized Gains (Losses), Sale Proceeds	19,200,000	6,389,000	26,795,000	18,970,000
Available-for-sale Securities Pledged as Collateral	154,330,000		154,330,000		206,774,000
Income Tax Expense (Benefit) Related to Net Realized Gains (Losses) On Sales of Securities			244,000	308,000
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses	0	0	0	0
Proceeds from Sale of Held-to-maturity Securities	0	$ 0	0	$ 0
Available-for-sale Securities, Amortized Cost Basis	329,787,000		329,787,000		373,844,000
Available-for-sale Securities	$ 330,231,000		$ 330,231,000		375,219,000
Fair Value Inputs, Prepayment Rate			1.00%
Threshold for Identifying Banks with Trust Preferred Securities			$ 15,000,000,000
Minimum Cost Saving for Refinance	2.00%		2.00%
Fair Value Inputs, Loss Severity			95.00%
Collateralized Debt Obligations [Member]
Note 7 - Investment Securities (Details) [Line Items]
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses	$ 0		$ 0
Number of Trust Preferred Securities	6		6
Available-for-sale Securities, Amortized Cost Basis	$ 3,501,000		$ 3,501,000		3,519,000
Available-for-sale Securities	$ 2,694,000		$ 2,694,000		$ 2,439,000
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Greater than or Equal to One Year	5		5
Minimum [Member] | Collateralized Debt Obligations [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Loss Severity			0.00%
Maximum [Member] | Collateralized Debt Obligations [Member]
Note 7 - Investment Securities (Details) [Line Items]
Fair Value Inputs, Loss Severity			100.00%

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Note 8 - Loans and Allowance for Loan Losses (Details) - Specific Reserve for Loans Modified as TDR's - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Specific Reserve for Loans Modified as TDR's [Abstract]
TDRs with no specific allowance recorded	$ 4,367	$ 4,588
TDRs with an allowance recorded	874	999
TDRs with an allowance recorded	674	813
	5,241	5,587
	$ 674	$ 813

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Note 10 - Off-balance-sheet Financial Instruments and Guarantees (Details) - Financial Instrument Commitments - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	$ 226,403	$ 209,772
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	220,961	203,496
Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	$ 5,442	$ 6,276

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Note 8 - Loans and Allowance for Loan Losses (Details) - Major Classes of Loans - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Commercial:
Loans	$ 578,204	$ 555,251
Net unearned costs (fees)	52	31
Loans receivable	578,256	555,282
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans	132,271	118,845
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans	19,031	23,471
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Loans	212,015	203,534
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans	55,984	53,077
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans	42,178	44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Loans	9,221	7,685
Retail Portfolio Segment [Member]
Commercial:
Loans	107,504	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans	38,867	37,147
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans	64,896	63,213
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans	$ 3,741	$ 4,175

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Operating Activities
Net income	$ 4,070	$ 4,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	524	561
Provision for loan losses	60	0
Net gain on investment securities available-for-sale	(717)	(907)
Provision for repossessed assets and other real estate owned	89
Net loss on sale of repossessed assets and other real estate owned	(70)	1
Net gain on sale of loans	(182)	(61)
Proceeds from sales of residential mortgages held-for-sale	6,487	1,542
Origination of residential mortgages held-for-sale	(6,391)	(1,720)
Income on bank-owned life insurance	(142)	(145)
Stock-based compensation expense	46	43
Net decrease (increase) in trading securities	336	(4,531)
Deferred income tax provision	49	(80)
Net decrease in income taxes payable	(453)	(10)
Net decrease in accrued interest receivable	244	130
Amortization of mortgage servicing rights and change in valuation allowance	31	30
Net amortization of premiums and discounts on investment securities	1,101	1,056
Net decrease in accrued interest payable	(7)	(65)
Increase in other assets	(304)	(532)
Decrease in other liabilities	(1,008)	(17)
Net cash provided by (used in) operating activities	3,763	(237)
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale	51,926	51,788
Proceeds from the sale of investment securities available-for-sale	26,795	18,970
Purchases of investment securities available-for-sale	(30,319)	(20,640)
Proceeds from redemption of investment in restricted bank stock	1,318	2,005
Purchase of restricted bank stock	(1,179)	(2,409)
Net increase in loans	(23,595)	(20,308)
Net purchases of premises and equipment	(214)	(410)
Proceeds from sales of repossessed assets and other real estate owned	3,007	10
Net cash provided by investing activities	27,739	29,006
Financing Activities
Net increase in non-interest bearing deposits	10,140	7,291
Net decrease in interest-bearing deposits	(35,651)	(25,167)
Net decrease in short-term borrowings	(2,293)	(1,056)
Repayments of long-term debt		(5,000)
Tax benefit from exercise of stock options	20	12
Cash dividends paid, net of reinvestment	(1,717)	(1,658)
Proceeds from issuance of common stock	378	265
Net cash used in financing activities	(29,123)	(25,313)
Increase in cash and cash equivalents	2,379	3,456
Cash and cash equivalents at beginning of year	18,245	16,286
Cash and cash equivalents at end of period	20,624	19,742
Supplemental Cash Flow Disclosures
Interest paid	2,231	2,290
Income taxes paid	1,650	1,410
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned	215	$ 20
Unsettled trades to purchase securities	$ 4,729

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Note 11 - Regulatory Restrictions (Details) - Capital Ratios and Regulatory Minimum Requirements - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Consolidated Entities [Member]
Total risk-based capital (to risk-weighted assets):
Risk-based capital (to risk-weighted assets) actual amount	$ 96,010	$ 93,927
Risk-based capital (to risk-weighted assets) actual ratio	13.05%	14.06%
Risk-based capital (to risk-weighted assets) adequately capitalized amount	$ 58,844	$ 53,425
Risk-based capital (to risk-weighted assets) adequately capitalized ratio	8.00%	8.00%
Risk-based capital (to risk-weighted assets) well capitalized amount	$ 73,555
Risk-based capital (to risk-weighted assets) well capitalized ratio	10.00%
Tier I capital (to risk-weighted assets):
Tier i capital (to risk-weighted assets) actual amount	$ 88,241	$ 85,439
Tier i capital (to risk-weighted assets) actual ratio	12.00%	12.79%
Tier i capital (to risk-weighted assets) adequately capitalized amount	$ 44,133	$ 26,713
Tier i capital (to risk-weighted assets) adequately capitalized ratio	6.00%	4.00%
Tier i capital (to risk-weighted assets) well capitalized amount	$ 44,133
Tier i capital (to risk-weighted assets) well capitalized ratio	6.00%
Common equity tier 1 capital (to risk-weighted assets):
Common equity tier 1 capital (to risk-weighted assets) actual amount	$ 88,241
Common equity tier 1 capital (to risk-weighted assets) actual ratio	12.00%
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 33,100
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized ratio	4.50%
Common equity tier 1 capital (to risk-weighted assets) well capitalized amount
Common equity tier 1 capital (to risk-weighted assets) well capitalized ratio
Tier I capital (to average assets):
Tier i capital (to average assets) actual amount	$ 88,241	$ 85,439
Tier i capital (to average assets) actual ratio	9.18%	8.65%
Tier i capital (to average assets) adequately capitalized amount	$ 38,443	$ 39,501
Tier i capital (to average assets) adequately capitalized ratio	4.00%	4.00%
Tier i capital (to average assets) well capitalized amount
Tier i capital (to average assets) well capitalized ratio
Bank [Member]
Total risk-based capital (to risk-weighted assets):
Risk-based capital (to risk-weighted assets) actual amount	$ 88,793	$ 86,884
Risk-based capital (to risk-weighted assets) actual ratio	12.45%	13.14%
Risk-based capital (to risk-weighted assets) adequately capitalized amount	$ 57,078	$ 52,891
Risk-based capital (to risk-weighted assets) adequately capitalized ratio	8.00%	8.00%
Risk-based capital (to risk-weighted assets) well capitalized amount	$ 71,348	$ 66,114
Risk-based capital (to risk-weighted assets) well capitalized ratio	10.00%	10.00%
Tier I capital (to risk-weighted assets):
Tier i capital (to risk-weighted assets) actual amount	$ 81,079	$ 78,824
Tier i capital (to risk-weighted assets) actual ratio	11.36%	11.92%
Tier i capital (to risk-weighted assets) adequately capitalized amount	$ 42,809	$ 26,446
Tier i capital (to risk-weighted assets) adequately capitalized ratio	6.00%	4.00%
Tier i capital (to risk-weighted assets) well capitalized amount	$ 57,078	$ 39,669
Tier i capital (to risk-weighted assets) well capitalized ratio	8.00%	6.00%
Common equity tier 1 capital (to risk-weighted assets):
Common equity tier 1 capital (to risk-weighted assets) actual amount	$ 81,079
Common equity tier 1 capital (to risk-weighted assets) actual ratio	11.36%
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 32,106
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized ratio	4.50%
Common equity tier 1 capital (to risk-weighted assets) well capitalized amount	$ 46,376
Common equity tier 1 capital (to risk-weighted assets) well capitalized ratio	6.50%
Tier I capital (to average assets):
Tier i capital (to average assets) actual amount	$ 81,079	$ 78,824
Tier i capital (to average assets) actual ratio	8.50%	8.04%
Tier i capital (to average assets) adequately capitalized amount	$ 38,159	$ 39,237
Tier i capital (to average assets) adequately capitalized ratio	4.00%	4.00%
Tier i capital (to average assets) well capitalized amount	$ 47,699	$ 49,047
Tier i capital (to average assets) well capitalized ratio	5.00%	5.00%

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Note 7 - Investment Securities (Details) - Investment Securities Held-to-maturity - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Schedule of Held-to-maturity Securities [Line Items]
State and municipal securities	$ 146	$ 146
State and municipal securities	154	156
US States and Political Subdivisions Debt Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
State and municipal securities	146	146
State and municipal securities	8	10
State and municipal securities	$ 154	$ 156

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014	Dec. 31, 2013
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Allocated Share-based Compensation Expense (in Dollars)	$ 25,000	$ 24,000	$ 46,000	$ 43,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)	$ 108,000		$ 108,000
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, Options, Grants in Period, Gross			21,000	20,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			(11,650)	(12,950)
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	85,075	107,850	85,075	107,850	88,375	115,800
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value (in Dollars per share)			$ 4.38	$ 3.81
The 1998 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	220,500		220,500
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			225,058
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period			60,244
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			164,814
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	0		0
The 2005 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			184,200
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period			55,225
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			43,900
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	85,075		85,075
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized			200,000
The 2015 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized	300,000		300,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period			0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	0		0
Employee Stock Option [Member] | The 1998 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years
Employee Stock Option [Member] | The 2005 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			5 years
Employee Stock Option [Member] | The 2015 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			5 years
Minimum [Member] | Employee Stock Option [Member] | The 1998 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			6 months
Maximum [Member] | Employee Stock Option [Member] | The 1998 Plan [Member]
Note 3 - Stock-based Compensation and Shareholders' Equity (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years

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Note 11 - Regulatory Restrictions (Tables)

6 Months Ended

Jun. 30, 2015

Disclosure Text Block [Abstract]

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

	Capital levels
	Actual					Minimum required					Well capitalized
As of June 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	96,010		13.05	%	$	58,844		8.00	%	$	73,555		10.00	%
Bank		88,793		12.45			57,078		8.00			71,348		10.00
Tier I capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	44,133		6.00		$	44,133		6.00
Bank		81,079		11.36			42,809		6.00			57,078		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	33,100		4.50			N/A		N/A
Bank		81,079		11.36			32,106		4.50			46,376		6.50
Tier I capital (to average assets):
Consolidated	$	88,241		9.18	%	$	38,443		4.00			N/A		N/A
Bank		81,079		8.50			38,159		4.00			47,699		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	93,927		14.06	%	$	53,425		8.00	%		N/A		N/A
Bank		86,884		13.14			52,891		8.00		$	66,114		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		85,439		12.79			26,713		4.00			N/A		N/A
Bank		78,824		11.92			26,446		4.00			39,669		6.00
Tier I capital (to average assets):
Consolidated		85,439		8.65			39,501		4.00			N/A		N/A
Bank		78,824		8.04			39,237		4.00			49,047		5.00

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Note 9 - Fair Value Measurements and Disclosures (Details)	6 Months Ended
	Jun. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
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 Inputs, Loss Severity	95.00%
Minimum Cost Saving for Refinance	2.00%
Impaired Financing Receivable, Recorded Investment (in Dollars)	$ 18,173,000	$ 21,077,000
Other Real Estate Owned [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Transfers out of Level 3 (in Dollars)	$ 50,000
Collateralized Debt Obligations [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Number of Trust Preferred Securities	6
Minimum [Member] | London Interbank Offered Rate (LIBOR) [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Debt Instrument, Basis Spread on Variable Rate	3.46%
Minimum [Member] | Collateralized Debt Obligations [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Loss Severity	0.00%
Maximum [Member] | London Interbank Offered Rate (LIBOR) [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Debt Instrument, Basis Spread on Variable Rate	7.90%
Maximum [Member] | Collateralized Debt Obligations [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Loss Severity	100.00%
Fair Value, Inputs, Level 3 [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Impaired Financing Receivable, Recorded Investment (in Dollars)	$ 131,000
Fair Value, Inputs, Level 3 [Member] | Collateralized Debt Obligations [Member]
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Number of Trust Preferred Securities	6

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Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position $ in Thousands	Jun. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	181	165
Securities in an unrealized loss position less than 12 months, fair value	$ 103,953	$ 28,745
Securities in an unrealized loss position less than 12 months, unrealized losses	(1,284)	(351)
Securities in an unrealized loss position 12 months or longer, fair value	46,279	112,156
Securities in an unrealized loss position 12 months or longer, unrealized losses	(2,191)	(3,347)
Securities in an unrealized loss position, fair value	150,232	140,901
Securities in an unrealized loss position, unrealized losses	$ (3,475)	$ (3,698)
US Government Agencies Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	17	29
Securities in an unrealized loss position less than 12 months, fair value	$ 16,484	$ 15,466
Securities in an unrealized loss position less than 12 months, unrealized losses	(144)	(30)
Securities in an unrealized loss position 12 months or longer, fair value	7,166	23,941
Securities in an unrealized loss position 12 months or longer, unrealized losses	(81)	(442)
Securities in an unrealized loss position, fair value	23,650	39,407
Securities in an unrealized loss position, unrealized losses	$ (225)	$ (472)
US States and Political Subdivisions Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	68	39
Securities in an unrealized loss position less than 12 months, fair value	$ 23,711	$ 3,452
Securities in an unrealized loss position less than 12 months, unrealized losses	(267)	(31)
Securities in an unrealized loss position 12 months or longer, fair value	4,522	11,964
Securities in an unrealized loss position 12 months or longer, unrealized losses	(61)	(119)
Securities in an unrealized loss position, fair value	28,233	15,416
Securities in an unrealized loss position, unrealized losses	$ (328)	$ (150)
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	33	34
Securities in an unrealized loss position less than 12 months, fair value	$ 38,711	$ 6,521
Securities in an unrealized loss position less than 12 months, unrealized losses	(492)	(15)
Securities in an unrealized loss position 12 months or longer, fair value	2,536	38,586
Securities in an unrealized loss position 12 months or longer, unrealized losses	(67)	(451)
Securities in an unrealized loss position, fair value	41,247	45,107
Securities in an unrealized loss position, unrealized losses	$ (559)	$ (466)
Collateralized Mortgage Obligations [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	42	51
Securities in an unrealized loss position less than 12 months, fair value	$ 20,555	$ 2,003
Securities in an unrealized loss position less than 12 months, unrealized losses	(146)	(205)
Securities in an unrealized loss position 12 months or longer, fair value	29,614	35,687
Securities in an unrealized loss position 12 months or longer, unrealized losses	(942)	(1,095)
Securities in an unrealized loss position, fair value	50,169	37,690
Securities in an unrealized loss position, unrealized losses	$ (1,088)	$ (1,300)
Collateralized Debt Obligations [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 12 months or longer, fair value	$ 2,191	$ 1,978
Securities in an unrealized loss position 12 months or longer, unrealized losses	(1,022)	(1,240)
Securities in an unrealized loss position, fair value	2,191	1,978
Securities in an unrealized loss position, unrealized losses	$ (1,022)	$ (1,240)
Corporate Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	1
Securities in an unrealized loss position less than 12 months, fair value	$ 1,005
Securities in an unrealized loss position less than 12 months, unrealized losses	(7)
Securities in an unrealized loss position, fair value	1,005
Securities in an unrealized loss position, unrealized losses	$ (7)
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	15	7
Securities in an unrealized loss position less than 12 months, fair value	$ 3,487	$ 1,303
Securities in an unrealized loss position less than 12 months, unrealized losses	(228)	(70)
Securities in an unrealized loss position 12 months or longer, fair value	250
Securities in an unrealized loss position 12 months or longer, unrealized losses	(18)
Securities in an unrealized loss position, fair value	3,737	1,303
Securities in an unrealized loss position, unrealized losses	$ (246)	$ (70)

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - Assumptions Used in Option Pricing Model	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Assumptions Used in Option Pricing Model [Abstract]
Risk free interest rate	1.06%	0.69%
Dividend yield	3.86%	4.28%
Volatility	26.74%	28.12%
Expected life (years)	5 years	5 years

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - Stock Option Activity - USD ($) $ / shares in Units, $ in Thousands	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Stock Option Activity [Abstract]
Outstanding-Number of options	88,375	115,800
Outstanding-Weighted average exercise price	$ 23.27	$ 23.51
Outstanding ending-Number of options	85,075	107,850
Outstanding ending-Weighted average exercise price	$ 24.22	$ 23.21
Outstanding-ending-Weighted average remaining contractual term	2 years 270 days	2 years 156 days
Outstanding-ending-Aggregate intrinsic value	$ 440	$ 442
Exercisable-Number of options	30,875	46,050
Exercisable-Weighted average exercise price	$ 20.85	$ 23.20
Exercisable-Weighted average remaining contractual term	1 year 43 days	354 days
Exercisable-Aggregate intrinsic value	$ 264	$ 239
Granted-Number of options	21,000	20,000
Granted-Weighted average exercise price	$ 29.25	$ 25.16
Exercised-Number of options	11,650	12,950
Exercised-Weighted average exercise price	$ 17.73	$ 17.28
Forfeited-Number of options	12,650	15,000
Forfeited-Weighted average exercise price	$ 31.87	$ 33.25

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Consolidated Statement of Shareholders' Equity (Unaudited) (Parentheticals) - $ / shares	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014
Cash dividends declared, per share	$ 0.58	$ 0.56

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Note 4 - Share Repurchase Plan (Details) - USD ($)	6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Dec. 31, 2014
Note 4 - Share Repurchase Plan (Details) [Line Items]
Treasury Stock, Shares	164,569		164,569
Treasury Stock, Value (in Dollars)	$ 2,476,000		$ 2,476,000
Share Repurchase Program [Member]
Note 4 - Share Repurchase Plan (Details) [Line Items]
Stock Repurchase Program, Number of Shares Authorized to be Repurchased	100,000
Treasury Stock, Shares, Acquired	0	0
Treasury Stock, Shares	57,883
Treasury Stock, Shares, Average Price per Share Acquired (in Dollars per share)	$ 16.97
Treasury Stock, Value (in Dollars)	$ 982,000

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Note 7 - Investment Securities (Details) - Investment Securities by Contractual Maturity - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Investment Securities by Contractual Maturity [Abstract]
Due in one year or less	$ 5,129
Due in one year or less	5,076
Due after one year through five years	230,192
Due after one year through five years	229,515
Due after five years through ten years	64,725
Due after five years through ten years	64,452
Due after ten years	22,566
Due after ten years	23,327
Equity securities	7,619
Equity securities	7,417
Total investment securities available-for-sale	330,231	$ 375,219
Total investment securities available-for-sale	329,787	373,844
Due after one year through five years	154
Due after one year through five years	146
Total investment securities held-to-maturity	154	156
Total investment securities held-to-maturity	$ 146	$ 146

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Note 8 - Loans and Allowance for Loan Losses (Details) - Loans by Loan Class Modified as TDRs $ in Thousands	3 Months Ended	6 Months Ended
	Jun. 30, 2014 USD ($)	Jun. 30, 2015 USD ($)	Jun. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Commercial:
Number of contracts		0
Recorded investment		$ 5,241		$ 5,587
Commercial Portfolio Segment [Member]
Commercial:
Number of contracts			1
Pre-modification recorded investment			$ 288
Post-modification recorded investment			$ 233
Commercial Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 60 Days Past Due [Member]
Commercial:
Number of contracts	12		12
Recorded investment	$ 658		$ 658
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Number of contracts			1
Pre-modification recorded investment			$ 288
Post-modification recorded investment			$ 233
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, Equal to Greater than 60 Days Past Due [Member]
Commercial:
Number of contracts	12		12
Recorded investment	$ 658		$ 658

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Consolidated Balance Sheets (Unaudited) - Scenario, Unspecified [Domain] - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Assets
Cash and due from banks	$ 11,022	$ 11,102
Interest-bearing deposits in banks	9,602	7,143
Total cash and cash equivalents	20,624	18,245
Investment securities
Trading	3,871	4,207
Available-for-sale (amortized cost $329,787 and $373,844)	330,231	375,219
Held-to-maturity (fair value $154 and $156)	146	146
Restricted investment in bank stocks	508	647
Loans held-for-sale	466	380
Loans receivable	578,256	555,282
Allowance for loan losses	(7,655)	(8,001)
Net loans	570,601	547,281
Bank-owned life insurance	10,803	10,658
Premises and equipment, net	9,391	9,702
Accrued interest receivable	2,324	2,568
Other real estate owned	198	3,025
Net deferred tax assets	3,192	2,925
Other assets	2,890	2,132
Total assets	955,245	977,135
Deposits
Demand, non-interest bearing	97,060	86,920
Interest-bearing demand	212,919	251,986
Money market	64,974	58,199
Savings	216,984	211,240
Time	142,055	148,827
Time of $100 or more	92,089	94,420
Total deposits	826,081	851,592
Short-term borrowings	32,896	35,189
Accrued interest payable	337	344
Other liabilities	7,394	3,656
Total liabilities	866,708	890,781
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,506,873 shares and 3,481,227 shares issued; 3,342,304 and 3,316,658 shares outstanding	2,192	2,176
Surplus	15,461	14,819
Retained earnings	73,067	70,928
Accumulated other comprehensive income, net of tax	293	907
Treasury stock, at cost; 164,569 shares	(2,476)	(2,476)
Total shareholders' equity	88,537	86,354
Total liabilities and shareholders' equity	$ 955,245	$ 977,135

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Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities		6 Months Ended
		Jun. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value		$ 329,787,000	$ 373,844,000
Investment securities available-for-sale		$ 330,231,000	375,219,000
PreTSL IV [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class	[1]	Mezzanine*
Book value	[1]	$ 243,000
Investment securities available-for-sale	[1]	215,000
Unrealized gains (losses)	[1]	$ (28,000)
Realized OTTI credit loss	[1]
Total recognized OTTI credit loss	[1]	$ (1,000)
Moody's/Fitch ratings	[1]	B1/B
Current number of performing banks	[1]	5
Current number of performing insurance companies	[1]
Actual deferrals and defaults as a % of total collateral	[1]	18.00%
Total performing collateral as a % of outstanding bonds	[1]	140.50%
PreTSL XVII [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 752,000
Investment securities available-for-sale		565,000
Unrealized gains (losses)		(187,000)
Total recognized OTTI credit loss		$ (222,000)
Moody's/Fitch ratings		C/C
Current number of performing banks		31
Current number of performing insurance companies		5
Actual deferrals and defaults as a % of total collateral		30.40%
Total performing collateral as a % of outstanding bonds		85.90%
PreTSL XIX [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 987,000
Investment securities available-for-sale		556,000
Unrealized gains (losses)		(431,000)
Total recognized OTTI credit loss		$ 0
Moody's/Fitch ratings		Caa3/C
Current number of performing banks		40
Current number of performing insurance companies		12
Actual deferrals and defaults as a % of total collateral		12.20%
Total performing collateral as a % of outstanding bonds		94.40%
PreTSL XXV [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 766,000
Investment securities available-for-sale		483,000
Unrealized gains (losses)		(283,000)
Total recognized OTTI credit loss		$ (222,000)
Moody's/Fitch ratings		C/C
Current number of performing banks		47
Current number of performing insurance companies		5
Actual deferrals and defaults as a % of total collateral		27.50%
Total performing collateral as a % of outstanding bonds		88.90%
Collateralized Debt Obligations [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value		$ 3,501,000	3,519,000
Investment securities available-for-sale		2,694,000	$ 2,439,000
Unrealized gains (losses)		(807,000)
Total recognized OTTI credit loss		$ (1,153,000)
Security 1 [Member] | PreTSL XXVI [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 465,000
Investment securities available-for-sale		372,000
Unrealized gains (losses)		(93,000)
Total recognized OTTI credit loss		$ (270,000)
Moody's/Fitch ratings		Caa3/C
Current number of performing banks		43
Current number of performing insurance companies		7
Actual deferrals and defaults as a % of total collateral		23.70%
Total performing collateral as a % of outstanding bonds		94.00%
Security 2 [Member] | PreTSL XXVI [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 288,000
Investment securities available-for-sale		503,000
Unrealized gains (losses)		215,000
Total recognized OTTI credit loss		$ (438,000)
Moody's/Fitch ratings		Caa3/C
Current number of performing banks		43
Current number of performing insurance companies		7
Actual deferrals and defaults as a % of total collateral		23.70%
Total performing collateral as a % of outstanding bonds		94.00%

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

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Consolidated Statements of Comprehensive Income (Parentheticals) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Tax expense (benefit)	$ 583	$ 636	$ 1,284	$ 1,333
Net of tax amount	1,934	2,172	4,070	4,468
Unrealized holding gains (losses) arising during the period, tax expense	(909)	1,185	(73)	2,306
Unrealized holding gains (losses) arising during the period, net of tax amount	(1,765)	2,299	(141)	4,475
Reclassification adjustment for (gains) losses included in net income, tax expense (benefit)	(73)	(97)	(244)	(308)
Reclassification adjustment for (gains) losses included in net income, net of tax amount	(141)	(188)	(473)	(599)
Other comprehensive (loss) income, tax expense (benefit)	(982)	1,088	(317)	1,998
Other comprehensive (loss) income, net of tax amount	(1,906)	2,111	(614)	3,876
Total comprehensive income, tax expense (benefit)	(399)	1,724	967	3,331
Total comprehensive income, net of tax amount	$ 28	$ 4,283	$ 3,456	$ 8,344

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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] $ in Thousands	6 Months Ended
	Jun. 30, 2015 USD ($)
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance, January 1, 2015	$ 2,439
Payments received	(18)
Total gains or losses (realized/unrealized)
Included in other comprehensive income	273
Balance, June 30, 2015	$ 2,694

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Note 6 - Comprehensive Income (Details) - Components of Accumulated Other Comprehensive Income - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income	$ 444	$ 1,375
Tax effect	(151)	(468)
Accumulated other comprehensive income, net of tax	293	907
Accumulated Net Investment Gain (Loss) Attributable to Parent [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income	820	1,975
Accumulated Other-than-Temporary Impairment Attributable to Parent [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income	$ (376)	$ (600)

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Note 5 - Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2015

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,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	1,934	$	2,172	$	4,070	$	4,468
Denominator for basic earnings per share - weighted average shares outstanding		3,333,018		3,285,052		3,327,384		3,280,532
Effect of dilutive securities - employee stock options		13,515		12,390		12,734		11,560
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,346,533		3,297,442		3,340,118		3,292,092
Earnings per share - basic	$	0.58	$	0.66	$	1.22	$	1.36
Earnings per share - diluted		0.58		0.66		1.22		1.36

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Note 6 - Comprehensive Income (Details) - Amounts Reclassified Out of Accumulated Other Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Tax effect	$ (583)	$ (636)	$ (1,284)	$ (1,333)
Total reclass out of accumulated other comprehensive income, net of tax	1,934	2,172	4,070	4,468
Reclassification out of Accumulated Other Comprehensive Income [Member]
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Unrealized net holding gains on available-for-sale securities	214	285	717	907
Tax effect	(73)	(96)	(244)	(308)
Total reclass out of accumulated other comprehensive income, net of tax	$ 141	$ 189	$ 473	$ 599

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Note 7 - Investment Securities (Tables)

6 Months Ended

Jun. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Trading Securities [Table Text Block]

	June 30,		December 31,
	2015		2014
State and municipal securities	$	3,871	$	4,207

Available-for-sale Securities [Table Text Block]

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
June 30, 2015	value		gains		losses			cost
U.S. Government agency	$	42,263	$	171	$	(225	)	$	42,317
State and municipal		73,938		1,255		(328	)		73,011
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		120,943		1,464		(559	)		120,038
Collateralized mortgage obligations (CMOs)		76,738		341		(1,088	)		77,485
Pooled trust preferred		2,694		215		(1,022	)		3,501
Corporate debt		6,036		25		(7	)		6,018
Equity		7,619		448		(246	)		7,417
Total investment securities available-for-sale	$	330,231	$	3,919	$	(3,475	)	$	329,787

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2014	value		gains		losses			cost
U.S. Government agency	$	62,665	$	212	$	(472	)	$	62,925
State and municipal		72,569		1,500		(150	)		71,219
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,192		1,819		(466	)		134,839
Collateralized mortgage obligations (CMOs)		87,662		330		(1,300	)		88,632
Pooled trust preferred		2,439		160		(1,240	)		3,519
Corporate debt		6,037		30		-			6,007
Equity		7,655		1,022		(70	)		6,703
Total investment securities available-for-sale	$	375,219	$	5,073	$	(3,698	)	$	373,844

Investments Classified by Contractual Maturity Date [Table Text Block]

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less	$	5,129	$	5,076
Due after one year through five years		230,192		229,515
Due after five years through ten years		64,725		64,452
Due after ten years		22,566		23,327
Equity securities		7,619		7,417
Total investment securities available-for-sale	$	330,231	$	329,787

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less		-		-
Due after one year through five years	$	154	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	154	$	146

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

	Three months ended June 30, 2015									Three months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	204	$	(23	)	$	-	$	181	$	280	$	(6	)	$	-	$	274
Debt securities		66		(33	)		-		33		74		(63	)		-		11
Total	$	270	$	(56	)	$	-	$	214	$	354	$	(69	)	$	-	$	285

	Six months ended June 30, 2015									Six months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	630	$	(23	)	$	-	$	607	$	870	$	(6	)	$	-	$	864
Debt securities		154		(44	)		-		110		137		(94	)		-		43
Total	$	784	$	(67	)	$	-	$	717	$	1,007	$	(100	)	$	-	$	907

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

Six months ended June 30,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,153	$	1,271

Held-to-maturity Securities [Table Text Block]

Held-To-Maturity

June 30, 2015

December 31, 2014

Gross

Gross

Gross

Gross

unrealized

unrealized

unrealized

unrealized

Amortized

holding

holding

Fair

Amortized

holding

holding

Fair

cost

gains

losses

value

cost

gains

losses

value

State and municipal securities

$

146

$

8

-

$

154

$

146

$

10

-

$

156

Schedule of Unrealized Loss on Investments [Table Text Block]

June 30, 2015
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		17	$	16,484	$	(144	)	$	7,166	$	(81	)	$	23,650	$	(225	)
State and municipal		68		23,711		(267	)		4,522		(61	)		28,233		(328	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		33		38,711		(492	)		2,536		(67	)		41,247		(559	)
Collateralized mortgage obligations (CMOs)		42		20,555		(146	)		29,614		(942	)		50,169		(1,088	)
Pooled trust preferred		5		-		-			2,191		(1,022	)		2,191		(1,022	)
Corporate debt		1		1,005		(7	)		-		-			1,005		(7	)
Equity		15		3,487		(228	)		250		(18	)		3,737		(246	)
Total		181	$	103,953	$	(1,284	)	$	46,279	$	(2,191	)	$	150,232	$	(3,475	)

December 31, 2014
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		29	$	15,466	$	(30	)	$	23,941	$	(442	)	$	39,407	$	(472	)
State and municipal		39		3,452		(31	)		11,964		(119	)		15,416		(150	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		34		6,521		(15	)		38,586		(451	)		45,107		(466	)
Collateralized mortgage obligations (CMOs)		51		2,003		(205	)		35,687		(1,095	)		37,690		(1,300	)
Pooled trust preferred		5		-		-			1,978		(1,240	)		1,978		(1,240	)
Equity		7		1,303		(70	)		-		-			1,303		(70	)
Total		165	$	28,745	$	(351	)	$	112,156	$	(3,347	)	$	140,901	$	(3,698	)

Schedule of Pooled Trust Preferred Securities [Table Text Block]

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2015)		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	$	215	$	(28	)	$	-	$	(1	)	B1/B		5		-		18.0	%		140.5	%
PreTSL XVII	Mezzanine		752		565		(187	)		-		(222	)	C/C		31		5		30.4			85.9
PreTSL XIX	Mezzanine		987		556		(431	)		-		-		Caa3/C		40		12		12.2			94.4
PreTSL XXV	Mezzanine		766		483		(283	)		-		(222	)	C/C		47		5		27.5			88.9
PreTSL XXVI	Mezzanine		465		372		(93	)		-		(270	)	Caa3/C		43		7		23.7			94.0
PreTSL XXVI	Mezzanine		288		503		215			-		(438	)	Caa3/C		43		7		23.7			94.0
		$	3,501	$	2,694	$	(807	)	$	-	$	(1,153	)

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Consolidated Statement of Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Common Stock [Member] Employee Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member] Employee Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Treasury Stock [Member]	Employee Stock [Member]	Total
Balance at Dec. 31, 2013		$ 2,148		$ 13,747	$ 65,618	$ (3,412)	$ (2,476)		$ 75,625
Balance (in Shares) at Dec. 31, 2013		3,271,658
Net income					4,468				4,468
Other comprehensive income (loss), net of tax						3,876			3,876
Cash dividends declared					(1,837)				(1,837)
Stock issued in connection with dividend reinvestment and stock purchase plan	$ 1	$ 9	$ 34	367				$ 35	376
Stock issued in connection with dividend reinvestment and stock purchase plan (in Shares)	1,572	15,144
Stock issued for options exercised		$ 3		30					$ 33
Stock issued for options exercised (in Shares)		5,444							(12,950)
Tax benefit of stock options exercised				12					$ 12
Stock-based compensation expense				43					43
Balance at Jun. 30, 2014		$ 2,161		14,233	68,249	464	(2,476)		82,631
Balance (in Shares) at Jun. 30, 2014		3,293,818
Balance at Dec. 31, 2014		$ 2,176		14,819	70,928	907	(2,476)		$ 86,354
Balance (in Shares) at Dec. 31, 2014		3,316,658							3,316,658
Net income					4,070				$ 4,070
Other comprehensive income (loss), net of tax						(614)			(614)
Cash dividends declared					(1,931)				(1,931)
Stock issued in connection with dividend reinvestment and stock purchase plan	$ 1	$ 10	$ 42	443				$ 43	453
Stock issued in connection with dividend reinvestment and stock purchase plan (in Shares)	1,721	16,123
Stock issued for options exercised		$ 5		91					$ 96
Stock issued for options exercised (in Shares)		7,802							(11,650)
Tax benefit of stock options exercised				20					$ 20
Stock-based compensation expense				46					46
Balance at Jun. 30, 2015		$ 2,192		$ 15,461	$ 73,067	$ 293	$ (2,476)		$ 88,537
Balance (in Shares) at Jun. 30, 2015		3,342,304							3,342,304

XML

Consolidated Balance Sheets (Unaudited) (Parentheticals) - Scenario, Unspecified [Domain] - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Available-for-sale, amortized cost (in Dollars)	$ 329,787	$ 373,844
Held-to-maturity, fair value (in Dollars)	$ 154	$ 156
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	3,506,873	3,481,227
Common stock, shares outstanding	3,342,304	3,316,658
Treasury stock, shares	164,569	164,569

XML

Note 8 - Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2015

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,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	132,271	$	118,845
Construction		19,031		23,471
Secured by commercial real estate		212,015		203,534
Secured by residential real estate		55,984		53,077
State and political subdivisions		42,178		44,104
Indirect lease financing		9,221		7,685
Retail:
1-4 family residential mortgages		38,867		37,147
Home equity loans and lines		64,896		63,213
Consumer		3,741		4,175
Total loans		578,204		555,251
Net unearned costs (fees)		52		31
Loans receivable	$	578,256	$	555,282

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, 2015 and December 31, 2014, overdrafts were approximately $102,000 and $142,000, 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, 2015, 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.

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, 2015 and December 31, 2014:

June 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	123,433	$	665	$	8,173	$	-	$	132,271
Construction		19,010		-		21		-		19,031
Secured by commercial real estate		192,524		2,047		17,444		-		212,015
Secured by residential real estate		53,038		718		2,228		-		55,984
State and political subdivisions		40,890		-		1,288		-		42,178
Indirect lease financing		9,014		-		207		-		9,221
	$	437,909	$	3,430	$	29,361	$	-	$	470,700

December 31, 2014	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	111,560	$	42	$	7,243	$	-	$	118,845
Construction		22,981		128		362		-		23,471
Secured by commercial real estate		178,339		2,418		22,777		-		203,534
Secured by residential real estate		50,172		408		2,497		-		53,077
State and political subdivisions		42,771		-		1,333		-		44,104
Indirect lease financing		7,543		-		142		-		7,685
	$	413,366	$	2,996	$	34,354	$	-	$	450,716

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, 2015 and December 31, 2014:

June 30, 2015	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	38,453	$	414	$	38,867
Home equity loans and lines		64,804		92		64,896
Consumer		3,741		-		3,741
	$	106,998	$	506	$	107,504

December 31, 2014	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	36,922	$	225	$	37,147
Home equity loans and lines		63,109		104		63,213
Consumer		4,174		1		4,175
	$	104,205	$	330	$	104,535

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, 2015 and December 31, 2014:

June 30, 2015	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	$	486		-	$	11	$	497	$	131,774	$	132,271
Construction		-		-		-		-		19,031		19,031
Secured by commercial real estate		404	$	105		1,151		1,660		210,355		212,015
Secured by residential real estate		136		341		264		741		55,243		55,984
State and political subdivisions		-		-		-		-		42,178		42,178
Indirect lease financing		91		40		90		221		9,000		9,221
Retail:
1-4 family residential mortgages		-		-		199		199		38,668		38,867
Home equity loans and lines		185		-		-		185		64,711		64,896
Consumer		10		4		-		14		3,727		3,741
	$	1,312	$	490	$	1,715	$	3,517	$	574,687	$	578,204

December 31, 2014	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		-		-		-		-	$	118,845	$	118,845
Construction	$	466		-		-	$	466		23,005		23,471
Secured by commercial real estate		28	$	332	$	3,747		4,107		199,427		203,534
Secured by residential real estate		600		574		-		1,174		51,903		53,077
State and political subdivisions		-		-		-		-		44,104		44,104
Indirect lease financing		291		-		-		291		7,394		7,685
Retail:
1-4 family residential mortgages		526		-		-		526		36,621		37,147
Home equity loans and lines		66		49		-		115		63,098		63,213
Consumer		16		8		-		24		4,151		4,175
	$	1,993	$	963	$	3,747	$	6,703	$	548,548	$	555,251

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, 2015 and December 31, 2014:

June 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,526
Construction		-		-
Secured by commercial real estate		-		4,302
Secured by residential real estate		-		1,489
State and political subdivisions		-		-
Indirect lease financing	$	90		-
Retail:
1-4 family residential mortgages		-		414
Home equity loans and lines		-		92
Consumer		-		-
	$	90	$	9,823

December 31, 2014	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	2,171
Construction		-		337
Secured by commercial real estate		-		6,465
Secured by residential real estate		-		1,467
State and political subdivisions		-		-
Indirect lease financing		-		-
Retail:
1-4 family residential mortgages		-		225
Home equity loans and lines		-		104
Consumer		-		1
	$	-	$	10,770

Activity in the allowance for loan losses for the three months ended June 30, 2015 and 2014 are as follows:

Three months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,875	$	(251	)	$	(30	)	$	9	$	1,603
Construction		285		(136	)		-			-		149
Secured by commercial real estate		2,569		141			(57	)		2		2,655
Secured by residential real estate		1,666		266			(313	)		16		1,635
State and political subdivisions		253		(21	)		-			-		232
Indirect lease financing		95		25			-			1		121
Retail:
1-4 family residential mortgages		308		5			-			-		313
Home equity loans and lines		479		(12	)		-			7		474
Consumer		85		4			(23	)		5		71
Unallocated		363		39		N/A			N/A			402
	$	7,978	$	60		$	(423	)	$	40	$	7,655

Three months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,308	$	55		$	-		$	44	$	2,407
Construction		391		(151	)		-			-		240
Secured by commercial real estate		2,757		(157	)		-			-		2,600
Secured by residential real estate		1,465		238			-			5		1,708
State and political subdivisions		293		(79	)		-			-		214
Loans to depository institutions		3		(2	)		-			-		1
Indirect lease financing		106		(19	)		-			5		92
Retail:
1-4 family residential mortgages		314		58			-			-		372
Home equity loans and lines		602		(127	)		(34	)		79		520
Consumer		63		22			(28	)		10		67
Unallocated		517		162		N/A			N/A			679
	$	8,819	$	-		$	(62	)	$	143	$	8,900

Activity in the allowance for loan losses for the six months ended June 30, 2015 and 2014 are as follows:

Six months ended June 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,892	$	(278	)	$	(30	)	$	19	$	1,603
Construction		297		(148	)		-			-		149
Secured by commercial real estate		2,700		36			(85	)		4		2,655
Secured by residential real estate		1,630		304			(317	)		18		1,635
State and political subdivisions		221		11			-			-		232
Indirect lease financing		93		26			(8	)		10		121
Retail:
1-4 family residential mortgages		312		1			-			-		313
Home equity loans and lines		453		9			-			12		474
Consumer		85		15			(41	)		12		71
Unallocated		318		84		N/A			N/A			402
	$	8,001	$	60		$	(481	)	$	75	$	7,655

Six months ended June 30, 2014	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	329		$	(17	)	$	51	$	2,407
Construction		439		(199	)		-			-		240
Secured by commercial real estate		2,898		(298	)		-			-		2,600
Secured by residential real estate		1,632		68			(1	)		9		1,708
State and political subdivisions		186		28			-			-		214
Loans to depository institutions		4		(3	)		-			-		1
Indirect lease financing		103		(14	)		(6	)		9		92
Retail:
1-4 family residential mortgages		303		69			-			-		372
Home equity loans and lines		583		(40	)		(121	)		98		520
Consumer		64		50			(71	)		24		67
Unallocated		669		10		N/A			N/A			679
	$	8,925	$	-		$	(216	)	$	191	$	8,900

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.

Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $2,177,000 and $1,897,000 as of June 30, 2015 and December 31, 2014, respectively. Non-performing TDRs totaled $3,064,000 and $3,690,000 as of June 30, 2015 and December 31, 2014, respectively. All TDRs are included in impaired loans.

The following table illustrates the specific reserve for loan losses allocated to loans modified as TDRs. These specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment.

	June 30, 2015				December 31, 2014
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	4,367		-	$	4,588		-
TDRs with an allowance recorded		874	$	674		999	$	813
	$	5,241	$	674	$	5,587	$	813

There were no TDR concessions made during the six months ended June 30, 2015. As of June 30, 2015 and December 31, 2014, QNB had commitments of $1,935,000 and $1,729,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were charge-offs of $0 and $35,000 during the six months ended June 30, 2015 and 2014, respectively, resulting from loans previously modified as TDRs.

There were no loans modified as TDRs during 2015 and the three months ended June 30, 2015 and 2014. The following table presents loans by loan class modified as TDRs during the six months ended June 30, 2015 and 2014. 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, 2014.

Six months ended June 30,	2015						2014
	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		-	$	-	$	-		1	$	288	$	233
		-	$	-	$	-		1	$	288	$	233

The following tables present loans modified as TDRs within 12 months prior to June 30, 2015 and 2014 for which there was a payment default (60 days or more past due) during the three and six months ended June 30, 2015 and 2014.

Three months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

Six months ended June 30,	2015				2014
TDRs Subsequently Defaulted	Number of contracts		Recorded investment		Number of contracts		Recorded investment
Commercial:
Secured by residential real estate		-	$	-		12	$	658
		-	$	-		12	$	658

The following tables present the balance in the allowance for loan losses at June 30, 2015 and December 31, 2014 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, 2015	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	$	1,603	$	757	$	846	$	132,271	$	7,870	$	124,401
Construction		149		-		149		19,031		348		18,683
Secured by commercial real estate		2,655		-		2,655		212,015		7,810		204,205
Secured by residential real estate		1,635		43		1,592		55,984		1,489		54,495
State and political subdivisions		232		-		232		42,178		-		42,178
Indirect lease financing		121		-		121		9,221		11		9,210
Retail:
1-4 family residential mortgages		313		39		274		38,867		528		38,339
Home equity loans and lines		474		-		474		64,896		117		64,779
Consumer		71		-		71		3,741		-		3,741
Unallocated		402		N/A		N/A		N/A		N/A		N/A
	$	7,655	$	839	$	6,414	$	578,204	$	18,173	$	560,031

	Allowance for Loan Losses						Loans Receivable
December 31, 2014	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	$	1,892	$	1,095	$	797	$	118,845	$	7,115	$	111,730
Construction		297		-		297		23,471		362		23,109
Secured by commercial real estate		2,700		-		2,700		203,534		11,546		191,988
Secured by residential real estate		1,630		91		1,539		53,077		1,567		51,510
State and political subdivisions		221		-		221		44,104		-		44,104
Indirect lease financing		93		-		93		7,685		16		7,669
Retail:
1-4 family residential mortgages		312		4		308		37,147		341		36,806
Home equity loans and lines		453		4		449		63,213		129		63,084
Consumer		85		-		85		4,175		1		4,174
Unallocated		318		N/A		N/A		N/A		N/A		N/A
	$	8,001	$	1,194	$	6,489	$	555,251	$	21,077	$	534,174

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of June 30, 2015 and December 31, 2014:

	June 30, 2015						December 31, 2014
	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	6,987	$	7,161	$	-	$	5,894	$	6,056	$	-
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,228		1,936		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		215		246		-		225		250		-
Home equity loans and lines		117		163		-		72		93		-
Consumer		-		-		-		1		1		-
	$	16,716	$	18,233	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	883	$	1,061	$	757	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		261		315		43		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		313		314		39		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,457	$	1,690	$	839	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	7,870	$	8,222	$	757	$	7,115	$	7,475	$	1,095
Construction		348		348		-		362		444		-
Secured by commercial real estate		7,810		8,368		-		11,546		12,198		-
Secured by residential real estate		1,489		2,251		43		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		11		11		-		16		16		-
Retail:
1-4 family residential mortgages		528		560		39		341		366		4
Home equity loans and lines		117		163		-		129		169		4
Consumer		-		-		-		1		1		-
	$	18,173	$	19,923	$	839	$	21,077	$	22,844	$	1,194

	Six Months Ended June 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,846	$	128	$	9,305	$	331
Construction		437		12		1,050		2
Secured by commercial real estate		8,526		86		12,304		344
Secured by residential real estate		1,549		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		13		1		26		1
Retail:
1-4 family residential mortgages		398		3		460		5
Home equity loans and lines		131		1		169		-
Consumer		1		-		2		-
	$	17,901	$	231	$	25,768	$	683

XML

Document And Entity Information - shares	6 Months Ended
	Jun. 30, 2015	Jul. 31, 2015
Document and Entity Information [Abstract]
Entity Registrant Name	QNB CORP
Trading Symbol	QNBC
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		3,342,304
Amendment Flag	false
Entity Central Index Key	0000750558
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2

XML

Note 9 - Fair Value Measurements and Disclosures

6 Months Ended

Jun. 30, 2015

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, 2015:

June 30, 2015	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
Trading Securities
State and municipal securities	$	-	$	3,871	$	-	$	3,871
Securities available-for-sale
U.S. Government agency securities		-	$	42,263		-	$	42,263
State and municipal securities		-		73,938		-		73,938
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		120,943		-		120,943
Collateralized mortgage obligations (CMOs)		-		76,738		-		76,738
Pooled trust preferred securities		-		-	$	2,694		2,694
Corporate debt securities		-		6,036		-		6,036
Equity securities	$	7,619		-		-		7,619
Total securities available-for-sale	$	7,619	$	319,918	$	2,694	$	330,231
Total recurring fair value measurements	$	7,619	$	323,789	$	2,694	$	334,102
Nonrecurring fair value measurements
Impaired loans	$	-		-	$	749	$	749
Other real estate owned		-	$	50		-		50
Mortgage servicing rights		-		-		60		60
Total nonrecurring fair value measurements	$	-	$	50	$	809	$	859

There were no transfers in and out of Level 1 fair value measurements during the six months ended June 30, 2015. There was one transfer for $50,000 from level 3 into level 2 fair value for the same period. This related to a property held in other real estate owned that was under agreement of sale at June 30, 2015. 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 period ended June 30, 2015.

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, 2014:

December 31, 2014	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
Trading Securities
State and municipal securities	$	-	$	4,207	$	-	$	4,207
Securities available-for-sale
U.S. Government agency securities		-	$	62,665		-	$	62,665
State and municipal securities		-		72,569		-		72,569
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		136,192		-		136,192
Collateralized mortgage obligations (CMOs)		-		87,662		-		87,662
Pooled trust preferred securities		-		-	$	2,439		2,439
Corporate debt securities		-		6,037		-		6,037
Equity securities	$	7,655		-		-		7,655
Total securities available-for-sale	$	7,655	$	365,125	$	2,439	$	375,219
Total recurring fair value measurements	$	7,655	$	369,332	$	2,439	$	379,426
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	3,715	$	3,715
Mortgage servicing rights		-		-		112		112
Total nonrecurring fair value measurements	$	-	$	-	$	3,827	$	3,827

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
	Fair value		Valuation techniques	Unobservable input	Value or range of values
June 30, 2015 - Impaired loans	$	638	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
June 30, 2015 - Impaired loans		111	Discounted cash flow (4)	Discount rate		6.375	%
June 30, 2015 - Mortgage servicing rights		60	Discounted cash flow	Remaining term	2 - 28 yrs
				Discount rate		10% to 12	%

	Quantitative information about Level 3 fair value measurements
	Fair value		Valuation techniques	Unobservable input	Value or range of values
December 31, 2014 - Impaired loans	$	953	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
December 31, 2014 - Impaired loans		112	Discounted cash flow (4)	Discount rate		6.375	%
December 31, 2014 - Impaired loans		2,650	Agreement of sale (5)
December 31, 2014 - Mortgage servicing rights		112	Discounted cash flow	Remaining term	2 - 28 yrs
				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 the age of the appraisal. The range is presented as a percent of the initial appraised value.
(3)	Appraisals and pending agreements of sale are adjusted by management for estimated liquidation expenses. The range is presented as a percent of the initial appraised value.
(4)	Fair value is determined using the cash flow of the borrower and the effective interest rate of the original note.
(5)	Fair value is determined by the net amount due.

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, 2015:

	Fair value measurements using
	significant unobservable inputs
	(Level 3)
Balance, January 1, 2015	$	2,439
Payments received		(18	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		273
Transfers in and/or out of Level 3		-
Balance, June 30, 2015	$	2,694

The Level 3 securities consist of six collateralized debt obligation securities, PreTSL securities, which are backed by trust preferred securities issued by banks, thrifts, and insurance companies. As discussed in Note 7, despite the fact that there were some trades during 2015, the market for these securities at June 30, 2015 was 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, 2015;

● 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. Default rates are 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. The base loss severity assumption and long-term loss severity assumptions are modeled at 95%. The severity factor for near-term default 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 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 no later than 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 3.46% to 7.90%. 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. For a further discussion of PreTSL valuation, see Note 7, Investment Securities.

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, 2015 and December 31, 2014:

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 - trading (carried at fair value), 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 Community 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. Included in the fair value of impaired loans at June 30, 2015 are $131,000 of loans that had no specific reserves required at quarter end; however, were partially charged-off on June 30, 2015.

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 2 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.

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, 2015	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	$	20,624	$	20,624	$	20,624		-		-
Investment securities:
Trading		3,871		3,871		-	$	3,871		-
Available-for-sale		330,231		330,231		7,619		319,918	$	2,694
Held-to-maturity		146		154		-		154		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		466		475		-		475		-
Net loans		570,601		565,261		-		-		565,261
Mortgage servicing rights		521		667		-		-		667
Accrued interest receivable		2,324		2,324		-		2,324		-
Financial liabilities
Deposits with no stated maturities	$	591,937	$	591,937	$	591,937		-		-
Deposits with stated maturities		234,144		234,954		-	$	234,954		-
Short-term borrowings		32,896		32,896		32,896		-		-
Accrued interest payable		337		337		-		337		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

					Fair value measurements
December 31, 2014	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	$	18,245	$	18,245	$	18,245		-		-
Investment securities:
Trading		4,207		4,207		-	$	4,207		-
Available-for-sale		375,219		375,219		7,655		365,125	$	2,439
Held-to-maturity		146		156		-		156		-
Restricted investment in bank stocks		647		647		-		647		-
Loans held-for-sale		380		394		-		394		-
Net loans		547,281		544,126		-		-		544,126
Mortgage servicing rights		504		601		-		-		601
Accrued interest receivable		2,568		2,568		-		2,568		-
Financial liabilities
Deposits with no stated maturities	$	608,345	$	608,345	$	608,345		-	$	-
Deposits with stated maturities		243,247		244,152		-	$	244,152		-
Short-term borrowings		35,189		35,189		35,189		-		-
Accrued interest payable		344		344		-		344		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

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Consolidated Statements of Income (Unaudited) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Interest income
Interest and fees on loans	$ 5,965,000	$ 5,665,000	$ 11,846,000	$ 11,177,000
Interest and dividends on investment securities (AFS & HTM):
Taxable	1,256,000	1,285,000	2,598,000	2,659,000
Tax-exempt	469,000	569,000	955,000	1,171,000
Interest on trading securities	40,000	44,000	81,000	67,000
Interest on interest-bearing balances and other interest income	16,000	25,000	73,000	41,000
Total interest income	7,746,000	7,588,000	15,553,000	15,115,000
Interest on deposits
Interest-bearing demand	154,000	148,000	320,000	308,000
Money market	38,000	28,000	74,000	55,000
Savings	200,000	193,000	396,000	382,000
Time	389,000	404,000	785,000	810,000
Time of $100 or more	295,000	277,000	590,000	540,000
Interest on short-term borrowings	28,000	31,000	59,000	60,000
Interest on long-term debt		10,000		70,000
Total interest expense	1,104,000	1,091,000	2,224,000	2,225,000
Net interest income	6,642,000	6,497,000	13,329,000	12,890,000
Provision for loan losses	60,000	0	60,000	0
Net interest income after provision for loan losses	6,582,000	6,497,000	13,269,000	12,890,000
Non-interest income
Net gain on sale of investment securities	214,000	285,000	717,000	907,000
Net (loss) gain on trading activites	(34,000)	93,000	(19,000)	115,000
Fees for services to customers	404,000	410,000	806,000	809,000
ATM and debit card	394,000	387,000	756,000	735,000
Retail brokerage and advisory income	204,000	149,000	377,000	315,000
Bank-owned life insurance	72,000	73,000	142,000	145,000
Merchant Income	81,000	84,000	151,000	156,000
Net gain on sale of loans	119,000	54,000	182,000	61,000
Other	145,000	90,000	164,000	194,000
Total non-interest income	1,599,000	1,625,000	3,276,000	3,437,000
Non-interest expense
Salaries and employee benefits	3,053,000	2,836,000	6,049,000	5,631,000
Net occupancy	455,000	424,000	909,000	870,000
Furniture and equipment	432,000	438,000	861,000	846,000
Marketing	212,000	222,000	422,000	440,000
Third party services	445,000	411,000	846,000	812,000
Telephone, postage and supplies	175,000	174,000	369,000	357,000
State taxes	173,000	153,000	347,000	304,000
FDIC insurance premiums	150,000	160,000	317,000	337,000
Other	569,000	496,000	1,071,000	929,000
Total non-interest expense	5,664,000	5,314,000	11,191,000	10,526,000
Income before income taxes	2,517,000	2,808,000	5,354,000	5,801,000
Provision for income taxes	583,000	636,000	1,284,000	1,333,000
Net income	$ 1,934,000	$ 2,172,000	$ 4,070,000	$ 4,468,000
Earnings per share - basic (in Dollars per share)	$ 0.58	$ 0.66	$ 1.22	$ 1.36
Earnings per share - diltued (in Dollars per share)	0.58	0.66	1.22	1.36
Cash dividends per share (in Dollars per share)	$ 0.29	$ 0.28	$ 0.58	$ 0.56

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Note 3 - Stock-based Compensation and Shareholders' Equity

6 Months Ended

Jun. 30, 2015

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 $25,000 and $24,000 for the three months ended June 30, 2015 and 2014, respectively. Stock-based compensation expense was $46,000 and $43,000 for the six months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, there was approximately $108,000 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, 2015, there were 225,058 options granted, 60,244 options forfeited, 164,814 options exercised and no remaining options outstanding under this Plan. The 1998 Plan expired on March 10, 2008.

The 2005 Plan authorized 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, 2015, there were 184,200 options granted, 55,225 options forfeited, 43,900 options exercised, and 85,075 options outstanding under this Plan. The 2005 Plan expired March 15, 2015.

The QNB Corp. 2015 Stock Incentive Plan authorizing the issuance of 300,000 shares was approved at the Company’s 2015 Annual Meeting of Shareholders. The terms of the 2015 Plan are identical to the 2005 plan. There were no options granted, forfeited, exercised or outstanding under this Plan as of June 30, 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,	2015			2014
Risk free interest rate		1.06	%		0.69	%
Dividend yield		3.86			4.28
Volatility		26.74			28.12
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 2015 and 2014 was $4.38 and $3.81, respectively.

Stock option activity during the six months ended June 30, 2015 and 2014 is as follows:

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2014		88,375	$	23.27
Granted		21,000		29.25
Exercised		11,650		17.73
Forfeited		12,650		31.87
Outstanding at June 30, 2015		85,075	$	24.22		2.74	$	440
Exercisable at June 30, 2015		30,875	$	20.85		1.12	$	264

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2013		115,800	$	23.51
Granted		20,000		25.16
Exercised		12,950		17.28
Forfeited		15,000		33.25
Outstanding at June 30, 2014		107,850	$	23.21		2.43	$	442
Exercisable at June 30, 2014		46,050	$	23.20		0.97	$	239

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Note 2 - Recent Accounting Pronouncements

6 Months Ended

Jun. 30, 2015

New Accounting Pronouncements and Changes in Accounting Principles [Abstract]

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU was issued to help improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets. The ASU’s core principle is that a company will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, this update specifies the accounting for certain costs to obtain or fulfill a contract with a customer and expands disclosure requirements for revenue recognition. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. QNB is evaluating the effect of adopting this new ASU.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40). The amendments in this Update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The provisions in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. QNB does not anticipate the adoption of this guidance will have a material impact on its financial statements but may result in expanded disclosures.

On January 9, 2015, the FASB issued ASU 2015-01 Extraordinary and Unusual Items (Subtopic 225-20) which eliminates from U.S. GAAP the concept of an extraordinary item. The Board released the new guidance as part of its simplification

initiative, which, as explained in the ASU, is intended to “identify, evaluate, and improve areas of U.S. GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements.” To be considered an extraordinary item under existing U.S. GAAP, an event or transaction must be unusual in nature and must occur infrequently. Stakeholders often questioned the decision-usefulness of labeling a transaction or event as extraordinary and indicated that it is difficult to ascertain whether an event or transaction satisfies both criteria. In light of this feedback and in a manner consistent with its simplification initiative, the FASB decided to eliminate the concept of an extraordinary item. As a result, an entity will no longer (1) segregate an extraordinary item from the results of ordinary operations; (2) separately present an extraordinary item on its income statement, net of tax, after income from continuing operations; and (3) disclose income taxes and earnings-per-share data applicable to an extraordinary item. However, the ASU does not affect the reporting and disclosure requirements for an event that is unusual in nature or that occurs infrequently. For all entities, the ASU is effective for annual periods beginning after December 15, 2015, and interim periods within those annual periods. Entities may apply the guidance prospectively or retrospectively to all prior periods presented in the financial statements. If an entity chooses to apply the guidance prospectively, it must disclose whether amounts included in income from continuing operations after adoption of the ASU are related to events and transactions previously recognized and classified as extraordinary items before the date of adoption. Early adoption is permitted if the guidance is applied as of the beginning of the annual period of adoption. QNB is evaluating the effect of adopting this new ASU.

On February 18, 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends the consolidation requirements in ASC 810 and significantly changes the consolidation analysis required under U.S. GAAP. The amendments include the following:

● Limited partnerships will be variable interest entities (VIEs), unless the limited partners have either substantive kick-out or participating rights. Although more partnerships will be VIEs, it is less likely that a general partner will consolidate a limited partnership.

● The ASU changes the effect that fees paid to a decision maker or service provider have on the consolidation analysis. Specifically, it is less likely that the fees themselves will be considered a variable interest, that an entity will be a VIE, or that consolidation will result.

● The ASU significantly amends how variable interests held by a reporting entity’s related parties or de facto agents affect its consolidation conclusion. Specifically, the ASU will result in less frequent performance of the related-party tiebreaker test (and mandatory consolidation by one of the related parties) than under current U.S. GAAP.

● For entities other than limited partnerships, the ASU clarifies how to determine whether the equity holders (as a group) have power over the entity (this will most likely result in a change to current practice). The clarification could affect whether the entity is a VIE.

This ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. QNB does not anticipate the adoption of this guidance will have a material impact on its financial statements.

On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for all entities for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). QNB is evaluating the effect of adopting this new ASU.

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Note 6 - Comprehensive Income (Tables)

6 Months Ended

Jun. 30, 2015

Disclosure Text Block [Abstract]

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

	June 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	820		$	1,975
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(376	)		(600	)
Accumulated other comprehensive income		444			1,375
Tax effect		(151	)		(468	)
Accumulated other comprehensive income, net of tax	$	293		$	907

Reclassification out of Accumulated Other Comprehensive Income [Table Text Block]

Three months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	214		$	285		Net gain on sale of investment securities
Tax effect		(73	)		(96	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	141		$	189		Net of tax

Six months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	717		$	907		Net gain on sale of investment securities
Tax effect		(244	)		(308	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	473		$	599		Net of tax

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Note 10 - Off-balance-sheet Financial Instruments and Guarantees

6 Months Ended

Jun. 30, 2015

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,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	220,961	$	203,496
Standby letters of credit		5,442		6,276
Total financial instrument commitments	$	226,403	$	209,772

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, 2015 and December 31, 2014 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, 2015

Disclosure Text Block [Abstract]

Comprehensive Income (Loss) Note [Text Block]

6. OTHER COMPREHENSIVE INCOME

The following shows the components of accumulated other comprehensive income at June 30, 2015 and December 31, 2014:

	June 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	820		$	1,975
Unrealized losses on available-for-sale securities for which a portion of an other-than-temporary impairment loss has been recognized in earnings		(376	)		(600	)
Accumulated other comprehensive income		444			1,375
Tax effect		(151	)		(468	)
Accumulated other comprehensive income, net of tax	$	293		$	907

The following tables present amounts reclassified out of accumulated other comprehensive income for the three and six months ended June 30, 2015 and 2014:

Three months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	214		$	285		Net gain on sale of investment securities
Tax effect		(73	)		(96	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	141		$	189		Net of tax

Six months ended June 30, 2015	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2015			2014			Affected line item in statement of income
Unrealized net holding gains on available-for-sale securities	$	717		$	907		Net gain on sale of investment securities
Tax effect		(244	)		(308	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	473		$	599		Net of tax

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Note 9 - Fair Value Measurements and Disclosures (Details) - Financial and Off-balance Sheet Instruments - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014	Jun. 30, 2014	Dec. 31, 2013
Financial assets
Cash and cash equivalents	$ 20,624	$ 18,245	$ 19,742	$ 16,286
Cash and cash equivalents	20,624	18,245
Investment securities:
Trading	3,871	4,207
Investment securities available-for-sale	330,231	375,219
Held-to-maturity	146	146
Held-to-maturity	154	156
Restricted investment in bank stocks	508	647
Restricted investment in bank stocks	508	647
Loans held-for-sale	466	380
Loans held-for-sale	475	394
Net loans	570,601	547,281
Net loans	565,261	544,126
Mortgage servicing rights	521	504
Mortgage servicing rights	667	601
Accrued interest receivable	2,324	2,568
Accrued interest receivable	2,324	2,568
Financial liabilities
Deposits with no stated maturities	826,081	851,592
Short-term borrowings	32,896	35,189
Short-term borrowings	32,896	35,189
Accrued interest payable	337	344
Accrued interest payable	337	344
With No Stated Maturities [Member]
Financial liabilities
Deposits with no stated maturities	591,937	608,345
Deposits with no stated maturities	591,937	608,345
With Stated Maturities [Member]
Financial liabilities
Deposits with no stated maturities	234,144	243,247
Deposits with no stated maturities	234,954	244,152
Fair Value, Inputs, Level 1 [Member]
Financial assets
Cash and cash equivalents	20,624	18,245
Investment securities:
Investment securities available-for-sale	7,619	7,655
Financial liabilities
Short-term borrowings	32,896	35,189
Fair Value, Inputs, Level 1 [Member] | With No Stated Maturities [Member]
Financial liabilities
Deposits with no stated maturities	591,937	608,345
Fair Value, Inputs, Level 2 [Member]
Investment securities:
Trading	3,871	4,207
Investment securities available-for-sale	319,918	365,125
Held-to-maturity	154	156
Restricted investment in bank stocks	508	647
Loans held-for-sale	475	394
Accrued interest receivable	2,324	2,568
Financial liabilities
Accrued interest payable	337	344
Fair Value, Inputs, Level 2 [Member] | With Stated Maturities [Member]
Financial liabilities
Deposits with no stated maturities	234,954	244,152
Fair Value, Inputs, Level 3 [Member]
Investment securities:
Investment securities available-for-sale	2,694	2,439
Net loans	565,261	544,126
Mortgage servicing rights	$ 667	$ 601

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Note 4 - Share Repurchase Plan

6 Months Ended

Jun. 30, 2015

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, 2015 and 2014. As of June 30, 2015, 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 5 - Earnings Per Share

6 Months Ended

Jun. 30, 2015

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,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	1,934	$	2,172	$	4,070	$	4,468
Denominator for basic earnings per share - weighted average shares outstanding		3,333,018		3,285,052		3,327,384		3,280,532
Effect of dilutive securities - employee stock options		13,515		12,390		12,734		11,560
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,346,533		3,297,442		3,340,118		3,292,092
Earnings per share - basic	$	0.58	$	0.66	$	1.22	$	1.36
Earnings per share - diluted		0.58		0.66		1.22		1.36

There were 21,000 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2015. There were 34,800 stock options that were anti-dilutive for both the three and six-month periods ended June 30, 2014. These stock options were not included in the above calculation.

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Note 7 - Investment Securities

6 Months Ended

Jun. 30, 2015

Investments, Debt and Equity Securities [Abstract]

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

7. INVESTMENT SECURITIES

QNB engages in trading activities for its own account. Municipal securities that are held principally for resale in the near term are recorded in the trading account at fair value with changes in fair value recorded in non-interest income. There were net realized and unrealized losses of $34,000 and gains of $93,000 recorded for the three months ended June 30, 2015 and 2014, respectively. There were net realized and unrealized losses of $19,000 and gains of $115,000 recorded for the six months ended at June 30, 2015 and 2014, respectively. Unrealized gains on trading activity related to trading securities still held at June 30, 2015 and December 31, 2014 totaled $21,000 and $24,000, respectively. Interest and dividends are included in interest income.

Trading securities, at fair value, at June 30, 2015 and December 31, 2014 were as follows:

	June 30,		December 31,
	2015		2014
State and municipal securities	$	3,871	$	4,207

The amortized cost and estimated fair values of investment securities available-for-sale at June 30, 2015 and December 31, 2014 were as follows:

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
June 30, 2015	value		gains		losses			cost
U.S. Government agency	$	42,263	$	171	$	(225	)	$	42,317
State and municipal		73,938		1,255		(328	)		73,011
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		120,943		1,464		(559	)		120,038
Collateralized mortgage obligations (CMOs)		76,738		341		(1,088	)		77,485
Pooled trust preferred		2,694		215		(1,022	)		3,501
Corporate debt		6,036		25		(7	)		6,018
Equity		7,619		448		(246	)		7,417
Total investment securities available-for-sale	$	330,231	$	3,919	$	(3,475	)	$	329,787

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2014	value		gains		losses			cost
U.S. Government agency	$	62,665	$	212	$	(472	)	$	62,925
State and municipal		72,569		1,500		(150	)		71,219
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,192		1,819		(466	)		134,839
Collateralized mortgage obligations (CMOs)		87,662		330		(1,300	)		88,632
Pooled trust preferred		2,439		160		(1,240	)		3,519
Corporate debt		6,037		30		-			6,007
Equity		7,655		1,022		(70	)		6,703
Total investment securities available-for-sale	$	375,219	$	5,073	$	(3,698	)	$	373,844

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at June 30, 2015 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.

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less	$	5,129	$	5,076
Due after one year through five years		230,192		229,515
Due after five years through ten years		64,725		64,452
Due after ten years		22,566		23,327
Equity securities		7,619		7,417
Total investment securities available-for-sale	$	330,231	$	329,787

For the three months ended June 30, 2015 and 2014, proceeds from sales of investment securities available-for-sale were approximately $19,200,000 and $6,389,000. Proceeds from sales of investment securities available-for-sale were approximately $26,795,000 and $18,970,000 for the six months ended June 30, 2015 and 2014, respectively.

At June 30, 2015 and December 31, 2014, investment securities available-for-sale totaling approximately $154,330,000 and $206,774,000, 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 (“OTTI”) 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:

	Three months ended June 30, 2015									Three months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	204	$	(23	)	$	-	$	181	$	280	$	(6	)	$	-	$	274
Debt securities		66		(33	)		-		33		74		(63	)		-		11
Total	$	270	$	(56	)	$	-	$	214	$	354	$	(69	)	$	-	$	285

	Six months ended June 30, 2015									Six months ended June 30, 2014
						Other-than-									Other-than-
	Gross		Gross			temporary				Gross		Gross			temporary
	realized		realized			impairment				realized		realized			impairment
	gains		losses			losses		Net gains		gains		losses			losses		Net gains
Equity securities	$	630	$	(23	)	$	-	$	607	$	870	$	(6	)	$	-	$	864
Debt securities		154		(44	)		-		110		137		(94	)		-		43
Total	$	784	$	(67	)	$	-	$	717	$	1,007	$	(100	)	$	-	$	907

The tax expense applicable to the net realized gains for the six-month periods ended June 30, 2015 and 2014 amounted to approximately $244,000 and $308,000, 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 2015 or 2014.

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,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
Reductions: gain on payoff		-		-
Additions:
Initial credit impairments		-		-
Subsequent credit impairments		-		-
Balance, end of period	$	1,153	$	1,271

The amortized cost and estimated fair values of investment securities held-to-maturity at June 30, 2015 and December 31, 2014 were as follows:

Held-To-Maturity

June 30, 2015

December 31, 2014

Gross

Gross

Gross

Gross

unrealized

unrealized

unrealized

unrealized

Amortized

holding

holding

Fair

Amortized

holding

holding

Fair

cost

gains

losses

value

cost

gains

losses

value

State and municipal securities

$

146

$

8

-

$

154

$

146

$

10

-

$

156

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at June 30, 2015 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.

			Amortized
June 30, 2015	Fair value		cost
Due in one year or less		-		-
Due after one year through five years	$	154	$	146
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	154	$	146

There were no sales of investment securities classified as held-to-maturity during the three and six months ended June 30, 2015 or 2014.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:

June 30, 2015
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		17	$	16,484	$	(144	)	$	7,166	$	(81	)	$	23,650	$	(225	)
State and municipal		68		23,711		(267	)		4,522		(61	)		28,233		(328	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		33		38,711		(492	)		2,536		(67	)		41,247		(559	)
Collateralized mortgage obligations (CMOs)		42		20,555		(146	)		29,614		(942	)		50,169		(1,088	)
Pooled trust preferred		5		-		-			2,191		(1,022	)		2,191		(1,022	)
Corporate debt		1		1,005		(7	)		-		-			1,005		(7	)
Equity		15		3,487		(228	)		250		(18	)		3,737		(246	)
Total		181	$	103,953	$	(1,284	)	$	46,279	$	(2,191	)	$	150,232	$	(3,475	)

December 31, 2014
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. Government agency		29	$	15,466	$	(30	)	$	23,941	$	(442	)	$	39,407	$	(472	)
State and municipal		39		3,452		(31	)		11,964		(119	)		15,416		(150	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		34		6,521		(15	)		38,586		(451	)		45,107		(466	)
Collateralized mortgage obligations (CMOs)		51		2,003		(205	)		35,687		(1,095	)		37,690		(1,300	)
Pooled trust preferred		5		-		-			1,978		(1,240	)		1,978		(1,240	)
Equity		7		1,303		(70	)		-		-			1,303		(70	)
Total		165	$	28,745	$	(351	)	$	112,156	$	(3,347	)	$	140,901	$	(3,698	)

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, 2015 in U.S. Government securities, state and municipal securities, mortgage-backed securities, CMOs and corporate debt securities are primarily the result of interest rate fluctuations. 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.

The Company’s investment in marketable equity securities primarily consists of investments in large cap stock companies. These equity securities are analyzed for impairment on an ongoing basis. Management believes these equity securities will recover in the foreseeable future. QNB evaluated the near-term prospects of the issuers in relation to the severity and duration of the impairment. Based on that evaluation and the Company’s ability and intent to hold those securities for a reasonable period of time sufficient for a forecasted recovery of fair value, the Company does not consider these equity securities to be other-than-temporarily impaired.

QNB holds six pooled trust preferred securities as of June 30, 2015. These securities have a total amortized cost of approximately $3,501,000 and a fair value of $2,694,000. Five of the six 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, 2015:

Deal	Class	Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2015)		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	$	215	$	(28	)	$	-	$	(1	)	B1/B		5		-		18.0	%		140.5	%
PreTSL XVII	Mezzanine		752		565		(187	)		-		(222	)	C/C		31		5		30.4			85.9
PreTSL XIX	Mezzanine		987		556		(431	)		-		-		Caa3/C		40		12		12.2			94.4
PreTSL XXV	Mezzanine		766		483		(283	)		-		(222	)	C/C		47		5		27.5			88.9
PreTSL XXVI	Mezzanine		465		372		(93	)		-		(270	)	Caa3/C		43		7		23.7			94.0
PreTSL XXVI	Mezzanine		288		503		215			-		(438	)	Caa3/C		43		7		23.7			94.0
		$	3,501	$	2,694	$	(807	)	$	-	$	(1,153	)

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

On January 14, 2014, Regulators released a final rule authorizing retention of pooled trust preferred securities backed primarily by bank-issued trust preferred securities which included the PreTSLs held by QNB. Due to the uncertainty invoked between the original release of the Volcker Rule and the final rule, there was a noticeable increase in trading activity. However, we believe most of these trades occurred under distress and do not represent trades made in an orderly market. Despite the trades that took place as discussed previously, the market for these securities at June 30, 2015 was not active and markets for similar securities also are not active. The new issue market is also inactive and the market values for these securities are depressed relative to historical levels. 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 previous table, 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, except for PreTSL IV which represents the senior-most obligation of the trust.

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 impairment 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 three and six months ended June 30, 2015 and 2014, 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 of 1% were forecasted. In addition to the base prepayment assumption, due to the enactment of the Dodd-Frank Act 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, 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.

● 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 any 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 generate additional capital either internally or externally.

● 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 2016 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. Based on information from various published studies, a 95% severity of loss was utilized for defaults projected in 2016 and thereafter.

Based upon the analysis performed by management as of June 30, 2015, it is probable that we will collect all contractual principal and interest payments on one of our six 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 5 - Earnings Per Share (Details) - Computation of Basic and Diluted Earnings Per Share - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Computation of Basic and Diluted Earnings Per Share [Abstract]
Numerator for basic and diluted earnings per share - net income (in Dollars)	$ 1,934	$ 2,172	$ 4,070	$ 4,468
Denominator for basic earnings per share - weighted average shares outstanding	3,333,018	3,285,052	3,327,384	3,280,532
Effect of dilutive securities - employee stock options	13,515	12,390	12,734	11,560
Denominator for diluted earnings per share - adjusted weighted average shares outstanding	3,346,533	3,297,442	3,340,118	3,292,092
Earnings per share - basic (in Dollars per share)	$ 0.58	$ 0.66	$ 1.22	$ 1.36
Earnings per share - diluted (in Dollars per share)	$ 0.58	$ 0.66	$ 1.22	$ 1.36

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Note 8 - Loans and Allowance for Loan Losses (Details) - Allowance for Loan Losses - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Commercial:
Allowance for loan losses, beginning of period	$ 7,978	$ 8,819	$ 8,001	$ 8,925
Provision for (credit to) loan losses	60	0	60	0
Charge-offs	(423)	(62)	(481)	(216)
Recoveries	40	143	75	191
Allowance for loan losses, end of period	7,655	8,900	7,655	8,900
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	1,875	2,308	1,892	2,044
Provision for (credit to) loan losses	(251)	55	(278)	329
Charge-offs	(30)	0	(30)	(17)
Recoveries	9	44	19	51
Allowance for loan losses, end of period	1,603	2,407	1,603	2,407
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	285	391	297	439
Provision for (credit to) loan losses	(136)	(151)	(148)	(199)
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	149	240	149	240
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Allowance for loan losses, beginning of period	2,569	2,757	2,700	2,898
Provision for (credit to) loan losses	141	(157)	36	(298)
Charge-offs	(57)	0	(85)	0
Recoveries	2	0	4	0
Allowance for loan losses, end of period	2,655	2,600	2,655	2,600
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Allowance for loan losses, beginning of period	1,666	1,465	1,630	1,632
Provision for (credit to) loan losses	266	238	304	68
Charge-offs	(313)	0	(317)	(1)
Recoveries	16	5	18	9
Allowance for loan losses, end of period	1,635	1,708	1,635	1,708
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period	253	293	221	186
Provision for (credit to) loan losses	(21)	(79)	11	28
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	232	214	232	214
Finance Leases Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period	95	106	93	103
Provision for (credit to) loan losses	25	(19)	26	(14)
Charge-offs	0	0	(8)	(6)
Recoveries	1	5	10	9
Allowance for loan losses, end of period	121	92	121	92
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Allowance for loan losses, beginning of period	308	314	312	303
Provision for (credit to) loan losses	5	58	1	69
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	313	372	313	372
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Allowance for loan losses, beginning of period	479	602	453	583
Provision for (credit to) loan losses	(12)	(127)	9	(40)
Charge-offs		(34)	0	(121)
Recoveries	7	79	12	98
Allowance for loan losses, end of period	474	520	474	520
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	85	63	85	64
Provision for (credit to) loan losses	4	22	15	50
Charge-offs	(23)	(28)	(41)	(71)
Recoveries	5	10	12	24
Allowance for loan losses, end of period	71	67	71	67
Unallocated Financing Receivables [Member]
Commercial:
Allowance for loan losses, beginning of period	363	517	318	669
Provision for (credit to) loan losses	39	162	84	10
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	$ 402	679	$ 402	679
Loans to Depository Institutions Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period		3		4
Provision for (credit to) loan losses		(2)		(3)
Charge-offs		0		0
Recoveries		0		0
Allowance for loan losses, end of period		$ 1		$ 1

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

6 Months Ended

Jun. 30, 2015

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,	2015			2014
Risk free interest rate		1.06	%		0.69	%
Dividend yield		3.86			4.28
Volatility		26.74			28.12
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, 2014		88,375	$	23.27
Granted		21,000		29.25
Exercised		11,650		17.73
Forfeited		12,650		31.87
Outstanding at June 30, 2015		85,075	$	24.22		2.74	$	440
Exercisable at June 30, 2015		30,875	$	20.85		1.12	$	264

	Number of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2013		115,800	$	23.51
Granted		20,000		25.16
Exercised		12,950		17.28
Forfeited		15,000		33.25
Outstanding at June 30, 2014		107,850	$	23.21		2.43	$	442
Exercisable at June 30, 2014		46,050	$	23.20		0.97	$	239

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Note 9 - Fair Value Measurements and Disclosures (Tables)

6 Months Ended

Jun. 30, 2015

Fair Value Disclosures [Abstract]

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

June 30, 2015	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
Trading Securities
State and municipal securities	$	-	$	3,871	$	-	$	3,871
Securities available-for-sale
U.S. Government agency securities		-	$	42,263		-	$	42,263
State and municipal securities		-		73,938		-		73,938
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		120,943		-		120,943
Collateralized mortgage obligations (CMOs)		-		76,738		-		76,738
Pooled trust preferred securities		-		-	$	2,694		2,694
Corporate debt securities		-		6,036		-		6,036
Equity securities	$	7,619		-		-		7,619
Total securities available-for-sale	$	7,619	$	319,918	$	2,694	$	330,231
Total recurring fair value measurements	$	7,619	$	323,789	$	2,694	$	334,102
Nonrecurring fair value measurements
Impaired loans	$	-		-	$	749	$	749
Other real estate owned		-	$	50		-		50
Mortgage servicing rights		-		-		60		60
Total nonrecurring fair value measurements	$	-	$	50	$	809	$	859

December 31, 2014	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
Trading Securities
State and municipal securities	$	-	$	4,207	$	-	$	4,207
Securities available-for-sale
U.S. Government agency securities		-	$	62,665		-	$	62,665
State and municipal securities		-		72,569		-		72,569
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		136,192		-		136,192
Collateralized mortgage obligations (CMOs)		-		87,662		-		87,662
Pooled trust preferred securities		-		-	$	2,439		2,439
Corporate debt securities		-		6,037		-		6,037
Equity securities	$	7,655		-		-		7,655
Total securities available-for-sale	$	7,655	$	365,125	$	2,439	$	375,219
Total recurring fair value measurements	$	7,655	$	369,332	$	2,439	$	379,426
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	3,715	$	3,715
Mortgage servicing rights		-		-		112		112
Total nonrecurring fair value measurements	$	-	$	-	$	3,827	$	3,827

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

	Quantitative information about Level 3 fair value measurements
	Fair value		Valuation techniques	Unobservable input	Value or range of values
June 30, 2015 - Impaired loans	$	638	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
June 30, 2015 - Impaired loans		111	Discounted cash flow (4)	Discount rate		6.375	%
June 30, 2015 - Mortgage servicing rights		60	Discounted cash flow	Remaining term	2 - 28 yrs
				Discount rate		10% to 12	%

	Quantitative information about Level 3 fair value measurements
	Fair value		Valuation techniques	Unobservable input	Value or range of values
December 31, 2014 - Impaired loans	$	953	Appraisal of collateral (1)	Appraisal adjustments (2)		-20% to -100	%
				Liquidation expenses (3)		-10	%
December 31, 2014 - Impaired loans		112	Discounted cash flow (4)	Discount rate		6.375	%
December 31, 2014 - Impaired loans		2,650	Agreement of sale (5)
December 31, 2014 - Mortgage servicing rights		112	Discounted cash flow	Remaining term	2 - 28 yrs
				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, January 1, 2015	$	2,439
Payments received		(18	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		273
Transfers in and/or out of Level 3		-
Balance, June 30, 2015	$	2,694

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

					Fair value measurements
June 30, 2015	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	$	20,624	$	20,624	$	20,624		-		-
Investment securities:
Trading		3,871		3,871		-	$	3,871		-
Available-for-sale		330,231		330,231		7,619		319,918	$	2,694
Held-to-maturity		146		154		-		154		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		466		475		-		475		-
Net loans		570,601		565,261		-		-		565,261
Mortgage servicing rights		521		667		-		-		667
Accrued interest receivable		2,324		2,324		-		2,324		-
Financial liabilities
Deposits with no stated maturities	$	591,937	$	591,937	$	591,937		-		-
Deposits with stated maturities		234,144		234,954		-	$	234,954		-
Short-term borrowings		32,896		32,896		32,896		-		-
Accrued interest payable		337		337		-		337		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

					Fair value measurements
December 31, 2014	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	$	18,245	$	18,245	$	18,245		-		-
Investment securities:
Trading		4,207		4,207		-	$	4,207		-
Available-for-sale		375,219		375,219		7,655		365,125	$	2,439
Held-to-maturity		146		156		-		156		-
Restricted investment in bank stocks		647		647		-		647		-
Loans held-for-sale		380		394		-		394		-
Net loans		547,281		544,126		-		-		544,126
Mortgage servicing rights		504		601		-		-		601
Accrued interest receivable		2,568		2,568		-		2,568		-
Financial liabilities
Deposits with no stated maturities	$	608,345	$	608,345	$	608,345		-	$	-
Deposits with stated maturities		243,247		244,152		-	$	244,152		-
Short-term borrowings		35,189		35,189		35,189		-		-
Accrued interest payable		344		344		-		344		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

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Note 8 - Loans and Allowance for Loan Losses (Details) - Past Due Loans - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Commercial:
Loans past due	$ 3,517	$ 6,703
Loans current	574,687	548,548
Loans	578,204	555,251
Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	1,312	1,993
Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	490	963
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	1,715	3,747
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans past due	497
Loans current	131,774	118,845
Loans	132,271	118,845
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	486
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	11
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans past due		466
Loans current	19,031	23,005
Loans	19,031	23,471
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due		466
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Loans past due	1,660	4,107
Loans current	210,355	199,427
Loans	212,015	203,534
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	404	28
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	105	332
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	1,151	3,747
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans past due	741	1,174
Loans current	55,243	51,903
Loans	55,984	53,077
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	136	600
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	341	574
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	264
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans current	42,178	44,104
Loans	42,178	44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Loans past due	221	291
Loans current	9,000	7,394
Loans	9,221	7,685
Finance Leases Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	91	291
Finance Leases Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	40
Finance Leases Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	90
Retail Portfolio Segment [Member]
Commercial:
Loans	107,504	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans past due	199	526
Loans current	38,668	36,621
Loans	38,867	37,147
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due		526
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	199
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans past due	185	115
Loans current	64,711	63,098
Loans	64,896	63,213
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	185	66
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due		49
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans past due	14	24
Loans current	3,727	4,151
Loans	3,741	4,175
Retail Portfolio Segment [Member] | Consumer Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	10	16
Retail Portfolio Segment [Member] | Consumer Loans [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	$ 4	$ 8

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Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains	$ 270	$ 354	$ 784	$ 1,007
Gross realized losses	(56)	(69)	(67)	(100)
Net gains	214	285	717	907
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains	204	280	630	870
Gross realized losses	(23)	(6)	(23)	(6)
Net gains	181	274	607	864
Debt Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains	66	74	154	137
Gross realized losses	(33)	(63)	(44)	(94)
Net gains	$ 33	$ 11	$ 110	$ 43

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2015	Jun. 30, 2014	Jun. 30, 2015	Jun. 30, 2014
Net income	$ 2,517	$ 2,808	$ 5,354	$ 5,801
Net unrealized holding gains (losses) on securities:
Unrealized holding (losses) gains arising during the period	(2,674)	3,484	(214)	6,781
Reclassification adjustment for gains included in net income	(214)	(285)	(717)	(907)
Other comprehensive (loss) income	(2,888)	3,199	(931)	5,874
Total comprehensive (loss) income	$ (371)	$ 6,007	$ 4,423	$ 11,675

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Note 1 - Basis of Presentation

6 Months Ended

Jun. 30, 2015

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 2014 Annual Report incorporated in the Form 10-K. Operating results for the three and six month periods ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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

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

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

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2015, for items that should potentially be recognized or disclosed in these financial statements.

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Note 9 - Fair Value Measurements and Disclosures (Details) - Quantitative Information about Assets Measured at Fair Value - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2015	Dec. 31, 2014
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	$ 859	$ 3,827
Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	749	3,715
Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	60	112
Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	809	3,827
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	749	3,715
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	60	112
Fair Value, Inputs, Level 3 [Member] | Income Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	$ 638	$ 953
Liquidation expenses	10.00%	10.00%
Fair Value, Inputs, Level 3 [Member] | Market Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	$ 111	$ 112
Discount rate	6.375%	6.375%
Fair Value, Inputs, Level 3 [Member] | Market Approach Valuation Technique [Member] | Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)	$ 60	$ 112
Fair Value, Inputs, Level 3 [Member] | Agreement of Sale [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		$ 2,650
Fair Value, Inputs, Level 3 [Member] | Minimum [Member] | Income Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustments	20.00%	20.00%
Fair Value, Inputs, Level 3 [Member] | Minimum [Member] | Market Approach Valuation Technique [Member] | Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Discount rate	10.00%	10.00%
Remaining term	2 years	2 years
Fair Value, Inputs, Level 3 [Member] | Maximum [Member] | Income Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Appraisal adjustments	100.00%	100.00%
Fair Value, Inputs, Level 3 [Member] | Maximum [Member] | Market Approach Valuation Technique [Member] | Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Discount rate	12.00%	12.00%
Remaining term	28 years	28 years

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Note 10 - Off-balance-sheet Financial Instruments and Guarantees (Tables)

6 Months Ended

Jun. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

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

	June 30,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	220,961	$	203,496
Standby letters of credit		5,442		6,276
Total financial instrument commitments	$	226,403	$	209,772

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Note 7 - Investment Securities (Details) - Trading Securities - USD ($) $ in Thousands	Jun. 30, 2015	Dec. 31, 2014
Schedule of Trading Securities and Other Trading Assets [Line Items]
State and municipal securities	$ 3,871	$ 4,207
US States and Political Subdivisions Debt Securities [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
State and municipal securities	$ 3,871	$ 4,207

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Note 11 - Regulatory Restrictions

6 Months Ended

Jun. 30, 2015

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, 2015, 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					Minimum required					Well capitalized
As of June 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	96,010		13.05	%	$	58,844		8.00	%	$	73,555		10.00	%
Bank		88,793		12.45			57,078		8.00			71,348		10.00
Tier I capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	44,133		6.00		$	44,133		6.00
Bank		81,079		11.36			42,809		6.00			57,078		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated	$	88,241		12.00	%	$	33,100		4.50			N/A		N/A
Bank		81,079		11.36			32,106		4.50			46,376		6.50
Tier I capital (to average assets):
Consolidated	$	88,241		9.18	%	$	38,443		4.00			N/A		N/A
Bank		81,079		8.50			38,159		4.00			47,699		5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	93,927		14.06	%	$	53,425		8.00	%		N/A		N/A
Bank		86,884		13.14			52,891		8.00		$	66,114		10.00	%
Tier I capital (to risk-weighted assets):
Consolidated		85,439		12.79			26,713		4.00			N/A		N/A
Bank		78,824		11.92			26,446		4.00			39,669		6.00
Tier I capital (to average assets):
Consolidated		85,439		8.65			39,501		4.00			N/A		N/A
Bank		78,824		8.04			39,237		4.00			49,047		5.00