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15 North
Third Street PO Box
9005
Quakertown,
Pennsylvania 18951
May 19,
2010
VIA
EDGAR and Facsimile
Michael
Clampitt, Esquire
Senior
Counsel
United
States Securities and Exchange Commission
Division
of Corporation Finance
Washington,
D.C. 20549
Mail Stop
4561
Form 10-K for the Fiscal Year Ended
December 31, 2009
File No.
000-17706
Dear
Mr. Clampitt:
We are responding to your letter, dated
May 10, 2010, relating to the filing referenced above of QNB Corp. (the “Company”). Each
of your comments is set forth below, together with the Company’s related
response. For convenience of reference, we have repeated each of your
questions or comments, in bold, immediately prior to our related
response.
Form 10-K for Year Ended
December 31, 2009
General
Additional Information, page
10
1. In
future filings please correct the address of the Securities and Exchange
Commission.
We will
correct the address of the Securities and Exchange Commission in future filings
to reflect the following:
SEC
Headquarters
100 F
Street, NE
Washington,
DC 20549
Item 3. Legal
Proceedings
2. Please
tell us and include in future filings whether you have any material pending
legal proceedings
rather than material litigation. Refer
to Item 103 of Regulation S-K.
The
Company is not a party to any pending material legal proceedings within the
meaning of Item 103 of Regulation S-K. We will revise future filings
to disclose any material pending legal proceedings as opposed to any
material pending litigation in accordance with
Item 103 of Regulation S-K.
Item 8. Financial Statements
and Supplementary Data
Note 4 – Investment
Securities Available for Sale, pages 61-65
Pooled Trust Preferred
Securities
3. The
staff notes the disclosure appearing on page 65 that in determining whether a
credit loss exists, the company 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. In addition, the staff notes that the company states
that the internal rate of return is the pre-tax yield used to discount the
future cash flows. The cash flows have been discounted using the
stated yield on the individual security purchased plus a market discount rate
ranging from 1% to 6%. These two statements appear to be
inconsistent. Please tell us how you determined the discount rate to
be used on the company’s OTTI methodology. If the rate used is not
the effective yield then state which rate is used by the company. If
the rate used is the effective yield then the company should revise its
disclosure in future filings to eliminate the apparent
inconsistency.
The
Company agrees with the staff that the placement of our discussion of the
internal rate of return utilized in the calculation of the fair value of our
pooled trust preferred securities within our discussion of how credit related
other-than-temporary-impairment (OTTI) is determined on our pooled trust
preferred securities could appear inconsistent to the reader. The statement made
earlier in the disclosure correctly states that when determining whether a
credit related other-than-temporary impairment exists the Company uses its best
estimate of the present value of cash flows expected to be collected from the
security and discounts them at the effective yield implicit in the security at
the date of acquisition.
In future
filings the Company will appropriately disclose that the internal rate of return
is utilized for the calculation of fair value in the fair value disclosure and
that the effective yield is used in the determination of OTTI in the OTTI
disclosure. The Company has also reflected this change in the disclosures
included in the Form 10-Q filed on May 17, 2010.
4. The
staff notes that for PreTSL XIX you disclose that there is no excess
subordination. Please tell us and revise future filings to state the
following:
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how
you calculate excess subordination;
and
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Excess
subordination is the amount by which the underlying performing collateral
exceeds the outstanding bonds being valued in the tranche as well as all of the
senior tranches. The excess subordination ratio is calculated by dividing the
difference between performing collateral and outstanding bonds (most senior
through the bond being valued) by performing collateral. A bond with no
excess subordination indicates that the outstanding bond balances (most senior
through the bond being valued) exceed the supporting collateral.
The
Company will revise the disclosure in future filings to include the coverage
ratio in lieu of the disclosure previously provided regarding excess
subordination. Coverage is the amount of performing collateral supporting a
particular tranche. Upon further review, the Company feels the coverage ratio
will more clearly reflect how much collateral supports each bond and should
provide more useful information to the reader of our financial statements.
Included below is a table to illustrate the disclosure we provided in our
December 31, 2009 Form 10-K regarding excess subordination and the proposed
disclosure of the coverage ratio in place of the excess subordination disclosure
at December 31, 2009.
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Current
Disclosure
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Proposed
Disclosure
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Deal
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Excess
subordin-
ation
as a % of
current
performing
collateral
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Total
performing
collateral
as a % of
outstanding
bonds
(coverage
ratio)
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PreTSL
IV
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19.0%
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123.5%
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PreTSL
V
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No
excess
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95.0%
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PreTSL
VI
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No
excess
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69.2%
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PreTSL
XVII
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No
excess
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88.5%
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PreTSL
XIX
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No
excess
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92.3%
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PreTSL
XXV
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No
excess
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78.0%
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PreTSL
XXVI
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No
excess
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84.8%
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In future
filings the Company will disclose the coverage ratio and will no longer provide
information related to excess subordination. The Company reflected this change
in the disclosures included in the Form 10-Q filed on May 17, 2010.
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how
you determined that with no excess subordination there was no credit
impairment.
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The
reason there was no credit impairment recorded on PreTSL XIX during 2009 even
though there was no excess subordination was a result of the present value of
the projected cash flows still approximating the book value of the bonds.
The way this pooled trust preferred security was structured at inception helps
to explain why the bond does not have to be 100% collateralized to pay off
entirely. The cash flow waterfalls for these securities are extremely complex
and the excess subordination does not include the value of the performance
triggers. If the performance triggers are not met, cash flow, including
interest, is allocated from the income notes first, the next subordinate bond
second, and so on until the applicable trigger is met. Thus, bonds more senior
in the waterfall are afforded credit enhancement both through the dollar value
of the bonds subordinate to them as well as the cash flow that would be
allocated to those subordinate bonds. This means that interest from subordinate
tranches can pay down principal on more senior notes as is currently the case
with respect to PreTSL XIX. Given the current and projected level of deferrals
and defaults, there is still enough cash flow to pay down the senior bonds and
some of the mezzanine classes.
Another
difference between the relationship of excess subordination and the calculation
of credit impairment relates to the reason and financial condition for issuers
who are deferring interest payments. Part of the OTTI analysis involves a review
of those issuers who are currently in a deferral status while the excess
subordination calculation assumes that both deferrals and defaults will all be
100% credit losses. In reality, some of the issuers who are deferring may not be
in imminent danger of failure and could just be taking advantage of an option
available to them to preserve some relatively inexpensive capital.
________________________
In
connection with responding to your comments, the Company acknowledges the
following:
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filing;
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filing; and
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the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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If you have any questions or further
comments with respect to these matters, please contact the undersigned at (610)
538-5612.
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QNB
CORP.
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/s/
Thomas J. Bisko
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Thomas
J. Bikso
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Chief
Executive Officer
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