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, 2016            

OR

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

For the transition period from to

Commission file number 0-17706

QNB Corp.

(Exact Name of Registrant as Specified in Its Charter)

Pennsylvania	23-2318082
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

15 North Third Street, P.O. Box 9005 Quakertown, PA	18951-9005
(Address of Principal Executive Offices)	(Zip Code)

(215) 538-5600

Registrant's Telephone Number, Including Area Code

Not Applicable

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

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 November 1, 2016
Common Stock, par value $0.625	3,401,488

QNB CORP. AND SUBSIDIARY

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2016

INDEX

	PART I - FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)	PAGE
	Consolidated Balance Sheets at September 30, 2016 and December 31, 2015	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2016 and 2015	6
	Consolidated Statement of Shareholders’ Equity for the Nine Months Ended September 30, 2016 and 2015	7
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	8
	Notes to Consolidated Financial Statements	9
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	40
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	61
ITEM 4.	CONTROLS AND PROCEDURES	61
	PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	62
ITEM 1A.	RISK FACTORS	62
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	62
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	62
ITEM 4.	MINE SAFETY DISCLOSURES	62
ITEM 5.	OTHER INFORMATION	62
ITEM 6.	EXHIBITS	63
SIGNATURES
CERTIFICATIONS

2

QNB Corp. and Subsidiary

CONSOLIDATED BALANCE SHEETS

	(in thousands, except share data)
	(current period unaudited)
	September 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	12,437		$	9,159
Interest-bearing deposits in banks		56,991			7,832
Total cash and cash equivalents		69,428			16,991
Investment securities
Trading		4,312			4,189
Available-for-sale (amortized cost $365,367 and $362,742)		368,834			361,915
Held-to-maturity (fair value $147 and $151)		147			147
Restricted investment in bank stocks		522			508
Loans held-for-sale		456			987
Loans receivable		608,231			615,270
Allowance for loan losses		(7,593	)		(7,554	)
Net loans		600,638			607,716
Bank-owned life insurance		11,206			10,978
Premises and equipment, net		8,777			9,257
Accrued interest receivable		2,573			2,562
Net deferred tax assets		2,334			3,673
Other assets		2,704			2,013
Total assets	$	1,071,931		$	1,020,936
Liabilities
Deposits
Demand, non-interest bearing	$	105,029		$	98,543
Interest-bearing demand		291,228			274,925
Money market		72,756			67,172
Savings		229,323			221,770
Time		132,128			135,251
Time of $100 or more		96,248			92,125
Total deposits		926,712			889,786
Short-term borrowings		41,179			37,163
Accrued interest payable		310			330
Other liabilities		5,734			3,214
Total liabilities		973,935			930,493
Shareholders' Equity
Common stock, par value $0.625 per share;
authorized 10,000,000 shares; 3,564,657 shares and 3,524,363
shares issued; 3,400,088 and 3,359,794 shares outstanding		2,228			2,203
Surplus		17,057			15,973
Retained earnings		78,899			75,289
Accumulated other comprehensive income (loss), net of tax		2,288			(546	)
Treasury stock, at cost; 164,569 shares		(2,476	)		(2,476	)
Total shareholders' equity		97,996			90,443
Total liabilities and shareholders' equity	$	1,071,931		$	1,020,936

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,
	2016			2015		2016			2015
Interest income
Interest and fees on loans	$	6,376		$	6,302	$	19,060		$	18,148
Interest and dividends on investment securities (AFS & HTM):
Taxable		1,317			1,242		3,964			3,840
Tax-exempt		478			519		1,483			1,474
Interest on trading securities		36			43		106			124
Interest on interest-bearing balances and other interest income		80			32		138			105
Total interest income		8,287			8,138		24,751			23,691
Interest expense
Interest on deposits
Interest-bearing demand		177			170		492			490
Money market		48			40		142			114
Savings		233			204		688			600
Time		378			381		1,122			1,166
Time of $100 or more		330			300		967			890
Interest on short-term borrowings		36			28		115			87
Total interest expense		1,202			1,123		3,526			3,347
Net interest income		7,085			7,015		21,225			20,344
Provision for loan losses		—			—		125			60
Net interest income after provision for loan losses		7,085			7,015		21,100			20,284
Non-interest income
Total other-than-temporary impairment loss on investment securities		—			—		(192	)		—
Less:  Portion of loss recognized in other comprehensive income (before taxes)		—			—		—			—
Net other-than temporary impairment losses on investment securities		—			—		(192	)		—
Net gain on sale of investment securities		316			83		842			800
Net gain on investment securities		316			83		650			800
Net (loss) gain on trading activities		(39	)		36		47			17
Fees for services to customers		425			434		1,205			1,240
ATM and debit card		419			397		1,229			1,153
Retail brokerage and advisory		129			180		425			557
Bank-owned life insurance		73			73		217			215
Merchant		86			75		242			226
Net gain on sale of loans		143			120		263			302
Other		92			95		316			259
Total non-interest income		1,644			1,493		4,594			4,769
Non-interest expense
Salaries and employee benefits		3,072			2,911		9,114			8,960
Net occupancy		438			427		1,305			1,336
Furniture and equipment		437			424		1,302			1,285
Marketing		220			174		681			596
Third party services		440			389		1,246			1,235
Telephone, postage and supplies		189			182		549			551
State taxes		178			173		499			520
FDIC insurance premiums		162			162		489			479
Other		480			731		1,543			1,802
Total non-interest expense		5,616			5,573		16,728			16,764
Income before income taxes		3,113			2,935		8,966			8,289
Provision for income taxes		821			715		2,311			1,999
Net income	$	2,292		$	2,220	$	6,655		$	6,290
Earnings per share - basic	$	0.68		$	0.66	$	1.97		$	1.89
Earnings per share - diluted	$	0.67		$	0.66	$	1.96		$	1.88
Cash dividends per share	$	0.30		$	0.29	$	0.90		$	0.87

4

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

5

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	(in thousands - unaudited)
Three months ended September 30,	2016									2015
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	3,113		$	821		$	2,292		$	2,935		$	715		$	2,220
Other comprehensive income:
Net unrealized holding (losses) gains on securities:
Unrealized holding (losses) gains arising during the period		(875	)		(298	)		(577	)		1,547			526			1,021
Reclassification adjustment for gains included in net income		(316	)		(107	)		(209	)		(83	)		(29	)		(54	)
Other comprehensive (loss) income		(1,191	)		(405	)		(786	)		1,464			497			967
Total comprehensive income	$	1,922		$	416		$	1,506		$	4,399		$	1,212		$	3,187

Nine months ended September 30,	2016									2015
	Before tax amount			Tax expense (benefit)			Net of tax amount			Before tax amount			Tax expense (benefit)			Net of tax amount
Net income	$	8,966		$	2,311		$	6,655		$	8,289		$	1,999		$	6,290
Other comprehensive income:
Net unrealized holding gains on securities:
Unrealized holding  gains arising during the period		4,944			1,681			3,263			1,333			453			880
Reclassification adjustment for gains included in net income		(650	)		(221	)		(429	)		(800	)		(273	)		(527	)
Other comprehensive income		4,294			1,460			2,834			533			180			353
Total comprehensive income	$	13,260		$	3,771		$	9,489		$	8,822		$	2,179		$	6,643

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

6

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Nine months ended September 30, 2016 and 2015

										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, 2015		3,359,794	$	2,203	$	15,973	$	75,289		$	(546	)	$	(2,476	)	$	90,443
Net income				—		—		6,655			—			—			6,655
Other comprehensive income, net of tax				—		—		—			2,834			—			2,834
Cash dividends declared ($0.90 per share)				—		—		(3,045	)		—			—			(3,045	)
Stock issued in connection with dividend    reinvestment and stock purchase plan		24,886		15		738		—			—			—			753
Stock issued for employee stock purchase    plan		1,540		1		40		—			—			—			41
Stock issued for options exercised		13,868		9		234		—			—			—			243
Tax benefit of stock options exercised				—		12		—			—			—			12
Stock-based compensation expense				—		60		—			—			—			60
Balance, September 30, 2016		3,400,088	$	2,228	$	17,057	$	78,899		$	2,288		$	(2,476	)	$	97,996

										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

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

7

QNB Corp. and Subsidiary

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(in thousands, unaudited)
Nine months ended September 30,	2016			2015
Operating Activities
Net income	$	6,655		$	6,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		668			769
Provision for loan losses		125			60
Net gain on investment securities available-for-sale		(650	)		(800	)
Net (gain) loss on sale of other real estate owned, repossessed assets and premises and equipment		(2	)		17
Net gain on sale of loans		(263	)		(302	)
Proceeds from sales of residential mortgages held-for-sale		7,188			9,595
Origination of residential mortgages held-for-sale		(6,394	)		(9,233	)
Income on bank-owned life insurance		(217	)		(215	)
Stock-based compensation expense		60			64
Net (increase) decrease in trading securities		(123	)		582
Deferred income tax provision		(121	)		66
Net increase in income taxes payable		141			17
Net (increase) decrease in accrued interest receivable		(11	)		13
Amortization of mortgage servicing rights and change in valuation allowance		59			53
Net amortization of premiums and discounts on investment securities		1,396			1,583
Net decrease in accrued interest payable		(20	)		(21	)
Increase in other assets		(775	)		(364	)
Increase (decrease) in other liabilities		329			(908	)
Net cash provided by operating activities		8,045			7,266
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale		85,046			68,472
Proceeds from the sale of investment securities available-for-sale		31,892			27,480
Purchases of investment securities available-for-sale		(118,245	)		(79,565	)
Proceeds from redemption of investment in restricted bank stock		1,482			1,318
Purchase of restricted bank stock		(1,496	)		(1,179	)
Net decrease (increase) in loans		6,953			(27,580	)
Net purchases of premises and equipment		(188	)		(413	)
Proceeds from sales of other real estate owned and repossessed assets		2			3,244
Net cash provided by (used in) investing activities		5,446			(8,223	)
Financing Activities
Net increase in non-interest bearing deposits		6,486			11,172
Net increase in interest-bearing deposits		30,440			45,910
Net increase (decrease) in short-term borrowings		4,016			(2,601	)
Tax benefit from exercise of stock options		12			20
Cash dividends paid, net of reinvestment		(2,662	)		(2,579	)
Proceeds from issuance of common stock		654			494
Net cash provided by financing activities		38,946			52,416
Increase in cash and cash equivalents		52,437			51,459
Cash and cash equivalents at beginning of year		16,991			16,991
Cash and cash equivalents at end of period	$	69,428		$	68,450
Supplemental Cash Flow Disclosures
Interest paid	$	3,546		$	3,368
Income taxes paid		2,227			1,904
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned		-			215
Unsettled trades to purchase securities		2,558			3,987

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

8

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 2015 Annual Report incorporated in the Form 10-K. Operating results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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, 2016, for items that should potentially be recognized or disclosed in these financial statements.

2. RECENT ACCOUNTING PRONOUNCEMENTS

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new standard on accounting for leases introduces a lessee model that brings most leases on the balance sheet, but recognizes expenses in the income statement similar to how items are recorded today. The new standard eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The ASU also eliminates the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities.  All entities will classify leases to determine how to recognize the related revenue and expense and this classification will affect amounts that lessors record on the balance sheet. The new guidance will be effective for public companies for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. QNB is evaluating the impact of this new standard on its consolidated financial statements.

On March 15, 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence.  The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an  available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The guidance in the ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years; early adoption is permitted for all entities. QNB does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal-versus agent implementation guidance and illustrations in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. This ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14).

On March 30, 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the

9

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

income statement when awards vest or are settled which will eliminate additional-paid-in-capital or APIC pools. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. QNB is evaluating this new standard, but does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

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

To that end, the new guidance:

• Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

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

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

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

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

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

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

For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  QNB is evaluating the impact of this new standard on its consolidated financial statements.

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 for both the three months ended September 30, 2016 and 2015. Stock-based compensation expense was $60,000 and $64,000 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was approximately $102,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 29 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 after a three-year period. As of September 30, 2016, 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.

10

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016, there were 184,200 options granted, 65,050 options forfeited, 64,425 options exercised, and 54,725 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 23,500 options granted and outstanding under this Plan as of September 30, 2016. There were no options forfeited or exercised as of September 30, 2016. The 2015 Plan expires on February 24, 2025.

The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of 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,	2016			2015
Risk free interest rate		1.14	%		1.06	%
Dividend yield		3.78	%		3.86	%
Volatility		22.62	%		26.74	%
Expected life (years)		4.20			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 2016 and 2015 was $3.79 and $4.38, respectively.

Stock option activity during the nine months ended September 30, 2016 and 2015 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2015		82,875		$	24.33
Granted		23,500			30.40
Exercised		(18,425	)		20.70
Forfeited		(9,725	)		25.61
Outstanding at September 30, 2016		78,225		$	26.85		2.74	$	560
Exercisable at September 30, 2016		23,100		$	22.38		0.87	$	268

	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

11

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016 and 2015. As of September 30, 2016, 57,883 shares were repurchased under this authorization at an average price of $16.97 and a total cost of $982,000.

5. EARNINGS PER SHARE

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

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Numerator for basic and diluted earnings per share - net    income	$	2,292	$	2,220	$	6,655	$	6,290
Denominator for basic earnings per share - weighted average     shares outstanding		3,391,471		3,343,011		3,381,491		3,332,650
Effect of dilutive securities - employee stock options		12,568		13,778		9,238		12,980
Denominator for diluted earnings per share - adjusted    weighted average shares outstanding		3,404,039		3,356,789		3,390,729		3,345,630
Earnings per share - basic	$	0.68	$	0.66	$	1.97	$	1.89
Earnings per share - diluted		0.67		0.66		1.96		1.88

There were no stock options that were anti-dilutive for the three-month period ended September 30, 2016, and 41,350 anti-dilutive options for the nine months ended September 30, 2016. There were 21,000 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2015. These stock options were not included in the above calculation.

6. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive income (loss) at September 30, 2016 and December 31, 2015:

	September 30,			December 31,
	2016			2015
Unrealized net holding gains (losses) on available-for-sale    securities	$	3,780		$	(568	)
Unrealized losses on available-for-sale securities for which a    portion of an other-than-temporary impairment loss has been    recognized in earnings		(313	)		(259	)
Accumulated other comprehensive income (loss)		3,467			(827	)
Tax effect		(1,179	)		281
Accumulated other comprehensive income (loss), net of tax	$	2,288		$	(546	)

12

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015:

Three months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	316		$	83		Net gain on sale of investment    securities
Tax effect		(108	)		(28	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	208		$	55		Net of tax

Nine months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	842		$	800		Net gain on sale of investment    securities
Other-than-temporary impairment losses on      investment securities		(192	)		-		Net other-than-temporary impairment      losses on investment securities
		650			800
Tax effect		(221	)		(273	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	429		$	527		Net of tax

7. INVESTMENT SECURITIES

QNB engages in trading activities for its own account. Municipal securities that are held principally for resale in the near term are recorded in the trading account at fair value with changes in fair value recorded in non-interest income. There were net realized and unrealized losses of $39,000 recorded for the three months ended September 30, 2016, which compares to net realized and unrealized gains of $36,000 recorded for the three months ended September 30, 2015. There were net realized and unrealized gains of $47,000 and $17,000 recorded for the nine months ended September 30, 2016 and 2015, respectively. Unrealized gains on trading activity related to trading securities still held at September 30, 2016 and December 31, 2015 totaled $13,000 and $31,000, respectively. Interest and dividends are included in interest income.

Trading securities, at fair value, at September 30, 2016 and December 31, 2015 were as follows:

	September 30,		December 31,
	2016		2015
State and municipal securities	$	4,312	$	4,189

13

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and estimated fair values of investment securities available-for-sale at September 30, 2016 and December 31, 2015 were as follows:

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2016	value		gains		losses			cost
U.S. Government agency	$	65,812	$	167	$	(98	)	$	65,743
State and municipal		73,560		1,701		(37	)		71,896
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		132,746		2,277		(11	)		130,480
Collateralized mortgage obligations (CMOs)		79,264		422		(298	)		79,140
Pooled trust preferred		2,275		246		(950	)		2,979
Corporate debt		7,112		50		(8	)		7,070
Equity		8,065		338		(332	)		8,059
Total investment securities available-for-sale	$	368,834	$	5,201	$	(1,734	)	$	365,367

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2015	value		gains		losses			cost
U.S. Government agency	$	61,779	$	88	$	(490	)	$	62,181
State and municipal		78,954		1,554		(31	)		77,431
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,681		944		(920	)		136,657
Collateralized mortgage obligations (CMOs)		65,610		178		(1,178	)		66,610
Pooled trust preferred		2,653		259		(897	)		3,291
Corporate debt		9,004		15		(95	)		9,084
Equity		7,234		516		(770	)		7,488
Total investment securities available-for-sale	$	361,915	$	3,554	$	(4,381	)	$	362,742

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at September 30, 2016 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, 2016	Fair value		cost
Due in one year or less	$	6,140	$	6,085
Due after one year through five years		240,710		237,900
Due after five years through ten years		101,608		100,465
Due after ten years		12,311		12,858
Equity securities		8,065		8,059
Total investment securities available-for-sale	$	368,834	$	365,367

For the three months ended September 30, 2016 and 2015, proceeds from sales of investment securities available-for-sale were approximately $3,078,000 and $685,000. Proceeds from sales of investment securities available-for-sale were approximately $31,892,000 and $27,480,000 for the nine months ended September 30, 2016 and 2015, respectively.

At September 30, 2016 and December 31, 2015, investment securities available-for-sale totaling approximately $215,013,000 and $197,149,000, respectively, were pledged as collateral for repurchase agreements and deposits of public funds.

14

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016								Three months ended September 30, 2015
					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	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83
Debt securities		—		—		—		—		—		—		—		—
Total	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83

	Nine months ended September 30, 2016										Nine months ended September 30, 2015
						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	$	734	$	—		$	(192	)	$	542	$	713	$	(23	)	$	—	$	690
Debt securities		181		(73	)		—			108		154		(44	)		—		110
Total	$	915	$	(73	)	$	(192	)	$	650	$	867	$	(67	)	$	—	$	800

The tax expense applicable to the net realized gains for the quarters and nine-month periods ended September 30, 2016 and 2015 were $107,000 and $29,000 for the quarter and $221,000 and $273,000 year-to-date, 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 2016 or 2015. The 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,	2016		2015
Balance, beginning of period	$	1,153	$	1,153
Additions:
Initial credit impairments		—		—
Subsequent credit impairments		—		—
Balance, end of period	$	1,153	$	1,153

15

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and estimated fair values of investment securities held-to-maturity at September 30, 2016 and December 31, 2015 were as follows:

Held-To-Maturity

September 30, 2016

December 31, 2015

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

$

—

$

—

$

147

$

147

$

4

$

—

$

151

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at September 30, 2016 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, 2016	Fair value		cost
Due in one year or less	$	147	$	147
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		—		—
Total investment securities held-to-maturity	$	147	$	147

There were no sales of investment securities classified as held-to-maturity during the three and nine months ended September 30, 2016 or 2015.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015:

September 30, 2016
			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		15	$	20,918	$	(98	)	$	—	$	—		$	20,918	$	(98	)
State and municipal		11		3,796		(37	)		—		—			3,796		(37	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		6		9,222		(11	)		—		—			9,222		(11	)
Collateralized mortgage obligations (CMOs)		38		27,179		(100	)		15,823		(198	)		43,002		(298	)
Pooled trust preferred		5		—		—			1,938		(950	)		1,938		(950	)
Corporate debt		1		—		—			1,003		(8	)		1,003		(8	)
Equity		18		3,259		(240	)		1,065		(92	)		4,324		(332	)
Total		94	$	64,374	$	(486	)	$	19,829	$	(1,248	)	$	84,203	$	(1,734	)

16

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

December 31, 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		32	$	40,949	$	(418	)	$	4,426	$	(72	)	$	45,375	$	(490	)
State and municipal		20		6,646		(19	)		1,555		(12	)		8,201		(31	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		62		90,796		(871	)		1,403		(49	)		92,199		(920	)
Collateralized mortgage obligations (CMOs)		49		28,372		(261	)		26,354		(917	)		54,726		(1,178	)
Pooled trust preferred		5		—		—			2,193		(897	)		2,193		(897	)
Corporate debt		6		5,988		(95	)		—		—			5,988		(95	)
Equity		19		4,035		(695	)		193		(75	)		4,228		(770	)
Total		193	$	176,786	$	(2,359	)	$	36,124	$	(2,022	)	$	212,910	$	(4,381	)

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, 2016 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, 2016. These securities have a total amortized cost of approximately $2,979,000 and a fair value of $2,275,000. 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, 2016:

Deal	Class		Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2016)		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	$	188	$	(55	)	$	—	$	(1	)	B1/BB		5		—		18.0	%		141.2	%
PreTSL XVII	Mezzanine			606		456		(150	)		—		(222	)	C/CC		34		5		21.6			99.7
PreTSL XIX	Mezzanine			874		483		(391	)		—		—		Caa1/CC		41		12		7.7			102.0
PreTSL XXV	Mezzanine			766		488		(279	)		—		(222	)	Ca/C		44		5		27.0			89.3
PreTSL XXVI	Mezzanine			399		323		(75	)		—		(270	)	Caa3/C		45		7		18.0			97.4
PreTSL XXVI	Mezzanine			91		337		246			—		(438	)	Caa3/C		45		7		18.0			97.4
			$	2,979	$	2,275	$	(704	)	$	—	$	(1,153	)

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

On January 14, 2014, Regulators released a final rule authorizing retention of pooled trust preferred securities backed primarily by bank-issued trust preferred securities which included the PreTSLs held by QNB. Due to the uncertainty invoked between the original release of the Volcker Rule and the final rule, there was a noticeable increase in trading activity. However, we believe most of these trades occurred under distress and do not represent trades made in an orderly market. Despite the trades that took place as discussed

17

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

previously, the market for these securities at September 30, 2016 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, 2016 and 2015, 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’s revised Tier 1 capital treatment, additional prepayment analysis was performed. 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 U.S. bank holding company with an investment grade credit rating and any foreign banking organization would prepay their issuance as soon as possible. For those institutions rated below investment grade we assumed that any holding company that could refinance for a cost savings of more than 2% when compared to the approximate cost of long-term funding given their rating and marketplace interest rates, will refinance 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, whether the TARP funding was redeemed or resold through a Treasury Department auction at a premium or discount, 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 2015 were approximately 0.37%. Thus, in addition to

18

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

the specific bank default assumptions used for the near term, for future defaults on the individual banks in the analysis for 2016 and beyond the rate used is calculated based on historic default averages 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.  Default factors used in the cash flow analysis range from 0.25% to 0.51%.

• 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, 2016, 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.

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.

19

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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,
	2016		2015
Commercial:
Commercial and industrial	$	110,892	$	124,397
Construction		32,133		27,372
Secured by commercial real estate		233,430		235,171
Secured by residential real estate		65,671		63,164
State and political subdivisions		35,033		40,285
Indirect lease financing		8,707		10,371
Retail:
1-4 family residential mortgages		46,544		42,833
Home equity loans and lines		70,408		67,384
Consumer		5,306		4,286
Total loans		608,124		615,263
Net unearned costs		107		7
Loans receivable	$	608,231	$	615,270

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, 2016 and December 31, 2015, overdrafts were approximately $172,000 and $203,000, 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

20

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

regional economy, or real estate values. Other than disclosed in the table above, at September 30, 2016, 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.

21

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016 and December 31, 2015:

September 30, 2016	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	102,130	$	700	$	8,062	$	—	$	110,892
Construction		32,122		—		11		—		32,133
Secured by commercial real estate		218,404		3,504		11,522		—		233,430
Secured by residential real estate		63,004		233		2,434		—		65,671
State and political subdivisions		35,033		—		—		—		35,033
Indirect lease financing		8,571		—		136		—		8,707
	$	459,264	$	4,437	$	22,165	$	—	$	485,866

December 31, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	117,246		—	$	7,151	$	—	$	124,397
Construction		27,355		—		17		—		27,372
Secured by commercial real estate		218,958	$	361		15,852		—		235,171
Secured by residential real estate		60,286		34		2,844		—		63,164
State and political subdivisions		39,027		—		1,258		—		40,285
Indirect lease financing		10,168		—		203		—		10,371
	$	473,040	$	395	$	27,325	$	—	$	500,760

22

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016 and December 31, 2015:

September 30, 2016	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	46,274	$	270	$	46,544
Home equity loans and lines		70,312		96		70,408
Consumer		5,211		95		5,306
	$	121,797	$	461	$	122,258

December 31, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	42,546	$	287	$	42,833
Home equity loans and lines		67,257		127		67,384
Consumer		4,286		—		4,286
	$	114,089	$	414	$	114,503

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, 2016 and December 31, 2015:

September 30, 2016	30-59days 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	$	15		—		—	$	15	$	110,877	$	110,892
Construction		—		—		—		—		32,133		32,133
Secured by commercial real estate		962	$	1,226	$	861		3,049		230,381		233,430
Secured by residential real estate		92		—		327		419		65,252		65,671
State and political subdivisions		—		—		—		—		35,033		35,033
Indirect lease financing		134		133		282		549		8,158		8,707
Retail:
1-4 family residential mortgages		—		—		—		—		46,544		46,544
Home equity loans and lines		55		172		—		227		70,181		70,408
Consumer		26		2		—		28		5,278		5,306
	$	1,284	$	1,533	$	1,470	$	4,287	$	603,837	$	608,124

December 31, 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	$	95		—		—	$	95	$	124,302	$	124,397
Construction		63		—		—		63		27,309		27,372
Secured by commercial real estate		443		—	$	935		1,378		233,793		235,171
Secured by residential real estate		—	$	97		369		466		62,698		63,164
State and political subdivisions		—		—		—		—		40,285		40,285
Indirect lease financing		320		53		130		503		9,868		10,371
Retail:
1-4 family residential mortgages		641		234		—		875		41,958		42,833
Home equity loans and lines		272		—		45		317		67,067		67,384
Consumer		12		10		—		22		4,264		4,286
	$	1,846	$	394	$	1,479	$	3,719	$	611,544	$	615,263

23

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016 and December 31, 2015:

September 30, 2016	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	2,908
Construction		—		—
Secured by commercial real estate		—		3,319
Secured by residential real estate		—		1,417
State and political subdivisions		—		—
Indirect lease financing	$	150		132
Retail:
1-4 family residential mortgages		—		270
Home equity loans and lines		—		96
Consumer		—		95
	$	150	$	8,237

December 31, 2015	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	3,433
Construction		—		—
Secured by commercial real estate		—		3,627
Secured by residential real estate		—		1,803
State and political subdivisions		—		—
Indirect lease financing	$	11		143
Retail:
1-4 family residential mortgages		—		287
Home equity loans and lines		—		127
Consumer		—		—
	$	11	$	9,420

Activity in the allowance for loan losses for the three months ended September 30, 2016 and 2015 are as follows:

Three months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,350	$	(55	)		—		$	9	$	1,304
Construction		429		(79	)		—			—		350
Secured by commercial real estate		2,231		233			—			2		2,466
Secured by residential real estate		1,550		(57	)		—			50		1,543
State and political subdivisions		204		(64	)		—			—		140
Indirect lease financing		226		(6	)		—			—		220
Retail:
1-4 family residential mortgages		298		(20	)		—			—		278
Home equity loans and lines		343		(7	)		—			4		340
Consumer		73		33		$	(29	)		7		84
Unallocated		846		22		N/A			N/A			868
	$	7,550	$	—		$	(29	)	$	72	$	7,593

24

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Three months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

Activity in the allowance for loan losses for the nine months ended September 30, 2016 and 2015 are as follows:

Nine months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,521	$	(105	)	$	(140	)	$	28	$	1,304
Construction		286		64			—			—		350
Secured by commercial real estate		2,411		49			—			6		2,466
Secured by residential real estate		1,812		(359	)		(20	)		110		1,543
State and political subdivisions		222		(82	)		—			—		140
Indirect lease financing		164		99			(52	)		9		220
Retail:
1-4 family residential mortgages		350		(72	)		—			—		278
Home equity loans and lines		428		(102	)		—			14		340
Consumer		76		49			(62	)		21		84
Unallocated		284		584		N/A			N/A			868
	$	7,554	$	125		$	(274	)	$	188	$	7,593

Nine months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

25

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 $1,149,000 and $1,288,000 as of September 30, 2016 and December 31, 2015, respectively. Non-performing TDRs totaled $2,279,000 and $990,000 as of September 30, 2016 and December 31, 2015, respectively. All TDRs are included in impaired loans.

26

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016				December 31, 2015
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	2,860		—	$	1,787		—
TDRs with an allowance recorded		568	$	388		491	$	491
	$	3,428	$	388	$	2,278	$	491

There were eleven newly identified TDRs during the nine months ended September 30, 2016. The TDR concessions involved extension of a maturity date, renewal of a line of credit and concessions to lower monthly payments. As of September 30, 2016 and December 31, 2015, QNB had commitments of $2,020,000 and $1,919,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were charge-offs of $0 and $5,000 during the nine months ended September 30, 2016 and 2015, 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, 2016 and 2015. 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,	2016						2015
	Numberof 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
Consumer		1	$	96	$	95		—		—		—
		1	$	96	$	95		1	$	142	$	142

Nine months ended September 30,	2016						2015
	Numberof 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		6	$	1,074	$	1,033		—		—		—
Secured by residential real estate		4		524		503		—		—		—
Retail:
1-4 family residential mortgages		—		—		—		1	$	142	$	142
Consumer		1		96		95		—		—		—
		11	$	1,694	$	1,631		1	$	142	$	142

There were no loans modified as TDRs within 12 months prior to September 30, 2016 and 2015 for which there was a payment default (60 days or more past due) during the three and nine months ended September 30, 2016 and 2015.

There were no consumer mortgage loans secured by residential real estate for which foreclosure proceedings are in process at September 30, 2016.

27

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the balance in the allowance for loan losses at September 30, 2016 and December 31, 2015 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, 2016	Balance		Balancerelated 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	$	1,304	$	462	$	842	$	110,892	$	3,820	$	107,072
Construction		350		—		350		32,133		280		31,853
Secured by commercial real estate		2,466		—		2,466		233,430		6,050		227,380
Secured by residential real estate		1,543		189		1,354		65,671		1,716		63,955
State and political subdivisions		140		—		140		35,033		—		35,033
Indirect lease financing		220		55		165		8,707		132		8,575
Retail:
1-4 family residential mortgages		278		11		267		46,544		561		45,983
Home equity loans and lines		340		—		340		70,408		119		70,289
Consumer		84		—		84		5,306		95		5,211
Unallocated		868	N/A		N/A		N/A		N/A		N/A
	$	7,593	$	717	$	6,008	$	608,124	$	12,773	$	595,351

	Allowance for Loan Losses						Loans Receivable
December 31, 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	$	1,521	$	712	$	809	$	124,397	$	4,586	$	119,811
Construction		286		—		286		27,372		364		27,008
Secured by commercial real estate		2,411		14		2,397		235,171		6,998		228,173
Secured by residential real estate		1,812		203		1,609		63,164		2,113		61,051
State and political subdivisions		222		—		222		40,285		—		40,285
Indirect lease financing		164		20		144		10,371		146		10,225
Retail:
1-4 family residential mortgages		350		25		325		42,833		583		42,250
Home equity loans and lines		428		—		428		67,384		151		67,233
Consumer		76		—		76		4,286		—		4,286
Unallocated		284	N/A		N/A		N/A		N/A		N/A
	$	7,554	$	974	$	6,296	$	615,263	$	14,941	$	600,322

28

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	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	$	3,167	$	3,531	$	—	$	3,629	$	3,923	$	—
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,932		7,416		—
Secured by residential real estate		918		1,286		—		942		1,653		—
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		—		—		—		3		3		—
Retail:
1-4 family residential mortgages		381		398		—		393		406		—
Home equity loans and lines		119		180		—		151		201		—
Consumer		95		96		—		-		-		—
	$	11,010	$	11,796	$	—	$	12,414	$	13,966	$	—
With an allowance recorded:
Commercial:
Commercial and industrial	$	653	$	804	$	462	$	957	$	1,086	$	712
Construction		—		—		—		—		—		—
Secured by commercial real estate		—		—		—		66		66		14
Secured by residential real estate		798		929		189		1,171		1,279		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		143		145		20
Retail:
1-4 family residential mortgages		180		194		11		190		197		25
Home equity loans and lines		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
	$	1,763	$	2,061	$	717	$	2,527	$	2,773	$	974
Total:
Commercial:
Commercial and industrial	$	3,820	$	4,335	$	462	$	4,586	$	5,009	$	712
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,998		7,482		14
Secured by residential real estate		1,716		2,215		189		2,113		2,932		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		146		148		20
Retail:
1-4 family residential mortgages		561		592		11		583		603		25
Home equity loans and lines		119		180		—		151		201		-
Consumer		95		96		—		-		-		—
	$	12,773	$	13,857	$	717	$	14,941	$	16,739	$	974

29

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Nine Months Ended September 30,	2016				2015
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	4,288	$	50	$	6,301	$	154
Construction		412		15		410		16
Secured by commercial real estate		6,327		100		7,881		121
Secured by residential real estate		1,945		11		1,522		—
State and political subdivisions		—		—		—		—
Indirect lease financing		114		—		22		1
Retail:
1-4 family residential mortgages		572		8		415		4
Home equity loans and lines		134		1		130		1
Consumer		10		—		3		—
	$	13,802	$	185	$	16,684	$	297

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.

30

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016:

September 30, 2016	Quotedprices 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	$	—	$	4,312	$	—	$	4,312
Securities available-for-sale
U.S. Government agency securities		—	$	65,812		—	$	65,812
State and municipal securities		—		73,560		—		73,560
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		132,746		—		132,746
Collateralized mortgage obligations (CMOs)		—		79,264		—		79,264
Pooled trust preferred securities		—		—	$	2,275		2,275
Corporate debt securities		—		7,112		—		7,112
Equity securities	$	8,065		—		—		8,065
Total securities available-for-sale	$	8,065	$	358,494	$	2,275	$	368,834
Total recurring fair value measurements	$	8,065	$	362,806	$	2,275	$	373,146
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,046	$	1,046
Mortgage servicing rights		—		—		142		142
Total nonrecurring fair value measurements	$	—	$	—	$	1,188	$	1,188

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended September 30, 2016. 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, 2016.

31

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2015:

December 31, 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	$	—	$	4,189	$	—	$	4,189
Securities available-for-sale
U.S. Government agency securities		—	$	61,779		—	$	61,779
State and municipal securities		—		78,954		—		78,954
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		136,681		—		136,681
Collateralized mortgage obligations (CMOs)		—		65,610		—		65,610
Pooled trust preferred securities		—		—	$	2,653		2,653
Corporate debt securities		—		9,004		—		9,004
Equity securities	$	7,234		—		—		7,234
Total securities available-for-sale	$	7,234	$	352,028	$	2,653	$	361,915
Total recurring fair value measurements	$	7,234	$	356,217	$	2,653	$	366,104
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,698	$	1,698
Mortgage servicing rights		—		—		133		133
Total nonrecurring fair value measurements	$	—	$	—	$	1,831	$	1,831

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
September 30, 2016	Fairvalue		Valuation techniques		Unobservable input		Valueor range of values
Impaired loans	$	778	Appraisalof collateral	(1)	Appraisal adjustments	(2)	-20% to -90%
					Liquidation expenses	(3)	-10%
Impaired loans		140	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		128	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-20% to -25%
Mortgage servicing rights		142	Discounted cash flow		Remaining term		2 - 27 yrs
					Discount rate		12% to 14%

32

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Quantitative information about Level 3 fair value measurements
December 31, 2015	Fair value		Valuation techniques		Unobservable input		Value or range of values
Impaired loans	$	1,331	Appraisal of collateral	(1)	Appraisal adjustments	(2)	-15% to -80%
					Liquidation expenses	(3)	-10%
Impaired loans		199	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		168	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-25% to -70%
Mortgage servicing rights		133	Discounted cash flow		Remaining term		3 - 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) If lendable value (lower than wholesale) is utilized then no additional discounts are taken. If lendable value is not provided then additional discounts are applied.

(5) Values obtained from financial statements for UCC collateral (fixed assets and inventory) are discounted to estimated realizable liquidation value.

The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the nine months ended September 30, 2016:

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, January 1, 2016	$	2,653
Payments received		(312	)
Total gains or losses (realized/unrealized)
Included in earnings		—
Included in other comprehensive income		(66	)
Transfers in and/or out of Level 3		—
Balance, September 30, 2016	$	2,275

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 over the past few years, the market for these securities at September 30, 2016 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.

33

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016;

• 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 5.03% to 7.79%. 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, 2016 and December 31, 2015:

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

34

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things. For certain securities which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence (Level 3). In the absence of such evidence, management’s best estimate is used. Management’s best estimate consists of both internal and external support on certain Level 3 investments. Cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

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

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

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

Impaired Loans (generally carried at fair value): Impaired loans are loans, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Included in the fair value of impaired loans at December 31, 2015 were $145,000 of loans that had no specific reserves required at year end; however, were partially charged-off at year end.  There were no such loans at September 30, 2016.

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.

35

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016	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	$	69,428	$	69,428	$	69,428		—		—
Investment securities:
Trading		4,312		4,312		—	$	4,312		—
Available-for-sale		368,834		368,834		8,065		358,494	$	2,275
Held-to-maturity		147		147		—		147		—
Restricted investment in bank stocks		522		522		—		522		—
Loans held-for-sale		456		466		—		466		—
Net loans		600,638		610,066		—		—		610,066
Mortgage servicing rights		498		555		—		—		555
Accrued interest receivable		2,573		2,573		—		2,573		—
Financial liabilities
Deposits with no stated maturities	$	698,336	$	698,336	$	698,336		—	$	—
Deposits with stated maturities		228,376		230,993		—	$	230,993		—
Short-term borrowings		41,179		41,179		41,179		—		—
Accrued interest payable		310		310		—		310		—
Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—

36

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

					Fair value measurements
December 31, 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	$	16,991	$	16,991	$	16,991		—		—
Investment securities:
Trading		4,189		4,189		—	$	4,189		—
Available-for-sale		361,915		361,915		7,234		352,028	$	2,653
Held-to-maturity		147		151		—		151		—
Restricted investment in bank stocks		508		508		—		508		—
Loans held-for-sale		987		1,004		—		1,004		—
Net loans		607,716		610,315		—		—		610,315
Mortgage servicing rights		504		642		—		—		642
Accrued interest receivable		2,562		2,562		—		2,562		—
Financial liabilities
Deposits with no stated maturities	$	662,410	$	662,410	$	662,410		—	$	—
Deposits with stated maturities		227,376		227,862		—	$	227,862		—
Short-term borrowings		37,163		37,163		37,163		—		—
Accrued interest payable		330		330		—		330		—
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,
	2016		2015
Commitments to extend credit and unused lines of credit	$	308,483	$	232,492
Standby letters of credit		12,980		9,493
Total financial instrument commitments	$	321,463	$	241,985

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

37

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2016 and December 31, 2015 for guarantees under standby letters of credit issued is not material.

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

11. REGULATORY RESTRICTIONS

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

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of September 30, 2016, that the Company and the Bank met capital adequacy requirements to which they were subject.

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

The Company and the Bank’s actual capital amounts and ratios are presented as follows:

	Capital levels
	Actual					Minimum required					Well capitalized
As of September 30, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	103,357		13.08	%	$	63,207		8.00	%	$	79,009		10.00	%
Bank		95,163	12.43				61,266	8.00				76,583	10.00
Tier I capital (to risk-weighted assets):
Consolidated		95,704	12.11				47,405	6.00				47,405	6.00
Bank		87,511	11.43				45,950	6.00				61,266	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		95,704	12.11				35,554	4.50			N/A		N/A
Bank		87,511	11.43				34,462	4.50				49,779	6.50
Tier I capital (to average assets):
Consolidated		95,704	9.08				42,160	4.00			N/A		N/A
Bank		87,511	8.37				41,835	4.00				52,293	5.00

38

QNB CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	98,432		12.58	%	$	62,613		8.00	%	$	78,266		10.00	%
Bank		91,091	11.97				60,874	8.00				76,093	10.00
Tier I capital (to risk-weighted assets):
Consolidated		90,819	11.60				46,960	6.00				46,960	6.00
Bank		83,478	10.97				45,656	6.00				60,874	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		90,819	11.60				35,220	4.50			N/A		N/A
Bank		83,478	10.97				34,242	4.50				49,460	6.50
Tier I capital (to average assets):
Consolidated		90,819	8.87				40,934	4.00			N/A		N/A
Bank		83,478	8.22				40,632	4.00				50,790	5.00

39

QNB CORP. AND SUBSIDIARY

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 2015 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

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QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Other-Than-Temporary Investment Security Impairment

Securities are evaluated periodically to determine whether a decline in their value is other-than-temporary. Management utilizes criteria such as the magnitude and duration of the decline, in addition to the reasons underlying the decline, to determine whether the loss in value is other-than-temporary. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospect for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. For equity securities, once a decline in value is determined to be other-than-temporary, the value of the equity security is reduced and a corresponding charge to earnings is recognized. As a result of prolonged declines in some equity securities’ fair values, $70,000 and $122,000 of other-than-temporary impairment charges were recorded during the first and second quarters of 2016, respectively.  There were no other-than-temporary impairment charges recorded during the third quarter 2016.

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 third quarter or nine months ended September 30, 2016 or 2015, respectively.

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.

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.

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QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

RESULTS OF OPERATIONS - OVERVIEW

QNB reported net income for the third quarter of 2016 of $2,292,000, or $0.67 per share on a diluted basis, compared to net income of $2,220,000, or $0.66 per share on a diluted basis, for the same period in 2015. For the nine month period ended September 30, 2016, QNB reported net income of $6,655,000, or $1.96 per share on a diluted basis. This compares to net income of $6,290,000, or $1.88 per share on a diluted basis, reported for the nine month period ended September 30, 2015.

Net income expressed as an annualized rate of return on average assets and average shareholders’ equity was 0.86% and 9.57%, respectively, for the quarter ended September 30, 2016 compared with 0.88% and 9.86%, respectively, for the quarter ended September 30, 2015.  For the comparative nine month periods, the annualized rate of return on average assets and average shareholders’ equity was 0.87% and 9.48%, respectively, for 2016 compared with 0.86% and 9.56%, respectively, for 2015.

Total assets as of September 30, 2016 were $1,071,931,000, compared with $1,020,936,000 at December 31, 2015. Loans receivable at September 30, 2016 were $608,231,000, compared with $615,270,000 at December 31, 2015, a decrease of $7,039,000, or 1.1%. Total deposits of $926,712,000 at September 30, 2016 increased $36,926,000, or 4.1%, compared with total deposits of $889,786,000 at December 31, 2015.

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QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results for the three and nine months ended September 30, 2016 include the following significant components:

• Net interest income increased $70,000, or 1.0%, to $7,085,000 and $881,000, or 4.3%, to $21,225,000 for the three and nine months ended September 30, 2016, respectively.

• Net interest margin on a tax-equivalent basis decreased fifteen basis points for the quarter and decreased two basis points year-to-date, to 2.93% and 3.05%, respectively.

• QNB recorded no provision for loan losses for the third quarters 2016 and 2015, and $125,000 for the first nine months of 2016 compared with $60,000 recorded for the first nine months of 2015.

• Non-interest income increased $151,000, or 10.1%, to $1,644,000 for the third quarter and declined $175,000, or 3.7%, to $4,594,000 for year-to-date 2016, respectively, compared to the same periods in 2015.

• Non-interest expense increased $43,000, or 0.8%, to $5,616,000 for the third quarter and decreased $36,000, to $16,728,000 year-to-date 2016, respectively, compared to the same periods in 2015.

• Total non-performing loans were $9,536,000, or 1.57% of loans receivable at September 30, 2016, compared with $10,719,000, or 1.74% of loans receivable at December 31, 2015. Loans on non-accrual status were $8,237,000 at September 30, 2016 compared with $9,420,000 at December 31, 2015. Net charge-offs for the first nine months of 2016 were $86,000, or 0.02% annualized of average total loans, compared with $392,000, or 0.09% annualized of average total loans for the first nine months of 2015.

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. QNB seeks to achieve sustainable and consistent earnings growth while maintaining adequate levels of capital and liquidity and limiting its exposure to credit and interest rate risk levels approved by the Board of Directors.

The following table presents the adjustment to convert net interest income to net interest income on a fully taxable-equivalent basis for the three and nine month periods ended September 30, 2016 and 2015.

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Total interest income	$	8,287	$	8,138	$	24,751	$	23,691
Total interest expense		1,202		1,123		3,526		3,347
Net interest income		7,085		7,015		21,225		20,344
Tax-equivalent adjustment		403		449		1,252		1,328
Net interest income (fully taxable-equivalent)	$	7,488	$	7,464	$	22,477	$	21,672

Net interest income is the primary source of operating income for QNB. Net interest income is interest income, dividends, and fees on earning assets, less interest expense incurred for funding sources. Earning assets primarily include loans, investment securities, interest bearing balances at the Federal Reserve Bank (Fed) and Federal funds sold. Sources used to fund these assets include deposits and borrowed funds. Net interest income is affected by changes in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the amount of earning assets funded by non-interest bearing deposits.

For purposes of this discussion, interest income and the average yield earned on loans and investment securities are adjusted to a tax-equivalent basis as detailed in the tables that appear above. This adjustment to interest income is made for analysis purposes only. Interest income is increased by the amount of savings of Federal income taxes, which QNB realizes by investing in certain tax-exempt state and municipal securities and by making loans to certain tax-exempt organizations. In this way, the ultimate economic impact of earnings from various assets can be more easily compared

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

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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, 2016								September 30, 2015
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	3,992			5.44	%	$	54	$	4,312			5.98	%	$	64
Investment securities (AFS & HTM):
U.S. Government agencies		60,860			1.88	%		286		46,701			1.57	%		183
State and municipal		71,905			4.03	%		724		75,293			4.15	%		781
Mortgage-backed and CMOs		197,462			1.95	%		963		200,241			1.99	%		994
Pooled trust preferred securities		3,091			0.23	%		2		3,495			0.36	%		3
Corporate debt securities		7,224			1.74	%		31		6,018			1.18	%		18
Equities		6,568			2.85	%		47		7,460			3.45	%		65
Total investment securities		347,110			2.37	%		2,053		339,208			2.41	%		2,044
Loans:
Commercial real estate		329,786			4.40	%		3,645		295,979			4.62	%		3,450
Residential real estate		45,606			3.94	%		449		40,789			4.23	%		431
Home equity loans		63,141			3.62	%		574		60,066			3.55	%		537
Commercial and industrial		111,058			4.32	%		1,206		123,416			4.29	%		1,333
Indirect lease financing		9,202			8.58	%		197		9,576			9.16	%		219
Consumer loans		4,626			5.21	%		61		3,927			5.37	%		53
Tax-exempt loans		39,226			3.75	%		370		42,191			3.99	%		424
Total loans, net of unearned income*		602,645			4.29	%		6,502		575,944			4.44	%		6,447
Other earning assets		62,778			0.51	%		81		41,419			0.31	%		32
Total earning assets		1,016,525			3.40	%		8,690		960,883			3.55	%		8,587
Cash and due from banks		16,378								13,225
Allowance for loan losses		(7,630	)							(7,720	)
Other assets		28,728								28,894
Total assets	$	1,054,001							$	995,282
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	157,179			0.20	%		80	$	135,455			0.21	%		71
Municipals		114,403			0.34	%		97		116,572			0.34	%		99
Money market		71,963			0.27	%		48		66,854			0.24	%		40
Savings		231,496			0.40	%		233		218,753			0.37	%		204
Time		133,296			1.13	%		378		139,403			1.08	%		381
Time of $100,000 or more		95,915			1.37	%		330		92,285			1.29	%		300
Total interest-bearing deposits		804,252			0.58	%		1,166		769,322			0.56	%		1,095
Short-term borrowings		38,506			0.37	%		36		31,134			0.37	%		28
Total interest-bearing liabilities		842,758			0.57	%		1,202		800,456			0.56	%		1,123
Non-interest-bearing deposits		112,114								101,429
Other liabilities		3,874								4,057
Shareholders' equity		95,255								89,340
Total liabilities and shareholders' equity	$	1,054,001							$	995,282
Net interest rate spread					2.83	%							2.99	%
Margin/net interest income					2.93	%	$	7,488					3.08	%	$	7,464

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

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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, 2016								September 30, 2015
	Average			Average					Average			Average
	Balance			Rate			Interest		Balance			Rate			Interest
Assets
Trading securities	$	3,919			5.47	%	$	161	$	4,211			5.95	%	$	188
Investment securities (AFS & HTM):
U.S. Government agencies		57,160			1.85	%		794		49,194			1.60	%		590
State and municipal		73,765			4.06	%		2,247		71,378			4.17	%		2,233
Mortgage-backed and CMOs		196,830			1.98	%		2,926		208,138			1.96	%		3,060
Pooled trust preferred securities		3,197			0.21	%		5		3,510			0.37	%		10
Corporate debt securities		8,160			1.77	%		108		6,011			1.15	%		52
Equities		7,192			3.28	%		177		7,205			3.26	%		175
Total investment securities		346,304			2.41	%		6,257		345,436			2.36	%		6,120
Loans:
Commercial real estate		327,225			4.43	%		10,854		290,561			4.55	%		9,882
Residential real estate		44,447			3.90	%		1,301		38,848			4.13	%		1,203
Home equity loans		62,557			3.72	%		1,740		58,177			3.58	%		1,556
Commercial and industrial		112,918			4.25	%		3,592		124,211			4.16	%		3,865
Indirect lease financing		9,844			8.88	%		656		8,784			9.07	%		598
Consumer loans		4,460			5.25	%		175		3,981			5.41	%		161
Tax-exempt loans		39,959			3.77	%		1,127		44,803			4.00	%		1,340
Total loans, net of unearned income*		601,410			4.32	%		19,445		569,365			4.37	%		18,605
Other earning assets		34,156			0.55	%		140		23,653			0.60	%		106
Total earning assets		985,789			3.52	%		26,003		942,665			3.55	%		25,019
Cash and due from banks		14,013								11,922
Allowance for loan losses		(7,622	)							(7,923	)
Other assets		28,683								29,291
Total assets	$	1,020,863							$	975,955
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-bearing demand	$	151,907			0.21	%		237	$	133,285			0.22	%		217
Municipals		98,777			0.35	%		255		108,554			0.34	%		273
Money market		70,556			0.27	%		142		63,960			0.24	%		114
Savings		228,894			0.40	%		688		216,510			0.37	%		600
Time		133,930			1.12	%		1,122		143,781			1.08	%		1,166
Time of $100,000 or more		94,462			1.37	%		967		92,543			1.29	%		890
Total interest-bearing deposits		778,526			0.59	%		3,411		758,633			0.57	%		3,260
Short-term borrowings		39,922			0.38	%		115		31,792			0.37	%		87
Total interest-bearing liabilities		818,448			0.58	%		3,526		790,425			0.57	%		3,347
Non-interest-bearing deposits		104,922								94,071
Other liabilities		3,756								3,518
Shareholders' equity		93,737								87,941
Total liabilities and shareholders' equity	$	1,020,863							$	975,955
Net interest rate spread					2.94	%							2.98	%
Margin/net interest income					3.05	%	$	22,477					3.07	%	$	21,672

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

46

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, 2016 compared									September 30, 2016 compared
	to September 30, 2015									to September 30, 2015
	Total			Due to change in:						Total			Due to change in:
	Change			Volume			Rate			Change			Volume			Rate
Interest income:
Trading securities	$	(10	)	$	(5	)	$	(5	)	$	(27	)	$	(13	)	$	(14	)
Investment securities (AFS & HTM):
U.S. Government agencies		103			56			47			204			95			109
State and municipal		(57	)		(35	)		(22	)		14			75			(61	)
Mortgage-backed and CMOs		(31	)		(14	)		(17	)		(134	)		(167	)		33
Pooled trust preferred securities		(1	)		—			(1	)		(5	)		(1	)		(4	)
Corporate debt securities		13			3			10			56			19			37
Equities		(18	)		(8	)		(10	)		2			1			1
Total Investment securities (AFS & HTM)		9			2			7			137			22			115
Loans:
Commercial real estate		195			383			(188	)		972			1,258			(286	)
Residential real estate		18			51			(33	)		98			173			(75	)
Home equity loans		37			26			11			184			118			66
Commercial and industrial		(127	)		(137	)		10			(273	)		(348	)		75
Indirect lease financing		(22	)		(9	)		(13	)		58			72			(14	)
Consumer loans		8			10			(2	)		14			20			(6	)
Tax-exempt loans		(54	)		(30	)		(24	)		(213	)		(143	)		(70	)
Total Loans		55			294			(239	)		840			1,150			(310	)
Other earning assets		49			17			32			34			47			(13	)
Total interest income		103			308			(205	)		984			1,206			(222	)
Interest expense:
Interest-bearing deposits:
Interest-bearing demand		9			11			(2	)		20			30			(10	)
Municipals		(2	)		(3	)		1			(18	)		(24	)		6
Money market		8			3			5			28			12			16
Savings		29			11			18			88			35			53
Time		(3	)		(17	)		14			(44	)		(79	)		35
Time of $100,000 or more		30			10			20			77			19			58
Total interest-bearing deposits		71			15			56			151			(7	)		158
Short-term borrowings		8			7			1			28			23			5
Total interest expense		79			22			57			179			16			163
Net interest income	$	24		$	286		$	(262	)	$	805		$	1,190		$	(385	)

Average earning assets for the third quarter 2016 were $1,016,525,000, an increase of $55,642,000 for the quarter, compared with the same period in 2015.  Average loans increased $26,701,000, or 4.6%, for the quarter and average investment securities increased $7,582,000 over the comparable period of 2015. 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 to 61.0% for the nine months ended September 30, 2016 compared to 60.4% for the same period in 2015.  On the funding side, average deposits increased $45,615,000, or 5.2%, for third quarter 2016 and $30,744,000, or 3.6%, for the nine months ended September 30, 2016, compared to the same periods in 2015.  Customers continue to reinvest funds into non-time deposits, as the yield on time deposits remains low and customers prefer to keep their funds liquid to capitalize on rising rates.  Average short-term borrowings, which consist primarily of commercial repurchase agreements, increased $7,372,000 for the third quarter 2016 compared to the third quarter 2015.

47

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 2016 was 2.93% compared to 3.08% for same period in 2015 and 3.08% reported for the second quarter of 2016.

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 $103,000, or 1.2%, to $8,690,000 for the third quarter of 2016; total interest expense increased 7.0% to $1,202,000. Growth in earning assets was the primary contributor to the increase in interest income. All categories of interest-bearing deposits except interest-bearing demand and municipal deposits experienced higher rates in the third quarter 2016 compared to third quarter 2015, due to the increase in balances in tiered-pricing accounts and a five basis point rate increase to the eSavings product in late 2015.

The yield on earning assets on a tax-equivalent basis declined fifteen basis points from 3.55% for the third quarter of 2015, to 3.40% for the third quarter of 2016 and declined sixteen basis points from the 3.56% reported for the second quarter of 2016. The rate paid on interest-bearing liabilities increased one basis point to 0.57% for the third quarter of 2016 compared to the same period in 2015 and decreased one basis point, compared to the quarter ended June 30, 2016.

Interest income on investment securities (trading, available-for-sale and held-to-maturity) decreased $1,000 when comparing the quarters ended September 30, 2016 and 2015. The average yield on the investment portfolio was 2.40% for the third quarter of 2016 compared with 2.46% for the third quarter of 2015. 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.

Income on U.S. Government agency securities increased $103,000, as the $14,159,000, or 30.3%, increase in average balances contributed to an increase in interest income by $56,000. This sector experienced a 31 basis point increase in the yield from 1.57% for the third quarter of 2015 to 1.88% for the same period in 2016, which contributed an additional $47,000.

Interest income on every other category of investment securities, except for corporate debt securities, declined in the third quarter 2016, compared to the same period in 2015.  Tax-exempt municipal securities experienced a decrease in average balances of $3,388,000, which, coupled with a twelve basis point reduction in average yield, resulted in a decrease of interest income of $57,000.  QNB had purchased many municipal securities when rates were significantly higher. Many of these bonds have either reached maturity or their call dates and are being replaced with municipal bonds with lower yields. Typically QNB purchases municipal bonds with 10-15 year maturities 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 2016.  The current yield on replacement bonds is well below the yield of the bonds being called or maturing.

Interest income on mortgage-backed securities and CMOs decreased $31,000 with a four basis point decline in average yield contributing approximately half the decline in interest income.  Average balances decreased $2,779,000, or 1.4%, to $197,462,000 when comparing the two periods. This portfolio generally provides higher yields relative to agency bonds and also provides monthly cash flow which can be used for liquidity purposes or can be reinvested when interest rates eventually increase. With the 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 $55,000 to $6,502,000 when comparing the third quarters of 2016 and 2015, with a 4.6% growth in average balances contributing an increase in interest income of $294,000, offset by a decline in interest income of $239,000 as a result of a fifteen basis point reduction in average portfolio yield to 4.29%. As a result of the interest rate environment and competitive pressures, new loans are being originated at lower rates, variable rate loans are repricing lower and many customers with fixed rates are requesting modifications for lower rates.

The largest category of the loan portfolio is commercial real estate loans. This category of loans includes commercial purpose loans secured by either commercial properties such as office buildings, factories, warehouses, medical facilities and retail establishments, or residential real estate, usually the residence of the business owner. The category also includes construction and land development loans. Income on commercial real estate loans increased $195,000 due to the 11.4% increase in average balances. Average balances increased $33,807,000, to $329,786,000 for the quarter ended September 30, 2016 compared with the same quarter in 2015. The yield on commercial real estate loans declined 22 basis points from 4.62% in 2015 to 4.40% in 2016.

48

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Income on commercial and industrial loans, the second largest category, decreased $127,000 as average commercial and industrial loan balances decreased $12,358,000, or 10.0%, to $111,058,000 for the third quarter of 2016 resulting in a $137,000 decrease in income. The average yield on these loans increased three basis points to 4.32% resulting in an increase in income of $10,000. Many of the loans in this category are indexed to the prime interest rate, which increased by one quarter of one percent in late December 2015.

Tax-exempt loan income was $370,000 for the third quarter of 2016, a decrease of $54,000 from the same period in 2015. With the decline in market interest rates many municipalities have refinanced existing debt or taken on new debt.  While QNB has been successful in winning some of these bids, average balances have decreased $2,965,000, or 7.0%, to $39,226,000 for the third quarter of 2016, resulting in a decrease of $30,000 in income. The rate renegotiation or bidding on these loans has resulted in an additional $24,000 decline in interest income as the average yield on the tax-exempt loan portfolio declined from 3.99% for the third quarter of 2015 to 3.75% for the third quarter of 2016.

QNB desires to become the “local consumer lender of choice” and to affect this QNB focused its retail lending efforts, adding new product offerings and increasing marketing and promotion.  The positive impact of this focus has been year-over-year growth in balances in all three categories of retail lending: residential mortgage, home equity and consumer loans.  Average residential mortgage loans secured by first lien 1-4 family residential mortgages increased by $4,817,000, or 11.8%, to $45,606,000 for the third quarter of 2016 compared to the same period in 2015. Over this same timeframe, the average yield on the portfolio declined by 29 basis points to 3.94% for the third quarter of 2016. The net result was an increase in interest income of $18,000. Average home equity loans increased $3,075,000, or 5.1%, to $63,141,000 while the average yield increased seven basis points to 3.62% resulting in an increase in interest income of $37,000. Average consumer loans increased $699,000, or 17.8%, to $4,626,000 while the yield on the portfolio decreased sixteen basis points to 5.21% for the third quarter of 2016 resulting in an $8,000 increase in interest income.

For the most part, earning assets are funded by deposits, which increased 5.2% when comparing the average balances for third quarters of 2016 and 2015.  Interest expense on total deposits and borrowed funds increased $71,000 and $8,000, respectively, when comparing the two quarters.

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 $10,685,000, or 10.5%, to $112,114,000 for the third quarter of 2016. QNB has been successful in increasing business checking accounts as average balances in these accounts have increased by $9,111,000, or 11.2%, when comparing the quarters. Average interest-bearing demand accounts increased $21,724,000, or 16.0%, to $157,179,000 for the third quarter of 2016. Interest expense on interest-bearing demand accounts increased $9,000 to $80,000 for the same period, as the average rate paid decreased by one basis point to 0.20% for the third quarter of 2016. 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 2016, the average balance in this product was $45,125,000 and the related interest expense was $63,000 for an average yield of 0.55%. In comparison, the average balance of the QNB-Rewards accounts for the third quarter of 2015 was $40,395,000 with a related interest expense of $57,000 and an average rate paid of 0.56%. 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 $95,060,000 for the third quarter of 2015 to $112,054,000 for the third quarter of 2016. The average rate paid on these balances was 0.06% for both periods.

Interest expense on municipal interest-bearing demand accounts decreased $2,000 to $97,000 for the third quarter of 2016. The average balance of municipal interest-bearing demand accounts decreased $2,169,000, or 1.9%, to $114,403,000, with the average interest rate paid on these accounts at 0.34% for both periods. The decrease in balances in 2016 may be attributable to school districts’ need for funds, as state funding has been delayed due to the state budget impasse.  Many of these accounts are indexed to the Federal funds rate with rate floors between 0.25% and 0.50%, therefore the increase in the Federal funds rate by one quarter of one percent in late December 2015 had minimal effect on the yield of these deposits. 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.

Average money market accounts increased $5,109,000, or 7.6%, to $71,963,000 for the third quarter of 2016 compared with the same period in 2015. Interest expense on money market accounts increased $8,000 to $48,000 and the average interest rate paid on money market accounts increased from 0.24% for the third quarter of 2015 to 0.27% for the third quarter of 2016. The majority of balances in this category are in a product that pays a tiered rate based on account balances.

49

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Interest expense on savings accounts increased $29,000 when comparing the third quarter of 2016 to the third quarter of 2015, and the average rate increased three basis points to 0.40% when comparing both periods. When comparing these same periods average savings accounts increased $12,743,000, or 5.8%, to $231,496,000 for the third quarter of 2016 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 2016 of $168,438,000. This product has grown successfully since its introduction in the third quarter of 2009. The average yield paid on these accounts was 0.50% for the third quarter of 2016 and 0.46% for the same period in 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 $5,307,000, or 9.2%, when comparing the third quarter 2016 average to the same 2015 quarter.

Total interest expense on time deposits increased $27,000 to $708,000 for the third quarter of 2016. Average total time deposits decreased by $2,477,000 to $229,211,000 for the third quarter of 2016. Similar to fixed-rate loans and investment securities, time deposits reprice over time and, therefore, have less of an immediate impact on costs in either a rising or falling rate environment. Unlike loans and investment securities, however, the maturity and repricing characteristics of time deposits tend to be shorter. The average rate paid on time deposits increased six basis points from 1.17% to 1.23% when comparing the third quarter of 2015 to the same period in 2016.

Approximately $96,000,000, or 42%, of time deposits at September 30, 2016 will mature over the next 12 months. The average rate paid on these time deposits is approximately 0.76%. 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 may 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 $8,000 for the third quarter of 2016 to $36,000 when compared to the same period in 2015. When comparing these same periods average balances increased from $31,134,000 to $38,506,000 while the average rate paid was 0.37% for both periods.

Nine Month Comparison

For the nine month period ending September 30, 2016 average earning assets increased $43,124,000, or 4.6%, to $985,789,000, with average loans increasing 5.6% and average investment securities increasing by $576,000. Average total deposits increased $30,744,000, or 3.6%, to $883,448,000 for the nine-month period ended September 30, 2016 compared to the same period in 2015. The net interest margin on a tax-equivalent basis was 3.05% for the nine-month period ended September 30, 2016, a two basis point decrease from the same period in 2015.

Total interest income on a tax-equivalent basis increased $984,000, or 3.9%, from $25,019,000 to $26,003,000, when comparing the nine-month periods ended September 30, 2015 and September 30, 2016 as the additional interest income generated from the growth in earning assets combined with the impact of improved yields on some of those assets. Interest income increased $1,206,000 as a result of volume increases but declined $222,000 as a result of lower yields. The analysis of the nine-month comparison periods is similar to what was described in the quarterly analysis.

The yield on earning assets decreased from 3.55% to 3.52% for the nine-month periods with the yield on loans declining five basis points to at 4.32%. QNB continues to feel the effect on yields 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, increased three basis points from 2.41% to 2.44% when comparing the nine-month periods.

Total interest expense increased $179,000 for the nine-month period ended September 30, 2016 compared with the same period in 2015, attributable to the increase in deposits into higher-earning tiered money markets and interest-bearing demand accounts, as well as a five basis point increase in the eSavings rate in late 2015. The average rate paid on interest bearing deposits increased two basis points to 0.59% for the nine month period ended September 30, 2016 versus the first nine months of 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

50

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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 $125,000 year-to-date 2016, compared with no provision recorded in the third quarter 2015, and $60,000 year-to-date 2015. QNB's allowance for loan losses of $7,593,000 represents 1.25% of loans receivable at September 30, 2016 compared to an allowance for loan losses of $7,554,000, or 1.23% of loans receivable, at December 31, 2015, and $7,669,000, or 1.32% of loans receivable at September 30, 2015. The allowance for loan losses at September 30, 2016 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 $43,000 for the third quarter of 2016, comprising net overdraft charge-offs totaling $22,000, offset by net recoveries of previously charged off loans.  This compares with net loan recoveries of $14,000 for the third quarter of 2015. For the nine month periods ended September 30, 2016 and 2015 net loan charge-offs were $86,000 and $392,000, respectively.

Non-performing assets of $11,811,000 at September 30, 2016 compares favorably with $13,372,000 as of December 31, 2015 and is slightly higher than $11,360,000 as of September 30, 2015. Included in this classification are non-performing loans, 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 $9,536,000, or 1.57% of loans receivable at September 30, 2016, compared with $10,719,000, or 1.74% of loans receivable at December 31, 2015, and $8,760,000, or 1.50% of loans receivable at September 30, 2015. 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, 2016, $6,053,000, or approximately 73% of the loans classified as non-accrual are current or past due less than 30 days. Loans classified as substandard or doubtful totaled $22,165,000, a reduction of $5,160,000, or 18.9%, from the $27,325,000 reported at December 31, 2015 and a decline from the $23,462,000 reported at September 30, 2015.

QNB had $150,000 of loans past due 90 days or more and still accruing interest at September 30, 2016 consisting of indirect lease financing balances, compared with $11,000 at December 31, 2015, and $52,000 at September 30, 2015. Total loans 30 days or more past due, which includes non-accrual loans by actual number of days delinquent, represented 0.70% of loans receivable at September 30, 2016 compared with 0.60% at December 31, 2015 and 0.42% at September 30, 2015.

Troubled debt restructured loans, not classified as non-accrual loans or loans past due 90 days or more and accruing, were $1,149,000 at September 30, 2016, compared with $1,288,000 at December 31, 2015, and $626,000 at September 30, 2015. There were eleven newly identified troubled debt restructures in the nine months ended September 30, 2016. QNB had no other real estate owned or repossessed assets as of September 30, 2016, December 31, 2015, or September 30, 2015.  Non-accrual pooled trust preferred securities are carried at fair value of $2,275,000, $2,653,000, and $2,600,000 at September 30, 2016, December 31, 2015 and September 30, 2015, respectively. The decrease in the carrying value of these securities reflects a combination of payments received and a decrease in their fair value.

51

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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.

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

	September 30,			December 31,			September 30,
	2016			2015			2015
Non-accrual loans	$	8,237		$	9,420		$	8,082
Loans past due 90 days or more and still accruing interest		150			11			52
Troubled debt restructured loans (not already included    above)		1,149			1,288			626
Total non-performing loans		9,536			10,719			8,760
Other real estate owned and repossessed assets		—			—			—
Non-accrual investment securities		2,275			2,653			2,600
Total non-performing assets	$	11,811		$	13,372		$	11,360
Total loans (excluding loans held-for-sale):
Average total loans (YTD)	$	601,143		$	574,015		$	568,978
Total loans		608,231			615,270			582,255
Allowance for loan losses		7,593			7,554			7,669
Allowance for loan losses to:
Non-performing loans		79.63	%		70.48	%		87.54	%
Total loans (excluding held-for-sale)		1.25	%		1.23	%		1.32	%
Average total loans		1.26	%		1.32	%		1.35	%
Non-performing loans / total loans (excluding held-for-sale)		1.57	%		1.74	%		1.50	%
Non-performing assets / total assets		1.10	%		1.31	%		1.09	%

An analysis of net loan (recoveries) charge-offs for the three and nine months ended September 30, 2016 compared to 2015 is as follows:

	Three months ended September 30,						Nine months ended September 30,
	2016			2015			2016			2015
Net (recoveries) charge-offs	$	(43	)	$	(14	)	$	86		$	392
Net annualized (recoveries) charge-offs to:
Total loans		(0.03	%)		(0.01	%)		0.02	%		0.09	%
Average total loans excluding held-for-sale		(0.03	%)		(0.01	%)		0.02	%		0.09	%
Allowance for loan losses		(2.26	%)		(0.69	%)		1.52	%		6.84	%

At September 30, 2016 and December 31, 2015, the recorded investment in loans for which impairment has been identified totaled $12,773,000 and $14,941,000 of which $11,010,000 and $12,414,000, respectively, required no specific allowance for loan loss. The recorded investment in impaired loans requiring an allowance for loan losses was $1,763,000 and $2,527,000 at September 30, 2016 and December 31, 2015, respectively, and the related allowance for loan losses associated with these loans was $717,000 and

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CONDITION AND RESULTS OF OPERATIONS

$974,000, 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.

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
	2016			2015		Amount			Percent			2016		2015		Amount			Percent
Net gain on investment securities	$	316		$	83	$	233			280.7	%	$	650	$	800	$	(150	)		-18.8	%
Net (loss) gain on trading activity		(39	)		36		(75	)		-208.3	%		47		17		30			176.5	%
Fees for services to customers		425			434		(9	)		-2.1	%		1,205		1,240		(35	)		-2.8	%
ATM and debit card		419			397		22			5.5	%		1,229		1,153		76			6.6	%
Retail brokerage and advisory		129			180		(51	)		-28.3	%		425		557		(132	)		-23.7	%
Bank-owned life insurance		73			73		-			0.0	%		217		215		2			0.9	%
Merchant		86			75		11			14.7	%		242		226		16			7.1	%
Net gain on sale of loans		143			120		23			19.2	%		263		302		(39	)		-12.9	%
Other		92			95		(3	)		-3.2	%		316		259		57			22.0	%
Total	$	1,644		$	1,493	$	151			10.1	%	$	4,594	$	4,769	$	(175	)		-3.7	%

Quarter to Quarter Comparison

Total non-interest income for the third quarter of 2016 was $1,644,000, an increase of $151,000, compared to $1,493,000 for the third quarter of 2015. Excluding net gains on investment securities, trading activities and sale of loans for both periods, total non-interest income was $1,224,000 and $1,254,000, a decrease of $30,000, or 2.4%.

Net gains on investment securities increased $233,000 from $83,000 in third quarter 2015 to $316,000 in third quarter 2016.  Gain on investments are primarily derived from sale of equities.  Market conditions in the equities market for the quarter ended September 30, 2016 versus the same period in 2015 resulted in better opportunities for sales.

QNB originates residential mortgage loans for sale in the secondary market.  Net gain on sale of loans increased $23,000, or 19.2%, to $143,000, when comparing the third quarter 2016 to the same period in 2015.  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 $3,632,000 and $3,108,000 for the third quarters of 2016 and 2015, respectively.

ATM and debit card income increased $22,000, or 5.5%, to $419,000 for the third quarter 2016, compared to the same period in 2015, due to increases in card-based transactions and expansion of checking account households.  

These increases in non-interest income were offset in part by a $75,000 decrease in trading income for the third quarter 2016, which had a net loss of $39,000, compared to a net gain of $36,000 for the same period in 2015.  Retail brokerage and advisory fees declined $51,000, or 28.3%, to $129,000 for the third quarter 2016 compared to the same period in 2015.  While assets under management have grown over 37% since year end 2015, to $95,000,000, the asset growth has been in products with more trailing income than up-front income.  Fees for services to customers decreased $9,000, or 2.1%, from $434,000 at September 30, 2015 to $425,000 at September 30, 2016, due primarily to a decrease in net overdraft income and the elimination of an ATM network service charge in September 2015.

Nine-Month Comparison

Total non-interest income for the nine month periods ended September 30, 2016 and 2015 was $4,594,000 and $4,769,000, respectively, a decrease of $175,000, or 3.7%. Excluding net gains on investment securities, trading activities and loans for both periods total non-interest income was $3,634,000 and $3,650,000, a decrease of $16,000

Net investment securities gains decreased $150,000, or 18.8%, to $650,000 for the nine months ended September 30, 2016 compared to $800,000 for the comparable nine months in 2015. During the first half of 2016, QNB recorded $192,000 of other-than-temporary

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CONDITION AND RESULTS OF OPERATIONS

impairment charges in two equity securities, as a result of a prolonged decline in their fair values.  There were no OTTI charges taken in the third quarter 2016 and 2015, and no OTTI charges taken for the nine months ended September 30, 2015. Gains on sales of securities were $842,000 in the 2016 period versus $800,000 in the 2015 period.

Retail brokerage and advisory income decreased $132,000, or 23.7%, to $425,000 for the nine months ended September 30, 2016, compared with the same period in 2015, for the reason detailed in the quarterly comparison.  Fees for services to customers decreased $35,000 in the nine months ended September 30, 2016 compared to 2015.  Overdraft income net of waived charges, representing approximately 74% of total fees for services to customers during the nine months ended September 30, 2016, decreased by $31,000. The decrease in overdraft income reflects a decrease in the volume of overdrafts, as well as increased fee waivers and refunds.

Net gains on the sale of loans decreased $39,000, or 12.9%, when comparing the nine months ended September 30, 2016 to the same period in 2015. Proceeds from the sale of residential mortgages were $7,188,000 and $9,595,000 for the nine-month periods ended September 30, 2016 and 2015, respectively

These decreases were offset by a $76,000, or 6.6%, increase in ATM and debit card income to $1,229,000 due to increased purchases by cardholders, and increased checking accounts during the period.  Net gain on trading activity increased $30,000 when comparing the two periods.  Other non-interest income increased $57,000, or 22.0%, when comparing the two periods, due to net losses on the sale of OREO and repossessed assets recorded in 2015, which did not recur in 2016.

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
	2016		2015		Amount			Percent			2016		2015		Amount			Percent
Salaries and employee benefits	$	3,072	$	2,911	$	161			5.5	%	$	9,114	$	8,960	$	154			1.7	%
Net occupancy		438		427		11			2.6	%		1,305		1,336		(31	)		-2.3	%
Furniture and equipment		437		424		13			3.1	%		1,302		1,285		17			1.3	%
Marketing		220		174		46			26.4	%		681		596		85			14.3	%
Third-party services		440		389		51			13.1	%		1,246		1,235		11			0.9	%
Telephone, postage and supplies		189		182		7			3.8	%		549		551		(2	)		-0.4	%
State taxes		178		173		5			2.9	%		499		520		(21	)		-4.0	%
FDIC insurance premiums		162		162		-			0.0	%		489		479		10			2.1	%
Other		480		731		(251	)		-34.3	%		1,543		1,802		(259	)		-14.4	%
Total	$	5,616	$	5,573	$	43			0.8	%	$	16,728	$	16,764	$	(36	)		-0.2	%

Quarter to Quarter Comparison

Total non-interest expense was $5,616,000 for the third quarter of 2016, an increase of $43,000, or 0.8%, compared to the third quarter of 2015.

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 2016 increased $161,000, or 5.5%, to $3,072,000, compared to the same period in 2015.  Salaries increased $60,000, or 2.5%, due to new hires and ordinary merit increases.  Benefits costs rose $101,000, or 19.1%, due primarily to increased health insurance cost resulting from additional claims in the third quarter 2016, compared to the same period in 2015.

Net occupancy costs increased $11,000, or 2.6%, reflecting increased building maintenance expense of $16,000, offset in part by decreased building utility expense of $5,000, when comparing the two periods.  Furniture and equipment expense increased by $13,000, or 3.1%, with declines in depreciation expense being offset by increases in software and equipment maintenance. Marketing expense increased $46,000, or 26.4%, to $220,000 for the three month period ended September 30, 2016. The increase is due to increased billboard and television advertising in the third quarter 2016, compared to the same period in 2015.

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CONDITION AND RESULTS OF OPERATIONS

Third party services are comprised of professional services, including legal, accounting, auditing and consulting services, as well as fees paid to outside vendors for support services of day-to-day operations. These support services include correspondent banking services, statement printing and mailing, investment security safekeeping and supply management services. Third party services expense increased $51,000, or 13.1%, to $440,000 for the three months ended September 30, 2016 when compared to the same period in 2015, attributable primarily to increased consulting cost of $28,000 for www.qnbbank.com website redesign, increased legal fees of $19,000 related to loan origination and collection activity, and increased audit and accounting fees of $6,000.

Other non-interest expense decreased $251,000, or 34.3%, to $480,000 for the third quarter of 2016. In the third quarter 2015, other non-interest expense was $731,000 which included a $208,000 third party contract termination fee related to debit card platform upgrades, which occurred in 2016.

Nine-Month Comparison

Total non-interest expense was $16,728,000 for the nine-month period ended September 30, 2016, a decrease of $36,000, or 0.2%, compared to the same period in 2015.

Salaries and benefits expense increased $154,000, or 1.7%, to $9,114,000 for the nine months ended September 30, 2016 compared to the same period in 2015, due primarily to increased health insurance cost resulting from additional claims.

Net occupancy costs decreased $31,000, or 2.3%, primarily due to reduced utilities expense and branch rent.  Furniture and equipment expense increased $17,000, or 1.3%, when comparing the two periods, with increased software and computer backup expense offset in part by a decrease in depreciation expense.   Marketing expense increased $85,000, or 14.3%, to $681,000 for the nine months ended September 30, 2016 for the same reason noted for the quarter in addition to a $50,000 charitable donation, which resulted in QNB receiving a shares tax credit.

Third party services expense increased $11,000, or 0.9%, to $1,246,000 for the nine months ended September 30, 2016 when compared to the same period in 2015. This included an increase in legal, consulting and audit and accounting expenses, offset by decreased third party services expense.

State tax expense was $499,000 for the nine months ended September 30, 2016, a decrease of $21,000 compared to the same period in 2015.  Year-to-date accrued shares tax was adjusted during the second quarter 2016 for a $37,500 shares tax credit related to a charitable donation.

Other non-interest expense decreased $259,000, or 14.4%, to $1,543,000 for the nine months ended September 30, 2016. Contributing to the higher expenses in 2015 is a $208,000 third party contract termination fee noted previously for the quarter, as well as reduced net collection and foreclosed property expenses, reduced courier costs and a decrease in check card charge-offs, when comparing the two periods.

INCOME TAXES

QNB utilizes an asset and liability approach for financial accounting and reporting of income taxes. As of September 30, 2016, QNB’s net deferred tax asset was $2,334,000. The primary components of deferred taxes are deferred tax assets of $2,582,000 relating to the allowance for loan losses, $539,000 related to non-accrual interest income, $179,000 related to deferred fees and rent, $80,000 generated by OTTI charges on equity securities and $392,000 related to OTTI charges on trust preferred securities. These amounts are partially offset by $1,179,000 in deferred tax liabilities related to unrealized gains on available for sale securities. As of December 31, 2015, QNB’s net deferred tax asset was $3,673,000. The primary difference in the balance of net deferred tax assets when comparing September 30, 2016 to December 31, 2015 is the increase in deferred tax liability due to increased 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 $821,000 for the three-month period ended September 30, 2016 compared to $715,000 for the three-month period ended September 30, 2015. The effective tax rate for third quarter of 2016 was 26.4% compared with 24.4% for

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CONDITION AND RESULTS OF OPERATIONS

the third quarter of 2015. For the nine-month periods ended September 30, 2016 and 2015 applicable income taxes and the effective tax rates were $2,311,000, or 25.8%, and $1,999,000, or 24.1%, respectively. This increase in effective tax rate in 2016 is due to the decreased proportion of tax-free income to total income, primarily municipal securities interest income, and increased state income taxes due to the depletion of a net loss carryforward at QNB Corp. in 2015.

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, loan fundings remained lower than expected in the first nine months of 2016.  The low level of interest rates and the extreme rate competition for quality loans is anticipated to continue through 2016. It is also anticipated that the rate competition for attracting and retaining deposits may increase in 2016 and into 2017 as short-term interest rates increase, which could result in a lower net interest margin and a decline in net interest income.

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

Total assets at September 30, 2016 were $1,071,931,000 compared with $1,020,936,000 at December 31, 2015.  Cash and cash equivalents increased $52,437,000 from $16,991,000 at December 31, 2015 to $69,428,000 at September 30, 2016, due in part to growth in deposit balances and delayed fundings for loan commitments, primarily commercial real estate projects granted in 2015 and 2016.

In addition to delayed loan fundings, QNB experienced large balance paydowns due to increased rate competition and sale of a commercial customer’s business and reduction of commercial credit lines.  Retail loan balances grew $7,755,000 to $122,258,000, when comparing September 30, 2016 to December 31, 2015.  The Bank had several successful home equity loan promotions over the past year and has received a strong response to the product offering. Student loans also contributed to the increase, with the portfolio doubling to $2,435,000 at September 30, 2016.

The composition of the investment portfolio is essentially unchanged since December 31, 2015.  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.   The company received principal and interest payments totaling $115,000 for the quarter and $312,000 year-to-date on four of these securities during 2016, which was recorded as a reduction to the amortized cost.  There was no credit-related other-than-temporary impairment charge during the quarter or nine months ended September 30, 2016 or 2015. It is possible that future calculations could require recording additional other-than-temporary impairment charges through earnings. For additional detail on these securities see Note 7 Investment Securities and Note 9 Fair Value Measurements and Disclosures.

Total deposits increased $36,926,000, or 4.1% to $926,712,000 at September 30, 2016 compared to the December 31, 2015 balances. Non-interest bearing demand balances increased $6,486,000 to $105,029,000 at September 30, 2016, due primarily to business deposits. Interest-bearing demand balances increased $16,303,000 to $291,228,000 from December 31, 2015 to September 30, 2016.  This increase is due in part to municipal deposit balance growth, which increased $7,286,000.  Municipal deposits can be volatile depending on the timing of deposits and withdrawals, and the cash flow needs of the school districts or municipalities.  Money market and savings balances increased $5,584,000 and $7,553,000, respectively, to $72,756,000 and $229,323,000, respectively.  Time deposits increased $1,000,000 from December 31, 2015 to September 30, 2016. During the first half of 2016, QNB offered an attractive five-year rate to lock in low-cost funding and retain maturing deposits, in anticipation of an eventual increase in interest

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CONDITION AND RESULTS OF OPERATIONS

rates. It is anticipated that total deposits will decrease during the fourth quarter as tax money received from the local school districts during September will then flow out for the subsequent twelve months 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 increased 10.8%, from $37,163,000 at December 31, 2015 to $41,179,000 at September 30, 2016. 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, 2016, the Bank had a maximum borrowing capacity with the FHLB of approximately $242,784,000. The maximum borrowing capacity changes as a function of qualifying collateral assets. QNB has no outstanding borrowings with the FHLB at September 30, 2016.  In addition, the Bank maintains unsecured Federal funds lines with three correspondent banks totaling $46,000,000. At September 30, 2016, there were no outstanding borrowings under these lines.  During the first quarter of 2016, QNB borrowed from the FHLB to fund short-term liquidity needs. Future availability under these lines is subject to the policies of the granting banks and may be withdrawn.

Liquid sources of funds, including cash, trading and available-for-sale investment securities and loans held-for-sale have increased $58,948,000, or 15.3%, since December 31, 2015, totaling $443,030,000 at September 30, 2016. This is due primarily due to increased cash provided by growth in deposits, especially seasonal municipal deposits in the third quarter 2016, coupled with declining loan balances since year-end 2015. Management expects these liquid sources will be adequate to meet normal fluctuations in loan demand or deposit withdrawals. The investment portfolio is expected to continue to provide sufficient liquidity, 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 may decrease.

Approximately $215,013,000 and $197,149,000 of available-for-sale securities at September 30, 2016 and December 31, 2015, 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, 2015 to September 30, 2016.

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, 2016 was $97,996,000, or 9.14% of total assets, compared to shareholders' equity of $90,443,000, or 8.86% of total assets, at December 31, 2015. Shareholders’ equity at September 30, 2016 and December 31, 2015 included a positive adjustment of $2,288,000 and a negative adjustment $546,000, respectively, related to unrealized holding gains and losses, net of taxes, on investment securities available-for-sale. Without these adjustments, shareholders' equity to total assets would have been 8.95% and 8.91% at September 30, 2016 and December 31, 2015, respectively.

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CONDITION AND RESULTS OF OPERATIONS

Average shareholders' equity and average total assets were $93,737,000 and $1,020,863,000 for the nine months ended September 30, 2016, an increase of 5.8% and 3.3%, respectively, from the averages for the year ended December 31, 2015. The ratio of average total equity to average total assets was 9.18% for the nine months ended September 30, 2016 compared to 8.97% for all of 2015. 

Retained earnings at September 30, 2016 were impacted by nine months of net income of $6,655,000 partially offset by cash dividends declared and paid of $3,045,000 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 $753,000 and $667,000 to capital during the nine months ended September 30, 2016 and 2015, 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, 2016, 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 and the Bank are subject to various regulatory capital requirements as issued by Federal regulatory authorities. Regulatory capital is defined in terms of Tier 1 capital and Tier 2. Risk-based capital ratios are expressed as a percentage of risk-weighted assets. Risk-weighted assets are determined by assigning various weights to all assets and off-balance sheet arrangements, such as letters of credit and loan commitments, based on associated risk. The 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 increased for both the quantity and quality of capital. The rules included a new common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, raised the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0%, required a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and required 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 was phased in beginning January 1, 2016, at 0.625% of risk-weighted assets and will 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 revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets. QNB continues to monitor the effect of these new rules on the business, operations and capital levels of the Company and the Bank.

As of September 30, 2016, 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.

	September30,			December 31,
Capital Analysis	2016			2015
Regulatory Capital
Shareholders' equity	$	97,996		$	90,443
Net unrealized securities gains, net of tax		(2,288	)		546
Net unrealized losses on available-for-sale equity securities,    net of tax		—			(167	)
Disallowed intangible assets		(4	)		(3	)
Common equity tier I capital		95,704			90,819
Tier I capital		95,704			90,819
Allowable portion: Allowance for loan losses and reserve    for unfunded commitments		7,652			7,613
Unrealized gains on equity securities, net of tax		1			—
Total regulatory capital	$	103,357		$	98,432
Risk-weighted assets	$	790,088		$	782,667
Quarterly average assets for leverage capital purposes	$	1,053,997		$	1,023,362

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CONDITION AND RESULTS OF OPERATIONS

	September 30,			December 31,
Capital Ratios	2016			2015
Common equity tier I capital / risk-weighted assets		12.11	%		11.60	%
Tier I capital / risk-weighted assets		12.11	%		11.60	%
Total regulatory capital / risk-weighted assets		13.08	%		12.58	%
Tier I capital / average assets (leverage ratio)		9.08	%		8.87	%

All regulatory capital ratios improved from December 31, 2015 as tier I capital and total regulatory capital increased for the third quarter 2016 when compared to the fourth quarter of 2015. The Company remains well-capitalized by all applicable regulatory requirements as of September 30, 2016.

MARKET RISK MANAGEMENT

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

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

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

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, 2016 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, 2016 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)	2016			2015
+300		-6.73	%		-10.71	%
+200		-4.09	%		-7.14	%
+100		-1.78	%		-3.68	%
-100	*N/A			*N/A

* Certain short-term interest are below 1%

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

59

QNB CORP. AND SUBSIDIARY

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

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, 2016 QNB did not have any hedging transactions in place such as interest rate swaps, caps or floors.

60

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.

61

QNB CORP. AND SUBSIDIARY

PART II. OTHER INFORMATION

SEPTEMBER 30, 2016

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, 2015.

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, 2016. The following provides certain information relating to QNB's stock repurchase plan.

Period	TotalNumber 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, 2016 through July 31, 2016		—		—		—		42,117
August 1, 2016 through August 31, 2016		—		—		—		42,117
September 1, 2016 through September 30, 2016		—		—		—		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.

62

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 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.

63

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 8, 2016	By:	/s/ David W. Freeman
		David W. Freeman
		Chief Executive Officer
Date:         November 8, 2016	By:	/s/ Janice McCracken Erkes
		Janice McCracken Erkes
		Chief Financial Officer
Date:         November 8, 2016	By:	/s/ Phillip N. Geiger
		Phillip N. Geiger
		Chief Accounting Officer, QNB Bank

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 8, 2016	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 8, 2016	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, 2016, 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 8, 2016	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, 2016, 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 8, 2016	By:	/s/ Janice McCracken Erkes
		Janice McCracken Erkes
		Chief Financial Officer

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Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2016	Nov. 01, 2016
Document And Entity Information [Abstract]
Entity Registrant Name	QNB CORP
Entity Central Index Key	0000750558
Trading Symbol	qnbc
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding (in shares)		3,401,488
Document Type	10-Q
Document Period End Date	Sep. 30, 2016
Document Fiscal Year Focus	2016
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Assets
Cash and due from banks	$ 12,437	$ 9,159
Interest-bearing deposits in banks	56,991	7,832
Total cash and cash equivalents	69,428	16,991
Investment securities
Trading	4,312	4,189
Available-for-sale (amortized cost $365,367 and $362,742)	368,834	361,915
Held-to-maturity (fair value $147 and $151)	147	147
Restricted investment in bank stocks	522	508
Loans held-for-sale	456	987
Loans receivable	608,231	615,270
Allowance for loan losses	(7,593)	(7,554)
Net loans	600,638	607,716
Bank-owned life insurance	11,206	10,978
Premises and equipment, net	8,777	9,257
Accrued interest receivable	2,573	2,562
Net deferred tax assets	2,334	3,673
Other assets	2,704	2,013
Total assets	1,071,931	1,020,936
Deposits
Demand, non-interest bearing	105,029	98,543
Interest-bearing demand	291,228	274,925
Money market	72,756	67,172
Savings	229,323	221,770
Time	132,128	135,251
Time of $100 or more	96,248	92,125
Total deposits	926,712	889,786
Short-term borrowings	41,179	37,163
Accrued interest payable	310	330
Other liabilities	5,734	3,214
Total liabilities	973,935	930,493
Shareholders' Equity
Common stock, par value $0.625 per share; authorized 10,000,000 shares; 3,564,657 shares and 3,524,363 shares issued; 3,400,088 and 3,359,794 shares outstanding	2,228	2,203
Surplus	17,057	15,973
Retained earnings	78,899	75,289
Accumulated other comprehensive income (loss), net of tax	2,288	(546)
Treasury stock, at cost; 164,569 shares	(2,476)	(2,476)
Total shareholders' equity	97,996	90,443
Total liabilities and shareholders' equity	$ 1,071,931	$ 1,020,936

XML

Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Statement Of Financial Position [Abstract]
Available-for-sale, amortized cost	$ 365,367	$ 362,742
Held-to-maturity, fair value	$ 147	$ 151
Common stock, par value (in dollars per share)	$ 0.625	$ 0.625
Common stock, shares authorized (in shares)	10,000,000	10,000,000
Common stock, shares issued (in shares)	3,564,657	3,524,363
Common stock, shares outstanding (in shares)	3,400,088	3,359,794
Treasury stock, shares (in shares)	164,569	164,569

XML

Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Interest income
Interest and fees on loans	$ 6,376	$ 6,302	$ 19,060	$ 18,148
Interest and dividends on investment securities (AFS & HTM):
Taxable	1,317	1,242	3,964	3,840
Tax-exempt	478	519	1,483	1,474
Interest on trading securities	36	43	106	124
Interest on interest-bearing balances and other interest income	80	32	138	105
Total interest income	8,287	8,138	24,751	23,691
Interest on deposits
Interest-bearing demand	177	170	492	490
Money market	48	40	142	114
Savings	233	204	688	600
Time	378	381	1,122	1,166
Time of $100 or more	330	300	967	890
Interest on short-term borrowings	36	28	115	87
Total interest expense	1,202	1,123	3,526	3,347
Net interest income	7,085	7,015	21,225	20,344
Provision for loan losses			125	60
Net interest income after provision for loan losses	7,085	7,015	21,100	20,284
Non-interest income
Total other-than-temporary impairment loss on investment securities	0	0	(192)
Net other-than temporary impairment losses on investment securities			(192)
Net gain on sale of investment securities	316	83	842	800
Net gain on investment securities	316	83	650	800
Net (loss) gain on trading activities	(39)	36	47	17
Fees for services to customers	425	434	1,205	1,240
ATM and debit card	419	397	1,229	1,153
Retail brokerage and advisory	129	180	425	557
Bank-owned life insurance	73	73	217	215
Merchant	86	75	242	226
Net gain on sale of loans	143	120	263	302
Other	92	95	316	259
Total non-interest income	1,644	1,493	4,594	4,769
Non-interest expense
Salaries and employee benefits	3,072	2,911	9,114	8,960
Net occupancy	438	427	1,305	1,336
Furniture and equipment	437	424	1,302	1,285
Marketing	220	174	681	596
Third party services	440	389	1,246	1,235
Telephone, postage and supplies	189	182	549	551
State taxes	178	173	499	520
FDIC insurance premiums	162	162	489	479
Other	480	731	1,543	1,802
Total non-interest expense	5,616	5,573	16,728	16,764
Income before income taxes	3,113	2,935	8,966	8,289
Provision for income taxes	821	715	2,311	1,999
Net income	$ 2,292	$ 2,220	$ 6,655	$ 6,290
Earnings per share - basic	$ 0.68	$ 0.66	$ 1.97	$ 1.89
Earnings per share - diluted	0.67	0.66	1.96	1.88
Cash dividends per share	$ 0.30	$ 0.29	$ 0.90	$ 0.87

XML

Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
Net income	$ 3,113	$ 2,935	$ 8,966	$ 8,289
Net unrealized holding (losses) gains on securities:
Unrealized holding (losses) gains arising during the period	(875)	1,547	4,944	1,333
Reclassification adjustment for gains included in net income	(316)	(83)	(650)	(800)
Other comprehensive (loss) income	(1,191)	1,464	4,294	533
Unrealized holding (losses) gains arising during the period	(298)	526	1,681	453
Reclassification adjustment for gains included in net income	(107)	(29)	(221)	(273)
Other comprehensive (loss) income	(405)	497	1,460	180
Unrealized holding (losses) gains arising during the period	(577)	1,021	3,263	880
Reclassification adjustment for gains included in net income	(209)	(54)	(429)	(527)
Other comprehensive (loss) income	(786)	967	2,834	353
Total comprehensive income	1,922	4,399	13,260	8,822
Net income	821	715	2,311	1,999
Total comprehensive income	416	1,212	3,771	2,179
Net income	2,292	2,220	6,655	6,290
Total comprehensive income	$ 1,506	$ 3,187	$ 9,489	$ 6,643

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Consolidated Statement of Shareholders' Equity (Unaudited) - USD ($) $ in Thousands	Total	Common Stock [Member]	Common Stock [Member] Employee Stock [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	AOCI Attributable to Parent [Member]	Treasury Stock [Member]
Balance (in shares) at Dec. 31, 2014		3,316,658
Balance at Dec. 31, 2014	$ 86,354	$ 2,176		$ 14,819	$ 70,928	$ 907	$ (2,476)
Net income	6,290				6,290
Other comprehensive income, net of tax	353					353
Cash dividends declared ($0.90 per share)	(2,901)				(2,901)
Stock issued in connection with dividend reinvestment and stock purchase plan (in shares)		23,796	1,721
Stock issued in connection with dividend reinvestment and stock purchase plan	667	$ 15		652
Stock issued for employee stock purchase plan	$ 43	$ 1		42
Stock issued for options exercised (in shares)	12,150	8,302
Stock issued for options exercised	$ 106	$ 5		101
Tax benefit of stock options exercised	20			20
Stock-based compensation expense	64			64
Balance (in shares) at Sep. 30, 2015		3,350,477
Balance at Sep. 30, 2015	$ 90,996	$ 2,197		15,698	74,317	1,260	(2,476)
Balance (in shares) at Dec. 31, 2015	3,359,794	3,359,794
Balance at Dec. 31, 2015	$ 90,443	$ 2,203		15,973	75,289	(546)	(2,476)
Net income	6,655				6,655
Other comprehensive income, net of tax	2,834					2,834
Cash dividends declared ($0.90 per share)	(3,045)				(3,045)
Stock issued in connection with dividend reinvestment and stock purchase plan (in shares)		24,886	1,540
Stock issued in connection with dividend reinvestment and stock purchase plan	753	$ 15		738
Stock issued for employee stock purchase plan	$ 41	$ 1		40
Stock issued for options exercised (in shares)	18,425	13,868
Stock issued for options exercised	$ 243	$ 9		234
Tax benefit of stock options exercised	12			12
Stock-based compensation expense	$ 60			60
Balance (in shares) at Sep. 30, 2016	3,400,088	3,400,088
Balance at Sep. 30, 2016	$ 97,996	$ 2,228		$ 17,057	$ 78,899	$ 2,288	$ (2,476)

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Consolidated Statement of Shareholders' Equity (Unaudited) (Parentheticals) - $ / shares	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Retained Earnings [Member]
Cash dividends declared, per share (in dollars per share)	$ 0.90	$ 0.87

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Operating Activities
Net income	$ 6,655	$ 6,290
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	668	769
Provision for loan losses	125	60
Net gain on investment securities available-for-sale	(650)	(800)
Net (gain) loss on sale of other real estate owned, repossessed assets and premises and equipment	(2)	17
Net gain on sale of loans	(263)	(302)
Proceeds from sales of residential mortgages held-for-sale	7,188	9,595
Origination of residential mortgages held-for-sale	(6,394)	(9,233)
Income on bank-owned life insurance	(217)	(215)
Stock-based compensation expense	60	64
Net (increase) decrease in trading securities	(123)	582
Deferred income tax provision	(121)	66
Net increase in income taxes payable	141	17
Net (increase) decrease in accrued interest receivable	(11)	13
Amortization of mortgage servicing rights and change in valuation allowance	59	53
Net amortization of premiums and discounts on investment securities	1,396	1,583
Net decrease in accrued interest payable	(20)	(21)
Increase in other assets	(775)	(364)
Increase (decrease) in other liabilities	329	(908)
Net cash provided by operating activities	8,045	7,266
Investing Activities
Proceeds from payments, maturities and calls of investment securities available-for-sale	85,046	68,472
Proceeds from the sale of investment securities available-for-sale	31,892	27,480
Purchases of investment securities available-for-sale	(118,245)	(79,565)
Proceeds from redemption of investment in restricted bank stock	1,482	1,318
Purchase of restricted bank stock	(1,496)	(1,179)
Net decrease (increase) in loans	6,953	(27,580)
Net purchases of premises and equipment	(188)	(413)
Proceeds from sales of other real estate owned and repossessed assets	2	3,244
Net cash provided by (used in) investing activities	5,446	(8,223)
Financing Activities
Net increase in non-interest bearing deposits	6,486	11,172
Net increase in interest-bearing deposits	30,440	45,910
Net increase (decrease) in short-term borrowings	4,016	(2,601)
Tax benefit from exercise of stock options	12	20
Cash dividends paid, net of reinvestment	(2,662)	(2,579)
Proceeds from issuance of common stock	654	494
Net cash provided by financing activities	38,946	52,416
Increase in cash and cash equivalents	52,437	51,459
Cash and cash equivalents at beginning of year	16,991	16,991
Cash and cash equivalents at end of period	69,428	68,450
Supplemental Cash Flow Disclosures
Interest paid	3,546	3,368
Income taxes paid	2,227	1,904
Non-cash transactions:
Transfer of loans to repossessed assets or other real estate owned		215
Unsettled trades to purchase securities	$ 2,558	$ 3,987

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2016

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation

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 2015 Annual Report incorporated in the Form 10-K. Operating results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

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, 2016, for items that should potentially be recognized or disclosed in these financial statements.

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Note 2 - Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2016

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Recent Accounting Pronouncements

2. RECENT ACCOUNTING PRONOUNCEMENTS

On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This new standard on accounting for leases introduces a lessee model that brings most leases on the balance sheet, but recognizes expenses in the income statement similar to how items are recorded today. The new standard eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The ASU also eliminates the current real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities.  All entities will classify leases to determine how to recognize the related revenue and expense and this classification will affect amounts that lessors record on the balance sheet. The new guidance will be effective for public companies for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. QNB is evaluating the impact of this new standard on its consolidated financial statements.

On March 15, 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence.  The ASU further requires that unrealized holding gains or losses in accumulated other comprehensive income related to an  available-for-sale security that becomes eligible for the equity method be recognized in earnings as of the date on which the investment qualifies for the equity method. The guidance in the ASU is effective for all entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years; early adoption is permitted for all entities. QNB does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This ASU amends the principal-versus agent implementation guidance and illustrations in the Board’s new revenue standard (ASU 2014-09). The FASB issued the ASU in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. This ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14).

On March 30, 2016, the FASB issued ASU 2016-09, Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. Entities will be required to recognize the income tax effects of awards in the income statement when awards vest or are settled which will eliminate additional-paid-in-capital or APIC pools. For public companies, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within those annual reporting periods. QNB is evaluating this new standard, but does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

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

To that end, the new guidance:

• Eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an organization’s current estimate of all expected credit losses over the contractual term of its financial assets

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

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

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

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

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

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

For public business entities that are U.S. Securities and Exchange Commission (SEC) filers, the new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  QNB is evaluating the impact of this new standard on its consolidated financial statements.

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Note 3 - Stock-based Compensation and Shareholders' Equity

9 Months Ended

Sep. 30, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

STOCK-BASED COMPENSATION AND SHAREHOLDERS’ EQUITY

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 for both the three months ended September 30, 2016 and 2015. Stock-based compensation expense was $60,000 and $64,000 for the nine months ended September 30, 2016 and 2015, respectively. As of September 30, 2016, there was approximately $102,000 of unrecognized compensation cost related to unvested share-based compensation award grants that is expected to be recognized over the next 29 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 after a three-year period. As of September 30, 2016, 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, 2016, there were 184,200 options granted, 65,050 options forfeited, 64,425 options exercised, and 54,725 options outstanding under this Plan. The 2005 Plan expired on March 15, 2015.

The 2015 Plan authorizes the issuance of 300,000 shares. The terms of the 2015 Plan are identical to the 2005 Plan. There were 23,500 options granted and outstanding under this Plan as of September 30, 2016. There were no options forfeited or exercised as of September 30, 2016. The 2015 Plan expires on February 24, 2025.

The fair value of each option is amortized into compensation expense on a straight-line basis between the grant date for the option and each vesting date. QNB estimated the fair value of stock options on the date of the grant using the Black-Scholes option pricing model. The model requires the use of 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,	2016			2015
Risk free interest rate		1.14	%		1.06	%
Dividend yield		3.78	%		3.86	%
Volatility		22.62	%		26.74	%
Expected life (years)		4.20			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 2016 and 2015 was $3.79 and $4.38, respectively.

Stock option activity during the nine months ended September 30, 2016 and 2015 is as follows:

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2015		82,875		$	24.33
Granted		23,500			30.40
Exercised		(18,425	)		20.70
Forfeited		(9,725	)		25.61
Outstanding at September 30, 2016		78,225		$	26.85		2.74	$	560
Exercisable at September 30, 2016		23,100		$	22.38		0.87	$	268

	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

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Note 4 - Share Repurchase Plan

9 Months Ended

Sep. 30, 2016

Temporary Equity Disclosure [Abstract]

SHARE REPURCHASE PLAN

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, 2016 and 2015. As of September 30, 2016, 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, 2016

Earnings Per Share [Abstract]

Earnings Per Share

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,
	2016		2015		2016		2015
Numerator for basic and diluted earnings per share - net    income	$	2,292	$	2,220	$	6,655	$	6,290
Denominator for basic earnings per share - weighted average     shares outstanding		3,391,471		3,343,011		3,381,491		3,332,650
Effect of dilutive securities - employee stock options		12,568		13,778		9,238		12,980
Denominator for diluted earnings per share - adjusted    weighted average shares outstanding		3,404,039		3,356,789		3,390,729		3,345,630
Earnings per share - basic	$	0.68	$	0.66	$	1.97	$	1.89
Earnings per share - diluted		0.67		0.66		1.96		1.88

There were no stock options that were anti-dilutive for the three-month period ended September 30, 2016, and 41,350 anti-dilutive options for the nine months ended September 30, 2016. There were 21,000 stock options that were anti-dilutive for both the three and nine-month periods ended September 30, 2015. These stock options were not included in the above calculation.

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Note 6 - Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2016

Other Comprehensive Income Loss Tax [Abstract]

Comprehensive Income (Loss)

6. COMPREHENSIVE INCOME (LOSS)

The following shows the components of accumulated other comprehensive income (loss) at September 30, 2016 and December 31, 2015:

	September 30,			December 31,
	2016			2015
Unrealized net holding gains (losses) on available-for-sale    securities	$	3,780		$	(568	)
Unrealized losses on available-for-sale securities for which a    portion of an other-than-temporary impairment loss has been    recognized in earnings		(313	)		(259	)
Accumulated other comprehensive income (loss)		3,467			(827	)
Tax effect		(1,179	)		281
Accumulated other comprehensive income (loss), net of tax	$	2,288		$	(546	)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015:

Three months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	316		$	83		Net gain on sale of investment    securities
Tax effect		(108	)		(28	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	208		$	55		Net of tax

Nine months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	842		$	800		Net gain on sale of investment    securities
Other-than-temporary impairment losses on      investment securities		(192	)		-		Net other-than-temporary impairment      losses on investment securities
		650			800
Tax effect		(221	)		(273	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	429		$	527		Net of tax

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Note 7 - Investment Securities

9 Months Ended

Sep. 30, 2016

Investments Debt And Equity Securities [Abstract]

Investment Securities

7. INVESTMENT SECURITIES

QNB engages in trading activities for its own account. Municipal securities that are held principally for resale in the near term are recorded in the trading account at fair value with changes in fair value recorded in non-interest income. There were net realized and unrealized losses of $39,000 recorded for the three months ended September 30, 2016, which compares to net realized and unrealized gains of $36,000 recorded for the three months ended September 30, 2015. There were net realized and unrealized gains of $47,000 and $17,000 recorded for the nine months ended September 30, 2016 and 2015, respectively. Unrealized gains on trading activity related to trading securities still held at September 30, 2016 and December 31, 2015 totaled $13,000 and $31,000, respectively. Interest and dividends are included in interest income.

Trading securities, at fair value, at September 30, 2016 and December 31, 2015 were as follows:

	September 30,		December 31,
	2016		2015
State and municipal securities	$	4,312	$	4,189

The amortized cost and estimated fair values of investment securities available-for-sale at September 30, 2016 and December 31, 2015 were as follows:

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2016	value		gains		losses			cost
U.S. Government agency	$	65,812	$	167	$	(98	)	$	65,743
State and municipal		73,560		1,701		(37	)		71,896
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		132,746		2,277		(11	)		130,480
Collateralized mortgage obligations (CMOs)		79,264		422		(298	)		79,140
Pooled trust preferred		2,275		246		(950	)		2,979
Corporate debt		7,112		50		(8	)		7,070
Equity		8,065		338		(332	)		8,059
Total investment securities available-for-sale	$	368,834	$	5,201	$	(1,734	)	$	365,367

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2015	value		gains		losses			cost
U.S. Government agency	$	61,779	$	88	$	(490	)	$	62,181
State and municipal		78,954		1,554		(31	)		77,431
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,681		944		(920	)		136,657
Collateralized mortgage obligations (CMOs)		65,610		178		(1,178	)		66,610
Pooled trust preferred		2,653		259		(897	)		3,291
Corporate debt		9,004		15		(95	)		9,084
Equity		7,234		516		(770	)		7,488
Total investment securities available-for-sale	$	361,915	$	3,554	$	(4,381	)	$	362,742

The amortized cost and estimated fair value of securities available-for-sale by contractual maturity at September 30, 2016 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, 2016	Fair value		cost
Due in one year or less	$	6,140	$	6,085
Due after one year through five years		240,710		237,900
Due after five years through ten years		101,608		100,465
Due after ten years		12,311		12,858
Equity securities		8,065		8,059
Total investment securities available-for-sale	$	368,834	$	365,367

For the three months ended September 30, 2016 and 2015, proceeds from sales of investment securities available-for-sale were approximately $3,078,000 and $685,000. Proceeds from sales of investment securities available-for-sale were approximately $31,892,000 and $27,480,000 for the nine months ended September 30, 2016 and 2015, respectively.

At September 30, 2016 and December 31, 2015, investment securities available-for-sale totaling approximately $215,013,000 and $197,149,000, 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, 2016								Three months ended September 30, 2015
					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	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83
Debt securities		—		—		—		—		—		—		—		—
Total	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83

	Nine months ended September 30, 2016										Nine months ended September 30, 2015
						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	$	734	$	—		$	(192	)	$	542	$	713	$	(23	)	$	—	$	690
Debt securities		181		(73	)		—			108		154		(44	)		—		110
Total	$	915	$	(73	)	$	(192	)	$	650	$	867	$	(67	)	$	—	$	800

The tax expense applicable to the net realized gains for the quarters and nine-month periods ended September 30, 2016 and 2015 were $107,000 and $29,000 for the quarter and $221,000 and $273,000 year-to-date, 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 2016 or 2015. The 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,	2016		2015
Balance, beginning of period	$	1,153	$	1,153
Additions:
Initial credit impairments		—		—
Subsequent credit impairments		—		—
Balance, end of period	$	1,153	$	1,153

The amortized cost and estimated fair values of investment securities held-to-maturity at September 30, 2016 and December 31, 2015 were as follows:

Held-To-Maturity

September 30, 2016

December 31, 2015

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

$

—

$

—

$

147

$

147

$

4

$

—

$

151

The amortized cost and estimated fair value of securities held-to-maturity by contractual maturity at September 30, 2016 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, 2016	Fair value		cost
Due in one year or less	$	147	$	147
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		—		—
Total investment securities held-to-maturity	$	147	$	147

There were no sales of investment securities classified as held-to-maturity during the three and nine months ended September 30, 2016 or 2015.

The following table indicates the length of time individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015:

September 30, 2016
			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		15	$	20,918	$	(98	)	$	—	$	—		$	20,918	$	(98	)
State and municipal		11		3,796		(37	)		—		—			3,796		(37	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		6		9,222		(11	)		—		—			9,222		(11	)
Collateralized mortgage obligations (CMOs)		38		27,179		(100	)		15,823		(198	)		43,002		(298	)
Pooled trust preferred		5		—		—			1,938		(950	)		1,938		(950	)
Corporate debt		1		—		—			1,003		(8	)		1,003		(8	)
Equity		18		3,259		(240	)		1,065		(92	)		4,324		(332	)
Total		94	$	64,374	$	(486	)	$	19,829	$	(1,248	)	$	84,203	$	(1,734	)

December 31, 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		32	$	40,949	$	(418	)	$	4,426	$	(72	)	$	45,375	$	(490	)
State and municipal		20		6,646		(19	)		1,555		(12	)		8,201		(31	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		62		90,796		(871	)		1,403		(49	)		92,199		(920	)
Collateralized mortgage obligations (CMOs)		49		28,372		(261	)		26,354		(917	)		54,726		(1,178	)
Pooled trust preferred		5		—		—			2,193		(897	)		2,193		(897	)
Corporate debt		6		5,988		(95	)		—		—			5,988		(95	)
Equity		19		4,035		(695	)		193		(75	)		4,228		(770	)
Total		193	$	176,786	$	(2,359	)	$	36,124	$	(2,022	)	$	212,910	$	(4,381	)

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, 2016 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, 2016. These securities have a total amortized cost of approximately $2,979,000 and a fair value of $2,275,000. 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, 2016:

Deal	Class		Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2016)		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	$	188	$	(55	)	$	—	$	(1	)	B1/BB		5		—		18.0	%		141.2	%
PreTSL XVII	Mezzanine			606		456		(150	)		—		(222	)	C/CC		34		5		21.6			99.7
PreTSL XIX	Mezzanine			874		483		(391	)		—		—		Caa1/CC		41		12		7.7			102.0
PreTSL XXV	Mezzanine			766		488		(279	)		—		(222	)	Ca/C		44		5		27.0			89.3
PreTSL XXVI	Mezzanine			399		323		(75	)		—		(270	)	Caa3/C		45		7		18.0			97.4
PreTSL XXVI	Mezzanine			91		337		246			—		(438	)	Caa3/C		45		7		18.0			97.4
			$	2,979	$	2,275	$	(704	)	$	—	$	(1,153	)

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

On January 14, 2014, Regulators released a final rule authorizing retention of pooled trust preferred securities backed primarily by bank-issued trust preferred securities which included the PreTSLs held by QNB. Due to the uncertainty invoked between the original release of the Volcker Rule and the final rule, there was a noticeable increase in trading activity. However, we believe most of these trades occurred under distress and do not represent trades made in an orderly market. Despite the trades that took place as discussed previously, the market for these securities at September 30, 2016 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, 2016 and 2015, 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’s revised Tier 1 capital treatment, additional prepayment analysis was performed. 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 U.S. bank holding company with an investment grade credit rating and any foreign banking organization would prepay their issuance as soon as possible. For those institutions rated below investment grade we assumed that any holding company that could refinance for a cost savings of more than 2% when compared to the approximate cost of long-term funding given their rating and marketplace interest rates, will refinance 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, whether the TARP funding was redeemed or resold through a Treasury Department auction at a premium or discount, 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 2015 were approximately 0.37%. Thus, in addition to the specific bank default assumptions used for the near term, for future defaults on the individual banks in the analysis for 2016 and beyond the rate used is calculated based on historic default averages 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.  Default factors used in the cash flow analysis range from 0.25% to 0.51%.

• 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, 2016, 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 8 - Loans & Allowance for Loan Losses

9 Months Ended

Sep. 30, 2016

Receivables [Abstract]

Loans & Allowance for Loan Losses

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,
	2016		2015
Commercial:
Commercial and industrial	$	110,892	$	124,397
Construction		32,133		27,372
Secured by commercial real estate		233,430		235,171
Secured by residential real estate		65,671		63,164
State and political subdivisions		35,033		40,285
Indirect lease financing		8,707		10,371
Retail:
1-4 family residential mortgages		46,544		42,833
Home equity loans and lines		70,408		67,384
Consumer		5,306		4,286
Total loans		608,124		615,263
Net unearned costs		107		7
Loans receivable	$	608,231	$	615,270

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, 2016 and December 31, 2015, overdrafts were approximately $172,000 and $203,000, 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, 2016, 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, 2016 and December 31, 2015:

September 30, 2016	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	102,130	$	700	$	8,062	$	—	$	110,892
Construction		32,122		—		11		—		32,133
Secured by commercial real estate		218,404		3,504		11,522		—		233,430
Secured by residential real estate		63,004		233		2,434		—		65,671
State and political subdivisions		35,033		—		—		—		35,033
Indirect lease financing		8,571		—		136		—		8,707
	$	459,264	$	4,437	$	22,165	$	—	$	485,866

December 31, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	117,246		—	$	7,151	$	—	$	124,397
Construction		27,355		—		17		—		27,372
Secured by commercial real estate		218,958	$	361		15,852		—		235,171
Secured by residential real estate		60,286		34		2,844		—		63,164
State and political subdivisions		39,027		—		1,258		—		40,285
Indirect lease financing		10,168		—		203		—		10,371
	$	473,040	$	395	$	27,325	$	—	$	500,760

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, 2016 and December 31, 2015:

September 30, 2016	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	46,274	$	270	$	46,544
Home equity loans and lines		70,312		96		70,408
Consumer		5,211		95		5,306
	$	121,797	$	461	$	122,258

December 31, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	42,546	$	287	$	42,833
Home equity loans and lines		67,257		127		67,384
Consumer		4,286		—		4,286
	$	114,089	$	414	$	114,503

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, 2016 and December 31, 2015:

September 30, 2016	30-59days 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	$	15		—		—	$	15	$	110,877	$	110,892
Construction		—		—		—		—		32,133		32,133
Secured by commercial real estate		962	$	1,226	$	861		3,049		230,381		233,430
Secured by residential real estate		92		—		327		419		65,252		65,671
State and political subdivisions		—		—		—		—		35,033		35,033
Indirect lease financing		134		133		282		549		8,158		8,707
Retail:
1-4 family residential mortgages		—		—		—		—		46,544		46,544
Home equity loans and lines		55		172		—		227		70,181		70,408
Consumer		26		2		—		28		5,278		5,306
	$	1,284	$	1,533	$	1,470	$	4,287	$	603,837	$	608,124

December 31, 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	$	95		—		—	$	95	$	124,302	$	124,397
Construction		63		—		—		63		27,309		27,372
Secured by commercial real estate		443		—	$	935		1,378		233,793		235,171
Secured by residential real estate		—	$	97		369		466		62,698		63,164
State and political subdivisions		—		—		—		—		40,285		40,285
Indirect lease financing		320		53		130		503		9,868		10,371
Retail:
1-4 family residential mortgages		641		234		—		875		41,958		42,833
Home equity loans and lines		272		—		45		317		67,067		67,384
Consumer		12		10		—		22		4,264		4,286
	$	1,846	$	394	$	1,479	$	3,719	$	611,544	$	615,263

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, 2016 and December 31, 2015:

September 30, 2016	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	2,908
Construction		—		—
Secured by commercial real estate		—		3,319
Secured by residential real estate		—		1,417
State and political subdivisions		—		—
Indirect lease financing	$	150		132
Retail:
1-4 family residential mortgages		—		270
Home equity loans and lines		—		96
Consumer		—		95
	$	150	$	8,237

December 31, 2015	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	3,433
Construction		—		—
Secured by commercial real estate		—		3,627
Secured by residential real estate		—		1,803
State and political subdivisions		—		—
Indirect lease financing	$	11		143
Retail:
1-4 family residential mortgages		—		287
Home equity loans and lines		—		127
Consumer		—		—
	$	11	$	9,420

Activity in the allowance for loan losses for the three months ended September 30, 2016 and 2015 are as follows:

Three months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,350	$	(55	)		—		$	9	$	1,304
Construction		429		(79	)		—			—		350
Secured by commercial real estate		2,231		233			—			2		2,466
Secured by residential real estate		1,550		(57	)		—			50		1,543
State and political subdivisions		204		(64	)		—			—		140
Indirect lease financing		226		(6	)		—			—		220
Retail:
1-4 family residential mortgages		298		(20	)		—			—		278
Home equity loans and lines		343		(7	)		—			4		340
Consumer		73		33		$	(29	)		7		84
Unallocated		846		22		N/A			N/A			868
	$	7,550	$	—		$	(29	)	$	72	$	7,593

Three months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

Activity in the allowance for loan losses for the nine months ended September 30, 2016 and 2015 are as follows:

Nine months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,521	$	(105	)	$	(140	)	$	28	$	1,304
Construction		286		64			—			—		350
Secured by commercial real estate		2,411		49			—			6		2,466
Secured by residential real estate		1,812		(359	)		(20	)		110		1,543
State and political subdivisions		222		(82	)		—			—		140
Indirect lease financing		164		99			(52	)		9		220
Retail:
1-4 family residential mortgages		350		(72	)		—			—		278
Home equity loans and lines		428		(102	)		—			14		340
Consumer		76		49			(62	)		21		84
Unallocated		284		584		N/A			N/A			868
	$	7,554	$	125		$	(274	)	$	188	$	7,593

Nine months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

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 $1,149,000 and $1,288,000 as of September 30, 2016 and December 31, 2015, respectively. Non-performing TDRs totaled $2,279,000 and $990,000 as of September 30, 2016 and December 31, 2015, 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, 2016				December 31, 2015
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	2,860		—	$	1,787		—
TDRs with an allowance recorded		568	$	388		491	$	491
	$	3,428	$	388	$	2,278	$	491

There were eleven newly identified TDRs during the nine months ended September 30, 2016. The TDR concessions involved extension of a maturity date, renewal of a line of credit and concessions to lower monthly payments. As of September 30, 2016 and December 31, 2015, QNB had commitments of $2,020,000 and $1,919,000, respectively, to lend additional funds to customers with loans whose terms have been modified in troubled debt restructurings. There were charge-offs of $0 and $5,000 during the nine months ended September 30, 2016 and 2015, 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, 2016 and 2015. 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,	2016						2015
	Numberof 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
Consumer		1	$	96	$	95		—		—		—
		1	$	96	$	95		1	$	142	$	142

Nine months ended September 30,	2016						2015
	Numberof 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		6	$	1,074	$	1,033		—		—		—
Secured by residential real estate		4		524		503		—		—		—
Retail:
1-4 family residential mortgages		—		—		—		1	$	142	$	142
Consumer		1		96		95		—		—		—
		11	$	1,694	$	1,631		1	$	142	$	142

There were no loans modified as TDRs within 12 months prior to September 30, 2016 and 2015 for which there was a payment default (60 days or more past due) during the three and nine months ended September 30, 2016 and 2015.

There were no consumer mortgage loans secured by residential real estate for which foreclosure proceedings are in process at September 30, 2016.

The following tables present the balance in the allowance for loan losses at September 30, 2016 and December 31, 2015 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, 2016	Balance		Balancerelated 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	$	1,304	$	462	$	842	$	110,892	$	3,820	$	107,072
Construction		350		—		350		32,133		280		31,853
Secured by commercial real estate		2,466		—		2,466		233,430		6,050		227,380
Secured by residential real estate		1,543		189		1,354		65,671		1,716		63,955
State and political subdivisions		140		—		140		35,033		—		35,033
Indirect lease financing		220		55		165		8,707		132		8,575
Retail:
1-4 family residential mortgages		278		11		267		46,544		561		45,983
Home equity loans and lines		340		—		340		70,408		119		70,289
Consumer		84		—		84		5,306		95		5,211
Unallocated		868	N/A		N/A		N/A		N/A		N/A
	$	7,593	$	717	$	6,008	$	608,124	$	12,773	$	595,351

	Allowance for Loan Losses						Loans Receivable
December 31, 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	$	1,521	$	712	$	809	$	124,397	$	4,586	$	119,811
Construction		286		—		286		27,372		364		27,008
Secured by commercial real estate		2,411		14		2,397		235,171		6,998		228,173
Secured by residential real estate		1,812		203		1,609		63,164		2,113		61,051
State and political subdivisions		222		—		222		40,285		—		40,285
Indirect lease financing		164		20		144		10,371		146		10,225
Retail:
1-4 family residential mortgages		350		25		325		42,833		583		42,250
Home equity loans and lines		428		—		428		67,384		151		67,233
Consumer		76		—		76		4,286		—		4,286
Unallocated		284	N/A		N/A		N/A		N/A		N/A
	$	7,554	$	974	$	6,296	$	615,263	$	14,941	$	600,322

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of September 30, 2016 and December 31, 2015:

	September 30, 2016						December 31, 2015
	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	$	3,167	$	3,531	$	—	$	3,629	$	3,923	$	—
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,932		7,416		—
Secured by residential real estate		918		1,286		—		942		1,653		—
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		—		—		—		3		3		—
Retail:
1-4 family residential mortgages		381		398		—		393		406		—
Home equity loans and lines		119		180		—		151		201		—
Consumer		95		96		—		-		-		—
	$	11,010	$	11,796	$	—	$	12,414	$	13,966	$	—
With an allowance recorded:
Commercial:
Commercial and industrial	$	653	$	804	$	462	$	957	$	1,086	$	712
Construction		—		—		—		—		—		—
Secured by commercial real estate		—		—		—		66		66		14
Secured by residential real estate		798		929		189		1,171		1,279		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		143		145		20
Retail:
1-4 family residential mortgages		180		194		11		190		197		25
Home equity loans and lines		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
	$	1,763	$	2,061	$	717	$	2,527	$	2,773	$	974
Total:
Commercial:
Commercial and industrial	$	3,820	$	4,335	$	462	$	4,586	$	5,009	$	712
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,998		7,482		14
Secured by residential real estate		1,716		2,215		189		2,113		2,932		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		146		148		20
Retail:
1-4 family residential mortgages		561		592		11		583		603		25
Home equity loans and lines		119		180		—		151		201		-
Consumer		95		96		—		-		-		—
	$	12,773	$	13,857	$	717	$	14,941	$	16,739	$	974

Nine Months Ended September 30,	2016				2015
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	4,288	$	50	$	6,301	$	154
Construction		412		15		410		16
Secured by commercial real estate		6,327		100		7,881		121
Secured by residential real estate		1,945		11		1,522		—
State and political subdivisions		—		—		—		—
Indirect lease financing		114		—		22		1
Retail:
1-4 family residential mortgages		572		8		415		4
Home equity loans and lines		134		1		130		1
Consumer		10		—		3		—
	$	13,802	$	185	$	16,684	$	297

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Note 9 - Fair Value Measurements and Disclosures

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Fair Value Measurements and Disclosures

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, 2016:

September 30, 2016	Quotedprices 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	$	—	$	4,312	$	—	$	4,312
Securities available-for-sale
U.S. Government agency securities		—	$	65,812		—	$	65,812
State and municipal securities		—		73,560		—		73,560
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		132,746		—		132,746
Collateralized mortgage obligations (CMOs)		—		79,264		—		79,264
Pooled trust preferred securities		—		—	$	2,275		2,275
Corporate debt securities		—		7,112		—		7,112
Equity securities	$	8,065		—		—		8,065
Total securities available-for-sale	$	8,065	$	358,494	$	2,275	$	368,834
Total recurring fair value measurements	$	8,065	$	362,806	$	2,275	$	373,146
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,046	$	1,046
Mortgage servicing rights		—		—		142		142
Total nonrecurring fair value measurements	$	—	$	—	$	1,188	$	1,188

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the nine months ended September 30, 2016. 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, 2016.

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, 2015:

December 31, 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	$	—	$	4,189	$	—	$	4,189
Securities available-for-sale
U.S. Government agency securities		—	$	61,779		—	$	61,779
State and municipal securities		—		78,954		—		78,954
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		136,681		—		136,681
Collateralized mortgage obligations (CMOs)		—		65,610		—		65,610
Pooled trust preferred securities		—		—	$	2,653		2,653
Corporate debt securities		—		9,004		—		9,004
Equity securities	$	7,234		—		—		7,234
Total securities available-for-sale	$	7,234	$	352,028	$	2,653	$	361,915
Total recurring fair value measurements	$	7,234	$	356,217	$	2,653	$	366,104
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,698	$	1,698
Mortgage servicing rights		—		—		133		133
Total nonrecurring fair value measurements	$	—	$	—	$	1,831	$	1,831

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
September 30, 2016	Fairvalue		Valuation techniques		Unobservable input		Valueor range of values
Impaired loans	$	778	Appraisalof collateral	(1)	Appraisal adjustments	(2)	-20% to -90%
					Liquidation expenses	(3)	-10%
Impaired loans		140	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		128	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-20% to -25%
Mortgage servicing rights		142	Discounted cash flow		Remaining term		2 - 27 yrs
					Discount rate		12% to 14%

	Quantitative information about Level 3 fair value measurements
December 31, 2015	Fair value		Valuation techniques		Unobservable input		Value or range of values
Impaired loans	$	1,331	Appraisal of collateral	(1)	Appraisal adjustments	(2)	-15% to -80%
					Liquidation expenses	(3)	-10%
Impaired loans		199	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		168	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-25% to -70%
Mortgage servicing rights		133	Discounted cash flow		Remaining term		3 - 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) If lendable value (lower than wholesale) is utilized then no additional discounts are taken. If lendable value is not provided then additional discounts are applied.

(5) Values obtained from financial statements for UCC collateral (fixed assets and inventory) are discounted to estimated realizable liquidation value.

The following table presents additional information about the securities available-for-sale measured at fair value on a recurring basis and for which QNB utilized significant unobservable inputs (Level 3 inputs) to determine fair value for the nine months ended September 30, 2016:

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, January 1, 2016	$	2,653
Payments received		(312	)
Total gains or losses (realized/unrealized)
Included in earnings		—
Included in other comprehensive income		(66	)
Transfers in and/or out of Level 3		—
Balance, September 30, 2016	$	2,275

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 over the past few years, the market for these securities at September 30, 2016 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, 2016;

• 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 5.03% to 7.79%. 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, 2016 and December 31, 2015:

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

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

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

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

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

Impaired Loans (generally carried at fair value): Impaired loans are loans, in which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Included in the fair value of impaired loans at December 31, 2015 were $145,000 of loans that had no specific reserves required at year end; however, were partially charged-off at year end.  There were no such loans at September 30, 2016.

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, 2016	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	$	69,428	$	69,428	$	69,428		—		—
Investment securities:
Trading		4,312		4,312		—	$	4,312		—
Available-for-sale		368,834		368,834		8,065		358,494	$	2,275
Held-to-maturity		147		147		—		147		—
Restricted investment in bank stocks		522		522		—		522		—
Loans held-for-sale		456		466		—		466		—
Net loans		600,638		610,066		—		—		610,066
Mortgage servicing rights		498		555		—		—		555
Accrued interest receivable		2,573		2,573		—		2,573		—
Financial liabilities
Deposits with no stated maturities	$	698,336	$	698,336	$	698,336		—	$	—
Deposits with stated maturities		228,376		230,993		—	$	230,993		—
Short-term borrowings		41,179		41,179		41,179		—		—
Accrued interest payable		310		310		—		310		—
Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—

					Fair value measurements
December 31, 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	$	16,991	$	16,991	$	16,991		—		—
Investment securities:
Trading		4,189		4,189		—	$	4,189		—
Available-for-sale		361,915		361,915		7,234		352,028	$	2,653
Held-to-maturity		147		151		—		151		—
Restricted investment in bank stocks		508		508		—		508		—
Loans held-for-sale		987		1,004		—		1,004		—
Net loans		607,716		610,315		—		—		610,315
Mortgage servicing rights		504		642		—		—		642
Accrued interest receivable		2,562		2,562		—		2,562		—
Financial liabilities
Deposits with no stated maturities	$	662,410	$	662,410	$	662,410		—	$	—
Deposits with stated maturities		227,376		227,862		—	$	227,862		—
Short-term borrowings		37,163		37,163		37,163		—		—
Accrued interest payable		330		330		—		330		—
Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—

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

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Off-balance-sheet Financial Instruments and Guarantees

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,
	2016		2015
Commitments to extend credit and unused lines of credit	$	308,483	$	232,492
Standby letters of credit		12,980		9,493
Total financial instrument commitments	$	321,463	$	241,985

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, 2016 and December 31, 2015 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 11 - Regulatory Restrictions

9 Months Ended

Sep. 30, 2016

Banking And Thrift [Abstract]

Regulatory Restrictions

11. REGULATORY RESTRICTIONS

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

Both the Company and the Bank are subject to regulatory capital requirements administered by Federal banking agencies. Failure to meet minimum capital requirements can initiate actions by regulators that could have an effect on the financial statements. Under the framework for prompt corrective action, both the Company and the Bank must meet capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items.

The capital amounts and classification are also subject to qualitative judgments by the regulators. Management believes, as of September 30, 2016, that the Company and the Bank met capital adequacy requirements to which they were subject.

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

The Company and the Bank’s actual capital amounts and ratios are presented as follows:

	Capital levels
	Actual					Minimum required					Well capitalized
As of September 30, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	103,357		13.08	%	$	63,207		8.00	%	$	79,009		10.00	%
Bank		95,163	12.43				61,266	8.00				76,583	10.00
Tier I capital (to risk-weighted assets):
Consolidated		95,704	12.11				47,405	6.00				47,405	6.00
Bank		87,511	11.43				45,950	6.00				61,266	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		95,704	12.11				35,554	4.50			N/A		N/A
Bank		87,511	11.43				34,462	4.50				49,779	6.50
Tier I capital (to average assets):
Consolidated		95,704	9.08				42,160	4.00			N/A		N/A
Bank		87,511	8.37				41,835	4.00				52,293	5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	98,432		12.58	%	$	62,613		8.00	%	$	78,266		10.00	%
Bank		91,091	11.97				60,874	8.00				76,093	10.00
Tier I capital (to risk-weighted assets):
Consolidated		90,819	11.60				46,960	6.00				46,960	6.00
Bank		83,478	10.97				45,656	6.00				60,874	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		90,819	11.60				35,220	4.50			N/A		N/A
Bank		83,478	10.97				34,242	4.50				49,460	6.50
Tier I capital (to average assets):
Consolidated		90,819	8.87				40,934	4.00			N/A		N/A
Bank		83,478	8.22				40,632	4.00				50,790	5.00

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

9 Months Ended

Sep. 30, 2016

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Assumptions Used in Option Pricing Model

Nine months ended September 30,	2016			2015
Risk free interest rate		1.14	%		1.06	%
Dividend yield		3.78	%		3.86	%
Volatility		22.62	%		26.74	%
Expected life (years)		4.20			5.00

Stock Option Activity

	Number of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2015		82,875		$	24.33
Granted		23,500			30.40
Exercised		(18,425	)		20.70
Forfeited		(9,725	)		25.61
Outstanding at September 30, 2016		78,225		$	26.85		2.74	$	560
Exercisable at September 30, 2016		23,100		$	22.38		0.87	$	268

	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

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Note 5 - Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2016

Earnings Per Share [Abstract]

Computation of Basic and Diluted 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,
	2016		2015		2016		2015
Numerator for basic and diluted earnings per share - net    income	$	2,292	$	2,220	$	6,655	$	6,290
Denominator for basic earnings per share - weighted average     shares outstanding		3,391,471		3,343,011		3,381,491		3,332,650
Effect of dilutive securities - employee stock options		12,568		13,778		9,238		12,980
Denominator for diluted earnings per share - adjusted    weighted average shares outstanding		3,404,039		3,356,789		3,390,729		3,345,630
Earnings per share - basic	$	0.68	$	0.66	$	1.97	$	1.89
Earnings per share - diluted		0.67		0.66		1.96		1.88

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Note 6 - Comprehensive Income (Loss) (Tables)

9 Months Ended

Sep. 30, 2016

Other Comprehensive Income Loss Tax [Abstract]

Components of Accumulated Other Comprehensive Income (Loss)

The following shows the components of accumulated other comprehensive income (loss) at September 30, 2016 and December 31, 2015:

	September 30,			December 31,
	2016			2015
Unrealized net holding gains (losses) on available-for-sale    securities	$	3,780		$	(568	)
Unrealized losses on available-for-sale securities for which a    portion of an other-than-temporary impairment loss has been    recognized in earnings		(313	)		(259	)
Accumulated other comprehensive income (loss)		3,467			(827	)
Tax effect		(1,179	)		281
Accumulated other comprehensive income (loss), net of tax	$	2,288		$	(546	)

Amounts Reclassified Out of Accumulated Other Comprehensive Income (Loss)

The following tables present amounts reclassified out of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015:

Three months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	316		$	83		Net gain on sale of investment    securities
Tax effect		(108	)		(28	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	208		$	55		Net of tax

Nine months ended September 30,	Amount reclassified from accumulated other comprehensive income
Details about accumulated other comprehensive income	2016			2015			Affected line item in statement of income
Unrealized net holding gains on available-for-sale    securities	$	842		$	800		Net gain on sale of investment    securities
Other-than-temporary impairment losses on      investment securities		(192	)		-		Net other-than-temporary impairment      losses on investment securities
		650			800
Tax effect		(221	)		(273	)	Provision for income taxes
Total reclass out of accumulated other comprehensive     income, net of tax	$	429		$	527		Net of tax

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Note 7 - Investment Securities (Tables)

9 Months Ended

Sep. 30, 2016

Investments Debt And Equity Securities [Abstract]

Trading Securities

	September 30,		December 31,
	2016		2015
State and municipal securities	$	4,312	$	4,189

Investment Securities Available-for-sale

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
September 30, 2016	value		gains		losses			cost
U.S. Government agency	$	65,812	$	167	$	(98	)	$	65,743
State and municipal		73,560		1,701		(37	)		71,896
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		132,746		2,277		(11	)		130,480
Collateralized mortgage obligations (CMOs)		79,264		422		(298	)		79,140
Pooled trust preferred		2,275		246		(950	)		2,979
Corporate debt		7,112		50		(8	)		7,070
Equity		8,065		338		(332	)		8,059
Total investment securities available-for-sale	$	368,834	$	5,201	$	(1,734	)	$	365,367

			Gross		Gross
			unrealized		unrealized
	Fair		holding		holding			Amortized
December 31, 2015	value		gains		losses			cost
U.S. Government agency	$	61,779	$	88	$	(490	)	$	62,181
State and municipal		78,954		1,554		(31	)		77,431
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		136,681		944		(920	)		136,657
Collateralized mortgage obligations (CMOs)		65,610		178		(1,178	)		66,610
Pooled trust preferred		2,653		259		(897	)		3,291
Corporate debt		9,004		15		(95	)		9,084
Equity		7,234		516		(770	)		7,488
Total investment securities available-for-sale	$	361,915	$	3,554	$	(4,381	)	$	362,742

Investment Securities by Contractual Maturity

			Amortized
September 30, 2016	Fair value		cost
Due in one year or less	$	6,140	$	6,085
Due after one year through five years		240,710		237,900
Due after five years through ten years		101,608		100,465
Due after ten years		12,311		12,858
Equity securities		8,065		8,059
Total investment securities available-for-sale	$	368,834	$	365,367

			Amortized
September 30, 2016	Fair value		cost
Due in one year or less	$	147	$	147
Due after one year through five years		—		—
Due after five years through ten years		—		—
Due after ten years		—		—
Total investment securities held-to-maturity	$	147	$	147

Gross Realized Losses on Equity and Debt Securities

	Three months ended September 30, 2016								Three months ended September 30, 2015
					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	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83
Debt securities		—		—		—		—		—		—		—		—
Total	$	316	$	—	$	—	$	316	$	83	$	—	$	—	$	83

	Nine months ended September 30, 2016										Nine months ended September 30, 2015
						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	$	734	$	—		$	(192	)	$	542	$	713	$	(23	)	$	—	$	690
Debt securities		181		(73	)		—			108		154		(44	)		—		110
Total	$	915	$	(73	)	$	(192	)	$	650	$	867	$	(67	)	$	—	$	800

Credit-related Other-than-temporary Impairment

Nine months ended September 30,	2016		2015
Balance, beginning of period	$	1,153	$	1,153
Additions:
Initial credit impairments		—		—
Subsequent credit impairments		—		—
Balance, end of period	$	1,153	$	1,153

Investment Securities Held-to-maturity

Held-To-Maturity

September 30, 2016

December 31, 2015

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

$

—

$

—

$

147

$

147

$

4

$

—

$

151

Securities in a Continuous Unrealized Loss Position

September 30, 2016
			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		15	$	20,918	$	(98	)	$	—	$	—		$	20,918	$	(98	)
State and municipal		11		3,796		(37	)		—		—			3,796		(37	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		6		9,222		(11	)		—		—			9,222		(11	)
Collateralized mortgage obligations (CMOs)		38		27,179		(100	)		15,823		(198	)		43,002		(298	)
Pooled trust preferred		5		—		—			1,938		(950	)		1,938		(950	)
Corporate debt		1		—		—			1,003		(8	)		1,003		(8	)
Equity		18		3,259		(240	)		1,065		(92	)		4,324		(332	)
Total		94	$	64,374	$	(486	)	$	19,829	$	(1,248	)	$	84,203	$	(1,734	)

December 31, 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		32	$	40,949	$	(418	)	$	4,426	$	(72	)	$	45,375	$	(490	)
State and municipal		20		6,646		(19	)		1,555		(12	)		8,201		(31	)
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed		62		90,796		(871	)		1,403		(49	)		92,199		(920	)
Collateralized mortgage obligations (CMOs)		49		28,372		(261	)		26,354		(917	)		54,726		(1,178	)
Pooled trust preferred		5		—		—			2,193		(897	)		2,193		(897	)
Corporate debt		6		5,988		(95	)		—		—			5,988		(95	)
Equity		19		4,035		(695	)		193		(75	)		4,228		(770	)
Total		193	$	176,786	$	(2,359	)	$	36,124	$	(2,022	)	$	212,910	$	(4,381	)

Pooled Trust Preferred Securities

Deal	Class		Book value		Fair value		Unrealized gains (losses)			Realized OTTI credit loss (YTD 2016)		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	$	188	$	(55	)	$	—	$	(1	)	B1/BB		5		—		18.0	%		141.2	%
PreTSL XVII	Mezzanine			606		456		(150	)		—		(222	)	C/CC		34		5		21.6			99.7
PreTSL XIX	Mezzanine			874		483		(391	)		—		—		Caa1/CC		41		12		7.7			102.0
PreTSL XXV	Mezzanine			766		488		(279	)		—		(222	)	Ca/C		44		5		27.0			89.3
PreTSL XXVI	Mezzanine			399		323		(75	)		—		(270	)	Caa3/C		45		7		18.0			97.4
PreTSL XXVI	Mezzanine			91		337		246			—		(438	)	Caa3/C		45		7		18.0			97.4
			$	2,979	$	2,275	$	(704	)	$	—	$	(1,153	)

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

9 Months Ended

Sep. 30, 2016

Troubled Debt Restructuring [Member]

Allowance for Loan Losses

	September 30, 2016				December 31, 2015
	Unpaid principal balance		Related allowance		Unpaid principal balance		Related allowance
TDRs with no specific allowance recorded	$	2,860		—	$	1,787		—
TDRs with an allowance recorded		568	$	388		491	$	491
	$	3,428	$	388	$	2,278	$	491

Total Retail Loans [Member]

Major Classes of Loans

	September 30,		December 31,
	2016		2015
Commercial:
Commercial and industrial	$	110,892	$	124,397
Construction		32,133		27,372
Secured by commercial real estate		233,430		235,171
Secured by residential real estate		65,671		63,164
State and political subdivisions		35,033		40,285
Indirect lease financing		8,707		10,371
Retail:
1-4 family residential mortgages		46,544		42,833
Home equity loans and lines		70,408		67,384
Consumer		5,306		4,286
Total loans		608,124		615,263
Net unearned costs		107		7
Loans receivable	$	608,231	$	615,270

Internal Risk Ratings and Payment Activity

September 30, 2016	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	102,130	$	700	$	8,062	$	—	$	110,892
Construction		32,122		—		11		—		32,133
Secured by commercial real estate		218,404		3,504		11,522		—		233,430
Secured by residential real estate		63,004		233		2,434		—		65,671
State and political subdivisions		35,033		—		—		—		35,033
Indirect lease financing		8,571		—		136		—		8,707
	$	459,264	$	4,437	$	22,165	$	—	$	485,866

December 31, 2015	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	117,246		—	$	7,151	$	—	$	124,397
Construction		27,355		—		17		—		27,372
Secured by commercial real estate		218,958	$	361		15,852		—		235,171
Secured by residential real estate		60,286		34		2,844		—		63,164
State and political subdivisions		39,027		—		1,258		—		40,285
Indirect lease financing		10,168		—		203		—		10,371
	$	473,040	$	395	$	27,325	$	—	$	500,760

September 30, 2016	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	46,274	$	270	$	46,544
Home equity loans and lines		70,312		96		70,408
Consumer		5,211		95		5,306
	$	121,797	$	461	$	122,258

December 31, 2015	Performing		Non-performing		Total
Retail:
1-4 family residential mortgages	$	42,546	$	287	$	42,833
Home equity loans and lines		67,257		127		67,384
Consumer		4,286		—		4,286
	$	114,089	$	414	$	114,503

Past Due Loans

September 30, 2016	30-59days 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	$	15		—		—	$	15	$	110,877	$	110,892
Construction		—		—		—		—		32,133		32,133
Secured by commercial real estate		962	$	1,226	$	861		3,049		230,381		233,430
Secured by residential real estate		92		—		327		419		65,252		65,671
State and political subdivisions		—		—		—		—		35,033		35,033
Indirect lease financing		134		133		282		549		8,158		8,707
Retail:
1-4 family residential mortgages		—		—		—		—		46,544		46,544
Home equity loans and lines		55		172		—		227		70,181		70,408
Consumer		26		2		—		28		5,278		5,306
	$	1,284	$	1,533	$	1,470	$	4,287	$	603,837	$	608,124

December 31, 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	$	95		—		—	$	95	$	124,302	$	124,397
Construction		63		—		—		63		27,309		27,372
Secured by commercial real estate		443		—	$	935		1,378		233,793		235,171
Secured by residential real estate		—	$	97		369		466		62,698		63,164
State and political subdivisions		—		—		—		—		40,285		40,285
Indirect lease financing		320		53		130		503		9,868		10,371
Retail:
1-4 family residential mortgages		641		234		—		875		41,958		42,833
Home equity loans and lines		272		—		45		317		67,067		67,384
Consumer		12		10		—		22		4,264		4,286
	$	1,846	$	394	$	1,479	$	3,719	$	611,544	$	615,263

Non-accrual Loans

September 30, 2016	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	2,908
Construction		—		—
Secured by commercial real estate		—		3,319
Secured by residential real estate		—		1,417
State and political subdivisions		—		—
Indirect lease financing	$	150		132
Retail:
1-4 family residential mortgages		—		270
Home equity loans and lines		—		96
Consumer		—		95
	$	150	$	8,237

December 31, 2015	90days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		—	$	3,433
Construction		—		—
Secured by commercial real estate		—		3,627
Secured by residential real estate		—		1,803
State and political subdivisions		—		—
Indirect lease financing	$	11		143
Retail:
1-4 family residential mortgages		—		287
Home equity loans and lines		—		127
Consumer		—		—
	$	11	$	9,420

Allowance for Loan Losses

Three months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,350	$	(55	)		—		$	9	$	1,304
Construction		429		(79	)		—			—		350
Secured by commercial real estate		2,231		233			—			2		2,466
Secured by residential real estate		1,550		(57	)		—			50		1,543
State and political subdivisions		204		(64	)		—			—		140
Indirect lease financing		226		(6	)		—			—		220
Retail:
1-4 family residential mortgages		298		(20	)		—			—		278
Home equity loans and lines		343		(7	)		—			4		340
Consumer		73		33		$	(29	)		7		84
Unallocated		846		22		N/A			N/A			868
	$	7,550	$	—		$	(29	)	$	72	$	7,593

Three months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

Nine months ended September 30, 2016	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	1,521	$	(105	)	$	(140	)	$	28	$	1,304
Construction		286		64			—			—		350
Secured by commercial real estate		2,411		49			—			6		2,466
Secured by residential real estate		1,812		(359	)		(20	)		110		1,543
State and political subdivisions		222		(82	)		—			—		140
Indirect lease financing		164		99			(52	)		9		220
Retail:
1-4 family residential mortgages		350		(72	)		—			—		278
Home equity loans and lines		428		(102	)		—			14		340
Consumer		76		49			(62	)		21		84
Unallocated		284		584		N/A			N/A			868
	$	7,554	$	125		$	(274	)	$	188	$	7,593

Nine months ended September 30, 2015	Balance, beginning of period		Provision (credit) for 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

Loans by Loan Class Modified as TDRs

Three months ended September 30,	2016						2015
	Numberof 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
Consumer		1	$	96	$	95		—		—		—
		1	$	96	$	95		1	$	142	$	142

Nine months ended September 30,	2016						2015
	Numberof 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		6	$	1,074	$	1,033		—		—		—
Secured by residential real estate		4		524		503		—		—		—
Retail:
1-4 family residential mortgages		—		—		—		1	$	142	$	142
Consumer		1		96		95		—		—		—
		11	$	1,694	$	1,631		1	$	142	$	142

Loans Disaggregated by Impairment Method

	Allowance for Loan Losses						Loans Receivable
September 30, 2016	Balance		Balancerelated 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	$	1,304	$	462	$	842	$	110,892	$	3,820	$	107,072
Construction		350		—		350		32,133		280		31,853
Secured by commercial real estate		2,466		—		2,466		233,430		6,050		227,380
Secured by residential real estate		1,543		189		1,354		65,671		1,716		63,955
State and political subdivisions		140		—		140		35,033		—		35,033
Indirect lease financing		220		55		165		8,707		132		8,575
Retail:
1-4 family residential mortgages		278		11		267		46,544		561		45,983
Home equity loans and lines		340		—		340		70,408		119		70,289
Consumer		84		—		84		5,306		95		5,211
Unallocated		868	N/A		N/A		N/A		N/A		N/A
	$	7,593	$	717	$	6,008	$	608,124	$	12,773	$	595,351

	Allowance for Loan Losses						Loans Receivable
December 31, 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	$	1,521	$	712	$	809	$	124,397	$	4,586	$	119,811
Construction		286		—		286		27,372		364		27,008
Secured by commercial real estate		2,411		14		2,397		235,171		6,998		228,173
Secured by residential real estate		1,812		203		1,609		63,164		2,113		61,051
State and political subdivisions		222		—		222		40,285		—		40,285
Indirect lease financing		164		20		144		10,371		146		10,225
Retail:
1-4 family residential mortgages		350		25		325		42,833		583		42,250
Home equity loans and lines		428		—		428		67,384		151		67,233
Consumer		76		—		76		4,286		—		4,286
Unallocated		284	N/A		N/A		N/A		N/A		N/A
	$	7,554	$	974	$	6,296	$	615,263	$	14,941	$	600,322

Impaired Loans

	September 30, 2016						December 31, 2015
	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	$	3,167	$	3,531	$	—	$	3,629	$	3,923	$	—
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,932		7,416		—
Secured by residential real estate		918		1,286		—		942		1,653		—
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		—		—		—		3		3		—
Retail:
1-4 family residential mortgages		381		398		—		393		406		—
Home equity loans and lines		119		180		—		151		201		—
Consumer		95		96		—		-		-		—
	$	11,010	$	11,796	$	—	$	12,414	$	13,966	$	—
With an allowance recorded:
Commercial:
Commercial and industrial	$	653	$	804	$	462	$	957	$	1,086	$	712
Construction		—		—		—		—		—		—
Secured by commercial real estate		—		—		—		66		66		14
Secured by residential real estate		798		929		189		1,171		1,279		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		143		145		20
Retail:
1-4 family residential mortgages		180		194		11		190		197		25
Home equity loans and lines		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
	$	1,763	$	2,061	$	717	$	2,527	$	2,773	$	974
Total:
Commercial:
Commercial and industrial	$	3,820	$	4,335	$	462	$	4,586	$	5,009	$	712
Construction		280		301		—		364		364		—
Secured by commercial real estate		6,050		6,004		—		6,998		7,482		14
Secured by residential real estate		1,716		2,215		189		2,113		2,932		203
State and political subdivisions		—		—		—		—		—		—
Indirect lease financing		132		134		55		146		148		20
Retail:
1-4 family residential mortgages		561		592		11		583		603		25
Home equity loans and lines		119		180		—		151		201		-
Consumer		95		96		—		-		-		—
	$	12,773	$	13,857	$	717	$	14,941	$	16,739	$	974

Nine Months Ended September 30,	2016				2015
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Commercial and industrial	$	4,288	$	50	$	6,301	$	154
Construction		412		15		410		16
Secured by commercial real estate		6,327		100		7,881		121
Secured by residential real estate		1,945		11		1,522		—
State and political subdivisions		—		—		—		—
Indirect lease financing		114		—		22		1
Retail:
1-4 family residential mortgages		572		8		415		4
Home equity loans and lines		134		1		130		1
Consumer		10		—		3		—
	$	13,802	$	185	$	16,684	$	297

XML

Note 9 - Fair Value Measurements and Disclosures (Tables)

9 Months Ended

Sep. 30, 2016

Fair Value Disclosures [Abstract]

Financial Assets Measured at Fair Value on a Recurring and Nonrecurring Basis

September 30, 2016	Quotedprices 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	$	—	$	4,312	$	—	$	4,312
Securities available-for-sale
U.S. Government agency securities		—	$	65,812		—	$	65,812
State and municipal securities		—		73,560		—		73,560
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		132,746		—		132,746
Collateralized mortgage obligations (CMOs)		—		79,264		—		79,264
Pooled trust preferred securities		—		—	$	2,275		2,275
Corporate debt securities		—		7,112		—		7,112
Equity securities	$	8,065		—		—		8,065
Total securities available-for-sale	$	8,065	$	358,494	$	2,275	$	368,834
Total recurring fair value measurements	$	8,065	$	362,806	$	2,275	$	373,146
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,046	$	1,046
Mortgage servicing rights		—		—		142		142
Total nonrecurring fair value measurements	$	—	$	—	$	1,188	$	1,188

December 31, 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	$	—	$	4,189	$	—	$	4,189
Securities available-for-sale
U.S. Government agency securities		—	$	61,779		—	$	61,779
State and municipal securities		—		78,954		—		78,954
U.S. Government agencies and sponsored enterprises (GSEs):
Mortgage-backed securities		—		136,681		—		136,681
Collateralized mortgage obligations (CMOs)		—		65,610		—		65,610
Pooled trust preferred securities		—		—	$	2,653		2,653
Corporate debt securities		—		9,004		—		9,004
Equity securities	$	7,234		—		—		7,234
Total securities available-for-sale	$	7,234	$	352,028	$	2,653	$	361,915
Total recurring fair value measurements	$	7,234	$	356,217	$	2,653	$	366,104
Nonrecurring fair value measurements
Impaired loans	$	—	$	—	$	1,698	$	1,698
Mortgage servicing rights		—		—		133		133
Total nonrecurring fair value measurements	$	—	$	—	$	1,831	$	1,831

Quantitative Information about Assets Measured at Fair Value

	Quantitative information about Level 3 fair value measurements
September 30, 2016	Fairvalue		Valuation techniques		Unobservable input		Valueor range of values
Impaired loans	$	778	Appraisalof collateral	(1)	Appraisal adjustments	(2)	-20% to -90%
					Liquidation expenses	(3)	-10%
Impaired loans		140	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		128	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-20% to -25%
Mortgage servicing rights		142	Discounted cash flow		Remaining term		2 - 27 yrs
					Discount rate		12% to 14%

	Quantitative information about Level 3 fair value measurements
December 31, 2015	Fair value		Valuation techniques		Unobservable input		Value or range of values
Impaired loans	$	1,331	Appraisal of collateral	(1)	Appraisal adjustments	(2)	-15% to -80%
					Liquidation expenses	(3)	-10%
Impaired loans		199	Used commercial vehicle and equipment guides		Guide value discounts	(4)	0% to -30%
Impaired loans		168	Financial statement values for UCC collateral		Financial statement value discounts	(5)	-25% to -70%
Mortgage servicing rights		133	Discounted cash flow		Remaining term		3 - 28 yrs
					Discount rate		10% to 12%

Available-for-sale Securities Measured at Fair Value Using Significant Unobservable Inputs

	Fair value measurements using significant unobservable inputs (Level 3)
Balance, January 1, 2016	$	2,653
Payments received		(312	)
Total gains or losses (realized/unrealized)
Included in earnings		—
Included in other comprehensive income		(66	)
Transfers in and/or out of Level 3		—
Balance, September 30, 2016	$	2,275

Financial and Off-balance Sheet Instruments

					Fair value measurements
September 30, 2016	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	$	69,428	$	69,428	$	69,428		—		—
Investment securities:
Trading		4,312		4,312		—	$	4,312		—
Available-for-sale		368,834		368,834		8,065		358,494	$	2,275
Held-to-maturity		147		147		—		147		—
Restricted investment in bank stocks		522		522		—		522		—
Loans held-for-sale		456		466		—		466		—
Net loans		600,638		610,066		—		—		610,066
Mortgage servicing rights		498		555		—		—		555
Accrued interest receivable		2,573		2,573		—		2,573		—
Financial liabilities
Deposits with no stated maturities	$	698,336	$	698,336	$	698,336		—	$	—
Deposits with stated maturities		228,376		230,993		—	$	230,993		—
Short-term borrowings		41,179		41,179		41,179		—		—
Accrued interest payable		310		310		—		310		—
Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—

					Fair value measurements
December 31, 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	$	16,991	$	16,991	$	16,991		—		—
Investment securities:
Trading		4,189		4,189		—	$	4,189		—
Available-for-sale		361,915		361,915		7,234		352,028	$	2,653
Held-to-maturity		147		151		—		151		—
Restricted investment in bank stocks		508		508		—		508		—
Loans held-for-sale		987		1,004		—		1,004		—
Net loans		607,716		610,315		—		—		610,315
Mortgage servicing rights		504		642		—		—		642
Accrued interest receivable		2,562		2,562		—		2,562		—
Financial liabilities
Deposits with no stated maturities	$	662,410	$	662,410	$	662,410		—	$	—
Deposits with stated maturities		227,376		227,862		—	$	227,862		—
Short-term borrowings		37,163		37,163		37,163		—		—
Accrued interest payable		330		330		—		330		—
Off-balance sheet instruments
Commitments to extend credit	$	—	$	—	$	—	$	—	$	—
Standby letters of credit		—		—		—		—		—

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

9 Months Ended

Sep. 30, 2016

Commitments And Contingencies Disclosure [Abstract]

Financial Instrument Commitments

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

	September 30,		December 31,
	2016		2015
Commitments to extend credit and unused lines of credit	$	308,483	$	232,492
Standby letters of credit		12,980		9,493
Total financial instrument commitments	$	321,463	$	241,985

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Note 11 - Regulatory Restrictions (Tables)

9 Months Ended

Sep. 30, 2016

Banking And Thrift [Abstract]

Capital Ratios and Regulatory Minimum Requirements

	Capital levels
	Actual					Minimum required					Well capitalized
As of September 30, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	103,357		13.08	%	$	63,207		8.00	%	$	79,009		10.00	%
Bank		95,163	12.43				61,266	8.00				76,583	10.00
Tier I capital (to risk-weighted assets):
Consolidated		95,704	12.11				47,405	6.00				47,405	6.00
Bank		87,511	11.43				45,950	6.00				61,266	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		95,704	12.11				35,554	4.50			N/A		N/A
Bank		87,511	11.43				34,462	4.50				49,779	6.50
Tier I capital (to average assets):
Consolidated		95,704	9.08				42,160	4.00			N/A		N/A
Bank		87,511	8.37				41,835	4.00				52,293	5.00

	Capital levels
	Actual					Adequately capitalized					Well capitalized
As of December 31, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total risk-based capital (to risk-weighted assets):
Consolidated	$	98,432		12.58	%	$	62,613		8.00	%	$	78,266		10.00	%
Bank		91,091	11.97				60,874	8.00				76,093	10.00
Tier I capital (to risk-weighted assets):
Consolidated		90,819	11.60				46,960	6.00				46,960	6.00
Bank		83,478	10.97				45,656	6.00				60,874	8.00
Common equity tier 1 capital (to risk-weighted assets):
Consolidated		90,819	11.60				35,220	4.50			N/A		N/A
Bank		83,478	10.97				34,242	4.50				49,460	6.50
Tier I capital (to average assets):
Consolidated		90,819	8.87				40,934	4.00			N/A		N/A
Bank		83,478	8.22				40,632	4.00				50,790	5.00

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Note 3 - Stock-based Compensation and Shareholders' Equity (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015	Dec. 31, 2014
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Allocated Share-based Compensation Expense	$ 18	$ 18	$ 60	$ 64
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized	$ 102		$ 102
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			29 months
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	78,225	84,575	78,225	84,575	82,875	88,375
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			23,500	21,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			18,425	12,150
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value			$ 3.79	$ 4.38
The 1998 Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	0		0
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, Forfeitures and Expirations in Period			60,244
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, Exercises in Period			164,814
The 1998 Plan [Member] | Employee Stock Option [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			3 years
The 1998 Plan [Member] | Employee Stock Option [Member] | Minimum [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			6 months
The 1998 Plan [Member] | Employee Stock Option [Member] | Maximum [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			10 years
The 2005 Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	54,725		54,725
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures and Expirations in Period			65,050
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, Exercises in Period			64,425
Share-based Compensation Arrangement by Share-based Payment Award, Number of Additional Shares Authorized			200,000
The 2005 Plan [Member] | Employee Stock Option [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period			5 years
The 2015 Plan [Member]
Share Based Compensation Arrangement By Share Based Payment Award [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	23,500		23,500
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, Forfeitures and Expirations in Period			0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross			23,500
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period			0

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Note 3 - Assumptions Used in Option Pricing Model (Details)	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Risk free interest rate	1.14%	1.06%
Dividend yield	3.78%	3.86%
Volatility	22.62%	26.74%
Expected life (years)	4 years 2 months 12 days	5 years

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Note 3 - Stock Option Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Share Based Compensation Arrangement By Share Based Payment Award Options Outstanding Roll Forward
Outstanding-Number of options (in shares)	82,875	88,375
Granted-Number of options (in shares)	23,500	21,000
Exercised-Number of options (in shares)	(18,425)	(12,150)
Forfeited-Number of options (in shares)	(9,725)	(12,650)
Outstanding ending-Number of options (in shares)	78,225	84,575
Exercisable-Number of options (in shares)	23,100	30,375
Outstanding-Weighted average exercise price (in dollars per share)	$ 24.33	$ 23.27
Granted-Weighted average exercise price (in dollars per share)	30.40	29.25
Exercised-Weighted average exercise price (in dollars per share)	20.70	17.81
Forfeited-Weighted average exercise price (in dollars per share)	25.61	31.87
Outstanding ending-Weighted average exercise price (in dollars per share)	26.85	24.25
Exercisable-Weighted average exercise price (in dollars per share)	$ 22.38	$ 20.87
Outstanding ending-Weighted average remaining contractual term	2 years 8 months 27 days	2 years 6 months
Exercisable-Weighted average remaining contractual term	10 months 13 days	10 months 21 days
Outstanding ending-Aggregate intrinsic value	$ 560	$ 444
Exercisable-Aggregate intrinsic value	$ 268	$ 262

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Note 4 - Share Repurchase Plan (Details Textual) - USD ($) $ / shares in Units, $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Equity Class Of Treasury Stock [Line Items]
Treasury Stock, Shares	164,569		164,569
Treasury Stock, Value	$ 2,476		$ 2,476
Share Repurchase Program 1 [Member]
Equity Class Of Treasury Stock [Line Items]
Treasury Stock, Shares, Acquired	0	0
Stock Repurchase Program, Number of Shares Authorized to be Repurchased		100,000
Treasury Stock, Shares	57,883
Treasury Stock Shares Average Price Per Share Acquired	$ 16.97
Treasury Stock, Value	$ 982

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Note 5 - Computation of Basic and Diluted Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Earnings Per Share [Abstract]
Numerator for basic and diluted earnings per share - net income	$ 2,292	$ 2,220	$ 6,655	$ 6,290
Denominator for basic earnings per share - weighted average shares outstanding	3,391,471	3,343,011	3,381,491	3,332,650
Effect of dilutive securities - employee stock options	12,568	13,778	9,238	12,980
Denominator for diluted earnings per share - adjusted weighted average shares outstanding	3,404,039	3,356,789	3,390,729	3,345,630
Earnings per share - basic	$ 0.68	$ 0.66	$ 1.97	$ 1.89
Earnings per share - diluted	$ 0.67	$ 0.66	$ 1.96	$ 1.88

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Note 5 - Earnings Per Share (Details Textual) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Employee Stock Option [Member]
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	0	21,000	41,350	21,000

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Note 6 - Components of Accumulated Other Comprehensive Income (Loss) (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Accumulated Other Comprehensive Income Loss [Line Items]
Accumulated other comprehensive income (loss)	$ 3,467	$ (827)
Tax effect	(1,179)	281
Accumulated other comprehensive income (loss), net of tax	2,288	(546)
Accumulated Net Investment Gain (Loss) Attributable to Parent [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Accumulated other comprehensive income (loss)	3,780	(568)
Accumulated Other-than-Temporary Impairment Attributable to Parent [Member]
Accumulated Other Comprehensive Income Loss [Line Items]
Accumulated other comprehensive income (loss)	$ (313)	$ (259)

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Note 6 - Amounts Reclassified Out of Accumulated Other Comprehensive Income (Loss) (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]
Total reclass out of accumulated other comprehensive income, before tax	$ 3,113	$ 2,935	$ 8,966	$ 8,289
Tax effect	(821)	(715)	(2,311)	(1,999)
Net income	2,292	2,220	6,655	6,290
Reclassification out of Accumulated Other Comprehensive Income (Loss) [Member]
Reclassification Adjustment Out Of Accumulated Other Comprehensive Income [Line Items]
Unrealized net holding gains on available-for-sale securities	316	83	842	800
Other-than-temporary impairment losses on investment securities			(192)
Total reclass out of accumulated other comprehensive income, before tax			650	800
Tax effect	(108)	(28)	(221)	(273)
Net income	$ 208	$ 55	$ 429	$ 527

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Note 7 -Investment Securities (Details Textual)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2016 USD ($) security	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) security	Sep. 30, 2015 USD ($)	Dec. 31, 2015 USD ($)
Investment Securities [Line Items]
Net (loss) gain on trading activities	$ (39,000)	$ 36,000	$ 47,000	$ 17,000
Trading Securities, Change in Unrealized Holding Gain (Loss)			13,000		$ 31,000
Available-for-sale Securities, Gross Realized Gains (Losses), Sale Proceeds	3,078,000	685,000	31,892,000	27,480,000
Income Tax Expense Benefit Related to Net Realized Gains Losses on Sales of Securities	107,000	$ 29,000	221,000	273,000
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses			0	0
Available-for-sale, amortized cost	365,367,000		365,367,000		362,742,000
Fair value	$ 368,834,000		$ 368,834,000		361,915,000
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%
Bank Failure Rate			0.37%
Fair Value Inputs, Loss Severity			95.00%
U.S. Government Agency and Sponsored Enterprises Securities [Member]
Investment Securities [Line Items]
Available-for-sale Securities Pledged as Collateral	$ 215,013,000		$ 215,013,000		197,149,000
Collateralized Debt Obligations [Member]
Investment Securities [Line Items]
Other than Temporary Impairment, Credit Losses Recognized in Earnings, Additions, Additional Credit Losses			$ 0	$ 0
Number Of Trust Preferred Securities | security	6		6
Available-for-sale, Securities in Unrealized Loss Positions, Qualitative Disclosure, Number of Positions, Greater than or Equal to One Year | security	5		5
Available-for-sale, amortized cost	$ 2,979,000		$ 2,979,000		3,291,000
Fair value	$ 2,275,000		$ 2,275,000		$ 2,653,000
Collateralized Debt Obligations [Member] | Minimum [Member]
Investment Securities [Line Items]
Fair Value Inputs, Probability of Default			0.25%
Fair Value Inputs, Loss Severity			0.00%
Collateralized Debt Obligations [Member] | Maximum [Member]
Investment Securities [Line Items]
Fair Value Inputs, Probability of Default			0.51%
Fair Value Inputs, Loss Severity			100.00%

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Note 7 -Trading Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Schedule Of Trading Securities And Other Trading Assets [Line Items]
State and municipal securities	$ 4,312	$ 4,189
US States and Political Subdivisions Debt Securities [Member]
Schedule Of Trading Securities And Other Trading Assets [Line Items]
State and municipal securities	$ 4,312	$ 4,189

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Note 7 -Investment Securities Available-for-sale (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	$ 368,834	$ 361,915
Investment securities available-for-sale, gross unrealized holding gains	5,201	3,554
Investment securities available-for-sale, gross unrealized holding losses	(1,734)	(4,381)
Investment securities available-for-sale, amortized cost	365,367	362,742
US Government Agencies Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	65,812	61,779
Investment securities available-for-sale, gross unrealized holding gains	167	88
Investment securities available-for-sale, gross unrealized holding losses	(98)	(490)
Investment securities available-for-sale, amortized cost	65,743	62,181
US States and Political Subdivisions Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	73,560	78,954
Investment securities available-for-sale, gross unrealized holding gains	1,701	1,554
Investment securities available-for-sale, gross unrealized holding losses	(37)	(31)
Investment securities available-for-sale, amortized cost	71,896	77,431
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	132,746	136,681
Investment securities available-for-sale, gross unrealized holding gains	2,277	944
Investment securities available-for-sale, gross unrealized holding losses	(11)	(920)
Investment securities available-for-sale, amortized cost	130,480	136,657
Collateralized Mortgage Obligations [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	79,264	65,610
Investment securities available-for-sale, gross unrealized holding gains	422	178
Investment securities available-for-sale, gross unrealized holding losses	(298)	(1,178)
Investment securities available-for-sale, amortized cost	79,140	66,610
Collateralized Debt Obligations [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	2,275	2,653
Investment securities available-for-sale, gross unrealized holding gains	246	259
Investment securities available-for-sale, gross unrealized holding losses	(950)	(897)
Investment securities available-for-sale, amortized cost	2,979	3,291
Corporate Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	7,112	9,004
Investment securities available-for-sale, gross unrealized holding gains	50	15
Investment securities available-for-sale, gross unrealized holding losses	(8)	(95)
Investment securities available-for-sale, amortized cost	7,070	9,084
Equity Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale	8,065	7,234
Investment securities available-for-sale, gross unrealized holding gains	338	516
Investment securities available-for-sale, gross unrealized holding losses	(332)	(770)
Investment securities available-for-sale, amortized cost	$ 8,059	$ 7,488

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Note 7 - Investment Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Investments Debt And Equity Securities [Abstract]
Due in one year or less	$ 6,140
Due after one year through five years	240,710
Due after five years through ten years	101,608
Due after ten years	12,311
Equity securities	8,065
Investment securities available-for-sale	368,834	$ 361,915
Due in one year or less	6,085
Due after one year through five years	237,900
Due after five years through ten years	100,465
Due after ten years	12,858
Equity securities	8,059
Investment securities available-for-sale, amortized cost	365,367	362,742
Due in one year or less	147
Due after one year through five years	0
Due after five years through ten years	0
Due after ten years	0
Held-to-maturity, fair value	147	151
Due in one year or less	147
Due after one year through five years	0
Due after five years through ten years	0
Due after ten years	0
Total investment securities held-to-maturity	$ 147	$ 147

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Note 7 -Gross Realized Losses on Equity and Debt Securities (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Schedule Of Gain Loss On Investments Including Marketable Securities And Investments Held At Cost Income Statement Reported Amounts Summary [Line Items]
Gross realized gains	$ 316	$ 83	$ 915	$ 867
Gross realized losses	0	0	(73)	(67)
Other-than-temporary impairment losses	0	0	(192)
Net gain on investment securities	316	83	650	800
Equity Securities [Member]
Schedule Of Gain Loss On Investments Including Marketable Securities And Investments Held At Cost Income Statement Reported Amounts Summary [Line Items]
Gross realized gains	316	83	734	713
Gross realized losses	0	0		(23)
Other-than-temporary impairment losses	0	0	(192)
Net gain on investment securities	316	83	542	690
Debt Securities [Member]
Schedule Of Gain Loss On Investments Including Marketable Securities And Investments Held At Cost Income Statement Reported Amounts Summary [Line Items]
Gross realized gains	0	0	181	154
Gross realized losses	0	0	(73)	(44)
Other-than-temporary impairment losses	0	0
Net gain on investment securities	$ 0	$ 0	$ 108	$ 110

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Note 7 -Credit-related Other-than-temporary Impairment (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015
Investments Debt And Equity Securities [Abstract]
Balance, beginning of period	$ 1,153	$ 1,153
Initial credit impairments	0	0
Subsequent credit impairments	0	0
Balance, end of period	$ 1,153	$ 1,153

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Note 7 -Investment Securities Held-to-maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Schedule Of Held To Maturity Securities [Line Items]
State and municipal securities	$ 147	$ 147
Held-to-maturity, fair value	147	151
US States and Political Subdivisions Debt Securities [Member]
Schedule Of Held To Maturity Securities [Line Items]
State and municipal securities	147	147
State and municipal securities	0	4
State and municipal securities	0	0
Held-to-maturity, fair value	$ 147	$ 151

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Note 7 -Securities in a Continuous Unrealized Loss Position (Details)	Sep. 30, 2016 USD ($) security	Dec. 31, 2015 USD ($) security
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	94	193
Securities in an unrealized loss position less than 12 months, fair value	$ 64,374,000	$ 176,786,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(486,000)	(2,359,000)
Securities in an unrealized loss position 12 months or longer, fair value	19,829,000	36,124,000
Securities in an unrealized loss position 12 months or longer, unrealized losses	(1,248,000)	(2,022,000)
Securities in an unrealized loss position, fair value	84,203,000	212,910,000
Securities in an unrealized loss position, unrealized losses	$ (1,734,000)	$ (4,381,000)
US Government Agencies Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	15	32
Securities in an unrealized loss position less than 12 months, fair value	$ 20,918,000	$ 40,949,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(98,000)	(418,000)
Securities in an unrealized loss position 12 months or longer, fair value		4,426,000
Securities in an unrealized loss position 12 months or longer, unrealized losses		(72,000)
Securities in an unrealized loss position, fair value	20,918,000	45,375,000
Securities in an unrealized loss position, unrealized losses	$ (98,000)	$ (490,000)
US States and Political Subdivisions Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	11	20
Securities in an unrealized loss position less than 12 months, fair value	$ 3,796,000	$ 6,646,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(37,000)	(19,000)
Securities in an unrealized loss position 12 months or longer, fair value		1,555,000
Securities in an unrealized loss position 12 months or longer, unrealized losses		(12,000)
Securities in an unrealized loss position, fair value	3,796,000	8,201,000
Securities in an unrealized loss position, unrealized losses	$ (37,000)	$ (31,000)
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	6	62
Securities in an unrealized loss position less than 12 months, fair value	$ 9,222,000	$ 90,796,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(11,000)	(871,000)
Securities in an unrealized loss position 12 months or longer, fair value		1,403,000
Securities in an unrealized loss position 12 months or longer, unrealized losses		(49,000)
Securities in an unrealized loss position, fair value	9,222,000	92,199,000
Securities in an unrealized loss position, unrealized losses	$ (11,000)	$ (920,000)
Collateralized Mortgage Obligations [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	38	49
Securities in an unrealized loss position less than 12 months, fair value	$ 27,179,000	$ 28,372,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(100,000)	(261,000)
Securities in an unrealized loss position 12 months or longer, fair value	15,823,000	26,354,000
Securities in an unrealized loss position 12 months or longer, unrealized losses	(198,000)	(917,000)
Securities in an unrealized loss position, fair value	43,002,000	54,726,000
Securities in an unrealized loss position, unrealized losses	$ (298,000)	$ (1,178,000)
Collateralized Debt Obligations [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	5	5
Securities in an unrealized loss position less than 12 months, fair value	$ 0	$ 0
Securities in an unrealized loss position less than 12 months, unrealized losses	0	0
Securities in an unrealized loss position 12 months or longer, fair value	1,938,000	2,193,000
Securities in an unrealized loss position 12 months or longer, unrealized losses	(950,000)	(897,000)
Securities in an unrealized loss position, fair value	1,938,000	2,193,000
Securities in an unrealized loss position, unrealized losses	$ (950,000)	$ (897,000)
Corporate Debt Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	1	6
Securities in an unrealized loss position less than 12 months, fair value		$ 5,988,000
Securities in an unrealized loss position less than 12 months, unrealized losses		(95,000)
Securities in an unrealized loss position 12 months or longer, fair value	$ 1,003,000
Securities in an unrealized loss position 12 months or longer, unrealized losses	(8,000)
Securities in an unrealized loss position, fair value	1,003,000	5,988,000
Securities in an unrealized loss position, unrealized losses	$ (8,000)	$ (95,000)
Equity Securities [Member]
Schedule Of Available For Sale Securities [Line Items]
No. of securities | security	18	19
Securities in an unrealized loss position less than 12 months, fair value	$ 3,259,000	$ 4,035,000
Securities in an unrealized loss position less than 12 months, unrealized losses	(240,000)	(695,000)
Securities in an unrealized loss position 12 months or longer, fair value	1,065,000	193,000
Securities in an unrealized loss position 12 months or longer, unrealized losses	(92,000)	(75,000)
Securities in an unrealized loss position, fair value	4,324,000	4,228,000
Securities in an unrealized loss position, unrealized losses	$ (332,000)	$ (770,000)

XML

Note 7 -Pooled Trust Preferred Securities (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016 USD ($) bank InsuranceCompany	Sep. 30, 2015 USD ($)	Sep. 30, 2016 USD ($) bank InsuranceCompany	Dec. 31, 2015 USD ($)
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale, amortized cost	$ 365,367		$ 365,367	$ 362,742
Fair value	368,834		368,834	361,915
Total recognized OTTI credit loss	0	$ 0	$ (192)
PreTSL IV [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	243		$ 243
Fair value	$ 188		188
Unrealized gains (losses)			(55)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (1)
Moody's/Fitch ratings			B1/BB
Current number of performing banks | bank	5		5
Current number of performing insurance companies | InsuranceCompany	0		0
Actual deferrals and defaults as a % of total collateral			18.00%
Total performing collateral as a % of outstanding bonds			141.20%
PreTSL XVII [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	$ 606		$ 606
Fair value	$ 456		456
Unrealized gains (losses)			(150)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (222)
Moody's/Fitch ratings			C/CC
Current number of performing banks | bank	34		34
Current number of performing insurance companies | InsuranceCompany	5		5
Actual deferrals and defaults as a % of total collateral			21.60%
Total performing collateral as a % of outstanding bonds			99.70%
PreTSL XIX [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	$ 874		$ 874
Fair value	$ 483		483
Unrealized gains (losses)			(391)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ 0
Moody's/Fitch ratings			Caa1/CC
Current number of performing banks | bank	41		41
Current number of performing insurance companies | InsuranceCompany	12		12
Actual deferrals and defaults as a % of total collateral			7.70%
Total performing collateral as a % of outstanding bonds			102.00%
PreTSL XXV [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	$ 766		$ 766
Fair value	$ 488		488
Unrealized gains (losses)			(279)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (222)
Moody's/Fitch ratings			Ca/C
Current number of performing banks | bank	44		44
Current number of performing insurance companies | InsuranceCompany	5		5
Actual deferrals and defaults as a % of total collateral			27.00%
Total performing collateral as a % of outstanding bonds			89.30%
PreTSL XXVI [Member] | Security One [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	$ 399		$ 399
Fair value	$ 323		323
Unrealized gains (losses)			(75)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (270)
Moody's/Fitch ratings			Caa3/C
Current number of performing banks | bank	45		45
Current number of performing insurance companies | InsuranceCompany	7		7
Actual deferrals and defaults as a % of total collateral			18.00%
Total performing collateral as a % of outstanding bonds			97.40%
PreTSL XXVI [Member] | Security Two [Member]
Schedule Of Available For Sale Securities [Line Items]
Class			Mezzanine
Investment securities available-for-sale, amortized cost	$ 91		$ 91
Fair value	$ 337		337
Unrealized gains (losses)			246
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (438)
Moody's/Fitch ratings			Caa3/C
Current number of performing banks | bank	45		45
Current number of performing insurance companies | InsuranceCompany	7		7
Actual deferrals and defaults as a % of total collateral			18.00%
Total performing collateral as a % of outstanding bonds			97.40%
Collateralized Debt Obligations [Member]
Schedule Of Available For Sale Securities [Line Items]
Investment securities available-for-sale, amortized cost	$ 2,979		$ 2,979	3,291
Fair value	$ 2,275		2,275	$ 2,653
Unrealized gains (losses)			(704)
Realized OTTI credit loss			0
Total recognized OTTI credit loss			$ (1,153)

XML

Note 8 - Major Classes of Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	$ 608,124	$ 615,263
Net unearned costs	107	7
Loans receivable	608,231	615,270
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	110,892	124,397
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	32,133	27,372
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	233,430	235,171
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	65,671	63,164
State and Political Subdivisions Portfolio Segment [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	35,033	40,285
Finance Leases Portfolio Segment [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	8,707	10,371
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	5,306	4,286
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	46,544	42,833
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Accounts Notes And Loans Receivable [Line Items]
Loans and leases receivable	$ 70,408	$ 67,384

XML

Note 8 - Loans & Allowance for Loan Losses (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2016 USD ($) contract	Sep. 30, 2015 contract	Sep. 30, 2016 USD ($) contract loan	Sep. 30, 2015 USD ($) contract	Dec. 31, 2015 USD ($)
Accounts Notes And Loans Receivable [Line Items]
Bank Overdrafts	$ 172,000		$ 172,000		$ 203,000
Financing Receivable, Modifications, Recorded Investment	$ 3,428,000		$ 3,428,000		2,278,000
Number of TDRs | contract	1	1	11	1
Loans and Leases Receivable, Impaired, Commitment to Lend	$ 2,020,000		$ 2,020,000		1,919,000
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down			$ 0	$ 5,000
Financing Receivable, Modifications, Subsequent Default, Number of Contracts | contract	0	0	0	0
Consumer Mortgage Loan on Real Estate Number of Loan in Foreclosure | loan			0
Performing Financial Instruments [Member]
Accounts Notes And Loans Receivable [Line Items]
Financing Receivable, Modifications, Recorded Investment	$ 1,149,000		$ 1,149,000		1,288,000
Nonperforming Financial Instruments [Member]
Accounts Notes And Loans Receivable [Line Items]
Financing Receivable, Modifications, Recorded Investment	$ 2,279,000		$ 2,279,000		$ 990,000
Residential Portfolio Segment [Member] | Maximum [Member]
Accounts Notes And Loans Receivable [Line Items]
Loan to Value Ratio			80.00%

XML

Note 8 - Internal Risk Ratings and Payment Activity (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	$ 608,124	$ 615,263
Excluding Retail Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	485,866	500,760
Excluding Retail Loans [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	459,264	473,040
Excluding Retail Loans [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	4,437	395
Excluding Retail Loans [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	22,165	27,325
Excluding Retail Loans [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	110,892	124,397
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	102,130	117,246
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	700	0
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	8,062	7,151
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	32,133	27,372
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	32,122	27,355
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	11	17
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	233,430	235,171
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	218,404	218,958
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	3,504	361
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	11,522	15,852
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	65,671	63,164
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	63,004	60,286
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	233	34
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	2,434	2,844
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
State and Political Subdivisions Portfolio Segment [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	35,033	40,285
State and Political Subdivisions Portfolio Segment [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	35,033	39,027
State and Political Subdivisions Portfolio Segment [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
State and Political Subdivisions Portfolio Segment [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	1,258
State and Political Subdivisions Portfolio Segment [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Finance Leases Portfolio Segment [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	8,707	10,371
Finance Leases Portfolio Segment [Member] | Pass [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	8,571	10,168
Finance Leases Portfolio Segment [Member] | Special Mention [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	0	0
Finance Leases Portfolio Segment [Member] | Substandard [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	136	203
Finance Leases Portfolio Segment [Member] | Doubtful [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	$ 0	$ 0

XML

Note 8 - Retail Loans by Credit Quality (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	$ 608,124	$ 615,263
Total Retail Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	122,258	114,503
Performing Financial Instruments [Member] | Total Retail Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	121,797	114,089
Nonperforming Financial Instruments [Member] | Total Retail Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	461	414
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	5,306	4,286
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	46,544	42,833
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	70,408	67,384
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	5,211	4,286
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Family Residential Mortgages [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	46,274	42,546
Retail Portfolio Segment [Member] | Performing Financial Instruments [Member] | Home Equity Loan [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	70,312	67,257
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	95	0
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Family Residential Mortgages [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	270	287
Retail Portfolio Segment [Member] | Nonperforming Financial Instruments [Member] | Home Equity Loan [Member]
Financing Receivable Recorded Investment [Line Items]
Loans and leases receivable	$ 96	$ 127

XML

Note 8 - Past Due Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	$ 4,287	$ 3,719
Loans current	603,837	611,544
Loans and leases receivable	608,124	615,263
Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	1,284	1,846
Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	1,533	394
Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	1,470	1,479
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	15	95
Loans current	110,877	124,302
Loans and leases receivable	110,892	124,397
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	15	95
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	63
Loans current	32,133	27,309
Loans and leases receivable	32,133	27,372
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	63
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Commercial Portfolio Segment [Member] | Construction Loans [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	3,049	1,378
Loans current	230,381	233,793
Loans and leases receivable	233,430	235,171
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	962	443
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	1,226	0
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	861	935
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	419	466
Loans current	65,252	62,698
Loans and leases receivable	65,671	63,164
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	92	0
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	97
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	327	369
State and Political Subdivisions Portfolio Segment [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Loans current	35,033	40,285
Loans and leases receivable	35,033	40,285
State and Political Subdivisions Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
State and Political Subdivisions Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
State and Political Subdivisions Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Finance Leases Portfolio Segment [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	549	503
Loans current	8,158	9,868
Loans and leases receivable	8,707	10,371
Finance Leases Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	134	320
Finance Leases Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	133	53
Finance Leases Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	282	130
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	28	22
Loans current	5,278	4,264
Loans and leases receivable	5,306	4,286
Retail Portfolio Segment [Member] | Financing Receivables, 30 to 59 Days Past Due [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	26	12
Retail Portfolio Segment [Member] | Financing Receivables, 60 to 89 Days Past Due [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	2	10
Retail Portfolio Segment [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member] | Consumer Loans [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	875
Loans current	46,544	41,958
Loans and leases receivable	46,544	42,833
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	641
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	234
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	0	0
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	227	317
Loans current	70,181	67,067
Loans and leases receivable	70,408	67,384
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, 30 to 59 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	55	272
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, 60 to 89 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	172	0
Retail Portfolio Segment [Member] | Home Equity Loan [Member] | Financing Receivables, Equal to Greater than 90 Days Past Due [Member]
Financing Receivable Recorded Investment Past Due [Line Items]
Loans past due	$ 0	$ 45

XML

Note 8 - Non-accrual Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	$ 150	$ 11
Loans receivable	8,237	9,420
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	2,908	3,433
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	0	0
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	3,319	3,627
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	1,417	1,803
State and Political Subdivisions Portfolio Segment [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	0	0
Finance Leases Portfolio Segment [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	150	11
Loans receivable	132	143
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	95	0
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	270	287
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Financing Receivables Non Accrual Status [Line Items]
Loans receivable	0	0
Loans receivable	$ 96	$ 127

XML

Note 8 - Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Sep. 30, 2016	Sep. 30, 2015
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	$ 7,550	$ 7,655	$ 7,554	$ 8,001
Provision for (credit to) loan losses	0	0	125	60
Charge-offs	(29)	(21)	(274)	(502)
Recoveries	72	35	188	110
Allowance for loan losses, end of period	7,593	7,669	7,593	7,669
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	1,350	1,603	1,521	1,892
Provision for (credit to) loan losses	(55)	(79)	(105)	(357)
Charge-offs	0	0	(140)	(30)
Recoveries	9	11	28	30
Allowance for loan losses, end of period	1,304	1,535	1,304	1,535
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	429	149	286	297
Provision for (credit to) loan losses	(79)	118	64	(30)
Charge-offs	0	0		0
Recoveries	0	0		0
Allowance for loan losses, end of period	350	267	350	267
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	2,231	2,655	2,411	2,700
Provision for (credit to) loan losses	233	(494)	49	(458)
Charge-offs	0	0		(85)
Recoveries	2	3	6	7
Allowance for loan losses, end of period	2,466	2,164	2,466	2,164
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	1,550	1,635	1,812	1,630
Provision for (credit to) loan losses	(57)	(53)	(359)	251
Charge-offs	0	(4)	(20)	(321)
Recoveries	50	2	110	20
Allowance for loan losses, end of period	1,543	1,580	1,543	1,580
State and Political Subdivisions Portfolio Segment [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	204	232	222	221
Provision for (credit to) loan losses	(64)	(4)	(82)	7
Charge-offs	0	0		0
Recoveries	0	0		0
Allowance for loan losses, end of period	140	228	140	228
Finance Leases Portfolio Segment [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	226	121	164	93
Provision for (credit to) loan losses	(6)	(4)	99	22
Charge-offs	0	0	(52)	(8)
Recoveries	0	5	9	15
Allowance for loan losses, end of period	220	122	220	122
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	73	71	76	85
Provision for (credit to) loan losses	33	18	49	33
Charge-offs	(29)	(17)	(62)	(58)
Recoveries	7	10	21	22
Allowance for loan losses, end of period	84	82	84	82
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	298	313	350	312
Provision for (credit to) loan losses	(20)	(7)	(72)	(6)
Charge-offs	0	0		0
Recoveries	0	0		0
Allowance for loan losses, end of period	278	306	278	306
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	343	474	428	453
Provision for (credit to) loan losses	(7)	(28)	(102)	(19)
Charge-offs	0	0		0
Recoveries	4	4	14	16
Allowance for loan losses, end of period	340	450	340	450
Unallocated Financing Receivables [Member]
Financing Receivable Allowance For Credit Losses [Line Items]
Allowance for loan losses, beginning of period	846	402	284	318
Provision for (credit to) loan losses	22	533	584	617
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Allowance for loan losses, end of period	$ 868	$ 935	$ 868	$ 935

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Note 8 - Specific Reserve for Loans Modified as TDR's (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Receivables [Abstract]
TDRs with no specific allowance recorded - unpaid principal balance	$ 2,860	$ 1,787
TDRs with an allowance recorded - unpaid principal balance	568	491
Unpaid principal balance	3,428	2,278
TDRs with an allowance recorded - related allowance	$ 388	$ 491

XML

Note 8 - Loans by Loan Class Modified as TDRs (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2016 USD ($) contract	Sep. 30, 2015 USD ($) contract	Sep. 30, 2016 USD ($) contract	Sep. 30, 2015 USD ($) contract
Financing Receivable Modifications [Line Items]
Number of contracts | contract	1	1	11	1
Pre-modification outstanding recorded investment	$ 96	$ 142	$ 1,694	$ 142
Post-modification outstanding recorded investment	$ 95	$ 142	$ 1,631	$ 142
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivable Modifications [Line Items]
Number of contracts | contract		1		1
Pre-modification outstanding recorded investment		$ 142		$ 142
Post-modification outstanding recorded investment		$ 142		$ 142
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivable Modifications [Line Items]
Number of contracts | contract			6
Pre-modification outstanding recorded investment			$ 1,074
Post-modification outstanding recorded investment			$ 1,033
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivable Modifications [Line Items]
Number of contracts | contract			4
Pre-modification outstanding recorded investment			$ 524
Post-modification outstanding recorded investment			$ 503
Consumer [Member] | Retail Portfolio Segment [Member]
Financing Receivable Modifications [Line Items]
Number of contracts | contract	1		1
Pre-modification outstanding recorded investment	$ 96		$ 96
Post-modification outstanding recorded investment	$ 95		$ 95

XML

Note 8 - Loans Disaggregated by Impairment Method (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Jun. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	$ 7,593	$ 7,550	$ 7,554	$ 7,669	$ 7,655	$ 8,001
Allowance for loan losses - individually evaluated for impairment	717		974
Allowance for loan losses - collectively evaluated for impairment	6,008		6,296
Loans and leases receivable	608,124		615,263
Loans - individually evaluated for impairment	12,773		14,941
Loans - collectively evaluated for impairment	595,351		600,322
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	1,304	1,350	1,521	1,535	1,603	1,892
Allowance for loan losses - individually evaluated for impairment	462		712
Allowance for loan losses - collectively evaluated for impairment	842		809
Loans and leases receivable	110,892		124,397
Loans - individually evaluated for impairment	3,820		4,586
Loans - collectively evaluated for impairment	107,072		119,811
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	350	429	286	267	149	297
Allowance for loan losses - individually evaluated for impairment	0		0
Allowance for loan losses - collectively evaluated for impairment	350		286
Loans and leases receivable	32,133		27,372
Loans - individually evaluated for impairment	280		364
Loans - collectively evaluated for impairment	31,853		27,008
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	2,466	2,231	2,411	2,164	2,655	2,700
Allowance for loan losses - individually evaluated for impairment	0		14
Allowance for loan losses - collectively evaluated for impairment	2,466		2,397
Loans and leases receivable	233,430		235,171
Loans - individually evaluated for impairment	6,050		6,998
Loans - collectively evaluated for impairment	227,380		228,173
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	1,543	1,550	1,812	1,580	1,635	1,630
Allowance for loan losses - individually evaluated for impairment	189		203
Allowance for loan losses - collectively evaluated for impairment	1,354		1,609
Loans and leases receivable	65,671		63,164
Loans - individually evaluated for impairment	1,716		2,113
Loans - collectively evaluated for impairment	63,955		61,051
State and Political Subdivisions Portfolio Segment [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	140	204	222	228	232	221
Allowance for loan losses - individually evaluated for impairment	0		0
Allowance for loan losses - collectively evaluated for impairment	140		222
Loans and leases receivable	35,033		40,285
Loans - individually evaluated for impairment	0		0
Loans - collectively evaluated for impairment	35,033		40,285
Finance Leases Portfolio Segment [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	220	226	164	122	121	93
Allowance for loan losses - individually evaluated for impairment	55		20
Allowance for loan losses - collectively evaluated for impairment	165		144
Loans and leases receivable	8,707		10,371
Loans - individually evaluated for impairment	132		146
Loans - collectively evaluated for impairment	8,575		10,225
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	84	73	76	82	71	85
Allowance for loan losses - individually evaluated for impairment	0		0
Allowance for loan losses - collectively evaluated for impairment	84		76
Loans and leases receivable	5,306		4,286
Loans - individually evaluated for impairment	95
Loans - collectively evaluated for impairment	5,211		4,286
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	278	298	350	306	313	312
Allowance for loan losses - individually evaluated for impairment	11		25
Allowance for loan losses - collectively evaluated for impairment	267		325
Loans and leases receivable	46,544		42,833
Loans - individually evaluated for impairment	561		583
Loans - collectively evaluated for impairment	45,983		42,250
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	340	343	428	450	474	453
Allowance for loan losses - individually evaluated for impairment	0
Allowance for loan losses - collectively evaluated for impairment	340		428
Loans and leases receivable	70,408		67,384
Loans - individually evaluated for impairment	119		151
Loans - collectively evaluated for impairment	70,289		67,233
Unallocated Financing Receivables [Member]
Credit Losses Related To Financing Receivables Current And Noncurrent [Line Items]
Allowance for loan losses	$ 868	$ 846	$ 284	$ 935	$ 402	$ 318

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Note 8 - Impaired Loans (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2016	Sep. 30, 2015	Dec. 31, 2015
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	$ 11,010		$ 12,414
Unpaid principal balance - with no specific allowance	11,796		13,966
Recorded investment - with an allowance	1,763		2,527
Unpaid principal balance - with an allowance	2,061		2,773
Related allowance	717		974
Unpaid principal balance	13,857		16,739
Recorded investment	12,773		14,941
Average recorded investment	13,802	$ 16,684
Interest income recognized	185	297
Commercial Portfolio Segment [Member] | Commercial and Industrial [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	3,167		3,629
Unpaid principal balance - with no specific allowance	3,531		3,923
Recorded investment - with an allowance	653		957
Unpaid principal balance - with an allowance	804		1,086
Related allowance	462		712
Unpaid principal balance	4,335		5,009
Recorded investment	3,820		4,586
Average recorded investment	4,288	6,301
Interest income recognized	50	154
Commercial Portfolio Segment [Member] | Construction Loans [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	280		364
Unpaid principal balance - with no specific allowance	301		364
Recorded investment - with an allowance	0		0
Unpaid principal balance - with an allowance	0		0
Related allowance	0		0
Unpaid principal balance	301		364
Recorded investment	280		364
Average recorded investment	412	410
Interest income recognized	15	16
Commercial Portfolio Segment [Member] | Secured by Commercial Real Estate [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	6,050		6,932
Unpaid principal balance - with no specific allowance	6,004		7,416
Recorded investment - with an allowance	0		66
Unpaid principal balance - with an allowance	0		66
Related allowance	0		14
Unpaid principal balance	6,004		7,482
Recorded investment	6,050		6,998
Average recorded investment	6,327	7,881
Interest income recognized	100	121
Commercial Portfolio Segment [Member] | Secured by Residential Real Estate [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	918		942
Unpaid principal balance - with no specific allowance	1,286		1,653
Recorded investment - with an allowance	798		1,171
Unpaid principal balance - with an allowance	929		1,279
Related allowance	189		203
Unpaid principal balance	2,215		2,932
Recorded investment	1,716		2,113
Average recorded investment	1,945	1,522
Interest income recognized	11	0
State and Political Subdivisions Portfolio Segment [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	0		0
Unpaid principal balance - with no specific allowance	0		0
Recorded investment - with an allowance	0		0
Unpaid principal balance - with an allowance	0		0
Related allowance	0		0
Unpaid principal balance	0		0
Recorded investment	0		0
Average recorded investment	0	0
Interest income recognized	0	0
Finance Leases Portfolio Segment [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance			3
Unpaid principal balance - with no specific allowance			3
Recorded investment - with an allowance	132		143
Unpaid principal balance - with an allowance	134		145
Related allowance	55		20
Unpaid principal balance	134		148
Recorded investment	132		146
Average recorded investment	114	22
Interest income recognized	0	1
Retail Portfolio Segment [Member] | Consumer Loans [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	95
Unpaid principal balance - with no specific allowance	96
Recorded investment - with an allowance	0		0
Unpaid principal balance - with an allowance	0		0
Related allowance	0		0
Unpaid principal balance	96		0
Recorded investment	95		0
Average recorded investment	10	3
Interest income recognized	0	0
Retail Portfolio Segment [Member] | Family Residential Mortgages [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	381		393
Unpaid principal balance - with no specific allowance	398		406
Recorded investment - with an allowance	180		190
Unpaid principal balance - with an allowance	194		197
Related allowance	11		25
Unpaid principal balance	592		603
Recorded investment	561		583
Average recorded investment	572	415
Interest income recognized	8	4
Retail Portfolio Segment [Member] | Home Equity Loan [Member]
Financing Receivable Impaired [Line Items]
Recorded investment - with no specific allowance	119		151
Unpaid principal balance - with no specific allowance	180		201
Recorded investment - with an allowance	0		0
Unpaid principal balance - with an allowance	0		0
Related allowance	0		0
Unpaid principal balance	180		201
Recorded investment	119		$ 151
Average recorded investment	134	130
Interest income recognized	$ 1	$ 1

XML

Note 9 - Financial Assets Measured at Fair Value on a Recurring and Nonrecurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Trading securities	$ 4,312	$ 4,189
Investment securities available-for-sale	368,834	361,915
Recurring fair value measurements	373,146	366,104
Nonrecurring fair value measurements	1,188	1,831
Impaired Loans [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Nonrecurring fair value measurements	1,046	1,698
Mortgage Servicing Rights [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Nonrecurring fair value measurements	142	133
Fair Value, Inputs, Level 1 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	8,065	7,234
Recurring fair value measurements	8,065	7,234
Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Trading securities	4,312	4,189
Investment securities available-for-sale	358,494	352,028
Recurring fair value measurements	362,806	356,217
Fair Value, Inputs, Level 3 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	2,275	2,653
Recurring fair value measurements	2,275	2,653
Nonrecurring fair value measurements	1,188	1,831
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Nonrecurring fair value measurements	1,046	1,698
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Nonrecurring fair value measurements	142	133
US Government Agencies Debt Securities [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	65,812	61,779
US Government Agencies Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	65,812	61,779
US States and Political Subdivisions Debt Securities [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Trading securities	4,312	4,189
Investment securities available-for-sale	73,560	78,954
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	73,560	78,954
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	132,746	136,681
Mortgage-backed Securities, Issued by US Government Sponsored Enterprises [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	132,746	136,681
Collateralized Mortgage Obligations [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	79,264	65,610
Collateralized Mortgage Obligations [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	79,264	65,610
Pooled Trust Preferred Securities [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	2,275	2,653
Pooled Trust Preferred Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	2,275	2,653
Corporate Debt Securities [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	7,112	9,004
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	7,112	9,004
Equity Securities [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	8,065	7,234
Equity Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Investment securities available-for-sale	$ 8,065	$ 7,234

XML

Note 9 - Fair Value Measurements and Disclosures (Details Textual)	9 Months Ended
	Sep. 30, 2016 USD ($) security	Dec. 31, 2015 USD ($)
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Fair Value Inputs, Loss Severity	95.00%
Minimum Cost Saving for Refinance	2.00%
Impaired Financing Receivable, with Related Allowance, Recorded Investment	$ 1,763,000	$ 2,527,000
Partial Charge-offs [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Impaired Financing Receivable, with Related Allowance, Recorded Investment	$ 0	$ 145,000
Collateralized Debt Obligations [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Number Of Trust Preferred Securities | security	6
Fair Value, Inputs, Level 3 [Member] | Collateralized Debt Obligations [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Number Of Trust Preferred Securities | security	6
Maximum [Member] | Collateralized Debt Obligations [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Fair Value Inputs, Loss Severity	100.00%
Minimum [Member] | Collateralized Debt Obligations [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Fair Value Inputs, Loss Severity	0.00%
London Interbank Offered Rate (LIBOR) [Member] | Maximum [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Fair Value, Measurement with Unobservable Inputs Reconciliation, Recurring Basis, Asset, Gain (Loss) Included in Earnings	$ 0
Fair Value Inputs, Loss Severity	95.00%
Minimum Cost Saving for Refinance	2.00%
Debt Instrument, Basis Spread on Variable Rate	7.79%
London Interbank Offered Rate (LIBOR) [Member] | Minimum [Member]
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Debt Instrument, Basis Spread on Variable Rate	5.03%

XML

Note 9 - Quantitative Information about Assets Measured at Fair Value (Details) - USD ($) $ in Thousands		9 Months Ended	12 Months Ended
		Sep. 30, 2016	Dec. 31, 2015
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		$ 1,188	$ 1,831
Impaired Loans [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		1,046	1,698
Mortgage Servicing Rights [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		142	133
Fair Value, Inputs, Level 3 [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		1,188	1,831
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		$ 1,046	1,698
Nonrecurring fair value liquidation inputs	[1]	10.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Appraisal Valuation Technique [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements	[2]	$ 778	$ 1,331
Nonrecurring fair value liquidation inputs	[1],[2]	10.00%	10.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Appraisal Valuation Technique [Member] | Minimum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[2],[3]	20.00%	15.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Appraisal Valuation Technique [Member] | Maximum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[2],[3]	90.00%	80.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Commercial Vehicle and Equipment Guides Valuation Technique [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements	[4]	$ 140	$ 199
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Commercial Vehicle and Equipment Guides Valuation Technique [Member] | Minimum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[4]	0.00%	0.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Commercial Vehicle and Equipment Guides Valuation Technique [Member] | Maximum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[4]	30.00%	30.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Market Approach Valuation Technique [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements	[5]	$ 128	$ 168
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Market Approach Valuation Technique [Member] | Minimum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[5]	20.00%	25.00%
Fair Value, Inputs, Level 3 [Member] | Impaired Loans [Member] | Market Approach Valuation Technique [Member] | Maximum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs	[5]	25.00%	70.00%
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		$ 142	$ 133
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member] | Discounted Cash Flow Valuation Technique [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value measurements		$ 142	$ 133
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member] | Discounted Cash Flow Valuation Technique [Member] | Minimum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs		12.00%	10.00%
Nonrecurring fair value expected term		2 years	3 years
Fair Value, Inputs, Level 3 [Member] | Mortgage Servicing Rights [Member] | Discounted Cash Flow Valuation Technique [Member] | Maximum [Member]
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis Valuation Techniques [Line Items]
Nonrecurring fair value range of value inputs		14.00%	12.00%
Nonrecurring fair value expected term		27 years	28 years

[1] 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.

[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 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.

[4] If lendable value (lower than wholesale) is utilized then no additional discounts are taken. If lendable value is not provided then additional discounts are applied.

[5] Values obtained from financial statements for UCC collateral (fixed assets and inventory) are discounted to estimated realizable liquidation value.

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Note 9 - Available-for-sale Securities Measured at Fair Value Using Significant Unobservable Inputs (Details) - Fair Value, Inputs, Level 3 [Member] $ in Thousands	9 Months Ended
	Sep. 30, 2016 USD ($)
Fair Value Assets Measured On Recurring Basis Unobservable Input Reconciliation [Line Items]
Balance, January 1, 2016	$ 2,653
Payments received	(312)
Included in other comprehensive income	(66)
Balance, September 30, 2016	$ 2,275

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Note 9 - Financial and Off-balance Sheet Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015	Sep. 30, 2015	Dec. 31, 2014
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Cash and cash equivalents	$ 69,428	$ 16,991	$ 68,450	$ 16,991
Trading	4,312	4,189
Investment securities available-for-sale	368,834	361,915
Held-to-maturity	147	147
Restricted investment in bank stocks	522	508
Loans held-for-sale	456	987
Net loans	600,638	607,716
Mortgage servicing rights	498	504
Accrued interest receivable	2,573	2,562
Deposits with no stated maturities	926,712	889,786
Short-term borrowings	41,179	37,163
Accrued interest payable	310	330
Cash and cash equivalents	69,428	16,991
Held-to-maturity	147	151
Restricted investment in bank stocks	522	508
Loans held-for-sale	466	1,004
Net loans	610,066	610,315
Mortgage servicing rights	555	642
Accrued interest receivable	2,573	2,562
Short-term borrowings	41,179	37,163
Accrued interest payable	310	330
Fair Value, Inputs, Level 1 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Investment securities available-for-sale	8,065	7,234
Cash and cash equivalents	69,428	16,991
Short-term borrowings	41,179	37,163
Fair Value, Inputs, Level 2 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Trading	4,312	4,189
Investment securities available-for-sale	358,494	352,028
Held-to-maturity	147	151
Restricted investment in bank stocks	522	508
Loans held-for-sale	466	1,004
Accrued interest receivable	2,573	2,562
Accrued interest payable	310	330
Fair Value, Inputs, Level 3 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Investment securities available-for-sale	2,275	2,653
Net loans	610,066	610,315
Mortgage servicing rights	555	642
With No Stated Maturities [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Deposits with no stated maturities	698,336	662,410
Deposits with no stated maturities	698,336	662,410
With No Stated Maturities [Member] | Fair Value, Inputs, Level 1 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Deposits with no stated maturities	698,336	662,410
With Stated Maturities [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Deposits with no stated maturities	228,376	227,376
Deposits with no stated maturities	230,993	227,862
With Stated Maturities [Member] | Fair Value, Inputs, Level 2 [Member]
Fair Value Balance Sheet Grouping Financial Statement Captions [Line Items]
Deposits with no stated maturities	$ 230,993	$ 227,862

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Note 10 - Financial Instrument Commitments (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Commitments And Contingencies Disclosure [Line Items]
Commitments to extend credit and unused lines of credit	$ 321,463	$ 241,985
Commitments to Extend Credit [Member]
Commitments And Contingencies Disclosure [Line Items]
Commitments to extend credit and unused lines of credit	308,483	232,492
Standby Letters of Credit [Member]
Commitments And Contingencies Disclosure [Line Items]
Commitments to extend credit and unused lines of credit	$ 12,980	$ 9,493

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Note 10 - Financial Instrument Commitments (Details Textual)	9 Months Ended
	Sep. 30, 2016
Maximum [Member]
Commitments And Contingencies Disclosure [Line Items]
Standby letters of credit expiration period	3 years

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Note 11 - Capital Ratios and Regulatory Minimum Requirements (Details) - USD ($) $ in Thousands	Sep. 30, 2016	Dec. 31, 2015
Consolidated Entities [Member]
Compliance With Regulatory Capital Requirements Under Banking Regulations [Line Items]
Capital	$ 103,357	$ 98,432
Tier 1 capital	95,704	90,819
Common equity tier 1 capital	95,704	90,819
Tier 1 leverage capital	$ 95,704	$ 90,819
Capital to risk-weighted assets	13.08%	12.58%
Tier 1 capital to risk-weighted assets	12.11%	11.60%
Common equity tier 1 capital to risk-weighted assets	12.11%	11.60%
Tier 1 leverage capital to average assets	9.08%	8.87%
Capital required for capital adequacy	$ 63,207	$ 62,613
Tier 1 capital required for capital adequacy	47,405	46,960
Common equity tier 1 capital required for capital adequacy	35,554	35,220
Tier 1 leverage capital required for capital adequacy	$ 42,160	$ 40,934
Capital required for capital adequacy to risk-weighted assets	8.00%	8.00%
Tier 1 capital required for capital adequacy to risk-weighted assets	6.00%	6.00%
Common equity tier 1 capital required for capital adequacy to risk-weighted assets	4.50%	4.50%
Tier 1 leverage capital required for capital adequacy to average assets	4.00%	4.00%
Capital required to be well capitalized	$ 79,009	$ 78,266
Tier 1 capital required to be well capitalized	$ 47,405	$ 46,960
Capital required to be well capitalized to risk-weighted assets	10.00%	10.00%
Tier 1 capital required to be well capitalized to risk-weighted assets	6.00%	6.00%
Bank [Member]
Compliance With Regulatory Capital Requirements Under Banking Regulations [Line Items]
Capital	$ 95,163	$ 91,091
Tier 1 capital	87,511	83,478
Common equity tier 1 capital	87,511	83,478
Tier 1 leverage capital	$ 87,511	$ 83,478
Capital to risk-weighted assets	12.43%	11.97%
Tier 1 capital to risk-weighted assets	11.43%	10.97%
Common equity tier 1 capital to risk-weighted assets	11.43%	10.97%
Tier 1 leverage capital to average assets	8.37%	8.22%
Capital required for capital adequacy	$ 61,266	$ 60,874
Tier 1 capital required for capital adequacy	45,950	45,656
Common equity tier 1 capital required for capital adequacy	34,462	34,242
Tier 1 leverage capital required for capital adequacy	$ 41,835	$ 40,632
Capital required for capital adequacy to risk-weighted assets	8.00%	8.00%
Tier 1 capital required for capital adequacy to risk-weighted assets	6.00%	6.00%
Common equity tier 1 capital required for capital adequacy to risk-weighted assets	4.50%	4.50%
Tier 1 leverage capital required for capital adequacy to average assets	4.00%	4.00%
Capital required to be well capitalized	$ 76,583	$ 76,093
Tier 1 capital required to be well capitalized	61,266	60,874
Common equity tier 1 capital required to be well capitalized	49,779	49,460
Tier 1 leverage capital required to be well capitalized	$ 52,293	$ 50,790
Capital required to be well capitalized to risk-weighted assets	10.00%	10.00%
Tier 1 capital required to be well capitalized to risk-weighted assets	8.00%	8.00%
Common equity tier 1 capital required to be well capitalized to risk-weighted assets	6.50%	6.50%
Tier 1 leverage capital required to be well capitalized to average assets	5.00%	5.00%