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                               September 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 October 30, 2015
Common Stock, par value $0.625	3,350,577

1

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2015

INDEX

	PART I - FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE
	Consolidated Balance Sheets at September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014	5
	Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 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	45
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	69
ITEM 4.	CONTROLS AND PROCEDURES	69
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	70
ITEM 1A.	RISK FACTORS	70
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	70
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	70
ITEM 4.	MINE SAFETY DISCLOSURES	70
ITEM 5.	OTHER INFORMATION	70
ITEM 6.	EXHIBITS	71
SIGNATURES
CERTIFICATIONS

2

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS

	(in thousands, except share data)
	(unaudited)
	September 30, 2015			December 31, 2014
Assets
Cash and due from banks	$	9,038		$	11,102
Interest-bearing deposits in banks		60,666			7,143
Total cash and cash equivalents		69,704			18,245
Investment securities
Trading		3,625			4,207
Available-for-sale (amortized cost $360,660 and $373,844)		362,568			375,219
Held-to-maturity (fair value $153 and $156)		147			146
Restricted investment in bank stocks		508			647
Loans held-for-sale		320			380
Loans receivable		582,255			555,282
Allowance for loan losses		(7,669	)		(8,001	)
Net loans		574,586			547,281
Bank-owned life insurance		10,886			10,658
Premises and equipment, net		9,345			9,702
Accrued interest receivable		2,555			2,568
Other real estate owned		-			3,025
Net deferred tax assets		2,677			2,925
Other assets		2,396			2,132
Total assets	$	1,039,317		$	977,135
Liabilities
Deposits
Demand, non-interest bearing	$	98,092		$	86,920
Interest-bearing demand		289,572			251,986
Money market		71,683			58,199
Savings		220,233			211,240
Time		136,988			148,827
Time of $100 or more		92,106			94,420
Total deposits		908,674			851,592
Short-term borrowings		32,588			35,189
Accrued interest payable		323			344
Other liabilities		6,736			3,656
Total liabilities		948,321			890,781
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,515,046 shares and 3,481,227 shares issued; 3,350,477 and 3,316,658 shares outstanding		2,197			2,176
Surplus		15,698			14,819
Retained earnings		74,317			70,928
Accumulated other comprehensive income, net of tax		1,260			907
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Total shareholders' equity		90,996			86,354
Total liabilities and shareholders' equity	$	1,039,317		$	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 September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Interest income
Interest and fees on loans	$	6,302	$	5,787	$	18,148	$	16,964
Interest and dividends on investment securities (AFS & HTM):
Taxable		1,242		1,324		3,840		3,983
Tax-exempt		519		541		1,474		1,712
Interest on trading securities		43		44		124		111
Interest on interest-bearing balances and other interest income		32		45		105		86
Total interest income		8,138		7,741		23,691		22,856
Interest expense
Interest on deposits
Interest-bearing demand		170		178		490		486
Money market		40		35		114		90
Savings		204		192		600		574
Time		381		416		1,166		1,226
Time of $100 or more		300		310		890		850
Interest on short-term borrowings		28		25		87		85
Interest on long-term debt		-		-		-		70
Total interest expense		1,123		1,156		3,347		3,381
Net interest income		7,015		6,585		20,344		19,475
Provision for loan losses		-		-		60		-
Net interest income after provision for loan losses		7,015		6,585		20,284		19,475
Non-interest income
Net gain on sale of investment securities		83		180		800		1,087
Net gain on trading activities		36		40		17		155
Fees for services to customers		434		432		1,240		1,241
ATM and debit card		397		378		1,153		1,113
Retail brokerage and advisory income		180		138		557		453
Bank-owned life insurance		73		74		215		219
Merchant Income		75		73		226		229
Net gain on sale of loans		120		110		302		171
Other		95		92		259		286
Total non-interest income		1,493		1,517		4,769		4,954
Non-interest expense
Salaries and employee benefits		2,911		2,963		8,960		8,594
Net occupancy		427		421		1,336		1,291
Furniture and equipment		424		444		1,285		1,290
Marketing		174		201		596		641
Third party services		389		454		1,235		1,266
Telephone, postage and supplies		182		187		551		544
State taxes		173		152		520		456
FDIC insurance premiums		162		170		479		507
Other		731		486		1,802		1,415
Total non-interest expense		5,573		5,478		16,764		16,004
Income before income taxes		2,935		2,624		8,289		8,425
Provision for income taxes		715		580		1,999		1,913
Net income	$	2,220	$	2,044	$	6,290	$	6,512
Earnings per share - basic	$	0.66	$	0.62	$	1.89	$	1.98
Earnings per share - diluted	$	0.66	$	0.62	$	1.88	$	1.98
Cash dividends per share	$	0.29	$	0.28	$	0.87	$	0.84

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 September 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	$	2,935		$	715		$	2,220		$	2,624		$	580		$	2,044
Other comprehensive income:
Net unrealized holding gains on securities:
Unrealized holding gains arising during the period		1,547			526			1,021			1,321			449			872
Reclassification adjustment for gains included in net income		(83	)		(29	)		(54	)		(180	)		(61	)		(119	)
Other comprehensive income		1,464			497			967			1,141			388			753
Total comprehensive income	$	4,399		$	1,212		$	3,187		$	3,765		$	968		$	2,797

Nine months ended September 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	$	8,289		$	1,999		$	6,290		$	8,425		$	1,913		$	6,512
Other comprehensive income:
Net unrealized holding gains on securities:
Unrealized holding gains arising during the period		1,333			453			880			5,819			1,979			3,840
Reclassification adjustment for gains included in net income		(800	)		(273	)		(527	)		(1,087	)		(370	)		(717	)
Other comprehensive income		533			180			353			4,732			1,609			3,123
Total comprehensive income	$	8,822		$	2,179		$	6,643		$	13,157		$	3,522		$	9,635

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

5

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Nine months ended September 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				-		-		6,290			-		-			6,290
Other comprehensive income, net of tax				-		-		-			353		-			353
Cash dividends declared ($0.87 per share)				-		-		(2,901	)		-		-			(2,901	)
Stock issued in connection with dividend reinvestment and stock purchase plan		23,796		15		652		-			-		-			667
Stock issued for employee stock purchase plan		1,721		1		42		-			-		-			43
Stock issued for options exercised		8,302		5		101		-			-		-			106
Tax benefit of stock options exercised				-		20		-			-		-			20
Stock-based compensation expense				-		64		-			-		-			64
Balance, September 30, 2015		3,350,477	$	2,197	$	15,698	$	74,317		$	1,260	$	(2,476	)	$	90,996

										Accumulated
	Number of									Other
(unaudited)	Shares		Common				Retained			Comprehensive			Treasury
(in thousands, except share and per share data)	Outstanding		Stock		Surplus		Earnings			Income (Loss)			Stock			Total
Balance, December 31, 2013		3,271,658	$	2,148	$	13,747	$	65,618		$	(3,412	)	$	(2,476	)	$	75,625
Net income				-		-		6,512			-			-			6,512
Other comprehensive income, net of tax				-		-		-			3,123			-			3,123
Cash dividends declared ($0.84 per share)				-		-		(2,762	)		-			-			(2,762	)
Stock issued in connection with dividend reinvestment and stock purchase plan		21,957		14		538		-			-			-			552
Stock issued for employee stock purchase plan		1,572		1		34		-			-			-			35
Stock issued for options exercised		11,919		7		147		-			-			-			154
Tax benefit of stock options exercised				-		29		-			-			-			29
Stock-based compensation expense				-		60		-			-			-			60
Balance, September 30, 2014		3,307,106	$	2,170	$	14,555	$	69,368		$	(289	)	$	(2,476	)	$	83,328

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)
Nine months ended September 30,	2015			2014
Operating Activities
Net income	$	6,290		$	6,512
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		769			850
Provision for loan losses		60			-
Net gain on investment securities available-for-sale		(800	)		(1,087	)
Net loss on sale of repossessed assets and other real estate owned		17			2
Net gain on sale of loans		(302	)		(171	)
Proceeds from sales of residential mortgages held-for-sale		9,595			4,192
Origination of residential mortgages held-for-sale		(9,233	)		(4,151	)
Income on bank-owned life insurance		(215	)		(219	)
Stock-based compensation expense		64			60
Net decrease (increase) in trading securities		582			(4,122	)
Deferred income tax provision		66			153
Net increase (decrease) in income taxes payable		17			(331	)
Net decrease (increase) in accrued interest receivable		13			(25	)
Amortization of mortgage servicing rights and change in valuation allowance		53			46
Net amortization of premiums and discounts on investment securities		1,583			1,571
Net decrease in accrued interest payable		(21	)		(55	)
Increase in other assets		(364	)		(389	)
Decrease in other liabilities		(908	)		(133	)
Net cash provided by operating activities		7,266			2,703
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale		68,472			67,329
Proceeds from the sale of investment securities available-for-sale		27,480			19,504
Purchases of investment securities available-for-sale		(79,565	)		(56,153	)
Proceeds from redemption of investment in restricted bank stock		1,318			2,452
Purchase of restricted bank stock		(1,179	)		(2,409	)
Net increase in loans		(27,580	)		(35,790	)
Net purchases of premises and equipment		(413	)		(812	)
Proceeds from sales of repossessed assets and other real estate owned		3,244			43
Net cash used in investing activities		(8,223	)		(5,836	)
Financing Activities
Net increase in non-interest bearing deposits		11,172			6,996
Net increase in interest-bearing deposits		45,910			58,768
Net decrease in short-term borrowings		(2,601	)		(6,508	)
Repayments of long-term debt		-			(5,000	)
Tax benefit from exercise of stock options		20			29
Cash dividends paid, net of reinvestment		(2,579	)		(2,498	)
Proceeds from issuance of common stock		494			477
Net cash provided by financing activities		52,416			52,264
Increase in cash and cash equivalents		51,459			49,131
Cash and cash equivalents at beginning of year		18,245			16,286
Cash and cash equivalents at end of period	$	69,704		$	65,417
Supplemental Cash Flow Disclosures
Interest paid	$	3,368		$	3,436
Income taxes paid		1,904			2,060
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned		215			265
Unsettled trades to purchase securities		3,987			230

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 nine month periods ended September 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 September 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. The adoption of this guidance did not have a material impact on QNB’s financial statements but may result in expanded disclosures.

8

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

2. RECENT ACCOUNTING PRONOUNCEMENTS (continued)

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.

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 $18,000 and $17,000 for the three months ended September 30, 2015 and 2014, respectively. Stock-based compensation expense was $64,000 and $60,000 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was approximately $90,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 28 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 September 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 September 30, 2015, there were 184,200 options granted, 55,225 options forfeited, 44,400 options exercised, and 84,575 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 September 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:

Nine months ended September 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 nine 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 nine months ended September 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		(12,150	)		17.81
Forfeited		(12,650	)		31.87
Outstanding at September 30, 2015		84,575		$	24.25		2.50	$	444
Exercisable at September 30, 2015		30,375		$	20.87		0.89	$	262

	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		(19,425	)		17.76
Forfeited		(24,625	)		29.35
Outstanding at September 30, 2014		91,750		$	23.52		3.33	$	172
Exercisable at September 30, 2014		87,893		$	23.53		2.10	$	384

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 nine months ended September 30, 2015 and 2014. As of September 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	2,220	$	2,044	$	6,290	$	6,512
Denominator for basic earnings per share - weighted average shares outstanding		3,343,011		3,298,057		3,332,650		3,286,438
Effect of dilutive securities - employee stock options		13,778		11,408		12,980		9,766
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,356,789		3,309,465		3,345,630		3,296,204
Earnings per share - basic	$	0.66	$	0.62	$	1.89	$	1.98
Earnings per share - diluted	$	0.66	$	0.62		1.88	$	1.98

There were 21,000 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2015. There were 31,450 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2014. These stock options were not included in the above calculation.

6. OTHER COMPREHENSIVE INCOME

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

	September 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	2,284		$	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		1,908			1,375
Tax effect		(648	)		(468	)
Accumulated other comprehensive income, net of tax	$	1,260		$	907

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

Three months ended September 30,	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	$	83		$	180		Net gain on sale of investment securities
Tax effect		(29	)		(61	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	54		$	119		Net of tax

12

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

6. OTHER COMPREHENSIVE INCOME (continued)

Nine months ended September 30,	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	$	800		$	1,087		Net gain on sale of investment securities
Tax effect		(273	)		(370	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	527		$	717		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 gains of $36,000 and $40,000 recorded for the three months ended September 30, 2015 and 2014, respectively. There were net realized and unrealized gains of $17,000 and $155,000 recorded for the nine months ended September 30, 2015 and 2014, respectively. Unrealized gains on trading activity related to trading securities still held at September 30, 2015 and December 31, 2014 totaled $29,000 and $24,000, respectively. Interest and dividends are included in interest income.

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

	September 30,		December 31,
	2015		2014
State and municipal securities	$	3,625	$	4,207

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

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2015	value		gains		losses			cost
U.S. Government agency	$	57,490	$	308	$	(44	)	$	57,226
State and municipal		83,042		1,493		(85	)		81,634
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		133,281		1,793		(203	)		131,691
Collateralized mortgage obligations (CMOs)		73,034		494		(599	)		73,139
Pooled trust preferred		2,600		215		(1,024	)		3,409
Corporate debt		6,029		23		(11	)		6,017
Equity		7,092		309		(761	)		7,544
Total investment securities available-for-sale	$	362,568	$	4,635	$	(2,727	)	$	360,660

13

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued)

			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 September 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
September 30, 2015	Fair value		cost
Due in one year or less	$	5,954	$	5,910
Due after one year through five years		245,136		243,167
Due after five years through ten years		82,140		81,254
Due after ten years		22,246		22,785
Equity securities		7,092		7,544
Total investment securities available-for-sale	$	362,568	$	360,660

For the three months ended September 30, 2015 and 2014, proceeds from sales of investment securities available-for-sale were approximately $685,000 and $534,000. Proceeds from sales of investment securities available-for-sale were approximately $27,480,000 and $19,504,000 for the nine months ended September 30, 2015 and 2014, respectively.

At September 30, 2015 and December 31, 2014, investment securities available-for-sale totaling approximately $238,281,000 and $206,774,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

14

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

7. INVESTMENT SECURITIES (continued) 

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 September 30, 2015								Three months ended September 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	$	83	$	-	$	-	$	83	$	181	$	-		$	-	$	181
Debt securities		-		-		-		-		-		(1	)		-		(1	)
Total	$	83	$	-	$	-	$	83	$	181	$	(1	)	$	-	$	180

	Nine months ended September 30, 2015									Nine months ended September 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	$	713	$	(23	)	$	-	$	690	$	1,051	$	(6	)	$	-	$	1,045
Debt securities		154		(44	)		-		110		137		(95	)		-		42
Total	$	867	$	(67	)	$	-	$	800	$	1,188	$	(101	)	$	-	$	1,087

The tax expense applicable to the net realized gains for the nine-month periods ended September 30, 2015 and 2014 amounted to approximately $273,000 and $370,000, 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 nine months of 2015 or 2014.

15

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:

Nine months ended September 30,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
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 September 30, 2015 and December 31, 2014 were as follows:

Held-To-Maturity

September 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

$

147

$

6

-

$

153

$

146

$

10

-

$

156

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at September 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
September 30, 2015	Fair value		cost
Due in one year or less
Due after one year through five years	$	153	$	147
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	153	$	147

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

16

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 September 30, 2015 and December 31, 2014:

September 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		11	$	10,330	$	(23	)	$	4,477	$	(21	)	$	14,807	$	(44	)
State and municipal		37		11,973		(58	)		2,688		(27	)		14,661		(85	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		24		34,497		(171	)		1,469		(32	)		35,966		(203	)
Collateralized mortgage obligations (CMOs)		30		5,259		(19	)		26,858		(580	)		32,117		(599	)
Pooled trust preferred		5		-		-			2,131		(1,024	)		2,131		(1,024	)
Corporate debt		2		2,003		(11	)		-		-			2,003		(11	)
Equity		23		5,232		(683	)		190		(78	)		5,422		(761	)
Total		132	$	69,294	$	(965	)	$	37,813	$	(1,762	)	$	107,107	$	(2,727	)

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 September 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 September 30, 2015. These securities have a total amortized cost of approximately $3,409,000 and a fair value of $2,600,000. 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.

17

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 September 30, 2015:

Deal	Class	Book value		Fair value		Unreal-ized 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	$	217	$	(26	)	$	-	$	(1	)	B1/BB		5		-		18.0	%		140.7	%
PreTSL XVII	Mezzanine		705		523		(182	)		-		(222	)	C/CC		33		5		26.7			91.2
PreTSL XIX	Mezzanine		987		554		(433	)		-		-		Caa3/CC		40		12		12.2			94.8
PreTSL XXV	Mezzanine		766		480		(286	)		-		(222	)	C/C		46		5		28.3			88.8
PreTSL XXVI	Mezzanine		454		357		(97	)		-		(270	)	Caa3/C		42		7		21.0			94.4
PreTSL XXVI	Mezzanine		254		469		215			-		(438	)	Caa3/C		42		7		21.0			94.4
		$	3,409	$	2,600	$	(809	)	$	-	$	(1,153	)

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

On January 14, 2014, Federal bank regulatory agencies 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 September 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 nine months ended September 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:

18

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. 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. We then assumed any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible. 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.

19

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 September 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 write-downs 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. 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.

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QNB CORP. AND SUBSIDIARY

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 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

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.

21

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Major classes of loans are as follows:

	September 30,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	121,217	$	118,845
Construction		25,681		23,471
Secured by commercial real estate		212,962		203,534
Secured by residential real estate		57,755		53,077
State and political subdivisions		41,443		44,104
Indirect lease financing		9,858		7,685
Retail:
1-4 family residential mortgages		41,691		37,147
Home equity loans and lines		67,341		63,213
Consumer		4,277		4,175
Total loans		582,225		555,251
Net unearned costs (fees)		30		31
Loans receivable	$	582,255	$	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 September 30, 2015 and December 31, 2014, overdrafts were approximately $214,000 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 September 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.

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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

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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 September 30, 2015 and December 31, 2014:

September 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	115,993	$	329	$	4,895	$	-	$	121,217
Construction		25,661		-		20		-		25,681
Secured by commercial real estate		196,047		2,019		14,896		-		212,962
Secured by residential real estate		54,866		711		2,178		-		57,755
State and political subdivisions		40,170		-		1,273		-		41,443
Indirect lease financing		9,658		-		200		-		9,858
	$	442,395	$	3,059	$	23,462	$	-	$	468,916

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

24

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 September 30, 2015 and December 31, 2014:

September 30, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	41,399	$	292	$	41,691
Home equity loans and lines		67,210		131		67,341
Consumer		4,250		27		4,277
	$	112,859	$	450	$	113,309

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 September 30, 2015 and December 31, 2014:

September 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	$	54		-		-	$	54	$	121,163	$	121,217
Construction		-		-		-		-		25,681		25,681
Secured by commercial real estate		-	$	65	$	1,075		1,140		211,822		212,962
Secured by residential real estate		102		512		164		778		56,977		57,755
State and political subdivisions		-		-		-		-		41,443		41,443
Indirect lease financing		66		26		133		225		9,633		9,858
Retail:
1-4 family residential mortgages		-		59		-		59		41,632		41,691
Home equity loans and lines		94		-		45		139		67,202		67,341
Consumer		32		28		-		60		4,217		4,277
	$	348	$	690	$	1,417	$	2,455	$	579,770	$	582,225

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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 September 30, 2015 and December 31, 2014:

September 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,488
Construction		-		-
Secured by commercial real estate		-		2,621
Secured by residential real estate		-		1,443
State and political subdivisions		-		-
Indirect lease financing	$	52		80
Retail:
1-4 family residential mortgages		-		292
Home equity loans and lines		-		131
Consumer		-		27
	$	52	$	8,082

26

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 September 30, 2015 and 2014 are as follows:

Three months ended September 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,603	$	(79	)	$	-		$	11	$	1,535
Construction		149		118			-			-		267
Secured by commercial real estate		2,655		(494	)		-			3		2,164
Secured by residential real estate		1,635		(53	)		(4	)		2		1,580
State and political subdivisions		232		(4	)		-			-		228
Indirect lease financing		121		(4	)		-			5		122
Retail:
1-4 family residential mortgages		313		(7	)		-			-		306
Home equity loans and lines		474		(28	)		-			4		450
Consumer		71		18			(17	)		10		82
Unallocated		402		533			N/A			N/A		935
	$	7,655	$	-		$	(21	)	$	35	$	7,669

27

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Three months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,407	$	(139	)	$	-		$	8	$	2,276
Construction		240		(67	)		-			-		173
Secured by commercial real estate		2,600		(129	)		-			1		2,472
Secured by residential real estate		1,708		555			(452	)		13		1,824
State and political subdivisions		214		(20	)		-			-		194
Loans to depository institutions		1		(1	)		-			-		-
Indirect lease financing		92		(6	)		(14	)		4		76
Retail:
1-4 family residential mortgages		372		39			(92	)		1		320
Home equity loans and lines		520		25			(3	)		5		547
Consumer		67		59			(17	)		12		121
Unallocated		679		(316	)		N/A			N/A		363
	$	8,900	$	-		$	(578	)	$	44	$	8,366

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

Nine months ended September 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	$	(357	)	$	(30	)	$	30	$	1,535
Construction		297		(30	)		-			-		267
Secured by commercial real estate		2,700		(458	)		(85	)		7		2,164
Secured by residential real estate		1,630		251			(321	)		20		1,580
State and political subdivisions		221		7			-			-		228
Indirect lease financing		93		22			(8	)		15		122
Retail:
1-4 family residential mortgages		312		(6	)		-			-		306
Home equity loans and lines		453		(19	)		-			16		450
Consumer		85		33			(58	)		22		82
Unallocated		318		617			N/A			N/A		935
	$	8,001	$	60		$	(502	)	$	110	$	7,669

28

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

Nine months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	190		$	(17	)	$	59	$	2,276
Construction		439		(266	)		-			-		173
Secured by commercial real estate		2,898		(427	)		-			1		2,472
Secured by residential real estate		1,632		623			(453	)		22		1,824
State and political subdivisions		186		8			-			-		194
Loans to depository institutions		4		(4	)		-			-		-
Indirect lease financing		103		(20	)		(20	)		13		76
Retail:
1-4 family residential mortgages		303		108			(92	)		1		320
Home equity loans and lines		583		(15	)		(124	)		103		547
Consumer		64		109			(88	)		36		121
Unallocated		669		(306	)		N/A			N/A		363
	$	8,925	$	-		$	(794	)	$	235	$	8,366

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.

29

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 $626,000 and $1,897,000 as of September 30, 2015 and December 31, 2014, respectively. Non-performing TDRs totaled $1,239,000 and $3,690,000 as of September 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.

	September 30, 2015				December 31, 2014 2013
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	969		-	$	4,588		-
TDRs with an allowance recorded		896	$	588		999	$	813
	$	1,865	$	588	$	5,587	$	813

There was one newly identified TDR during the nine months ended September 30, 2015. QNB granted a concession to an existing retail borrower who was experiencing financial difficulties. As of September 30, 2015 and December 31, 2014, QNB had commitments of $1,939,000 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 $5,000 and $522,000 during the nine months ended September 30, 2015 and 2014, respectively, resulting from loans previously modified as TDRs.

30

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

The following tables present loans, by loan class, modified as TDRs during the three and nine months ended September 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 as of the period end indicated.

Three months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-	$	-	$	-
		1	$	142	$	142		-	$	-	$	-

Nine months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-		-		-
		1	$	142	$	142		1	$	288	$	233

There were no loans modified as TDRs within 12 months prior to September 30, 2015 for which there was a payment default (60 days or more past due) during the three and nine months ended September 30, 2015. There were no loans modified as TDRs within 12 months prior to September 30, 2014 for which there was a payment default during the three months ended September 30, 2014. There were 12 loans modified as TDRs within 12 months prior to September 20, 2014 with a recorded balance of $658,000 for which there was a payment default during the nine months ended September 30, 2014. All of these loans were either charged off or repaid during the thrid quarter 2014, resulting in $0 recorded balance at September 30, 2014.

The company has one consumer mortgage loan secured by residential real estate for which foreclosure proceedings are in process at September 30, 2015. The recorded investment is $45,000.

31

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 September 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
September 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	$	1,535	$	745	$	790	$	121,217	$	4,188	$	117,029
Construction		267		-		267		25,681		346		25,335
Secured by commercial real estate		2,164		-		2,164		212,962		5,244		207,718
Secured by residential real estate		1,580		89		1,491		57,755		1,443		56,312
State and political subdivisions		228		-		228		41,443		-		41,443
Indirect lease financing		122		-		122		9,858		104		9,754
Retail:
1-4 family residential mortgages		306		33		273		41,691		547		41,144
Home equity loans and lines		450		-		450		67,341		155		67,186
Consumer		82		-		82		4,277		27		4,250
Unallocated		935		N/A		N/A		N/A		N/A		N/A
	$	7,669	$	867	$	5,867	$	582,225	$	12,054	$	570,171

	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

32

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 September 30, 2015 and December 31, 2014:

	September 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	$	3,169	$	3,373	$	-	$	5,894	$	6,056	$	-
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		997		1,433		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		242		253		-		225		250		-
Home equity loans and lines		155		203		-		72		93		-
Consumer		27		27		-		1		1		-
	$	10,284	$	11,440	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,019	$	1,210	$	745	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		446		753		89		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		305		311		33		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,770	$	2,274	$	867	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	4,188	$	4,583	$	745	$	7,115	$	7,475	$	1,095
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		1,443		2,186		89		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		547		564		33		341		366		4
Home equity loans and lines		155		203		-		129		169		4
Consumer		27		27		-		1		1		-
	$	12,054	$	13,714	$	867	$	21,077	$	22,844	$	1,194

33

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

8. LOANS & ALLOWANCE FOR LOAN LOSSES (continued)

	Nine Months Ended September 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,301	$	154	$	9,305	$	331
Construction		410		16		1,050		2
Secured by commercial real estate		7,881		121		12,304		344
Secured by residential real estate		1,522		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		22		1		26		1
Retail:
1-4 family residential mortgages		415		4		460		5
Home equity loans and lines		130		1		169		-
Consumer		3		-		2		-
	$	16,684	$	297	$	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.

34

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 September 30, 2015:

September 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	$	-	$	3,625	$	-	$	3,625
Securities available-for-sale
U.S. Government agency securities		-	$	57,490		-	$	57,490
State and municipal securities		-		83,042		-		83,042
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		133,281		-		133,281
Collateralized mortgage obligations (CMOs)		-		73,034		-		73,034
Pooled trust preferred securities		-		-	$	2,600		2,600
Corporate debt securities		-		6,029		-		6,029
Equity securities	$	7,092		-		-		7,092
Total securities available-for-sale	$	7,092	$	352,876	$	2,600	$	362,568
Total recurring fair value measurements	$	7,092	$	356,501	$	2,600	$	366,193
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	903	$	903
Mortgage servicing rights		-		-		135		135
Total nonrecurring fair value measurements	$	-	$	-	$	1,038	$	1,038

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended September 30, 2015. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the nine-month period ended September 30, 2015.

35

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

36

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
September 30, 2015 - Impaired loans	$	793	Appraisal of collateral (1)	Appraisal adjustments (2)		-10% to -100	%
				Liquidation expenses (3)		-10	%
September 30, 2015 - Impaired loans		110	Discounted cash flow (4)	Discount rate		6.375	%
September 30, 2015 - Mortgage servicing rights		135	Discounted cash flow	Remaining term		2 - 23 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.

37

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 nine months ended September 30, 2015:

	Fair value measurements using
	significant unobservable inputs
	(Level 3)
Balance, January 1, 2015	$	2,439
Payments received		(110	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		271
Transfers in and/or out of Level 3		-
Balance, September 30, 2015	$	2,600

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 September 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 September 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. 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.

38

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 3.36% to 7.80%. 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 September 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.

39

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.

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.

40

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 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
September 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	$	69,704	$	69,704	$	69,704		-		-
Investment securities:
Trading		3,625		3,625		-	$	3,625		-
Available-for-sale		362,568		362,568		7,092		352,876	$	2,600
Held-to-maturity		147		153		-		153		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		320		333		-		333		-
Net loans		574,586		579,168		-		-		579,168
Mortgage servicing rights		522		653		-		-		653
Accrued interest receivable		2,555		2,555		-		2,555		-
Financial liabilities
Deposits with no stated maturities	$	679,580	$	679,580	$	679,580		-	$	-
Deposits with stated maturities		229,094		230,844		-	$	230,844		-
Short-term borrowings		32,588		32,588		32,588		-		-
Accrued interest payable		323		323		-		323		-
Off-balance sheet instruments
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-
Standby letters of credit		-		-		-		-		-

41

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:

	September 30,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	233,308	$	203,496
Standby letters of credit		9,650		6,276
Total financial instrument commitments	$	242,958	$	209,772

42

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 September 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 both State and Federal 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 bank regulatory agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements and the amount of dividens that can be paid to shareholders. 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 September 30, 2015, that the Company and the Bank met capital adequacy requirements to which they were subject.

The Bank is presently considered it to be “well capitalized” under the regulatory framework. To be categorized as well capitalized, the Company and the Bank must maintain minimum ratios as set forth in the following table.

43

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

11. REGULATORY RESTRICTIONS (continued)

	Capital levels
	Actual					Minimum required					Well capitalized
As of September 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	97,163		13.01	%	$	59,765		8.00	%	$	74,706		10.00	%
Bank		89,971		12.40			58,057		8.00			72,571		10.00
Tier I capital (to risk-weighted assets):
Consolidated		89,435		11.97			44,824		6.00			44,824		6.00
Bank		82,243		11.33			43,543		6.00			58,057		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		89,435		11.97			33,618		4.50			N/A		N/A
Bank		82,243		11.33			32,657		4.50			47,171		6.50
Tier I capital (to average assets):
Consolidated		89,435		8.99			39,811		4.00			N/A		N/A
Bank		82,243		8.32			39,522		4.00			49,403		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

44

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.

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.

45

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 nine 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 or present value of future estimated cash flows. 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.

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.

46

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

47

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 third quarter of 2015 of $2,220,000, or $0.66 per share on a diluted basis, compared to net income of $2,044,000, or $0.62 per share on a diluted basis, for the same period in 2014. For the nine month period ended September 30, 2015, QNB reported net income of $6,290,000, or $1.88 per share on a diluted basis. This compares to net income of $6,512,000, or $1.98 per share on a diluted basis, reported for the nine month period ended September 30, 2014.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.88% and 9.86%, respectively, for the quarter ended September 30, 2015 compared with 0.85% and 9.73%, respectively, for the quarter ended September 30, 2014. For the comparative nine month periods, the annualized rate of return on average assets and average shareholders’ equity was 0.86% and 9.56%, respectively, for 2015 compared with 0.93% and 10.64%, respectively, for 2014.

Total assets as of September 30, 2015 were $1,039,317,000, compared with $977,135,000 at December 31, 2014. Loans receivable at September 30, 2015 were $582,255,000, compared with $555,282,000 at December 31, 2014, an increase of $26,973,000, or 4.9%, with commercial lending as the largest contributor to the growth. Total deposits of $908,674,000 at September 30, 2015 increased $57,082,000, or 6.7%, compared with total deposits of $851,592,000 at December 31, 2014, due primarily to the seasonal inflow in public funds balances.

Results for the three and nine months ended September 30, 2015 include the following significant components:

● Net interest income increased $430,000, or 6.5%, to $7,015,000 and $869,000, or 4.5%, to $20,344,000 for the three and nine months ended September 30, 2015, respectively.

● Net interest margin on a tax-equivalent basis increased four basis points for the quarter and decreased four basis points year-to-date, to 3.08% and 3.07%, respectively.

● QNB recorded no provision for loan losses for the third quarter and $60,000 for the first nine months of 2015 compared with no provision recorded for first nine months of 2014.

● Non-interest income decreased $24,000, or 1.6%, to $1,493,000 for the third quarter and declined $185,000, or 3.7%, to $4,769,000 for year-to-date 2015, respectively, compared to the same periods in 2014.

● Non-interest expense increased $95,000, or 1.7%, to $5,573,000 for the third quarter and increased $760,000, or 4.7%, to $16,764,000 year-to-date 2015, respectively, compared to the same periods in 2014.

● Total non-performing loans were $8,760,000, or 1.50% of loans receivable at September 30, 2015, compared to $12,667,000, or 2.28% of loans receivable at December 31, 2014. Loans on non-accrual status were $8,082,000 at September 30, 2015 compared with $10,770,000 at December 31, 2014. Net charge-offs for the first nine months of 2015 were $392,000, or 0.09% annualized of average total loans, as compared with $559,000, or 0.14% annualized of average total loans for the first nine months of 2014.

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

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. 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. 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.

48

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 nine month periods ended September 30, 2015 and 2014.

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Total interest income	$	8,138	$	7,741	$	23,691	$	22,856
Total interest expense		1,123		1,156		3,347		3,381
Net interest income		7,015		6,585		20,344		19,475
Tax-equivalent adjustment		449		471		1,328		1,445
Net interest income (fully taxable-equivalent)	$	7,464	$	7,056	$	21,672	$	20,920

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.

49

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

	Three Months Ended
	September 30, 2015								September 30, 2014
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	4,312			5.98	%	$	64	$	4,460			5.98	%	$	67
Investment securities (AFS & HTM):
U.S. Government agencies		46,701			1.57	%		183		54,689			1.59	%		217
State and municipal		75,293			4.15	%		781		75,430			4.34	%		819
Mortgage-backed and CMOs		200,241			1.99	%		994		207,817			2.03	%		1,052
Pooled trust preferred securities		3,495			0.36	%		3		3,519			0.18	%		2
Corporate debt securities		6,018			1.18	%		18		6,008			1.12	%		17
Equities		7,460			3.45	%		65		6,322			3.00	%		48
Total investment securities		339,208			2.41	%		2,044		353,785			2.44	%		2,155
Loans:
Commercial real estate		295,979			4.62	%		3,450		264,074			4.59	%		3,052
Residential real estate		40,789			4.23	%		431		35,579			4.16	%		371
Home equity loans		60,066			3.55	%		537		57,360			3.67	%		531
Commercial and industrial		123,416			4.29	%		1,333		113,323			4.54	%		1,297
Indirect lease financing		9,576			9.16	%		219		7,335			9.83	%		180
Consumer loans		3,927			5.37	%		53		3,904			5.63	%		56
Tax-exempt loans		42,191			3.99	%		424		43,326			4.19	%		457
Total loans, net of unearned income*		575,944			4.44	%		6,447		524,901			4.49	%		5,944
Other earning assets		41,419			0.31	%		32		38,361			0.48	%		46
Total earning assets		960,883			3.55	%		8,587		921,507			3.54	%		8,212
Cash and due from banks		13,225								13,505
Allowance for loan losses		(7,720	)							(8,722	)
Other assets		28,894								32,222
Total assets	$	995,282							$	958,512
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	135,455			0.21	%		71	$	118,035			0.23	%		70
Municipals		116,572			0.34	%		99		128,805			0.33	%		108
Money market		66,854			0.24	%		40		58,451			0.24	%		35
Savings		218,753			0.37	%		204		207,282			0.37	%		192
Time		139,403			1.08	%		381		151,079			1.09	%		416
Time of $100,000 or more		92,285			1.29	%		300		95,898			1.28	%		310
Total interest-bearing deposits		769,322			0.56	%		1,095		759,550			0.59	%		1,131
Short-term borrowings		31,134			0.37	%		28		28,028			0.36	%		25
Long-term debt		-			0.00	%		-		-			0.00	%		-
Total interest-bearing liabilities		800,456			0.56	%		1,123		787,578			0.58	%		1,156
Non-interest-bearing deposits		101,429								84,618
Other liabilities		4,057								2,971
Shareholders' equity		89,340								83,345
Total liabilities and shareholders' equity	$	995,282							$	958,512
Net interest rate spread					2.99	%							2.96	%
Margin/net interest income					3.08	%	$	7,464					3.04	%	$	7,056

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

Non-accrual loans and investment securities are included in earning assets.

* Includes loans held-for-sale

50

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

	Nine Months Ended
	September 30, 2015								September 30, 2014
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	4,211			5.95	%	$	188	$	4,026			5.57	%	$	168
Investment securities (AFS & HTM):
U.S. Government agencies		49,194			1.60	%		590		59,312			1.50	%		669
State and municipal		71,378			4.17	%		2,233		78,904			4.38	%		2,593
Mortgage-backed and CMOs		208,138			1.96	%		3,060		205,654			2.05	%		3,156
Pooled trust preferred securities		3,510			0.37	%		10		3,519			0.17	%		5
Corporate debt securities		6,011			1.15	%		52		6,009			1.12	%		50
Equities		7,205			3.26	%		175		5,909			3.15	%		140
Total investment securities		345,436			2.36	%		6,120		359,307			2.45	%		6,613
Loans:
Commercial real estate		290,561			4.55	%		9,882		261,598			4.60	%		9,002
Residential real estate		38,848			4.13	%		1,203		33,240			4.23	%		1,056
Home equity loans		58,177			3.58	%		1,556		55,546			3.81	%		1,584
Commercial and industrial		124,211			4.16	%		3,865		112,691			4.37	%		3,681
Indirect lease financing		8,784			9.07	%		598		7,900			9.85	%		584
Consumer loans		3,981			5.41	%		161		3,609			5.69	%		154
Tax-exempt loans		44,803			4.00	%		1,340		43,230			4.24	%		1,371
Total loans, net of unearned income*		569,365			4.37	%		18,605		517,814			4.50	%		17,432
Other earning assets		23,653			0.60	%		106		18,510			0.63	%		88
Total earning assets		942,665			3.55	%		25,019		899,657			3.61	%		24,301
Cash and due from banks		11,922								11,607
Allowance for loan losses		(7,923	)							(8,825	)
Other assets		29,291								32,114
Total assets	$	975,955							$	934,553
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	133,285			0.22	%		217	$	117,336			0.24	%		207
Municipals		108,554			0.34	%		273		112,189			0.33	%		279
Money market		63,960			0.24	%		114		57,728			0.21	%		90
Savings		216,510			0.37	%		600		208,481			0.37	%		574
Time		143,781			1.08	%		1,166		151,504			1.08	%		1,226
Time of $100,000 or more		92,543			1.29	%		890		90,588			1.26	%		850
Total interest-bearing deposits		758,633			0.57	%		3,260		737,826			0.58	%		3,226
Short-term borrowings		31,792			0.37	%		87		31,793			0.36	%		85
Long-term debt		-			0.00	%		-		1,941			4.76	%		70
Total interest-bearing liabilities		790,425			0.57	%		3,347		771,560			0.59	%		3,381
Non-interest-bearing deposits		94,071								78,188
Other liabilities		3,518								2,977
Shareholders' equity		87,941								81,828
Total liabilities and shareholders' equity	$	975,955							$	934,553
Net interest rate spread					2.98	%							3.02	%
Margin/net interest income					3.07	%	$	21,672					3.11	%	$	20,920

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.

	Three Months Ended									Nine Months Ended
	September 30, 2015 compared									September 30, 2015 compared
	to September 30, 2014									to September 30, 2014
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Trading securities	$	(3	)	$	(3	)	$	-		$	20		$	8		$	12
Investment securities (AFS & HTM):
U.S. Government agencies		(34	)		(31	)		(3	)		(79	)		(114	)		35
State and municipal		(38	)		(2	)		(36	)		(360	)		(247	)		(113	)
Mortgage-backed and CMOs		(58	)		(38	)		(20	)		(96	)		38			(134	)
Pooled trust preferred securities		1			(1	)		2			5			-			5
Corporate debt securities		1			-			1			2			-			2
Equities		17			9			8			35			29			6
Total Investment securities (AFS & HTM)		(111	)		(63	)		(48	)		(493	)		(294	)		(199	)
Loans:
Commercial real estate		398			369			29			880			997			(117	)
Residential real estate		60			54			6			147			177			(30	)
Home equity loans		6			25			(19	)		(28	)		75			(103	)
Commercial and industrial		36			115			(79	)		184			377			(193	)
Indirect lease financing		39			55			(16	)		14			66			(52	)
Consumer loans		(3	)		-			(3	)		7			15			(8	)
Tax-exempt loans		(33	)		(12	)		(21	)		(31	)		50			(81	)
Total Loans		503			606			(103	)		1,173			1,757			(584	)
Other earning assets		(14	)		4			(18	)		18			24			(6	)
Total interest income		375			544			(169	)		718			1,495			(777	)
Interest expense:
Interest-bearing demand		1			10			(9	)		10			28			(18	)
Municipals		(9	)		(11	)		2			(6	)		(10	)		4
Money market		5			4			1			24			9			15
Savings		12			11			1			26			22			4
Time		(35	)		(33	)		(2	)		(60	)		(63	)		3
Time of $100,000 or more		(10	)		(11	)		1			40			19			21
Total interest-bearing deposits		(36	)		(30	)		(6	)		34			5			29
Short-term borrowings		3			3			-			2			-			2
Long-term debt		-			-			-			(70	)		(70	)		-
Total interest expense		(33	)		(27	)		(6	)		(34	)		(65	)		31
Net interest income	$	408		$	571		$	(163	)	$	752		$	1,560		$	(808	)

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

Net interest income for the quarter ended September 30, 2015 totaled $7,015,000, an increase of $430,000, or 6.5%, over the same period in 2014. When compared to the second quarter of 2015, net interest income increased $373,000 from the $6,642,000 reported.

52

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 third quarter of 2015 were $960,883,000, an increase of $39,376,000 from the third quarter of 2014, with average loans increasing $51,043,000, or 9.7%, and average investment securities decreasing $14,725,000, or 4.1%, 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 57.0% for the third quarter 2014 to 59.9% for the third quarter 2015. On the funding side, average deposits increased $26,583,000, or 3.1%, to $870,751,000 for the third quarter of 2015 with growth in all categories with the exception of municipal deposits and 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 increased $3,106,000 to $31,134,000, which 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 third quarter of 2015 was 3.08% compared to 3.04% for the third quarter of 2014 and 3.06% reported for the second 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 $375,000, or 4.6%, to $8,587,000 for the third quarter of 2015, while total interest expense declined to $1,123,000. Growth in earning assets contributed an additional $544,000 of interest income but was offset by a decline in interest income of $169,000 resulting from lower yields. Interest expense on deposits declined $36,000. The decline in higher-costing funding time deposits and municipal deposits was the primary contributor while rate declines resulted in a small improvement in interest expense. Consumer and businesses continue to shift deposits into lower rate accounts.

The yield on earning assets on a tax-equivalent basis increased one basis point from 3.54% for the third quarter of 2014, to 3.55% for the third quarter of 2015 and increased one basis point from the 3.54% reported for the second quarter of 2015. The rate paid on interest-bearing liabilities decreased two basis points to 0.56% for the third quarter of 2015 compared to the same period in 2014 and declined one basis point compared to the funding rate reported for the quarter ended June 30, 2015.

Interest income on investment securities (trading, available-for-sale and held-to-maturity) decreased $114,000 when comparing the two quarters primarily as a result of the decrease in average balances for the three months ended September 30, 2015, compared to the same period in 2014. A three basis point decline in average yield also contributed to the decrease in interest income. The average yield on the investment portfolio was 2.45% for the third quarter of 2015 compared with 2.48% for the third 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 than the securities being called and repaid. During the first nine months of 2015, 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 U.S. Government agency securities decreased $34,000, as the $7,988,000, or 14.6%, decline in average balances reduced interest income by $31,000. A two basis point decrease in the yield from 1.59% for the third quarter of 2014 to 1.57% for the same period in 2015 contributed an additional $3,000 decrease in interest income.

Interest income on tax-exempt municipal securities decreased $38,000 with the decline in average yield from 4.34% in the third quarter 2014 to 4.15% for the third quarter 2015 contributing $36,000 of the decline in interest income. 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. Historically, 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.

53

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Interest income on mortgage-backed securities and CMOs decreased $58,000. Average balances declined $7,576,000, or 3.6%, from $207,817,000 for third quarter 2014 to $200,241,000 for the same period in 2015, which contributed $38,000 to the overall decline in interest income. The yield on the mortgage-backed and CMO portfolio decreased four basis points from 2.03% to 1.99% for the third quarters in 2014 and 2015, respectively, which resulted in a decrease of $20,000 in interest income. This portfolio 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 $503,000 to $6,447,000 when comparing the third quarters of 2015 and 2014, with growth in average balances offsetting the decline in the portfolio yield. During the third quarter 2015, a non-accrual loan payoff contributed an additional $150,000 to interest income. The yield on the loan portfolio decreased five basis points to 4.44% when comparing the same periods, resulting in a reduction in interest income of $103,000. When comparing the two quarters, the 9.7% increase in average balances resulted in an increase of $606,000 in interest income. As a result of the prolonged low 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 $398,000 and was impacted positively by both the increase in average balances and by the increase in yield. Average balances increased $31,905,000, or 12.1%, to $295,979,000 for the three months ended September 30, 2015 compared with the same quarter in 2014. The yield on commercial real estate loans was 4.62% for the third quarter of 2015, an increase of three basis points from the 4.59% reported for the third quarter of 2014.

Income on commercial and industrial loans, the second largest category, increased $36,000 as average commercial and industrial loan balances increased $10,093,000, or 8.9%, to $123,416,000 for the third quarter of 2015 resulting in an additional $115,000 in income. The average yield on these loans decreased 25 basis points to 4.29% resulting in a decrease in income of $79,000. Many of the loans in this category are indexed to the prime interest rate and have floors.

Tax-exempt loan income was $424,000 for the third quarter of 2015, a decrease of $33,000 from the same period in 2014. With the decline in market interest rates many municipalities have refinanced existing debt or taken on new debt. Although QNB has been successful in winning some of these bids, average balances have decreased $1,135,000, or 2.6%, to $42,191,000 for the third quarter of 2015, resulting in a $12,000 decrease in income. Rate renegotiation or bidding on these loans has resulted in a $21,000 decline in interest income as the average yield on the tax-exempt loan portfolio declined from 4.19% for the third quarter of 2014 to 3.99% for the third quarter of 2015.

QNB desires to become the “local consumer lender of choice” and to accomplish this QNB focused its retail lending efforts, adding new product offerings and increasing marketing and promotion. QNB achieved 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 $5,210,000, or 14.6%, to $40,789,000 for the third quarter of 2015 compared to the same period in 2014. Over this same timeframe, the average yield on the portfolio increased seven basis points to 4.23% for the third quarter of 2015. The result of the increase in balances and yield was an increase in interest income of $60,000. Average home equity loans increased $2,706,000, or 4.7%, to $60,066,000 while the average yield declined 12 basis points to 3.55%. The result is an increase in interest income of $6,000. Average consumer loans increased slightly to $3,927,000 while the yield on the portfolio decreased 26 basis points to 5.37% for the third quarter of 2015 resulting in a $3,000 decrease in interest income.

54

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

For the most part, earning assets are funded by deposits, which increased 3.1% when comparing the third quarters of 2015 and 2014. Interest expense on total deposits decreased $36,000 when comparing the two quarters while interest expense on borrowed funds increased $3,000, due to growth in these balances and a slight increase in rate paid on these balances. While the rate paid on interest-bearing deposits declined three basis points comparing the third 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 $16,811,000, or 19.9%, to $101,429,000 for the third quarter of 2015. QNB has been successful in increasing business checking accounts as average balances in these accounts have increased by $13,608,000, or 20.1%, when comparing the quarters. Average interest-bearing demand accounts increased $17,420,000, or 14.8%, to $135,455,000 for the third quarter of 2015. Interest expense on interest-bearing demand accounts increased $1,000 to $71,000 for the same period, as the average rate paid declined by two basis points from 0.23% for the third quarter of 2014 to 0.21% for the third 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 third quarter of 2015, the average balance in this product was $40,395,000 and the related interest expense was $57,000 for an average yield of 0.56%. In comparison, the average balance of the QNB-Rewards accounts for the third quarter of 2014 was $35,976,000 with a related interest expense of $57,000 and an average rate paid of 0.63%. 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 $82,059,000 for the third quarter of 2014 to $95,060,000 for the third quarter of 2015. The average rate paid on these balances was 0.06% for both periods.

The average balance of municipal interest-bearing demand accounts decreased $12,233,000 to $116,572,000, with the average interest rate paid on these accounts at 0.34% for the third quarter of 2015 and 0.33% for the same period in 2014. The decrease in balances in 2015 may be attributable to school districts’ need for funds, as state funding has been delayed due to the state budget impasse. Interest expense on municipal interest-bearing demand accounts decreased $9,000 to $99,000 for the third quarter of 2015. Many of these accounts are indexed to the Federal funds rate with rate floors between 0.25% and 0.50%. 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 decrease during the fourth quarter of 2015 as school districts and municipalities invest tax receipts.

Average money market accounts increased $8,403,000, or 14.4%, to $66,854,000 for the third quarter of 2015 compared with the same period in 2014. Interest expense on money market accounts increased $5,000 to $40,000 and the average interest rate paid on money market accounts was 0.24% for both the third quarter of 2014 and 2015. The majority of balances in this category are in a product that pays a tiered rate based on account balances.

Interest expense on savings accounts increased $12,000 when comparing the third quarter of 2015 to the third quarter of 2014, with the average rate at 0.37% for both periods. When comparing these same periods average savings accounts increased $11,471,000, or 5.5%, to $218,753,000 for the third 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 third quarter of 2015 of $161,002,000, increasing $6,030,000, or 3.9% from the same period in 2014. This product has grown successfully since its introduction in the third quarter of 2009. The average yield paid on these accounts was 0.46% for both the third 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 $5,441,000, or 10.4%, when comparing the third quarter 2015 average to the same 2014 quarter. The average yield paid was 0.12% for third quarter 2015, up two basis points from 0.10% paid for third quarter 2014.

55

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Total interest expense on time deposits decreased $45,000 to $681,000 for the third quarter of 2015. Average total time deposits decreased by $15,289,000 to $231,688,000 for the third 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 remained unchanged at 1.17% when comparing the third quarter of 2014 to the same period in 2015.

Approximately $104,059,000, or 45.4%, of time deposits at September 30, 2015 will reprice or mature over the next 12 months. The average rate paid on these time deposits is approximately 0.99%. 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 increased $3,000 for the third quarter of 2015 to $28,000. When comparing these same periods average balances increased from $28,028,000 to $31,134,000 while the average rate paid increased one basis point to 0.37% when comparing the periods.

Nine Month Comparison

For the nine month period ended September 30, 2015 net interest income was $20,344,000, an increase of $869,000, or 4.5%, higher than the $19,475,000 reported for the first nine months of 2014. For the nine month period ending September 30, 2015 average earning assets increased $43,008,000, or 4.8%, to $942,665,000, with average loans increasing 10.0% and average investment securities decreasing 3.8%. Average total deposits increased $36,690,000, or 4.5%, to $852,704,000 for the nine-month period ended September 30, 2015 compared to the same period in 2014. The net interest margin on a tax-equivalent basis was 3.07% for the nine-month period ended September 30, 2015, a decrease of four basis points from the same period in 2014.

Total interest income on a tax-equivalent basis increased $718,000, or 3.0%, from $24,301,000 to $25,019,000, when comparing the nine-month periods ended September 30, 2014 and September 30, 2015 as the additional interest income generated from the growth in earning assets was partially offset by the impact of declining yields on those assets. Interest income increased $1,495,000 as a result of volume increases but declined $777,000 as a result of lower yields. The analysis of the nine-month comparison periods is similar to what was described in the quarterly analysis: Loan demand was funded by growth in average deposits combined with a reduction of the investment securities portfolio.

The yield on earning assets decreased from 3.61% to 3.55% for the nine-month periods with the yield on loans decreasing from 4.50% to 4.37% comparing the same periods. 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 eight basis points from 2.49% to 2.41% when comparing the nine-month periods.

56

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Total interest expense decreased $34,000 for the nine-month period ended September 30, 2015 compared with the same period in 2014, attributable in part to the absence of long-term debt in 2015, which was repaid in 2014. The average rate paid on interest bearing deposits decreased one basis point from 0.58% for the nine months ended September 30, 2014 to 0.57% for the same period in 2015.

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 no provision for loan losses in the third quarter and $60,000 year-to-date 2015, while no provision was recorded in the same periods in 2014. QNB's allowance for loan losses of $7,669,000 represents 1.32% of loans receivable at September 30, 2015 compared to an allowance for loan losses of $8,001,000, or 1.44% of loans receivable, at December 31, 2014, and $8,366,000, or 1.56% of loans receivable at September 30, 2014. The allowance for loan losses at September 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 recoveries were $14,000 for the third quarter of 2015, comprising net overdraft charge-offs totaling $6,000, offset by net recoveries on individual accounts. This compares with net loan charge-offs of $534,000 for the third quarter of 2014. For the nine month periods ended September 30, 2015 and 2014 net loan charge-offs were $392,000 and $559,000, respectively.

Non-performing assets of $11,360,000 at September 30, 2015 compares favorably with $18,152,000 as of December 31, 2014 and $17,962,000 as of September 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 $8,760,000, or 1.50% of loans receivable at September 30, 2015, compared with $12,667,000, or 2.28% of loans receivable at December 31, 2014, and $12,454,000, or 2.32% of loans receivable at September 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 September 30, 2015, $6,037,000, or approximately 75% 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 third 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 September 30, 2015 commercial loans rated substandard or doubtful totaled $23,462,000, a reduction of $9,907,000, or 29.7%, from the $33,369,000 reported as of September 30, 2014, and a decrease of $10,892,000, or 31.7%, from the $34,354,000 reported at December 31, 2014.

57

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

QNB had $52,000 of loans past due 90 days or more and still accruing interest at September 30, 2015 consisting of indirect lease financing balances. At December 31, 2014 and September 30, 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 0.42% of loans receivable at September 30, 2015 compared with 1.21% at December 31, 2014 and 0.64% at September 30, 2014.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were $626,000 at September 30, 2015, compared with $1,897,000 at December 31, 2014, and $1,895,000 at September 30, 2014. There was additional credit extended to two troubled debt restructures since September 2014; one residential borrower and one borrower rated substandard whose credit facility was renewed in 2015. QNB had no other real estate owned or repossessed assets as of September 30, 2015 compared with $3,046,000 at December 31, 2014 and September 30, 2014, respectively. Included in the December 31, and September 30, 2014 amount was one property with a fair value of $2,325,000, which was sold in January 2015. All OREO properties held at December 31, 2014 or aquired in 2015 have been sold at a cumulative net gain of $2,000 recognized in the quarter and a total net loss of $9,000 recognized on the sale of six properties for the nine months ended September 30, 2015. Non-accrual pooled trust preferred securities are carried at fair value of $2,600,000, $2,439,000, and $2,462,000 at September 30, 2015, December 31, 2014 and September 30, 2014, respectively. The change 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 September 30, 2015 and December 31, 2014, the recorded investment in loans for which impairment has been identified totaled $12,054,000 and $21,077,000 of which $10,284,000 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 $1,770,000 and $2,058,000 at September 30, 2015 and December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, the related allowance for loan losses associated with these loans was $867,000 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:

	September 30,			December 31,			September 30,
	2015			2014			2014
Non-accrual loans	$	8,082		$	10,770		$	10,559
Loans past due 90 days or more and still accruing interest		52			-			-
Troubled debt restructured loans (not already included above)		626			1,897			1,895
Total non-performing loans		8,760			12,667			12,454
Other real estate owned and repossessed assets		-			3,046			3,046
Non-accrual investment securities		2,600			2,439			2,462
Total non-performing assets	$	11,360		$	18,152		$	17,962
Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	568,978		$	523,825		$	517,573
Total loans		582,255			555,282			536,682
Allowance for loan losses		7,669			8,001			8,366
Allowance for loan losses to:
Non-performing loans		87.54	%		63.17	%		67.18	%
Total loans (excluding held-for-sale)		1.32	%		1.44	%		1.56	%
Average total loans		1.35	%		1.53	%		1.62	%
Non-performing loans / total loans (excluding held-for-sale)		1.50	%		2.28	%		2.32	%
Non-performing assets / total assets		1.09	%		1.86	%		1.81	%

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

	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Net charge-offs (recoveries)	$	(14	)	$	534		$	392		$	559
Net annualized charge-offs (recoveries) to:
Total loans		-0.01	%		0.39	%		0.09	%		0.14	%
Average total loans excluding held-for-sale		-0.01	%		0.40	%		0.09	%		0.14	%
Allowance for loan losses		-0.69	%		25.34	%		6.84	%		8.94	%

59

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						Nine months				Change from
	ended September 30,				prior year						ended September 30,				prior year
	2015		2014		Amount			Percent			2015		2014		Amount			Percent
Net gain on investment securities	$	83	$	180	$	(97	)		-53.9	%	$	800	$	1,087	$	(287	)		-26.4	%
Net gain on trading activity		36		40		(4	)		-10.0	%		17		155		(138	)		-89.0	%
Fees for services to customers		434		432		2			0.5	%		1,240		1,241		(1	)		-0.1	%
ATM and debit card		397		378		19			5.0	%		1,153		1,113		40			3.6	%
Retail brokerage and advisory income		180		138		42			30.4	%		557		453		104			23.0	%
Bank-owned life insurance		73		74		(1	)		-1.4	%		215		219		(4	)		-1.8	%
Merchant income		75		73		2			2.7	%		226		229		(3	)		-1.3	%
Net gain on sale of loans		120		110		10			9.1	%		302		171		131			76.6	%
Other		95		92		3			3.3	%		259		286		(27	)		-9.4	%
Total	$	1,493	$	1,517	$	(24	)		-1.6	%	$	4,769	$	4,954	$	(185	)		-3.7	%

Quarter to Quarter Comparison

Total non-interest income for the third quarter of 2015 was $1,493,000, a decrease of $24,000, compared to $1,517,000 for the third quarter of 2014. Excluding net gains on investment securities, trading activities and sale of loans for both periods, total non-interest income was $1,254,000 and $1,187,000, an increase of $67,000, or 5.6%.

Decreases in net gains on investment securities and trading activity, which declined from $180,000 and $40,000, respectively, in the third quarter of 2014, to $83,000 and $36,000, respectively, in the same period in 2015, contributed $101,000 of the decrease in non-interest income. Gain on investments are primarily derived from sale of equities. Market conditions in the equities market for the quarter ended September 30, 2015 versus the same period in 2014 resulted in fewer opportunities for sales in 2015 compared to 2014. 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 decrease in trading investment portfolio is attributable to significantly decreased activity in the municipal bond markets for the third quarter 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 third quarter of 2015 or 2014.

QNB originates residential mortgage loans for sale in the secondary market. Net gains on sale of loans increased from $110,000 during the third quarter of 2014 to $120,000 during the third 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 $3,108,000 and $2,650,000 for the third quarters of 2015 and 2014, respectively.

Fees for services for customers, combined with ATM and debit card fees increased $21,000 for the third quarter of 2015, compared to the same period in 2014 due to increased debit card transactions. Retail brokerage and advisory income was $180,000 for the third quarter of 2015 compared to $138,000 for the third quarter of 2014. This represents an increase of $42,000, or 30.4%. 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 September 30, 2015 were $63,326,000, increasing $18,366,000 from assets under management of $44,960,000 at September 30, 2014.

60

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Nine-Month Comparison

Total non-interest income for the nine month periods ended September 30, 2015 and 2014 was $4,769,000 and $4,954,000, respectively, a decrease of $185,000, or 3.7%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $3,650,000 and $3,541,000, an increase of $109,000, or 3.1%.

Net investment securities gains decreased $287,000, or 26.4%, to $800,000 for the nine months ended September 30, 2015 compared to $1,087,000 for the comparable nine months in 2014. The gains in both periods were primarily on the sale of equity securities. There were no OTTI charges in the 2015 or 2014 periods.

Fees for services to customers decreased $1,000 in the first nine months of 2015 compared to 2014. Overdraft income net of waived charges, representing approximately 74% of total fees for services to customers during the nine months ended September 30, 2015, increased by $39,000. 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 $23,000 decline in internet banking fees, as the fees related to this transaction channel were reduced beginning in 2015. Service charges on business checking accounts declined $11,000 during the period, as increased balances covered transaction costs and reduced fee income. ATM and debit card income increased $40,000, or 3.6%, to $1,153,000 due to increased purchases by cardholders during the period.

Retail brokerage and advisory income was $557,000 for nine months of 2015 compared to $453,000 for nine months of 2014, an increase of $104,000, or 23.0%.

Net gains on the sale of loans increased $131,000, or 76.6%, when comparing the nine months ended September 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 $9,595,000 and $4,192,000 for the nine-month periods ended September 30, 2015 and 2014, respectively.

Other non-interest income decreased $27,000, or 9.4%, when comparing the nine-month periods ended September 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						Nine months				Change from
	ended September 30,				prior year						ended September 30,				prior year
	2015		2014		Amount			Percent			2015		2014		Amount			Percent
Salaries and employee benefits	$	2,911	$	2,963	$	(52	)		-1.8	%	$	8,960	$	8,594	$	366			4.3	%
Net occupancy		427		421		6			1.4	%		1,336		1,291		45			3.5	%
Furniture and equipment		424		444		(20	)		-4.5	%		1,285		1,290		(5	)		-0.4	%
Marketing		174		201		(27	)		-13.4	%		596		641		(45	)		-7.0	%
Third-party services		389		454		(65	)		-14.3	%		1,235		1,266		(31	)		-2.4	%
Telephone, postage and supplies		182		187		(5	)		-2.7	%		551		544		7			1.3	%
State taxes		173		152		21			13.8	%		520		456		64			14.0	%
FDIC insurance premiums		162		170		(8	)		-4.7	%		479		507		(28	)		-5.5	%
Other		731		486		245			50.4	%		1,802		1,415		387			27.3	%
Total	$	5,573	$	5,478	$	95			1.7	%	$	16,764	$	16,004	$	760			4.7	%

61

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Quarter to Quarter Comparison

Total non-interest expense was $5,573,000 for the third quarter of 2015, an increase of $95,000, or 1.7%, compared to the third quarter of 2014.

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 third quarter of 2015 were $2,911,000, a decrease of $52,000, or 1.8%, from the $2,963,000 reported in the third quarter of 2014. When comparing the two periods, the net decrease is attributed to a decrease in net benefits expense due primarily to insurance reimbursements for medical claims paid in prior periods. Partially offsetting this was increased salary expenses of $124,000.

Net occupancy costs increased $6,000, or 1.4%, primarily branch rent. Furniture and equipment expense declined by $20,000, or 4.5%, with declines in depreciation expense being somewhat offset by increases in software and equipment maintenance. Marketing expense decreased $27,000, or 13.4%, to $174,000 for the three month period ended September 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 decreased $65,000, or 14.3%, to $389,000 for the three months ended September 30, 2015 when compared to the same period in 2014, attributable primarily to reduced third party IT services, consultant services, and other third party expenses, which decreased $19,000, $23,000 and $28,000, respectively.

FDIC insurance premium expense decreased $8,000, or 4.7%, to $162,000, when comparing the three months ended September 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 third quarter of 2015, an increase of $21,000 compared to the same period in 2014. The increase related to the change in the Bank’s equity capital.

Other non-interest expense increased $245,000, or 50.4%, to $731,000 for the third quarter of 2015. Contributing to the higher expenses was a $208,000 third party contract termination fee related to debit card platform upgrades anticipated to occur during 2016.

Nine-Month Comparison

Total non-interest expense was $16,764,000 for the nine-month period ended September 30, 2015, an increase of $760,000, or 4.7%, compared to the same period in 2014.

Salaries and benefits expense increased $366,000, or 4.3%, to $8,960,000 for the nine months ended September 30, 2015 compared to the same period in 2014. Salary expense and related taxes increased $587,000 during the period to $7,732,000. Included in this increase was an incentive compensation accrual for the period which increased by approximately $69,000 compared with the first nine months of 2014. The remainder of the increase is attributable to two additional full-time equivalent employees, higher commissions on retail brokerage income and normal merit increases. Benefits expense decreased $221,000, to $1,228,000, related to medical claims insurance reimbursements received in the third quarter 2015 compared with increased medical claims for third quarter 2014.

62

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Net occupancy costs increased $45,000, or 3.5%, primarily branch rent. Marketing expense declined $45,000, or 7.0%, to $596,000 for the nine months ended September 30, 2015 for the same reason noted for the quarter.

Third party services expense decreased $31,000, or 2.4%, to $1,235,000 for the nine months ended September 30, 2015 when compared to the same period in 2014. This included a decrease in expenses for consultant services, which, in 2014 were engaged to evaluate the executive management team.

State tax expense was $520,000 for the nine months ended September 30, 2015, an increase of $64,000 compared to the same period in 2014 due to the increase in the Bank’s equity capital for the period.

Other non-interest expense increased $387,000, or 27.3%, to $1,802,000 for the nine months ended September 30, 2015. Contributing to the higher expenses were a $208,000 third party contract termination fee noted previously for the quarter, $74,000 for additional collections expenses and tax payments for delinquent loans, $54,000 of third party processing costs for a product designed to enhance cash flow for business loan customers, $24,000 related to additional expenses for check card charge-offs, and $14,000 for a higher regulatory fee assessment.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of September 30, 2015, QNB’s net deferred tax asset was $2,677,000. The primary components of deferred taxes are deferred tax assets of $2,607,000 relating to the allowance for loan losses, $477,000 related to non-accrual interest income, $123,000 related to deferred fees and rent, $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 approximately $1,000,000 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 September 30, 2015 to December 31, 2014 is the decrease in deferred tax asset related to the reduction in allowance for loan losses and 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 $715,000 for the three-month period ended September 30, 2015 compared to $580,000 for the three-month period ended September 30, 2014. The effective tax rate for third quarter of 2015 was 24.4% compared with 22.1% for the third quarter of 2014. For the nine-month periods ended September 30, 2015 and 2014 applicable income taxes and the effective tax rates were $1,999,000, or 24.1%, and $1,913,000, or 22.7%, 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 three quarters of 2015, the low level of interest rates and the increasing 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 2016 as short-term interest rates may to begin to increase which could result in a lower net interest margin and a decline in net interest income.

63

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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

Total assets at September 30, 2015 were $1,039,317,000 compared with $977,135,000 at December 31, 2014. Cash and cash equivalents increased $51,459,000 to $69,704,000 at September 30, 2015. Proceeds from the decline in total investment securities of $13,232,000 were used in part to fund the growth in loans receivable, which totaled $26,973,000 when compared to December 31, 2014. Loans receivable were $582,255,000 at September 30, 2015. Demand for loans by both businesses and consumers was strong during the first nine months of 2015.

Average total commercial loans increased $42,940,000 when comparing the first nine months of 2015 to the first nine months of 2014. Commercial and industrial loans increased $11,520,000, or 10.2%, to $124,211,000. 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 $28,963,000, or 11.1%, when comparing the average balances for the nine month periods while average tax-exempt loans to state and municipal organizations increased $1,573,000, or 3.6%, over the same time period.

Average residential real estate loans and home equity loans increased $8,239,000, or 9.3%, when comparing the first nine months of 2015 to the same period in 2014. The Bank had several successful loan promotions over the past year and has received a strong response to the product offerings.

Total investment securities, including trading securities, available-for-sale securities and held-to-maturity securities were $366,340,000 at September 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 $3,409,000 and a fair value of $2,600,000 at September 30, 2015. The company received principal and interest payments totaling $110,000 on three of these securities during the third quarter, which was recorded as a reduction to the amortized cost. There was no credit-related other-than-temporary impairment charge in the nine months ended September 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.

64

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Total deposits increased $57,082,000, or 6.7%, to $908,674,000 at September 30, 2015 compared to the December 31, 2014 balances. Interest bearing demand balances increased $37,586,000 to $289,572,000 at September 30, 2015. This increase is primarily attributable to municipal deposits which increased $32,946,000. Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities. Non-interest bearing demand deposits increased $11,172,000, or 12.9%, when comparing September 30, 2015 to year-end 2014. The majority of this increase is from business deposits. Money market and savings balances increased $13,484,000 and $8,993,000, respectively, to $71,683,000 and $220,233,000, respectively. Time deposits decreased $14,153,000, declining from $243,247,000 at December 31, 2014 to $229,094,000 at September 30, 2015, as customers continue to look for liquidity in anticipation of rising interest rates. It is anticipated that total deposits will decline during the fourth quarter as tax money is received by the local school districts are expected to 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.

Short-term borrowings decreased $2,601,000 from $35,189,000 at December 31, 2014 to $32,588,000 at September 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 September 30, 2015, the Bank had a maximum borrowing capacity with the FHLB of approximately $250,554,000. The maximum borrowing capacity changes as a function of qualifying collateral assets. QNB has no outstanding borrowings with the FHLB at September 30, 2015. In addition, the Bank maintains unsecured Federal funds lines with three correspondent banks totaling $46,000,000. At September 30, 2015, there were no outstanding borrowings under these lines. During the first five 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 increased $38,166,000, or 9.6%, since December 31, 2014. Total cash and cash equivalents, trading and available-for-sale investment securities and loans held-for-sale totaled $436,217,000 and $398,051,000 at September 30, 2015 and December 31, 2014, respectively, primarily due to the seasonal inflow of public funds deposits and other deposit growth, net of 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 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.

65

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Approximately $238,281,000 and $206,774,000 of available-for-sale securities at September 30, 2015 and December 31, 2014, respectively, were pledged as collateral for repurchase agreements and deposits of public funds. The increase in the amount of pledged securities corresponds with the increase in municipal deposits from December 31, 2014 to September 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.

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 September 30, 2015 was $90,996,000, or 8.76% of total assets, compared to shareholders' equity of $86,354,000, or 8.84% of total assets, at December 31, 2014. Shareholders’ equity at September 30, 2015 and December 31, 2014 included a positive adjustment of $1,260,000 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 8.64% and 8.75% at September 30, 2015 and December 31, 2014, respectively.

Average shareholders' equity and average total assets were $87,941,000 and $975,955,000 for the first nine months of 2015, an increase of 6.4% and 3.0%, respectively, from the averages for the year ended December 31, 2014. The ratio of average total equity to average total assets was 9.01% for the nine months of 2015 compared to 8.72% for all of 2014. 

Retained earnings at September 30, 2015 were impacted by nine months of net income of $6,290,000 partially offset by cash dividends declared and paid of $2,901,000 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 $667,000 and $552,000 to capital during the first nine 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 September 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.

66

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

As of September 30, 2015, the capital levels for QNB and the Bank remained characterized as “well-capitalized” under the new rules.

The following table sets forth consolidated information for QNB Corp.

	September 30,			December 31,
Capital Analysis	2015			2014
Regulatory Capital
Shareholders' equity	$	90,996		$	86,354
Net unrealized securities gains, net of tax		(1,260	)		(907	)
Net unrealized losses on available-for-sale equity securities, net of tax		(298	)		-
Disallowed intangible assets		(3	)		(8	)
Common equity tier I capital		89,435		N/A
Tier I capital		89,435			85,439
Allowable portion: Allowance for loan losses and reserve for unfunded commitments		7,728			8,060
Unrealized gains on equity securities, net of tax		-			428
Total regulatory capital	$	97,163		$	93,927
Risk-weighted assets	$	747,060		$	667,818
Quarterly average assets for leverage capital purposes	$	995,279		$	987,527

	September 30,			December 31,
Capital Ratios	2015			2014
Common equity tier I capital / risk-weighted assets		11.97	%		N/A
Tier I capital / risk-weighted assets		11.97	%		12.79	%
Total regulatory capital / risk-weighted assets		13.01	%		14.06	%
Tier I capital / average assets (leverage ratio)		8.99	%		8.65	%

Under the requirements, at September 30, 2015 and December 31, 2014, QNB has a tier 1 capital ratio of 11.97% and 12.79%, a total regulatory capital ratio of 13.01% and 14.06%, and a leverage ratio of 8.99% and 8.65%, respectively. The leverage ratio improved from December 31, 2014 due to the proportion increase of tier I capital compared to the increase in quarterly average assets 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 September 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.

67

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

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 September 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 September 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	September 30,
(in basis points)	2015			2014
+300		-10.71	%		-14.63	%
+200		-7.14	%		-9.60	%
+100		-3.68	%		-5.11	%
-100		*NA			*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 September 30, 2015 QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

68

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.

69

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

SEPTEMBER 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
	QNB did not repurchase any shares of its common stock during the quarter ended September 30, 2015. The following provides certain information relating to QNB's stock repurchase plan.

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
July 1, 2015 through July 31, 2015	-	-	-	42,117
August 1, 2015 through August 31, 2015	-	-	-	42,117
September 1, 2015 through September 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.

70

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 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.

71

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

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

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Note 7 - Investment Securities (Details) - Investment Securities Available-for-sale - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	$ 362,568,000	$ 375,219,000
Investment securities available-for-sale, gross unrealized holding gains	4,635,000	5,073,000
Investment securities available-for-sale, gross unrealized holding losses	(2,727,000)	(3,698,000)
Investment securities available-for-sale, amortized cost	360,660,000	373,844,000
US Government Agencies Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	57,490,000	62,665,000
Investment securities available-for-sale, gross unrealized holding gains	308,000	212,000
Investment securities available-for-sale, gross unrealized holding losses	(44,000)	(472,000)
Investment securities available-for-sale, amortized cost	57,226,000	62,925,000
US States and Political Subdivisions Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	83,042,000	72,569,000
Investment securities available-for-sale, gross unrealized holding gains	1,493,000	1,500,000
Investment securities available-for-sale, gross unrealized holding losses	(85,000)	(150,000)
Investment securities available-for-sale, amortized cost	81,634,000	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	133,281,000	136,192,000
Investment securities available-for-sale, gross unrealized holding gains	1,793,000	1,819,000
Investment securities available-for-sale, gross unrealized holding losses	(203,000)	(466,000)
Investment securities available-for-sale, amortized cost	131,691,000	134,839,000
Collateralized Mortgage Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	73,034,000	87,662,000
Investment securities available-for-sale, gross unrealized holding gains	494,000	330,000
Investment securities available-for-sale, gross unrealized holding losses	(599,000)	(1,300,000)
Investment securities available-for-sale, amortized cost	73,139,000	88,632,000
Collateralized Debt Obligations [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	2,600,000	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	(1,024,000)	(1,240,000)
Investment securities available-for-sale, amortized cost	3,409,000	3,519,000
Corporate Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	6,029,000	6,037,000
Investment securities available-for-sale, gross unrealized holding gains	23,000	30,000
Investment securities available-for-sale, gross unrealized holding losses	(11,000)
Investment securities available-for-sale, amortized cost	6,017,000	6,007,000
Equity Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Investment securities available-for-sale	7,092,000	7,655,000
Investment securities available-for-sale, gross unrealized holding gains	309,000	1,022,000
Investment securities available-for-sale, gross unrealized holding losses	(761,000)	(70,000)
Investment securities available-for-sale, amortized cost	$ 7,544,000	$ 6,703,000

XML

Note 8 - Loans and Allowance for Loan Losses (Details) - Loans Disaggregated by Impairment Method - USD ($) $ in Thousands	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013
Commercial:
Allowance for loan losses	$ 7,669	$ 7,655	$ 8,001	$ 8,366	$ 8,900	$ 8,925
Allowance for loan losses - individually evaluated for impairment	867		1,194
Allowance for loan losses - collectively evaluated for impairment	5,867		6,489
Loans	582,225		555,251
Loans - individually evaluated for impairment	12,054		21,077
Loans - collectively evaluated for impairment	570,171		534,174
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Allowance for loan losses	1,535	1,603	1,892	2,276	2,407	2,044
Allowance for loan losses - individually evaluated for impairment	745		1,095
Allowance for loan losses - collectively evaluated for impairment	790		797
Loans	121,217		118,845
Loans - individually evaluated for impairment	4,188		7,115
Loans - collectively evaluated for impairment	117,029		111,730
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Allowance for loan losses	267	149	297	173	240	439
Allowance for loan losses - collectively evaluated for impairment	267		297
Loans	25,681		23,471
Loans - individually evaluated for impairment	346		362
Loans - collectively evaluated for impairment	25,335		23,109
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Allowance for loan losses	2,164	2,655	2,700	2,472	2,600	2,898
Allowance for loan losses - collectively evaluated for impairment	2,164		2,700
Loans	212,962		203,534
Loans - individually evaluated for impairment	5,244		11,546
Loans - collectively evaluated for impairment	207,718		191,988
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Allowance for loan losses	1,580	1,635	1,630	1,824	1,708	1,632
Allowance for loan losses - individually evaluated for impairment	89		91
Allowance for loan losses - collectively evaluated for impairment	1,491		1,539
Loans	57,755		53,077
Loans - individually evaluated for impairment	1,443		1,567
Loans - collectively evaluated for impairment	56,312		51,510
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Allowance for loan losses	228	232	221	194	214	186
Allowance for loan losses - collectively evaluated for impairment	228		221
Loans	41,443		44,104
Loans - collectively evaluated for impairment	41,443		44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Allowance for loan losses	122	121	93	76	92	103
Allowance for loan losses - collectively evaluated for impairment	122		93
Loans	9,858		7,685
Loans - individually evaluated for impairment	104		16
Loans - collectively evaluated for impairment	9,754		7,669
Retail Portfolio Segment [Member]
Commercial:
Loans	113,309		104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Allowance for loan losses	306	313	312	320	372	303
Allowance for loan losses - individually evaluated for impairment	33		4
Allowance for loan losses - collectively evaluated for impairment	273		308
Loans	41,691		37,147
Loans - individually evaluated for impairment	547		341
Loans - collectively evaluated for impairment	41,144		36,806
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Allowance for loan losses	450	474	453	547	520	583
Allowance for loan losses - individually evaluated for impairment			4
Allowance for loan losses - collectively evaluated for impairment	450		449
Loans	67,341		63,213
Loans - individually evaluated for impairment	155		129
Loans - collectively evaluated for impairment	67,186		63,084
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Allowance for loan losses	82	71	85	121	67	64
Allowance for loan losses - collectively evaluated for impairment	82		85
Loans	4,277		4,175
Loans - individually evaluated for impairment	27		1
Loans - collectively evaluated for impairment	4,250		4,174
Unallocated Financing Receivables [Member]
Commercial:
Allowance for loan losses	935	$ 402	318	$ 363	$ 679	$ 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	Sep. 30, 2015	Dec. 31, 2014
Commercial:
Loans and Leases receivable	$ 582,225	$ 555,251
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans and Leases receivable	121,217	118,845
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	115,993	111,560
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	329	42
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	4,895	7,243
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans and Leases receivable	25,681	23,471
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	25,661	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	20	362
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Loans and Leases receivable	212,962	203,534
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	196,047	178,339
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	2,019	2,418
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	14,896	22,777
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans and Leases receivable	57,755	53,077
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	54,866	50,172
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	711	408
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	2,178	2,497
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	41,443	44,104
State and Political Subdivisions Portfolio Segment [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	40,170	42,771
State and Political Subdivisions Portfolio Segment [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	1,273	1,333
Finance Leases Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	9,858	7,685
Finance Leases Portfolio Segment [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	9,658	7,543
Finance Leases Portfolio Segment [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	200	142
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member]
Commercial:
Loans and Leases receivable	468,916	450,716
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Pass [Member]
Commercial:
Loans and Leases receivable	442,395	413,366
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Special Mention [Member]
Commercial:
Loans and Leases receivable	3,059	2,996
Commercial, State and Political Subdivision and Lease Financing Portfolio Segments [Member] | Substandard [Member]
Commercial:
Loans and Leases receivable	23,462	34,354
Retail Portfolio Segment [Member]
Commercial:
Loans and Leases receivable	113,309	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	41,691	37,147
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	67,341	63,213
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable	4,277	4,175
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member]
Commercial:
Loans and Leases receivable	112,859	104,205
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	41,399	36,922
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	67,210	63,109
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable	4,250	4,174
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member]
Commercial:
Loans and Leases receivable	450	330
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans and Leases receivable	292	225
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Home Equity Loan [Member]
Commercial:
Loans and Leases receivable	131	104
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Consumer Loans [Member]
Commercial:
Loans and Leases receivable	$ 27	$ 1

XML

Note 8 - Loans and Allowance for Loan Losses (Details) - Impaired Loans - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
With no specific allowance recorded:
Recorded investment - with no specific allowance	$ 10,284	$ 19,019
Unpaid principal balance - with no specific allowance	11,440	20,485
With an allowance recorded:
Recorded investment - wth an allowance	1,770	2,058
Unpaid principal balance - with an allowance	2,274	2,359
Related allowance	867	1,194
Total:
Recorded investment	12,054	21,077
Unpaid principal balance	13,714	22,844
Related allowance	867	1,194
Average recorded investment	16,684	25,768
Interest income recognized	297	683
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	3,169	5,894
Unpaid principal balance - with no specific allowance	3,373	6,056
With an allowance recorded:
Recorded investment - wth an allowance	1,019	1,221
Unpaid principal balance - with an allowance	1,210	1,419
Related allowance	745	1,095
Total:
Recorded investment	4,188	7,115
Unpaid principal balance	4,583	7,475
Related allowance	745	1,095
Average recorded investment	6,301	9,305
Interest income recognized	154	331
Commercial Portfolio Segment [Member] | Construction Loans [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	346	362
Unpaid principal balance - with no specific allowance	347	444
Total:
Recorded investment	346	362
Unpaid principal balance	347	444
Average recorded investment	410	1,050
Interest income recognized	16	2
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	5,244	11,546
Unpaid principal balance - with no specific allowance	5,700	12,198
Total:
Recorded investment	5,244	11,546
Unpaid principal balance	5,700	12,198
Average recorded investment	7,881	12,304
Interest income recognized	121	344
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	997	903
Unpaid principal balance - with no specific allowance	1,433	1,427
With an allowance recorded:
Recorded investment - wth an allowance	446	664
Unpaid principal balance - with an allowance	753	748
Related allowance	89	91
Total:
Recorded investment	1,443	1,567
Unpaid principal balance	2,186	2,175
Related allowance	89	91
Average recorded investment	1,522	2,452
Finance Leases Portfolio Segment [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	104	16
Unpaid principal balance - with no specific allowance	104	16
Total:
Recorded investment	104	16
Unpaid principal balance	104	16
Average recorded investment	22	26
Interest income recognized	1	1
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	242	225
Unpaid principal balance - with no specific allowance	253	250
With an allowance recorded:
Recorded investment - wth an allowance	305	116
Unpaid principal balance - with an allowance	311	116
Related allowance	33	4
Total:
Recorded investment	547	341
Unpaid principal balance	564	366
Related allowance	33	4
Average recorded investment	415	460
Interest income recognized	4	5
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	155	72
Unpaid principal balance - with no specific allowance	203	93
With an allowance recorded:
Recorded investment - wth an allowance		57
Unpaid principal balance - with an allowance		76
Related allowance		4
Total:
Recorded investment	155	129
Unpaid principal balance	203	169
Related allowance		4
Average recorded investment	130	169
Interest income recognized	1
Retail Portfolio Segment [Member] | Consumer Loans [Member]
With no specific allowance recorded:
Recorded investment - with no specific allowance	27	1
Unpaid principal balance - with no specific allowance	27	1
Total:
Recorded investment	27	1
Unpaid principal balance	27	1
Average recorded investment	$ 3	$ 2

XML

Note 8 - Loans and Allowance for Loan Losses (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Bank Overdrafts	$ 214,000		$ 214,000		$ 142,000
Financing Receivable, Modifications, Recorded Investment	$ 1,865,000	$ 0	$ 1,865,000	$ 0	5,587,000
Financing Receivable, Modifications, Number of Contracts	1		1	1
Loans and Leases Receivable, Impaired, Commitment to Lend	$ 1,939,000		$ 1,939,000		1,729,000
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down			$ 5,000	$ 522,000
Financing Receivable, Modifications, Subsequent Default, Number of Contracts	0	0	0	12
Financing Receivable, Modifications, Subsequent Default, Recorded Investment				$ 658,000
Performing Financial Instruments [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	$ 626,000		$ 626,000		1,897,000
Nonperforming Financial Instruments [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Financing Receivable, Modifications, Recorded Investment	1,239,000		1,239,000		$ 3,690,000
Consumer Portfolio Segment [Member]
Note 8 - Loans and Allowance for Loan Losses (Details) [Line Items]
Mortgage Loans in Process of Foreclosure, Amount	$ 45,000		$ 45,000
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		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 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	31,450	21,000	31,450

XML

Note 9 - Fair Value Measurements and Disclosures (Details) - Financial Assets Measured at Fair Value on a Recurring and Nonrecurring Basis - USD ($)	Sep. 30, 2015	Dec. 31, 2014
Trading Securities
Trading securities	$ 3,625,000	$ 4,207,000
Securities available-for-sale
Investment securities available-for-sale	362,568,000	375,219,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	366,193,000	379,426,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	1,038,000	3,827,000
Impaired Loans [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	903,000	3,715,000
Mortgage Servicing Rights [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	135,000	112,000
US States and Political Subdivisions Debt Securities [Member]
Trading Securities
Trading securities	3,625,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	83,042,000	72,569,000
US Government Agencies Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	57,490,000	62,665,000
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Securities available-for-sale
Investment securities available-for-sale	133,281,000	136,192,000
Collateralized Mortgage Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	73,034,000	87,662,000
Collateralized Debt Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	2,600,000	2,439,000
Corporate Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	6,029,000	6,037,000
Equity Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	7,092,000	7,655,000
Fair Value, Inputs, Level 1 [Member]
Securities available-for-sale
Investment securities available-for-sale	7,092,000	7,655,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	7,092,000	7,655,000
Fair Value, Inputs, Level 1 [Member] | Equity Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	7,092,000	7,655,000
Fair Value, Inputs, Level 2 [Member]
Trading Securities
Trading securities	3,625,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	352,876,000	365,125,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	356,501,000	369,332,000
Fair Value, Inputs, Level 2 [Member] | US States and Political Subdivisions Debt Securities [Member]
Trading Securities
Trading securities	3,625,000	4,207,000
Securities available-for-sale
Investment securities available-for-sale	83,042,000	72,569,000
Fair Value, Inputs, Level 2 [Member] | US Government Agencies Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	57,490,000	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	133,281,000	136,192,000
Fair Value, Inputs, Level 2 [Member] | Collateralized Mortgage Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	73,034,000	87,662,000
Fair Value, Inputs, Level 2 [Member] | Corporate Debt Securities [Member]
Securities available-for-sale
Investment securities available-for-sale	6,029,000	6,037,000
Fair Value, Inputs, Level 3 [Member]
Securities available-for-sale
Investment securities available-for-sale	2,600,000	2,439,000
U.S. Government agencies and sponsored enterprises (GSEs):
Recurring fair value measurements	2,600,000	2,439,000
Nonrecurring fair value measurements
Nonrecurring fair value measurements	1,038,000	3,827,000
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	903,000	3,715,000
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Nonrecurring fair value measurements
Nonrecurring fair value measurements	135,000	112,000
Fair Value, Inputs, Level 3 [Member] | Collateralized Debt Obligations [Member]
Securities available-for-sale
Investment securities available-for-sale	$ 2,600,000	$ 2,439,000

XML

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

9 Months Ended

Sep. 30, 2015

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

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

	September 30,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	121,217	$	118,845
Construction		25,681		23,471
Secured by commercial real estate		212,962		203,534
Secured by residential real estate		57,755		53,077
State and political subdivisions		41,443		44,104
Indirect lease financing		9,858		7,685
Retail:
1-4 family residential mortgages		41,691		37,147
Home equity loans and lines		67,341		63,213
Consumer		4,277		4,175
Total loans		582,225		555,251
Net unearned costs (fees)		30		31
Loans receivable	$	582,255	$	555,282

Financing Receivable Credit Quality Indicators [Table Text Block]

September 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	115,993	$	329	$	4,895	$	-	$	121,217
Construction		25,661		-		20		-		25,681
Secured by commercial real estate		196,047		2,019		14,896		-		212,962
Secured by residential real estate		54,866		711		2,178		-		57,755
State and political subdivisions		40,170		-		1,273		-		41,443
Indirect lease financing		9,658		-		200		-		9,858
	$	442,395	$	3,059	$	23,462	$	-	$	468,916

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

September 30, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	41,399	$	292	$	41,691
Home equity loans and lines		67,210		131		67,341
Consumer		4,250		27		4,277
	$	112,859	$	450	$	113,309

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]

September 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	$	54		-		-	$	54	$	121,163	$	121,217
Construction		-		-		-		-		25,681		25,681
Secured by commercial real estate		-	$	65	$	1,075		1,140		211,822		212,962
Secured by residential real estate		102		512		164		778		56,977		57,755
State and political subdivisions		-		-		-		-		41,443		41,443
Indirect lease financing		66		26		133		225		9,633		9,858
Retail:
1-4 family residential mortgages		-		59		-		59		41,632		41,691
Home equity loans and lines		94		-		45		139		67,202		67,341
Consumer		32		28		-		60		4,217		4,277
	$	348	$	690	$	1,417	$	2,455	$	579,770	$	582,225

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]

September 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,488
Construction		-		-
Secured by commercial real estate		-		2,621
Secured by residential real estate		-		1,443
State and political subdivisions		-		-
Indirect lease financing	$	52		80
Retail:
1-4 family residential mortgages		-		292
Home equity loans and lines		-		131
Consumer		-		27
	$	52	$	8,082

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 September 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,603	$	(79	)	$	-		$	11	$	1,535
Construction		149		118			-			-		267
Secured by commercial real estate		2,655		(494	)		-			3		2,164
Secured by residential real estate		1,635		(53	)		(4	)		2		1,580
State and political subdivisions		232		(4	)		-			-		228
Indirect lease financing		121		(4	)		-			5		122
Retail:
1-4 family residential mortgages		313		(7	)		-			-		306
Home equity loans and lines		474		(28	)		-			4		450
Consumer		71		18			(17	)		10		82
Unallocated		402		533			N/A			N/A		935
	$	7,655	$	-		$	(21	)	$	35	$	7,669

Three months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,407	$	(139	)	$	-		$	8	$	2,276
Construction		240		(67	)		-			-		173
Secured by commercial real estate		2,600		(129	)		-			1		2,472
Secured by residential real estate		1,708		555			(452	)		13		1,824
State and political subdivisions		214		(20	)		-			-		194
Loans to depository institutions		1		(1	)		-			-		-
Indirect lease financing		92		(6	)		(14	)		4		76
Retail:
1-4 family residential mortgages		372		39			(92	)		1		320
Home equity loans and lines		520		25			(3	)		5		547
Consumer		67		59			(17	)		12		121
Unallocated		679		(316	)		N/A			N/A		363
	$	8,900	$	-		$	(578	)	$	44	$	8,366

Nine months ended September 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	$	(357	)	$	(30	)	$	30	$	1,535
Construction		297		(30	)		-			-		267
Secured by commercial real estate		2,700		(458	)		(85	)		7		2,164
Secured by residential real estate		1,630		251			(321	)		20		1,580
State and political subdivisions		221		7			-			-		228
Indirect lease financing		93		22			(8	)		15		122
Retail:
1-4 family residential mortgages		312		(6	)		-			-		306
Home equity loans and lines		453		(19	)		-			16		450
Consumer		85		33			(58	)		22		82
Unallocated		318		617			N/A			N/A		935
	$	8,001	$	60		$	(502	)	$	110	$	7,669

Nine months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	190		$	(17	)	$	59	$	2,276
Construction		439		(266	)		-			-		173
Secured by commercial real estate		2,898		(427	)		-			1		2,472
Secured by residential real estate		1,632		623			(453	)		22		1,824
State and political subdivisions		186		8			-			-		194
Loans to depository institutions		4		(4	)		-			-		-
Indirect lease financing		103		(20	)		(20	)		13		76
Retail:
1-4 family residential mortgages		303		108			(92	)		1		320
Home equity loans and lines		583		(15	)		(124	)		103		547
Consumer		64		109			(88	)		36		121
Unallocated		669		(306	)		N/A			N/A		363
	$	8,925	$	-		$	(794	)	$	235	$	8,366

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

Three months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-	$	-	$	-
		1	$	142	$	142		-	$	-	$	-

Nine months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-		-		-
		1	$	142	$	142		1	$	288	$	233

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

	Allowance for Loan Losses						Loans Receivable
September 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	$	1,535	$	745	$	790	$	121,217	$	4,188	$	117,029
Construction		267		-		267		25,681		346		25,335
Secured by commercial real estate		2,164		-		2,164		212,962		5,244		207,718
Secured by residential real estate		1,580		89		1,491		57,755		1,443		56,312
State and political subdivisions		228		-		228		41,443		-		41,443
Indirect lease financing		122		-		122		9,858		104		9,754
Retail:
1-4 family residential mortgages		306		33		273		41,691		547		41,144
Home equity loans and lines		450		-		450		67,341		155		67,186
Consumer		82		-		82		4,277		27		4,250
Unallocated		935		N/A		N/A		N/A		N/A		N/A
	$	7,669	$	867	$	5,867	$	582,225	$	12,054	$	570,171

	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]

	September 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	$	3,169	$	3,373	$	-	$	5,894	$	6,056	$	-
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		997		1,433		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		242		253		-		225		250		-
Home equity loans and lines		155		203		-		72		93		-
Consumer		27		27		-		1		1		-
	$	10,284	$	11,440	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,019	$	1,210	$	745	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		446		753		89		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		305		311		33		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,770	$	2,274	$	867	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	4,188	$	4,583	$	745	$	7,115	$	7,475	$	1,095
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		1,443		2,186		89		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		547		564		33		341		366		4
Home equity loans and lines		155		203		-		129		169		4
Consumer		27		27		-		1		1		-
	$	12,054	$	13,714	$	867	$	21,077	$	22,844	$	1,194

	Nine Months Ended September 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,301	$	154	$	9,305	$	331
Construction		410		16		1,050		2
Secured by commercial real estate		7,881		121		12,304		344
Secured by residential real estate		1,522		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		22		1		26		1
Retail:
1-4 family residential mortgages		415		4		460		5
Home equity loans and lines		130		1		169		-
Consumer		3		-		2		-
	$	16,684	$	297	$	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]

	September 30, 2015				December 31, 2014 2013
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	969		-	$	4,588		-
TDRs with an allowance recorded		896	$	588		999	$	813
	$	1,865	$	588	$	5,587	$	813

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Note 8 - Loans and Allowance for Loan Losses (Details) - Non-Accrual Loans - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Commercial:
Loans 90 days or more past due and still accruing	$ 52
Non-accrual loans	8,082	$ 10,770
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Non-accrual loans	3,488	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	2,621	6,465
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Non-accrual loans	1,443	1,467
Finance Leases Portfolio Segment [Member]
Commercial:
Loans 90 days or more past due and still accruing	52
Non-accrual loans	80
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Non-accrual loans	292	225
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Non-accrual loans	131	104
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Non-accrual loans	$ 27	$ 1

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Note 7 - Investment Securities (Details) - Credit-Related Other-Than-Temporary Impairment - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Credit-Related Other-Than-Temporary Impairment [Abstract]
Balance, beginning of period	$ 1,153,000	$ 1,271,000
Additions:
Initial credit impairments	0	0
Subsequent credit impairments	0	0
Balance, end of period	$ 1,153,000	$ 1,271,000

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Note 7 - Investment Securities (Details)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) [Line Items]
Trading Gain (Loss)	$ 36,000	$ 40,000	$ 17,000	$ 155,000
Trading Securities, Change in Unrealized Holding Gain (Loss)			29,000		$ 24,000
Available-for-sale Securities, Gross Realized Gains (Losses), Sale Proceeds	685,000	534,000	27,480,000	19,504,000
Available-for-sale Securities Pledged as Collateral	238,281,000		238,281,000		206,774,000
Income Tax Expense (Benefit) Related to Net Realized Gains (Losses) On Sales of Securities			273,000	370,000
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses			0	0
Proceeds from Sale of Held-to-maturity Securities	0	0	0	0
Available-for-sale Securities, Amortized Cost Basis	360,660,000		360,660,000		373,844,000
Available-for-sale Securities	$ 362,568,000		$ 362,568,000		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	$ 0	$ 0
Number of Trust Preferred Securities	6		6
Available-for-sale Securities, Amortized Cost Basis	$ 3,409,000		$ 3,409,000		3,519,000
Available-for-sale Securities	$ 2,600,000		$ 2,600,000		$ 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 ($)	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014
Specific Reserve for Loans Modified as TDR's [Abstract]
TDRs with no specific allowance recorded	$ 969,000	$ 4,588,000
TDRs with an allowance recorded	896,000	999,000
TDRs with an allowance recorded	588,000	813,000
	1,865,000	5,587,000	$ 0
	$ 588,000	$ 813,000

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Note 10 - Off-balance-sheet Financial Instruments and Guarantees (Details) - Financial Instrument Commitments - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	$ 242,958	$ 209,772
Commitments to Extend Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	233,308	203,496
Standby Letters of Credit [Member]
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Financial instrument commitments	$ 9,650	$ 6,276

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Note 8 - Loans and Allowance for Loan Losses (Details) - Major Classes of Loans - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Commercial:
Loans	$ 582,225	$ 555,251
Net unearned costs (fees)	30	31
Loans receivable	582,255	555,282
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans	121,217	118,845
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans	25,681	23,471
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Loans	212,962	203,534
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans	57,755	53,077
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans	41,443	44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Loans	9,858	7,685
Retail Portfolio Segment [Member]
Commercial:
Loans	113,309	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans	41,691	37,147
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans	67,341	63,213
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans	$ 4,277	$ 4,175

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Operating Activities
Net income	$ 6,290	$ 6,512
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	769	850
Provision for loan losses	60	0
Net gain on investment securities available-for-sale	(800)	(1,087)
Net loss on sale of repossessed assets and other real estate owned	17	2
Net gain on sale of loans	(302)	(171)
Proceeds from sales of residential mortgages held-for-sale	9,595	4,192
Origination of residential mortgages held-for-sale	(9,233)	(4,151)
Income on bank-owned life insurance	(215)	(219)
Stock-based compensation expense	64	60
Net decrease (increase) in trading securities	582	(4,122)
Deferred income tax provision	66	153
Net increase (decrease) in income taxes payable	17	(331)
Net decrease (increase) in accrued interest receivable	13	(25)
Amortization of mortgage servicing rights and change in valuation allowance	53	46
Net amortization of premiums and discounts on investment securities	1,583	1,571
Net decrease in accrued interest payable	(21)	(55)
Increase in other assets	(364)	(389)
Decrease in other liabilities	(908)	(133)
Net cash provided by operating activities	7,266	2,703
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale	68,472	67,329
Proceeds from the sale of investment securities available-for-sale	27,480	19,504
Purchases of investment securities available-for-sale	(79,565)	(56,153)
Proceeds from redemption of investment in restricted bank stock	1,318	2,452
Purchase of restricted bank stock	(1,179)	(2,409)
Net increase in loans	(27,580)	(35,790)
Net purchases of premises and equipment	(413)	(812)
Proceeds from sales of repossessed assets and other real estate owned	3,244	43
Net cash used in investing activities	(8,223)	(5,836)
Financing Activities
Net increase in non-interest bearing deposits	11,172	6,996
Net increase in interest-bearing deposits	45,910	58,768
Net decrease in short-term borrowings	(2,601)	(6,508)
Repayments of long-term debt		(5,000)
Tax benefit from exercise of stock options	20	29
Cash dividends paid, net of reinvestment	(2,579)	(2,498)
Proceeds from issuance of common stock	494	477
Net cash provided by financing activities	52,416	52,264
Increase in cash and cash equivalents	51,459	49,131
Cash and cash equivalents at beginning of year	18,245	16,286
Cash and cash equivalents at end of period	69,704	65,417
Supplemental Cash Flow Disclosures
Interest paid	3,368	3,436
Income taxes paid	1,904	2,060
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned	215	265
Unsettled trades to purchase securities	$ 3,987	$ 230

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Note 11 - Regulatory Restrictions (Details) - Capital Ratios and Regulatory Minimum Requirements - USD ($) $ in Thousands	Sep. 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	$ 97,163	$ 93,927
Risk-based capital (to risk-weighted assets) actual ratio	13.01%	14.06%
Risk-based capital (to risk-weighted assets) adequately capitalized amount	$ 59,765	$ 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	$ 74,706
Risk-based capital (to risk-weighted assets) well capitalized ratio	10.00%
Tier I capital (to risk-weighted assets):
Tier 1 capital (to risk-weighted assets) actual amount	$ 89,435	$ 85,439
Tier 1 capital (to risk-weighted assets) actual ratio	11.97%	12.79%
Tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 44,824	$ 26,713
Tier 1 capital (to risk-weighted assets) adequately capitalized ratio	6.00%	4.00%
Tier 1 capital (to risk-weighted assets) well capitalized amount	$ 44,824
Tier 1 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	$ 89,435
Common equity tier 1 capital (to risk-weighted assets) actual ratio	11.97%
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 33,618
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 1 capital (to average assets) actual amount	$ 89,435	$ 85,439
Tier 1 capital (to average assets) actual ratio	8.99%	8.65%
Tier 1 capital (to average assets) adequately capitalized amount	$ 39,811	$ 39,501
Tier 1 capital (to average assets) adequately capitalized ratio	4.00%	4.00%
Tier 1 capital (to average assets) well capitalized amount
Tier 1 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	$ 89,971	$ 86,884
Risk-based capital (to risk-weighted assets) actual ratio	12.40%	13.14%
Risk-based capital (to risk-weighted assets) adequately capitalized amount	$ 58,057	$ 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	$ 72,571	$ 66,114
Risk-based capital (to risk-weighted assets) well capitalized ratio	10.00%	10.00%
Tier I capital (to risk-weighted assets):
Tier 1 capital (to risk-weighted assets) actual amount	$ 82,243	$ 78,824
Tier 1 capital (to risk-weighted assets) actual ratio	11.33%	11.92%
Tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 43,543	$ 26,446
Tier 1 capital (to risk-weighted assets) adequately capitalized ratio	6.00%	4.00%
Tier 1 capital (to risk-weighted assets) well capitalized amount	$ 58,057	$ 39,669
Tier 1 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	$ 82,243
Common equity tier 1 capital (to risk-weighted assets) actual ratio	11.33%
Common equity tier 1 capital (to risk-weighted assets) adequately capitalized amount	$ 32,657
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	$ 47,171
Common equity tier 1 capital (to risk-weighted assets) well capitalized ratio	6.50%
Tier I capital (to average assets):
Tier 1 capital (to average assets) actual amount	$ 82,243	$ 78,824
Tier 1 capital (to average assets) actual ratio	8.32%	8.04%
Tier 1 capital (to average assets) adequately capitalized amount	$ 39,522	$ 39,237
Tier 1 capital (to average assets) adequately capitalized ratio	4.00%	4.00%
Tier 1 capital (to average assets) well capitalized amount	$ 49,403	$ 49,047
Tier 1 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	Sep. 30, 2015	Dec. 31, 2014
Schedule of Held-to-maturity Securities [Line Items]
State and municipal securities	$ 147	$ 146
State and municipal securities	153	156
US States and Political Subdivisions Debt Securities [Member]
Schedule of Held-to-maturity Securities [Line Items]
State and municipal securities	147	146
State and municipal securities	6	10
State and municipal securities	$ 153	$ 156

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 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)	$ 18,000	$ 17,000	$ 64,000	$ 60,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)	$ 90,000		$ 90,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			28 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			12,150	19,425
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	84,575	91,750	84,575	91,750	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			44,400
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	84,575		84,575
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)

9 Months Ended

Sep. 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 September 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	97,163		13.01	%	$	59,765		8.00	%	$	74,706		10.00	%
Bank		89,971		12.40			58,057		8.00			72,571		10.00
Tier I capital (to risk-weighted assets):
Consolidated		89,435		11.97			44,824		6.00			44,824		6.00
Bank		82,243		11.33			43,543		6.00			58,057		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		89,435		11.97			33,618		4.50			N/A		N/A
Bank		82,243		11.33			32,657		4.50			47,171		6.50
Tier I capital (to average assets):
Consolidated		89,435		8.99			39,811		4.00			N/A		N/A
Bank		82,243		8.32			39,522		4.00			49,403		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)	9 Months Ended
	Sep. 30, 2015
Note 9 - Fair Value Measurements and Disclosures (Details) [Line Items]
Fair Value Inputs, Loss Severity	95.00%
Minimum Cost Saving for Refinance	2.00%
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	3.36%
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	7.80%
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] | 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	Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	132	165
Securities in an unrealized loss position less than 12 months, fair value	$ 69,294	$ 28,745
Securities in an unrealized loss position less than 12 months, unrealized losses	(965)	(351)
Securities in an unrealized loss position 12 months or longer, fair value	37,813	112,156
Securities in an unrealized loss position 12 months or longer, unrealized losses	(1,762)	(3,347)
Securities in an unrealized loss position, fair value	107,107	140,901
Securities in an unrealized loss position, unrealized losses	$ (2,727)	$ (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	11	29
Securities in an unrealized loss position less than 12 months, fair value	$ 10,330	$ 15,466
Securities in an unrealized loss position less than 12 months, unrealized losses	(23)	(30)
Securities in an unrealized loss position 12 months or longer, fair value	4,477	23,941
Securities in an unrealized loss position 12 months or longer, unrealized losses	(21)	(442)
Securities in an unrealized loss position, fair value	14,807	39,407
Securities in an unrealized loss position, unrealized losses	$ (44)	$ (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	37	39
Securities in an unrealized loss position less than 12 months, fair value	$ 11,973	$ 3,452
Securities in an unrealized loss position less than 12 months, unrealized losses	(58)	(31)
Securities in an unrealized loss position 12 months or longer, fair value	2,688	11,964
Securities in an unrealized loss position 12 months or longer, unrealized losses	(27)	(119)
Securities in an unrealized loss position, fair value	14,661	15,416
Securities in an unrealized loss position, unrealized losses	$ (85)	$ (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	24	34
Securities in an unrealized loss position less than 12 months, fair value	$ 34,497	$ 6,521
Securities in an unrealized loss position less than 12 months, unrealized losses	(171)	(15)
Securities in an unrealized loss position 12 months or longer, fair value	1,469	38,586
Securities in an unrealized loss position 12 months or longer, unrealized losses	(32)	(451)
Securities in an unrealized loss position, fair value	35,966	45,107
Securities in an unrealized loss position, unrealized losses	$ (203)	$ (466)
Collateralized Mortgage Obligations [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	30	51
Securities in an unrealized loss position less than 12 months, fair value	$ 5,259	$ 2,003
Securities in an unrealized loss position less than 12 months, unrealized losses	(19)	(205)
Securities in an unrealized loss position 12 months or longer, fair value	26,858	35,687
Securities in an unrealized loss position 12 months or longer, unrealized losses	(580)	(1,095)
Securities in an unrealized loss position, fair value	32,117	37,690
Securities in an unrealized loss position, unrealized losses	$ (599)	$ (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	$ 2,131	$ 1,978
Securities in an unrealized loss position 12 months or longer, unrealized losses	(1,024)	(1,240)
Securities in an unrealized loss position, fair value	2,131	1,978
Securities in an unrealized loss position, unrealized losses	$ (1,024)	$ (1,240)
Corporate Debt Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	2
Securities in an unrealized loss position less than 12 months, fair value	$ 2,003
Securities in an unrealized loss position less than 12 months, unrealized losses	(11)
Securities in an unrealized loss position, fair value	2,003
Securities in an unrealized loss position, unrealized losses	$ (11)
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Securities in a Continuous Unrealized Loss Position [Line Items]
No. of securities	23	7
Securities in an unrealized loss position less than 12 months, fair value	$ 5,232	$ 1,303
Securities in an unrealized loss position less than 12 months, unrealized losses	(683)	(70)
Securities in an unrealized loss position 12 months or longer, fair value	190
Securities in an unrealized loss position 12 months or longer, unrealized losses	(78)
Securities in an unrealized loss position, fair value	5,422	1,303
Securities in an unrealized loss position, unrealized losses	$ (761)	$ (70)

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details) - Assumptions Used in Option Pricing Model	9 Months Ended
	Sep. 30, 2015	Sep. 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	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Stock Option Activity [Abstract]
Outstanding-Number of options	88,375	115,800
Outstanding-Weighted average exercise price	$ 23.27	$ 23.51
Granted-Number of options	21,000	20,000
Granted-Weighted average exercise price	$ 29.25	$ 25.16
Exercised-Number of options	(12,150)	(19,425)
Exercised-Weighted average exercise price	$ 17.81	$ 17.76
Forfeited-Number of options	(12,650)	(24,625)
Forfeited-Weighted average exercise price	$ 31.87	$ 29.35
Outstanding ending-Number of options	84,575	91,750
Outstanding ending-Weighted average exercise price	$ 24.25	$ 23.52
Outstanding-ending-Weighted average remaining contractual term	2 years 6 months	3 years 120 days
Outstanding-ending-Aggregate intrinsic value	$ 444	$ 172
Exercisable-Number of options	30,375	87,893
Exercisable-Weighted average exercise price	$ 20.87	$ 23.53
Exercisable-Weighted average remaining contractual term	324 days	2 years 36 days
Exercisable-Aggregate intrinsic value	$ 262	$ 384

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Consolidated Statement of Shareholders' Equity (Unaudited) (Parentheticals) - $ / shares	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Cash dividends declared, per share	$ 0.87	$ 0.84

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Note 4 - Share Repurchase Plan (Details) - USD ($)	9 Months Ended
	Sep. 30, 2015	Sep. 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	Sep. 30, 2015	Dec. 31, 2014
Investment Securities by Contractual Maturity [Abstract]
Due in one year or less	$ 5,954
Due in one year or less	5,910
Due after one year through five years	245,136
Due after one year through five years	243,167
Due after five years through ten years	82,140
Due after five years through ten years	81,254
Due after ten years	22,246
Due after ten years	22,785
Equity securities	7,092
Equity securities	7,544
Total investment securities available-for-sale	362,568	$ 375,219
Total investment securities available-for-sale	360,660	373,844
Due in one year or less
Due after one year through five years	153
Due after one year through five years	147
Total investment securities held-to-maturity	153	156
Total investment securities held-to-maturity	$ 147	$ 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	9 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)
Retail:
Number of contracts	1	1	1
Pre-modification outstanding recorded investment	$ 142	$ 142	$ 288
Post-modification outstanding recorded investment	$ 142	$ 142	$ 233
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Retail:
Number of contracts	1	1
Pre-modification outstanding recorded investment	$ 142	$ 142
Post-modification outstanding recorded investment	$ 142	$ 142
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Retail:
Number of contracts			1
Pre-modification outstanding recorded investment			$ 288
Post-modification outstanding recorded investment			$ 233

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Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets
Cash and due from banks	$ 9,038	$ 11,102
Interest-bearing deposits in banks	60,666	7,143
Total cash and cash equivalents	69,704	18,245
Investment securities
Trading	3,625	4,207
Available-for-sale (amortized cost $360,660 and $373,844)	362,568	375,219
Held-to-maturity (fair value $153 and $156)	147	146
Restricted investment in bank stocks	508	647
Loans held-for-sale	320	380
Loans receivable	582,255	555,282
Allowance for loan losses	(7,669)	(8,001)
Net loans	574,586	547,281
Bank-owned life insurance	10,886	10,658
Premises and equipment, net	9,345	9,702
Accrued interest receivable	2,555	2,568
Other real estate owned		3,025
Net deferred tax assets	2,677	2,925
Other assets	2,396	2,132
Total assets	1,039,317	977,135
Deposits
Demand, non-interest bearing	98,092	86,920
Interest-bearing demand	289,572	251,986
Money market	71,683	58,199
Savings	220,233	211,240
Time	136,988	148,827
Time of $100 or more	92,106	94,420
Total deposits	908,674	851,592
Short-term borrowings	32,588	35,189
Accrued interest payable	323	344
Other liabilities	6,736	3,656
Total liabilities	948,321	890,781
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,515,046 shares and 3,481,227 shares issued; 3,350,477 and 3,316,658 shares outstanding	2,197	2,176
Surplus	15,698	14,819
Retained earnings	74,317	70,928
Accumulated other comprehensive income, net of tax	1,260	907
Treasury stock, at cost; 164,569 shares	(2,476)	(2,476)
Total shareholders' equity	90,996	86,354
Total liabilities and shareholders' equity	$ 1,039,317	$ 977,135

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Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities		9 Months Ended
		Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value		$ 360,660,000	$ 373,844,000
Investment securities available-for-sale		$ 362,568,000	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]	217,000
Unrealized gains (losses)	[1]	$ (26,000)
Realized OTTI credit loss	[1]
Total recognized OTTI credit loss	[1]	$ (1,000)
Moody's/Fitch ratings	[1]	B1/BB
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]	140.70%
PreTSL XVII [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 705,000
Investment securities available-for-sale		523,000
Unrealized gains (losses)		(182,000)
Total recognized OTTI credit loss		$ (222,000)
Moody's/Fitch ratings		C/CC
Current number of performing banks		33
Current number of performing insurance companies		5
Actual deferrals and defaults as a % of total collateral		26.70%
Total performing collateral as a % of outstanding bonds		91.20%
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		554,000
Unrealized gains (losses)		(433,000)
Total recognized OTTI credit loss		$ 0
Moody's/Fitch ratings		Caa3/CC
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		94.80%
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		480,000
Unrealized gains (losses)		(286,000)
Total recognized OTTI credit loss		$ (222,000)
Moody's/Fitch ratings		C/C
Current number of performing banks		46
Current number of performing insurance companies		5
Actual deferrals and defaults as a % of total collateral		28.30%
Total performing collateral as a % of outstanding bonds		88.80%
Collateralized Debt Obligations [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Book value		$ 3,409,000	3,519,000
Investment securities available-for-sale		2,600,000	$ 2,439,000
Unrealized gains (losses)		(809,000)
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		$ 454,000
Investment securities available-for-sale		357,000
Unrealized gains (losses)		(97,000)
Total recognized OTTI credit loss		$ (270,000)
Moody's/Fitch ratings		Caa3/C
Current number of performing banks		42
Current number of performing insurance companies		7
Actual deferrals and defaults as a % of total collateral		21.00%
Total performing collateral as a % of outstanding bonds		94.40%
Security 2 [Member] | PreTSL XXVI [Member]
Note 7 - Investment Securities (Details) - Pooled Trust Preferred Securities [Line Items]
Class		Mezzanine
Book value		$ 254,000
Investment securities available-for-sale		469,000
Unrealized gains (losses)		215,000
Total recognized OTTI credit loss		$ (438,000)
Moody's/Fitch ratings		Caa3/C
Current number of performing banks		42
Current number of performing insurance companies		7
Actual deferrals and defaults as a % of total collateral		21.00%
Total performing collateral as a % of outstanding bonds		94.40%

[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		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Tax expense (benefit)	$ 715	$ 580	$ 1,999	$ 1,913
Net of tax amount	2,220	2,044	6,290	6,512
Unrealized holding gains (losses) arising during the period, tax expense	526	449	453	1,979
Unrealized holding gains (losses) arising during the period, net of tax amount	1,021	872	880	3,840
Reclassification adjustment for (gains) losses included in net income, tax expense (benefit)	(29)	(61)	(273)	(370)
Reclassification adjustment for (gains) losses included in net income, net of tax amount	(54)	(119)	(527)	(717)
Other comprehensive (loss) income, tax expense (benefit)	497	388	180	1,609
Other comprehensive (loss) income, net of tax amount	967	753	353	3,123
Total comprehensive income, tax expense (benefit)	1,212	968	2,179	3,522
Total comprehensive income, net of tax amount	$ 3,187	$ 2,797	$ 6,643	$ 9,635

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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	9 Months Ended
	Sep. 30, 2015 USD ($)
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance, January 1, 2015	$ 2,439
Payments received	(110)
Total gains or losses (realized/unrealized)
Included in other comprehensive income	271
Balance, September 30, 2015	$ 2,600

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Note 6 - Comprehensive Income (Details) - Components of Accumulated Other Comprehensive Income - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income	$ 1,908	$ 1,375
Tax effect	(648)	(468)
Accumulated other comprehensive income, net of tax	1,260	907
Accumulated Net Investment Gain (Loss) Attributable to Parent [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Accumulated other comprehensive income	2,284	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)

9 Months Ended

Sep. 30, 2015

Earnings Per Share [Abstract]

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

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	2,220	$	2,044	$	6,290	$	6,512
Denominator for basic earnings per share - weighted average shares outstanding		3,343,011		3,298,057		3,332,650		3,286,438
Effect of dilutive securities - employee stock options		13,778		11,408		12,980		9,766
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,356,789		3,309,465		3,345,630		3,296,204
Earnings per share - basic	$	0.66	$	0.62	$	1.89	$	1.98
Earnings per share - diluted	$	0.66	$	0.62		1.88	$	1.98

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Note 6 - Comprehensive Income (Details) - Amounts Reclassified Out of Accumulated Other Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Reclassification Adjustment out of Accumulated Other Comprehensive Income [Line Items]
Tax effect	$ (715)	$ (580)	$ (1,999)	$ (1,913)
Total reclass out of accumulated other comprehensive income, net of tax	2,220	2,044	6,290	6,512
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	83	180	800	1,087
Tax effect	(29)	(61)	(273)	(370)
Total reclass out of accumulated other comprehensive income, net of tax	$ 54	$ 119	$ 527	$ 717

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Note 7 - Investment Securities (Tables)

9 Months Ended

Sep. 30, 2015

Investments, Debt and Equity Securities [Abstract]

Trading Securities [Table Text Block]

	September 30,		December 31,
	2015		2014
State and municipal securities	$	3,625	$	4,207

Available-for-sale Securities [Table Text Block]

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2015	value		gains		losses			cost
U.S. Government agency	$	57,490	$	308	$	(44	)	$	57,226
State and municipal		83,042		1,493		(85	)		81,634
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		133,281		1,793		(203	)		131,691
Collateralized mortgage obligations (CMOs)		73,034		494		(599	)		73,139
Pooled trust preferred		2,600		215		(1,024	)		3,409
Corporate debt		6,029		23		(11	)		6,017
Equity		7,092		309		(761	)		7,544
Total investment securities available-for-sale	$	362,568	$	4,635	$	(2,727	)	$	360,660

			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
September 30, 2015	Fair value		cost
Due in one year or less	$	5,954	$	5,910
Due after one year through five years		245,136		243,167
Due after five years through ten years		82,140		81,254
Due after ten years		22,246		22,785
Equity securities		7,092		7,544
Total investment securities available-for-sale	$	362,568	$	360,660

			Amortized
September 30, 2015	Fair value		cost
Due in one year or less
Due after one year through five years	$	153	$	147
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	153	$	147

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

	Three months ended September 30, 2015								Three months ended September 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	$	83	$	-	$	-	$	83	$	181	$	-		$	-	$	181
Debt securities		-		-		-		-		-		(1	)		-		(1	)
Total	$	83	$	-	$	-	$	83	$	181	$	(1	)	$	-	$	180

	Nine months ended September 30, 2015									Nine months ended September 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	$	713	$	(23	)	$	-	$	690	$	1,051	$	(6	)	$	-	$	1,045
Debt securities		154		(44	)		-		110		137		(95	)		-		42
Total	$	867	$	(67	)	$	-	$	800	$	1,188	$	(101	)	$	-	$	1,087

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

Nine months ended September 30,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
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

September 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

$

147

$

6

-

$

153

$

146

$

10

-

$

156

Schedule of Unrealized Loss on Investments [Table Text Block]

September 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		11	$	10,330	$	(23	)	$	4,477	$	(21	)	$	14,807	$	(44	)
State and municipal		37		11,973		(58	)		2,688		(27	)		14,661		(85	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		24		34,497		(171	)		1,469		(32	)		35,966		(203	)
Collateralized mortgage obligations (CMOs)		30		5,259		(19	)		26,858		(580	)		32,117		(599	)
Pooled trust preferred		5		-		-			2,131		(1,024	)		2,131		(1,024	)
Corporate debt		2		2,003		(11	)		-		-			2,003		(11	)
Equity		23		5,232		(683	)		190		(78	)		5,422		(761	)
Total		132	$	69,294	$	(965	)	$	37,813	$	(1,762	)	$	107,107	$	(2,727	)

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		Unreal-ized 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	$	217	$	(26	)	$	-	$	(1	)	B1/BB		5		-		18.0	%		140.7	%
PreTSL XVII	Mezzanine		705		523		(182	)		-		(222	)	C/CC		33		5		26.7			91.2
PreTSL XIX	Mezzanine		987		554		(433	)		-		-		Caa3/CC		40		12		12.2			94.8
PreTSL XXV	Mezzanine		766		480		(286	)		-		(222	)	C/C		46		5		28.3			88.8
PreTSL XXVI	Mezzanine		454		357		(97	)		-		(270	)	Caa3/C		42		7		21.0			94.4
PreTSL XXVI	Mezzanine		254		469		215			-		(438	)	Caa3/C		42		7		21.0			94.4
		$	3,409	$	2,600	$	(809	)	$	-	$	(1,153	)

XML

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					6,512				6,512
Other comprehensive income, net of tax						3,123			3,123
Cash dividends declared					(2,762)				(2,762)
Stock issued in connection with dividend reinvestment and stock purchase plan	$ 1	$ 14	$ 34	538				$ 35	552
Stock issued in connection with dividend reinvestment and stock purchase plan (in Shares)	1,572	21,957
Stock issued for options exercised		$ 7		147					$ 154
Stock issued for options exercised (in Shares)		11,919							19,425
Tax benefit of stock options exercised				29					$ 29
Stock-based compensation expense				60					60
Balance at Sep. 30, 2014		$ 2,170		14,555	69,368	(289)	(2,476)		83,328
Balance (in Shares) at Sep. 30, 2014		3,307,106
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					6,290				$ 6,290
Other comprehensive income, net of tax						353			353
Cash dividends declared					(2,901)				(2,901)
Stock issued in connection with dividend reinvestment and stock purchase plan	$ 1	$ 15	$ 42	652				$ 43	667
Stock issued in connection with dividend reinvestment and stock purchase plan (in Shares)	1,721	23,796
Stock issued for options exercised		$ 5		101					$ 106
Stock issued for options exercised (in Shares)		8,302							12,150
Tax benefit of stock options exercised				20					$ 20
Stock-based compensation expense				64					64
Balance at Sep. 30, 2015		$ 2,197		$ 15,698	$ 74,317	$ 1,260	$ (2,476)		$ 90,996
Balance (in Shares) at Sep. 30, 2015		3,350,477							3,350,477

XML

Consolidated Balance Sheets (Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Available-for-sale, amortized cost (in Dollars)	$ 360,660	$ 373,844
Held-to-maturity, fair value (in Dollars)	$ 153	$ 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	3,515,046	3,481,227
Common stock, shares outstanding	3,350,477	3,316,658
Treasury stock, shares	164,569	164,569

XML

Note 8 - Loans and Allowance for Loan Losses

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2015		2014
Commercial:
Commercial and industrial	$	121,217	$	118,845
Construction		25,681		23,471
Secured by commercial real estate		212,962		203,534
Secured by residential real estate		57,755		53,077
State and political subdivisions		41,443		44,104
Indirect lease financing		9,858		7,685
Retail:
1-4 family residential mortgages		41,691		37,147
Home equity loans and lines		67,341		63,213
Consumer		4,277		4,175
Total loans		582,225		555,251
Net unearned costs (fees)		30		31
Loans receivable	$	582,255	$	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 September 30, 2015 and December 31, 2014, overdrafts were approximately $214,000 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 September 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 September 30, 2015 and December 31, 2014:

September 30, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	115,993	$	329	$	4,895	$	-	$	121,217
Construction		25,661		-		20		-		25,681
Secured by commercial real estate		196,047		2,019		14,896		-		212,962
Secured by residential real estate		54,866		711		2,178		-		57,755
State and political subdivisions		40,170		-		1,273		-		41,443
Indirect lease financing		9,658		-		200		-		9,858
	$	442,395	$	3,059	$	23,462	$	-	$	468,916

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 September 30, 2015 and December 31, 2014:

September 30, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	41,399	$	292	$	41,691
Home equity loans and lines		67,210		131		67,341
Consumer		4,250		27		4,277
	$	112,859	$	450	$	113,309

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 September 30, 2015 and December 31, 2014:

September 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	$	54		-		-	$	54	$	121,163	$	121,217
Construction		-		-		-		-		25,681		25,681
Secured by commercial real estate		-	$	65	$	1,075		1,140		211,822		212,962
Secured by residential real estate		102		512		164		778		56,977		57,755
State and political subdivisions		-		-		-		-		41,443		41,443
Indirect lease financing		66		26		133		225		9,633		9,858
Retail:
1-4 family residential mortgages		-		59		-		59		41,632		41,691
Home equity loans and lines		94		-		45		139		67,202		67,341
Consumer		32		28		-		60		4,217		4,277
	$	348	$	690	$	1,417	$	2,455	$	579,770	$	582,225

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 September 30, 2015 and December 31, 2014:

September 30, 2015	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	3,488
Construction		-		-
Secured by commercial real estate		-		2,621
Secured by residential real estate		-		1,443
State and political subdivisions		-		-
Indirect lease financing	$	52		80
Retail:
1-4 family residential mortgages		-		292
Home equity loans and lines		-		131
Consumer		-		27
	$	52	$	8,082

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 September 30, 2015 and 2014 are as follows:

Three months ended September 30, 2015	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,603	$	(79	)	$	-		$	11	$	1,535
Construction		149		118			-			-		267
Secured by commercial real estate		2,655		(494	)		-			3		2,164
Secured by residential real estate		1,635		(53	)		(4	)		2		1,580
State and political subdivisions		232		(4	)		-			-		228
Indirect lease financing		121		(4	)		-			5		122
Retail:
1-4 family residential mortgages		313		(7	)		-			-		306
Home equity loans and lines		474		(28	)		-			4		450
Consumer		71		18			(17	)		10		82
Unallocated		402		533			N/A			N/A		935
	$	7,655	$	-		$	(21	)	$	35	$	7,669

Three months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,407	$	(139	)	$	-		$	8	$	2,276
Construction		240		(67	)		-			-		173
Secured by commercial real estate		2,600		(129	)		-			1		2,472
Secured by residential real estate		1,708		555			(452	)		13		1,824
State and political subdivisions		214		(20	)		-			-		194
Loans to depository institutions		1		(1	)		-			-		-
Indirect lease financing		92		(6	)		(14	)		4		76
Retail:
1-4 family residential mortgages		372		39			(92	)		1		320
Home equity loans and lines		520		25			(3	)		5		547
Consumer		67		59			(17	)		12		121
Unallocated		679		(316	)		N/A			N/A		363
	$	8,900	$	-		$	(578	)	$	44	$	8,366

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

Nine months ended September 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	$	(357	)	$	(30	)	$	30	$	1,535
Construction		297		(30	)		-			-		267
Secured by commercial real estate		2,700		(458	)		(85	)		7		2,164
Secured by residential real estate		1,630		251			(321	)		20		1,580
State and political subdivisions		221		7			-			-		228
Indirect lease financing		93		22			(8	)		15		122
Retail:
1-4 family residential mortgages		312		(6	)		-			-		306
Home equity loans and lines		453		(19	)		-			16		450
Consumer		85		33			(58	)		22		82
Unallocated		318		617			N/A			N/A		935
	$	8,001	$	60		$	(502	)	$	110	$	7,669

Nine months ended September 30, 2014	Balance, beginning of period		Provision (credit) for loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,044	$	190		$	(17	)	$	59	$	2,276
Construction		439		(266	)		-			-		173
Secured by commercial real estate		2,898		(427	)		-			1		2,472
Secured by residential real estate		1,632		623			(453	)		22		1,824
State and political subdivisions		186		8			-			-		194
Loans to depository institutions		4		(4	)		-			-		-
Indirect lease financing		103		(20	)		(20	)		13		76
Retail:
1-4 family residential mortgages		303		108			(92	)		1		320
Home equity loans and lines		583		(15	)		(124	)		103		547
Consumer		64		109			(88	)		36		121
Unallocated		669		(306	)		N/A			N/A		363
	$	8,925	$	-		$	(794	)	$	235	$	8,366

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 $626,000 and $1,897,000 as of September 30, 2015 and December 31, 2014, respectively. Non-performing TDRs totaled $1,239,000 and $3,690,000 as of September 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.

	September 30, 2015				December 31, 2014 2013
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	969		-	$	4,588		-
TDRs with an allowance recorded		896	$	588		999	$	813
	$	1,865	$	588	$	5,587	$	813

There was one newly identified TDR during the nine months ended September 30, 2015. QNB granted a concession to an existing retail borrower who was experiencing financial difficulties. As of September 30, 2015 and December 31, 2014, QNB had commitments of $1,939,000 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 $5,000 and $522,000 during the nine months ended September 30, 2015 and 2014, respectively, resulting from loans previously modified as TDRs.

The following tables present loans, by loan class, modified as TDRs during the three and nine months ended September 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 as of the period end indicated.

Three months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-	$	-	$	-
		1	$	142	$	142		-	$	-	$	-

Nine months ended September 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
Retail:
1-4 family residential mortgages		1	$	142	$	142		-		-		-
		1	$	142	$	142		1	$	288	$	233

There were no loans modified as TDRs within 12 months prior to September 30, 2015 for which there was a payment default (60 days or more past due) during the three and nine months ended September 30, 2015. There were no loans modified as TDRs within 12 months prior to September 30, 2014 for which there was a payment default during the three months ended September 30, 2014. There were 12 loans modified as TDRs within 12 months prior to September 20, 2014 with a recorded balance of $658,000 for which there was a payment default during the nine months ended September 30, 2014. All of these loans were either charged off or repaid during the thrid quarter 2014, resulting in $0 recorded balance at September 30, 2014.

The company has one consumer mortgage loan secured by residential real estate for which foreclosure proceedings are in process at September 30, 2015. The recorded investment is $45,000.

The following tables present the balance in the allowance for loan losses at September 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
September 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	$	1,535	$	745	$	790	$	121,217	$	4,188	$	117,029
Construction		267		-		267		25,681		346		25,335
Secured by commercial real estate		2,164		-		2,164		212,962		5,244		207,718
Secured by residential real estate		1,580		89		1,491		57,755		1,443		56,312
State and political subdivisions		228		-		228		41,443		-		41,443
Indirect lease financing		122		-		122		9,858		104		9,754
Retail:
1-4 family residential mortgages		306		33		273		41,691		547		41,144
Home equity loans and lines		450		-		450		67,341		155		67,186
Consumer		82		-		82		4,277		27		4,250
Unallocated		935		N/A		N/A		N/A		N/A		N/A
	$	7,669	$	867	$	5,867	$	582,225	$	12,054	$	570,171

	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 September 30, 2015 and December 31, 2014:

	September 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	$	3,169	$	3,373	$	-	$	5,894	$	6,056	$	-
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		997		1,433		-		903		1,427		-
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		242		253		-		225		250		-
Home equity loans and lines		155		203		-		72		93		-
Consumer		27		27		-		1		1		-
	$	10,284	$	11,440	$	-	$	19,019	$	20,485	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,019	$	1,210	$	745	$	1,221	$	1,419	$	1,095
Construction		-		-		-		-		-		-
Secured by commercial real estate		-		-		-		-		-		-
Secured by residential real estate		446		753		89		664		748		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		-		-		-		-		-		-
Retail:
1-4 family residential mortgages		305		311		33		116		116		4
Home equity loans and lines		-		-		-		57		76		4
Consumer		-		-		-		-		-		-
	$	1,770	$	2,274	$	867	$	2,058	$	2,359	$	1,194
Total:
Commercial:
Commercial and industrial	$	4,188	$	4,583	$	745	$	7,115	$	7,475	$	1,095
Construction		346		347		-		362		444		-
Secured by commercial real estate		5,244		5,700		-		11,546		12,198		-
Secured by residential real estate		1,443		2,186		89		1,567		2,175		91
State and political subdivisions		-		-		-		-		-		-
Indirect lease financing		104		104		-		16		16		-
Retail:
1-4 family residential mortgages		547		564		33		341		366		4
Home equity loans and lines		155		203		-		129		169		4
Consumer		27		27		-		1		1		-
	$	12,054	$	13,714	$	867	$	21,077	$	22,844	$	1,194

	Nine Months Ended September 30, 2015				Year Ended December 31, 2014
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	6,301	$	154	$	9,305	$	331
Construction		410		16		1,050		2
Secured by commercial real estate		7,881		121		12,304		344
Secured by residential real estate		1,522		-		2,452		-
State and political subdivisions		-		-		-		-
Indirect lease financing		22		1		26		1
Retail:
1-4 family residential mortgages		415		4		460		5
Home equity loans and lines		130		1		169		-
Consumer		3		-		2		-
	$	16,684	$	297	$	25,768	$	683

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Oct. 30, 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		3,350,577
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	Sep. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

XML

Note 9 - Fair Value Measurements and Disclosures

9 Months Ended

Sep. 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 September 30, 2015:

September 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	$	-	$	3,625	$	-	$	3,625
Securities available-for-sale
U.S. Government agency securities		-	$	57,490		-	$	57,490
State and municipal securities		-		83,042		-		83,042
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		133,281		-		133,281
Collateralized mortgage obligations (CMOs)		-		73,034		-		73,034
Pooled trust preferred securities		-		-	$	2,600		2,600
Corporate debt securities		-		6,029		-		6,029
Equity securities	$	7,092		-		-		7,092
Total securities available-for-sale	$	7,092	$	352,876	$	2,600	$	362,568
Total recurring fair value measurements	$	7,092	$	356,501	$	2,600	$	366,193
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	903	$	903
Mortgage servicing rights		-		-		135		135
Total nonrecurring fair value measurements	$	-	$	-	$	1,038	$	1,038

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended September 30, 2015. There were also no transfers in or out of level 3 for the same period. There were no losses included in earnings attributable to the change in unrealized gains or losses relating to the available-for-sale securities above with fair value measurements utilizing significant unobservable inputs for the nine-month period ended September 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
September 30, 2015 - Impaired loans	$	793	Appraisal of collateral (1)	Appraisal adjustments (2)		-10% to -100	%
				Liquidation expenses (3)		-10	%
September 30, 2015 - Impaired loans		110	Discounted cash flow (4)	Discount rate		6.375	%
September 30, 2015 - Mortgage servicing rights		135	Discounted cash flow	Remaining term		2 - 23 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 nine months ended September 30, 2015:

	Fair value measurements using
	significant unobservable inputs
	(Level 3)
Balance, January 1, 2015	$	2,439
Payments received		(110	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		271
Transfers in and/or out of Level 3		-
Balance, September 30, 2015	$	2,600

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 September 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 September 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. 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 3.36% to 7.80%. 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 September 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.

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 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
September 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	$	69,704	$	69,704	$	69,704		-		-
Investment securities:
Trading		3,625		3,625		-	$	3,625		-
Available-for-sale		362,568		362,568		7,092		352,876	$	2,600
Held-to-maturity		147		153		-		153		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		320		333		-		333		-
Net loans		574,586		579,168		-		-		579,168
Mortgage servicing rights		522		653		-		-		653
Accrued interest receivable		2,555		2,555		-		2,555		-
Financial liabilities
Deposits with no stated maturities	$	679,580	$	679,580	$	679,580		-	$	-
Deposits with stated maturities		229,094		230,844		-	$	230,844		-
Short-term borrowings		32,588		32,588		32,588		-		-
Accrued interest payable		323		323		-		323		-
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		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Interest income
Interest and fees on loans	$ 6,302,000	$ 5,787,000	$ 18,148,000	$ 16,964,000
Interest and dividends on investment securities (AFS & HTM):
Taxable	1,242,000	1,324,000	3,840,000	3,983,000
Tax-exempt	519,000	541,000	1,474,000	1,712,000
Interest on trading securities	43,000	44,000	124,000	111,000
Interest on interest-bearing balances and other interest income	32,000	45,000	105,000	86,000
Total interest income	8,138,000	7,741,000	23,691,000	22,856,000
Interest on deposits
Interest-bearing demand	170,000	178,000	490,000	486,000
Money market	40,000	35,000	114,000	90,000
Savings	204,000	192,000	600,000	574,000
Time	381,000	416,000	1,166,000	1,226,000
Time of $100 or more	300,000	310,000	890,000	850,000
Interest on short-term borrowings	28,000	25,000	87,000	85,000
Interest on long-term debt				70,000
Total interest expense	1,123,000	1,156,000	3,347,000	3,381,000
Net interest income	7,015,000	6,585,000	20,344,000	19,475,000
Provision for loan losses	0	0	60,000	0
Net interest income after provision for loan losses	7,015,000	6,585,000	20,284,000	19,475,000
Non-interest income
Net gain on sale of investment securities	83,000	180,000	800,000	1,087,000
Net gain on trading activities	36,000	40,000	17,000	155,000
Fees for services to customers	434,000	432,000	1,240,000	1,241,000
ATM and debit card	397,000	378,000	1,153,000	1,113,000
Retail brokerage and advisory income	180,000	138,000	557,000	453,000
Bank-owned life insurance	73,000	74,000	215,000	219,000
Merchant Income	75,000	73,000	226,000	229,000
Net gain on sale of loans	120,000	110,000	302,000	171,000
Other	95,000	92,000	259,000	286,000
Total non-interest income	1,493,000	1,517,000	4,769,000	4,954,000
Non-interest expense
Salaries and employee benefits	2,911,000	2,963,000	8,960,000	8,594,000
Net occupancy	427,000	421,000	1,336,000	1,291,000
Furniture and equipment	424,000	444,000	1,285,000	1,290,000
Marketing	174,000	201,000	596,000	641,000
Third party services	389,000	454,000	1,235,000	1,266,000
Telephone, postage and supplies	182,000	187,000	551,000	544,000
State taxes	173,000	152,000	520,000	456,000
FDIC insurance premiums	162,000	170,000	479,000	507,000
Other	731,000	486,000	1,802,000	1,415,000
Total non-interest expense	5,573,000	5,478,000	16,764,000	16,004,000
Income before income taxes	2,935,000	2,624,000	8,289,000	8,425,000
Provision for income taxes	715,000	580,000	1,999,000	1,913,000
Net income	$ 2,220,000	$ 2,044,000	$ 6,290,000	$ 6,512,000
Earnings per share - basic (in Dollars per share)	$ 0.66	$ 0.62	$ 1.89	$ 1.98
Earnings per share - diluted (in Dollars per share)	0.66	0.62	1.88	1.98
Cash dividends per share (in Dollars per share)	$ 0.29	$ 0.28	$ 0.87	$ 0.84

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Note 3 - Stock-based Compensation and Shareholders' Equity

9 Months Ended

Sep. 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 $18,000 and $17,000 for the three months ended September 30, 2015 and 2014, respectively. Stock-based compensation expense was $64,000 and $60,000 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was approximately $90,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 28 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 September 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 September 30, 2015, there were 184,200 options granted, 55,225 options forfeited, 44,400 options exercised, and 84,575 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 September 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:

Nine months ended September 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 nine months of 2015 and 2014 was $4.38 and $3.81, respectively.

Stock option activity during the nine months ended September 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		(12,150	)		17.81
Forfeited		(12,650	)		31.87
Outstanding at September 30, 2015		84,575		$	24.25		2.50	$	444
Exercisable at September 30, 2015		30,375		$	20.87		0.89	$	262

	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		(19,425	)		17.76
Forfeited		(24,625	)		29.35
Outstanding at September 30, 2014		91,750		$	23.52		3.33	$	172
Exercisable at September 30, 2014		87,893		$	23.53		2.10	$	384

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Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 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. The adoption of this guidance did not have a material impact on QNB’s 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)

9 Months Ended

Sep. 30, 2015

Disclosure Text Block [Abstract]

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

	September 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	2,284		$	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		1,908			1,375
Tax effect		(648	)		(468	)
Accumulated other comprehensive income, net of tax	$	1,260		$	907

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

Three months ended September 30,	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	$	83		$	180		Net gain on sale of investment securities
Tax effect		(29	)		(61	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	54		$	119		Net of tax

Nine months ended September 30,	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	$	800		$	1,087		Net gain on sale of investment securities
Tax effect		(273	)		(370	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	527		$	717		Net of tax

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

9 Months Ended

Sep. 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:

	September 30,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	233,308	$	203,496
Standby letters of credit		9,650		6,276
Total financial instrument commitments	$	242,958	$	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 September 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

9 Months Ended

Sep. 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 September 30, 2015 and December 31, 2014:

	September 30,			December 31,
	2015			2014
Unrealized net holding gains on available-for-sale securities	$	2,284		$	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		1,908			1,375
Tax effect		(648	)		(468	)
Accumulated other comprehensive income, net of tax	$	1,260		$	907

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

Three months ended September 30,	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	$	83		$	180		Net gain on sale of investment securities
Tax effect		(29	)		(61	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	54		$	119		Net of tax

Nine months ended September 30,	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	$	800		$	1,087		Net gain on sale of investment securities
Tax effect		(273	)		(370	)	Provision for income taxes
Total reclass out of accumulated other comprehensive income, net of tax	$	527		$	717		Net of tax

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Note 9 - Fair Value Measurements and Disclosures (Details) - Financial and Off-balance Sheet Instruments - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014	Dec. 31, 2013
Financial assets
Cash and cash equivalents	$ 69,704	$ 18,245	$ 65,417	$ 16,286
Cash and cash equivalents	69,704	18,245
Investment securities:
Trading	3,625	4,207
Investment securities available-for-sale	362,568	375,219
Held-to-maturity	147	146
Held-to-maturity	153	156
Restricted investment in bank stocks	508	647
Restricted investment in bank stocks	508	647
Loans held-for-sale	320	380
Loans held-for-sale	333	394
Net loans	574,586	547,281
Net loans	579,168	544,126
Mortgage servicing rights	522	504
Mortgage servicing rights	653	601
Accrued interest receivable	2,555	2,568
Accrued interest receivable	2,555	2,568
Financial liabilities
Deposits	908,674	851,592
Short-term borrowings	32,588	35,189
Short-term borrowings	32,588	35,189
Accrued interest payable	323	344
Accrued interest payable	323	344
With No Stated Maturities [Member]
Financial liabilities
Deposits	679,580	608,345
Deposits	679,580	608,345
With Stated Maturities [Member]
Financial liabilities
Deposits	229,094	243,247
Deposits	230,844	244,152
Fair Value, Inputs, Level 1 [Member]
Financial assets
Cash and cash equivalents	69,704	18,245
Investment securities:
Investment securities available-for-sale	7,092	7,655
Financial liabilities
Short-term borrowings	32,588	35,189
Fair Value, Inputs, Level 1 [Member] | With No Stated Maturities [Member]
Financial liabilities
Deposits	679,580	608,345
Fair Value, Inputs, Level 2 [Member]
Investment securities:
Trading	3,625	4,207
Investment securities available-for-sale	352,876	365,125
Held-to-maturity	153	156
Restricted investment in bank stocks	508	647
Loans held-for-sale	333	394
Accrued interest receivable	2,555	2,568
Financial liabilities
Accrued interest payable	323	344
Fair Value, Inputs, Level 2 [Member] | With Stated Maturities [Member]
Financial liabilities
Deposits	230,844	244,152
Fair Value, Inputs, Level 3 [Member]
Investment securities:
Investment securities available-for-sale	2,600	2,439
Net loans	579,168	544,126
Mortgage servicing rights	$ 653	$ 601

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Note 4 - Share Repurchase Plan

9 Months Ended

Sep. 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 nine months ended September 30, 2015 and 2014. As of September 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

9 Months Ended

Sep. 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 September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Numerator for basic and diluted earnings per share - net income	$	2,220	$	2,044	$	6,290	$	6,512
Denominator for basic earnings per share - weighted average shares outstanding		3,343,011		3,298,057		3,332,650		3,286,438
Effect of dilutive securities - employee stock options		13,778		11,408		12,980		9,766
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		3,356,789		3,309,465		3,345,630		3,296,204
Earnings per share - basic	$	0.66	$	0.62	$	1.89	$	1.98
Earnings per share - diluted	$	0.66	$	0.62		1.88	$	1.98

There were 21,000 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2015. There were 31,450 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2014. These stock options were not included in the above calculation.

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Note 7 - Investment Securities

9 Months Ended

Sep. 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 gains of $36,000 and $40,000 recorded for the three months ended September 30, 2015 and 2014, respectively. There were net realized and unrealized gains of $17,000 and $155,000 recorded for the nine months ended September 30, 2015 and 2014, respectively. Unrealized gains on trading activity related to trading securities still held at September 30, 2015 and December 31, 2014 totaled $29,000 and $24,000, respectively. Interest and dividends are included in interest income.

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

	September 30,		December 31,
	2015		2014
State and municipal securities	$	3,625	$	4,207

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

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2015	value		gains		losses			cost
U.S. Government agency	$	57,490	$	308	$	(44	)	$	57,226
State and municipal		83,042		1,493		(85	)		81,634
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		133,281		1,793		(203	)		131,691
Collateralized mortgage obligations (CMOs)		73,034		494		(599	)		73,139
Pooled trust preferred		2,600		215		(1,024	)		3,409
Corporate debt		6,029		23		(11	)		6,017
Equity		7,092		309		(761	)		7,544
Total investment securities available-for-sale	$	362,568	$	4,635	$	(2,727	)	$	360,660

			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 September 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
September 30, 2015	Fair value		cost
Due in one year or less	$	5,954	$	5,910
Due after one year through five years		245,136		243,167
Due after five years through ten years		82,140		81,254
Due after ten years		22,246		22,785
Equity securities		7,092		7,544
Total investment securities available-for-sale	$	362,568	$	360,660

For the three months ended September 30, 2015 and 2014, proceeds from sales of investment securities available-for-sale were approximately $685,000 and $534,000. Proceeds from sales of investment securities available-for-sale were approximately $27,480,000 and $19,504,000 for the nine months ended September 30, 2015 and 2014, respectively.

At September 30, 2015 and December 31, 2014, investment securities available-for-sale totaling approximately $238,281,000 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 September 30, 2015								Three months ended September 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	$	83	$	-	$	-	$	83	$	181	$	-		$	-	$	181
Debt securities		-		-		-		-		-		(1	)		-		(1	)
Total	$	83	$	-	$	-	$	83	$	181	$	(1	)	$	-	$	180

	Nine months ended September 30, 2015									Nine months ended September 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	$	713	$	(23	)	$	-	$	690	$	1,051	$	(6	)	$	-	$	1,045
Debt securities		154		(44	)		-		110		137		(95	)		-		42
Total	$	867	$	(67	)	$	-	$	800	$	1,188	$	(101	)	$	-	$	1,087

The tax expense applicable to the net realized gains for the nine-month periods ended September 30, 2015 and 2014 amounted to approximately $273,000 and $370,000, 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 nine 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:

Nine months ended September 30,	2015		2014
Balance, beginning of period	$	1,153	$	1,271
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 September 30, 2015 and December 31, 2014 were as follows:

Held-To-Maturity

September 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

$

147

$

6

-

$

153

$

146

$

10

-

$

156

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at September 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
September 30, 2015	Fair value		cost
Due in one year or less
Due after one year through five years	$	153	$	147
Due after five years through ten years		-		-
Due after ten years		-		-
Total investment securities held-to-maturity	$	153	$	147

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

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

September 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		11	$	10,330	$	(23	)	$	4,477	$	(21	)	$	14,807	$	(44	)
State and municipal		37		11,973		(58	)		2,688		(27	)		14,661		(85	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		24		34,497		(171	)		1,469		(32	)		35,966		(203	)
Collateralized mortgage obligations (CMOs)		30		5,259		(19	)		26,858		(580	)		32,117		(599	)
Pooled trust preferred		5		-		-			2,131		(1,024	)		2,131		(1,024	)
Corporate debt		2		2,003		(11	)		-		-			2,003		(11	)
Equity		23		5,232		(683	)		190		(78	)		5,422		(761	)
Total		132	$	69,294	$	(965	)	$	37,813	$	(1,762	)	$	107,107	$	(2,727	)

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 September 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 September 30, 2015. These securities have a total amortized cost of approximately $3,409,000 and a fair value of $2,600,000. 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 September 30, 2015:

Deal	Class	Book value		Fair value		Unreal-ized 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	$	217	$	(26	)	$	-	$	(1	)	B1/BB		5		-		18.0	%		140.7	%
PreTSL XVII	Mezzanine		705		523		(182	)		-		(222	)	C/CC		33		5		26.7			91.2
PreTSL XIX	Mezzanine		987		554		(433	)		-		-		Caa3/CC		40		12		12.2			94.8
PreTSL XXV	Mezzanine		766		480		(286	)		-		(222	)	C/C		46		5		28.3			88.8
PreTSL XXVI	Mezzanine		454		357		(97	)		-		(270	)	Caa3/C		42		7		21.0			94.4
PreTSL XXVI	Mezzanine		254		469		215			-		(438	)	Caa3/C		42		7		21.0			94.4
		$	3,409	$	2,600	$	(809	)	$	-	$	(1,153	)

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

On January 14, 2014, Federal bank regulatory agencies 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 September 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 nine months ended September 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. 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. We then assumed any holding company that could refinance for a cost savings of more than 2% will refinance and will do so as soon as possible. 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 September 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 write-downs 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		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Computation of Basic and Diluted Earnings Per Share [Abstract]
Numerator for basic and diluted earnings per share - net income (in Dollars)	$ 2,220	$ 2,044	$ 6,290	$ 6,512
Denominator for basic earnings per share - weighted average shares outstanding	3,343,011	3,298,057	3,332,650	3,286,438
Effect of dilutive securities - employee stock options	13,778	11,408	12,980	9,766
Denominator for diluted earnings per share - adjusted weighted average shares outstanding	3,356,789	3,309,465	3,345,630	3,296,204
Earnings per share - basic (in Dollars per share)	$ 0.66	$ 0.62	$ 1.89	$ 1.98
Earnings per share - diluted (in Dollars per share)	$ 0.66	$ 0.62	$ 1.88	$ 1.98

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Note 8 - Loans and Allowance for Loan Losses (Details) - Allowance for Loan Losses - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Commercial:
Allowance for loan losses, beginning of period	$ 7,655	$ 8,900	$ 8,001	$ 8,925
Provision for (credit to) loan losses	0	0	60	0
Charge-offs	(21)	(578)	(502)	(794)
Recoveries	35	44	110	235
Allowance for loan losses, end of period	7,669	8,366	7,669	8,366
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	1,603	2,407	1,892	2,044
Provision for (credit to) loan losses	(79)	(139)	(357)	190
Charge-offs	0	0	(30)	(17)
Recoveries	11	8	30	59
Allowance for loan losses, end of period	1,535	2,276	1,535	2,276
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	149	240	297	439
Provision for (credit to) loan losses	118	(67)	(30)	(266)
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	267	173	267	173
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Commercial:
Allowance for loan losses, beginning of period	2,655	2,600	2,700	2,898
Provision for (credit to) loan losses	(494)	(129)	(458)	(427)
Charge-offs	0	0	(85)	0
Recoveries	3	1	7	1
Allowance for loan losses, end of period	2,164	2,472	2,164	2,472
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Allowance for loan losses, beginning of period	1,635	1,708	1,630	1,632
Provision for (credit to) loan losses	(53)	555	251	623
Charge-offs	(4)	(452)	(321)	(453)
Recoveries	2	13	20	22
Allowance for loan losses, end of period	1,580	1,824	1,580	1,824
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period	232	214	221	186
Provision for (credit to) loan losses	(4)	(20)	7	8
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	228	194	228	194
Finance Leases Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period	121	92	93	103
Provision for (credit to) loan losses	(4)	(6)	22	(20)
Charge-offs	0	(14)	(8)	(20)
Recoveries	5	4	15	13
Allowance for loan losses, end of period	122	76	122	76
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Allowance for loan losses, beginning of period	313	372	312	303
Provision for (credit to) loan losses	(7)	39	(6)	108
Charge-offs	0	(92)	0	(92)
Recoveries	0	1	0	1
Allowance for loan losses, end of period	306	320	306	320
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Allowance for loan losses, beginning of period	474	520	453	583
Provision for (credit to) loan losses	(28)	25	(19)	(15)
Charge-offs	0	(3)	0	(124)
Recoveries	4	5	16	103
Allowance for loan losses, end of period	450	547	450	547
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Allowance for loan losses, beginning of period	71	67	85	64
Provision for (credit to) loan losses	18	59	33	109
Charge-offs	(17)	(17)	(58)	(88)
Recoveries	10	12	22	36
Allowance for loan losses, end of period	82	121	82	121
Unallocated Financing Receivables [Member]
Commercial:
Allowance for loan losses, beginning of period	402	679	318	669
Provision for (credit to) loan losses	533	(316)	617	(306)
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	$ 935	363	$ 935	363
Loans to Depository Institutions Portfolio Segment [Member]
Commercial:
Allowance for loan losses, beginning of period		1		4
Provision for (credit to) loan losses		(1)		(4)
Charge-offs		0		0
Recoveries		0		0
Allowance for loan losses, end of period		$ 0		$ 0

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

9 Months Ended

Sep. 30, 2015

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

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

Nine months ended September 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		(12,150	)		17.81
Forfeited		(12,650	)		31.87
Outstanding at September 30, 2015		84,575		$	24.25		2.50	$	444
Exercisable at September 30, 2015		30,375		$	20.87		0.89	$	262

	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		(19,425	)		17.76
Forfeited		(24,625	)		29.35
Outstanding at September 30, 2014		91,750		$	23.52		3.33	$	172
Exercisable at September 30, 2014		87,893		$	23.53		2.10	$	384

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Note 9 - Fair Value Measurements and Disclosures (Tables)

9 Months Ended

Sep. 30, 2015

Fair Value Disclosures [Abstract]

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

September 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	$	-	$	3,625	$	-	$	3,625
Securities available-for-sale
U.S. Government agency securities		-	$	57,490		-	$	57,490
State and municipal securities		-		83,042		-		83,042
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		-		133,281		-		133,281
Collateralized mortgage obligations (CMOs)		-		73,034		-		73,034
Pooled trust preferred securities		-		-	$	2,600		2,600
Corporate debt securities		-		6,029		-		6,029
Equity securities	$	7,092		-		-		7,092
Total securities available-for-sale	$	7,092	$	352,876	$	2,600	$	362,568
Total recurring fair value measurements	$	7,092	$	356,501	$	2,600	$	366,193
Nonrecurring fair value measurements
Impaired loans	$	-	$	-	$	903	$	903
Mortgage servicing rights		-		-		135		135
Total nonrecurring fair value measurements	$	-	$	-	$	1,038	$	1,038

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
September 30, 2015 - Impaired loans	$	793	Appraisal of collateral (1)	Appraisal adjustments (2)		-10% to -100	%
				Liquidation expenses (3)		-10	%
September 30, 2015 - Impaired loans		110	Discounted cash flow (4)	Discount rate		6.375	%
September 30, 2015 - Mortgage servicing rights		135	Discounted cash flow	Remaining term		2 - 23 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		(110	)
Total gains or losses (realized/unrealized)
Included in earnings		-
Included in other comprehensive income		271
Transfers in and/or out of Level 3		-
Balance, September 30, 2015	$	2,600

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

					Fair value measurements
September 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	$	69,704	$	69,704	$	69,704		-		-
Investment securities:
Trading		3,625		3,625		-	$	3,625		-
Available-for-sale		362,568		362,568		7,092		352,876	$	2,600
Held-to-maturity		147		153		-		153		-
Restricted investment in bank stocks		508		508		-		508		-
Loans held-for-sale		320		333		-		333		-
Net loans		574,586		579,168		-		-		579,168
Mortgage servicing rights		522		653		-		-		653
Accrued interest receivable		2,555		2,555		-		2,555		-
Financial liabilities
Deposits with no stated maturities	$	679,580	$	679,580	$	679,580		-	$	-
Deposits with stated maturities		229,094		230,844		-	$	230,844		-
Short-term borrowings		32,588		32,588		32,588		-		-
Accrued interest payable		323		323		-		323		-
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	Sep. 30, 2015	Dec. 31, 2014
Commercial:
Loans past due	$ 2,455	$ 6,703
Loans current	579,770	548,548
Loans	582,225	555,251
Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	348	1,993
Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	690	963
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	1,417	3,747
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member]
Commercial:
Loans past due	54
Loans current	121,163	118,845
Loans	121,217	118,845
Commercial Portfolio Segment [Member] | Commercial and Industrial Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	54
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Commercial:
Loans past due		466
Loans current	25,681	23,005
Loans	25,681	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	1,140	4,107
Loans current	211,822	199,427
Loans	212,962	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		28
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	65	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	1,075	3,747
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Commercial:
Loans past due	778	1,174
Loans current	56,977	51,903
Loans	57,755	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	102	600
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	512	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	164
State and Political Subdivisions Portfolio Segment [Member]
Commercial:
Loans current	41,443	44,104
Loans	41,443	44,104
Finance Leases Portfolio Segment [Member]
Commercial:
Loans past due	225	291
Loans current	9,633	7,394
Loans	9,858	7,685
Finance Leases Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	66	291
Finance Leases Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	26
Finance Leases Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	133
Retail Portfolio Segment [Member]
Commercial:
Loans	113,309	104,535
Retail Portfolio Segment [Member] | 1-4 Family Residential Mortgages [Member]
Commercial:
Loans past due	59	526
Loans current	41,632	36,621
Loans	41,691	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, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	59
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Commercial:
Loans past due	139	115
Loans current	67,202	63,098
Loans	67,341	63,213
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	94	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] | Home Equity Loan [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Commercial:
Loans past due	45
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Commercial:
Loans past due	60	24
Loans current	4,217	4,151
Loans	4,277	4,175
Retail Portfolio Segment [Member] | Consumer Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Commercial:
Loans past due	32	16
Retail Portfolio Segment [Member] | Consumer Loans [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Commercial:
Loans past due	$ 28	$ 8

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Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains	$ 83	$ 181	$ 867	$ 1,188
Gross realized losses		(1)	(67)	(101)
Net gains	83	180	800	1,087
Equity Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains	83	181	713	1,051
Gross realized losses			(23)	(6)
Net gains	$ 83	181	690	1,045
Debt Securities [Member]
Note 7 - Investment Securities (Details) - Gross Realized Losses on Equity and Debt Securities [Line Items]
Gross realized gains			154	137
Gross realized losses		(1)	(44)	(95)
Net gains		$ (1)	$ 110	$ 42

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net income	$ 2,935	$ 2,624	$ 8,289	$ 8,425
Net unrealized holding gains on securities:
Unrealized holding gains arising during the period	1,547	1,321	1,333	5,819
Reclassification adjustment for gains included in net income	(83)	(180)	(800)	(1,087)
Other comprehensive income	1,464	1,141	533	4,732
Total comprehensive income	$ 4,399	$ 3,765	$ 8,822	$ 13,157

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 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 nine month periods ended September 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 September 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		9 Months Ended		12 Months Ended
		Sep. 30, 2015		Dec. 31, 2014
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		$ 1,038		$ 3,827
Nonrecurring fair value measurements		1,038		3,827
Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		903		3,715
Nonrecurring fair value measurements		903		3,715
Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		135		112
Nonrecurring fair value measurements		135		112
Fair Value, Inputs, Level 3 [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		1,038		3,827
Nonrecurring fair value measurements		1,038		3,827
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		903		3,715
Nonrecurring fair value measurements		903		3,715
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Fair Value (in Dollars)		135		112
Nonrecurring fair value measurements		135		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)	[1],[2]	$ 793		$ 953
Appraisal adjustments	[1],[2]
Nonrecurring fair value measurements	[1],[2]	$ 793		$ 953
Liquidation expenses	[3]	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)	[4]	$ 110	[3]	$ 112
Nonrecurring fair value measurements	[4]	$ 110	[3]	$ 112
Discount rate	[4]	6.375%	[3]	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)		$ 135		$ 112
Nonrecurring fair value measurements		$ 135		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)	[5]			2,650
Nonrecurring fair value measurements	[5]			$ 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	[1],[2]	10.00%		20.00%
Liquidation expenses	[3]
Fair Value, Inputs, Level 3 [Member] | Minimum [Member] | Market Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Discount rate	[4]		[3]
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	[1],[2]	100.00%		100.00%
Liquidation expenses	[3]
Fair Value, Inputs, Level 3 [Member] | Maximum [Member] | Market Approach Valuation Technique [Member] | Impaired Loans [Member]
Fair Value Inputs, Assets, Quantitative Information [Line Items]
Discount rate	[4]		[3]
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		23 years		28 years

[1] 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.

[2] 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.

[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.

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

9 Months Ended

Sep. 30, 2015

Commitments and Contingencies Disclosure [Abstract]

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

	September 30,		December 31,
	2015		2014
Commitments to extend credit and unused lines of credit	$	233,308	$	203,496
Standby letters of credit		9,650		6,276
Total financial instrument commitments	$	242,958	$	209,772

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Note 7 - Investment Securities (Details) - Trading Securities - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Schedule of Trading Securities and Other Trading Assets [Line Items]
State and municipal securities	$ 3,625	$ 4,207
US States and Political Subdivisions Debt Securities [Member]
Schedule of Trading Securities and Other Trading Assets [Line Items]
State and municipal securities	$ 3,625	$ 4,207

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Note 11 - Regulatory Restrictions

9 Months Ended

Sep. 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 both State and Federal 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 bank regulatory agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements and the amount of dividens that can be paid to shareholders. 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 September 30, 2015, that the Company and the Bank met capital adequacy requirements to which they were subject.

The Bank is presently considered it to be “well capitalized” under the regulatory framework. 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 September 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	97,163		13.01	%	$	59,765		8.00	%	$	74,706		10.00	%
Bank		89,971		12.40			58,057		8.00			72,571		10.00
Tier I capital (to risk-weighted assets):
Consolidated		89,435		11.97			44,824		6.00			44,824		6.00
Bank		82,243		11.33			43,543		6.00			58,057		8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		89,435		11.97			33,618		4.50			N/A		N/A
Bank		82,243		11.33			32,657		4.50			47,171		6.50
Tier I capital (to average assets):
Consolidated		89,435		8.99			39,811		4.00			N/A		N/A
Bank		82,243		8.32			39,522		4.00			49,403		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