68 on December 31, 1998. As interest rates have fluctuated, QNB has maintained a larger negative GAP position (-8.45) over a time horizon on one year compared with the average peer group bank (-5.88).
Forecasting QNB's (see Appendix E) interest rate sensitivity for 1998 using their current loan portfolio shows they will end up in a 29.10 million dollar decrease in Net Interest Income. This is seen by using December 31, 1997 as a base year and finding the change in interest rates (Appendix F) by the month. Once the forecasted change in periodic gap is found for each of the eight buckets the total decrease is found by taking the present value of each bucket and then summing them together.
Credit Risk.
Credit Risk is defined as the potential for borrowers to fail to meet their debt obligations held by financial institutions under the agreed upon terms. Financial institutions would face no credit risk if the maturity value plus interest was received on their promised dates. Should a borrower default on their debt obligations the principal as well as the interest are at risk. The goal of credit risk is to maximize a bank's risk adjusted rate of return by maintaining credit risk exposure within the banks acceptable parameters. QNB is having credit quality problems. Net charge-offs were .12% more than their peer in 1997, and past-due and non-accrual loans and leases were 1.93% while their peer only had 1.58%. Both of these are significantly higher. .
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Overall, QNB has total loans in the amount of $266,399, which is 8.21% more than its competitor. Although they have more total loans and leases, they are earning a smaller return on assets, .91% while competition produced 1.04%. Net income in 1997 was $3548, .13% less than the peer earned. Loan income to loans and leases was 11.44% in 1997, and the peer was close behind at 11.32%. QNB is earning about the same income on their loan portfolio as their competitor even though their portfolio contains more long-term assets showing that the portfolio needs to be rebalanced.
