SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X|[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,June 30, 1998
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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
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QNB Corp.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2318082
- --------------------------------- ---------------------------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (215)538-5600
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Not Applicable
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Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report.
Indicate by check |X|[X] 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 |X|[x] 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 May 14,July 10, 1998
- ----------------------------- -------------------------------------------------------
Common Stock, par value $1.25 1,431,2401,431,912
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED MARCH 31,JUNE 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income for
Three and Six Months Ended March 31,June 30, 1998
and 1997..........................11997 1
Consolidated Balance Sheets at March 31,June 30, 1998
and December 31, 1997.........................................21997 2
Consolidated Statements of Cash Flows for ThreeSix
Months Ended March 31,June 30, 1998 and 1997..........................31997 3
Notes to Consolidated Financial Statements.............................4Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION............................6CONDITION 6
ITEM 3. Quantitative and Qualitative Disclosure About
Market Risk 19
PART II - OTHER INFORMATION
OTHER INFORMATION.................................................... 18ITEM 1. Legal Proceedings. 20
(See Regulation S-K Item 305)
ITEM 2. Changes in Securities 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submissions of Matters to a Vote of Securities
Holders 20
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
--------------------------------
Three Months Six Months
Ended March 31,June 30, Ended June 30,
1998 1997 1998 1997
- --------------------------- ------ --------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans ................................. $3,625 $3,465$3,777 $3,534 $7,402 $6,999
Interest and dividends on investment
securities:
Taxable ................................................ 1,625 1,4241,632 1,535 3,257 2,959
Tax-exempt ............................................. 140 130160 135 300 265
Interest on Federal funds sold ............................. 65 44
------ ------119 48 184 92
- --------------------------------------------------------------------------------
Total interest income ............................. 5,455 5,063
------ ------5,688 5,252 11,143 10,315
- --------------------------------------------------------------------------------
Interest Expense
Interest on deposits
NOW accounts ........................................... 143 165150 167 293 332
Money market accounts .................................. 235 231239 233 474 464
Savings ................................................ 198 190206 194 404 384
Time ................................................... 1,392 1,2951,444 1,339 2,836 2,634
Time over $100,000 ..................................... 277 211287 237 564 448
Interest on short-term borrowings .......................... 75 70
------ ------86 77 161 147
- --------------------------------------------------------------------------------
Total interest expense ............................ 2,320 2,162
------ ------2,412 2,247 4,732 4,409
- --------------------------------------------------------------------------------
Net interest income ............................... 3,135 2,9013,276 3,005 6,411 5,906
Provision for loan losses .................................. 100 100 ------ ------200 200
- --------------------------------------------------------------------------------
Net interest income after
provision for loan losses 3,035 2,801
------ ------3,176 2,905 6,211 5,706
- --------------------------------------------------------------------------------
Non-Interest Income
Fees for services to customers ............................. 259256 269 515 538
Mortgage servicing fees .................................... 42 4544 48 86 93
Net gain on investment
securities available-for-sale .......-- 5 68 160165
Net gain on sale of loans .................................. 54 34110 8 164 42
Other operating income ..................................... 190109 119 ------ ------299 238
- --------------------------------------------------------------------------------
Total non-interest income ......................... 613 627
------ ------519 449 1,132 1,076
- --------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits ............................. 1,361 1,3511,363 1,303 2,724 2,654
Net occupancy expense ...................................... 156 163160 162 316 325
Furniture and equipment expense ............................ 157 187162 158 319 345
Marketing expense .......................................... 64 59124 82 188 141
Supplies expense ........................................... 43 5051 42 94 92
Professional fees .......................................... 32 4929 40 61 89
Insurance expense .......................................... 24 2724 48 51
Other real estate owned expense ............................ 46 35 71 81 106
Other expense .............................................. 385 358
------ ------460 372 845 730
- --------------------------------------------------------------------------------
Total non-interest expense ........................ 2,268 2,279
------ ------2,408 2,254 4,676 4,533
- --------------------------------------------------------------------------------
Income before income taxes ............................. 1,380 1,1491,287 1,100 2,667 2,249
Provision for income taxes ................................. 403 328
------ ------346 319 749 647
- --------------------------------------------------------------------------------
Net Income ............................................. $ 977941 $ 821
====== ======781 $1,918 $1,602
- --------------------------------------------------------------------------------
Net Income Per Share - Basic ........................... $ .68.66 $ .58
====== ======.55 $ 1.34 $ 1.12
- --------------------------------------------------------------------------------
Net Income Per Share - Diluted ......................... $ .68.65 $ .57
====== ======.54 $ 1.33 $ 1.12
- --------------------------------------------------------------------------------
Cash Dividends Per Share ............................... $ .18 $ .16 ====== ======$ .36 $ .32
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 1
QNB CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31,- --------------------------------------------------------------------------------
June 30, December 31,
1998 1997
--------- ------------- --------------------------------------------------------------------------------
Assets
Cash and due from banks ................................ $ 11,74012,961 $ 12,574
Federal funds sold ..................................... 10,2478,210 2,022
Investment securities
available-for-sale ................................. 73,75476,690 75,920
held-to-maturity (market value
$40,872$45,154 and $40,713) 40,49144,829 40,400
Total loans, net of unearned income of
$425$373 and $448 ... 171,677168,595 167,720
Allowance for loan losses .......................... (2,787)(2,886) (2,670)
--------- ---------- --------------------------------------------------------------------------------
Net loans ..................................... 168,890165,709 165,050
Premises and equipment, net ............................ 4,1034,181 4,066
Other real estate owned ................................ 822773 1,564
Accrued interest receivable ............................ 1,9212,007 2,007
Other assets ........................................... 2,2012,304 2,169
--------- ---------- --------------------------------------------------------------------------------
Total assets ........................................... $ 314,169 $ 305,772
========= =========$317,664 $305,772
- --------------------------------------------------------------------------------
Liabilities
Deposits
Demand, non-interest-bearing ....................... $ 35,70837,850 $ 38,692
NOW accounts ....................................... 42,46141,895 42,176
Money market accounts .............................. 32,76932,604 32,520
Savings ............................................ 38,35837,878 36,629
Time ............................................... 103,307106,779 101,447
Time over $100,000 ................................. 20,80819,320 15,702
--------- ---------- --------------------------------------------------------------------------------
Total deposits ................................ 273,411276,326 267,166
Short-term borrowings .................................. 11,30811,510 10,342
Accrued interest payable ............................... 1,1531,125 1,057
Other liabilities ...................................... 1,6121,400 1,375
--------- ---------- --------------------------------------------------------------------------------
Total liabilities ...................................... 287,484290,361 279,940
========= =========- --------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued
1,431,912 shares and 1,431,240 shares 1,7891,790 1,789
Surplus ................................................ 4,3694,393 4,369
Retained earnings ...................................... 19,52120,204 18,801
Accumulated other comprehensive income ................. 1,006916 873
--------- ---------- --------------------------------------------------------------------------------
Total shareholders' equity ............................. 26,68527,303 25,832
--------- ---------- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity ............. $ 314,169 $ 305,772
========= =========$317,664 $305,772
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 2
QNB CORP. and Subsidiary
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three- --------------------------------------------------------------------------------
Six Months Ended March 31,June 30, 1998 1997
-------- --------- --------------------------------------------------------------------------------
Operating Activities
Net income .............................................................................. $ 977 $ 821$1,918 $1,602
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses ............................................................. 100 100200 200
Depreciation and amortization ......................................................... 100 124215 250
Securities gains ...................................................................... (68) (160)(165)
Net gain on sale of loans ............................................................. (54) (34)(164) (42)
Proceeds from sales of residential mortgages 7,199 593
Originations of residential mortgages held-for-
sale (5,159) (396)
Net gains(gains) losses on sales or writedowns of
other real estate owned ........................... (41) (1)(16) 9
Deferred income tax provision ......................................................... (23) (29)(63) (20)
Change in income taxes payable ........................................................ 419 346106 (70)
Net decrease (increase)increase in interest and dividends receivable .......................... 86 (248)-- (128)
Net amortization of premiums and discounts ............................................ (1)5 8
Net increase in interest payable ...................................................... 96 9768 30
Increase in other assets .............................................................. (142) (226)(124) (82)
Decrease in other liabilities ......................................................... (117) (44)
-------- --------(16) (70)
- --------------------------------------------------------------------------------
Net cash provided by operating activities ............................................. 1,332 754
-------- --------4,101 1,719
- --------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities and calls of investment
securities
available-for-sale .................................................................... 9,222 4,06010,924 6,146
held-to-maturity ...................................................................... 3,082 7858,599 1,978
Proceeds from sales of investment securities
available-for-sale .................................................................... 5,114 3,4679,951
Purchase of investment securities
available-for-sale .................................................................... (11,906) (14,105)(16,701) (26,958)
held-to-maturity ...................................................................... (3,167) (995)(13,007) (1,245)
Net increase (decrease) in Federal funds sold ...................................................... (8,225) (86)(6,188) 2,510
Proceeds from sales of student loans .................................................... 211 1,126
Proceeds from sales of residential mortgages ............................................ 2,051 325
Originations of residential mortgages held-for-sale ..................................... (1,631) (327)1,467 1,381
Net increase in loans ................................................................... (4,516) (3,440)(4,280) (6,016)
Net purchases of premises and equipment ................................................. (138) (16)(331) (54)
Proceeds from the sale of other real estate owned ....................................... 783 221
-------- --------856 306
- --------------------------------------------------------------------------------
Net cash used by investing activities ................................................. (9,120) (8,985)
-------- --------(13,547) (12,001)
- --------------------------------------------------------------------------------
Financing Activities
Net decrease (increase) in
non-interest-bearing deposits ........................................... (2,984) (145)(842) 6,636
Net increase in interest-bearing deposits ............................................... 9,229 6,10510,002 6,048
Net increase (decrease) in short-term borrowings ................................................... 966 1,6621,168 (187)
Cash dividends paid ..................................................................... (257) (228)(515) (457)
Proceeds from issuance of common stock .................................................. -- 30
-------- --------20 52
- --------------------------------------------------------------------------------
Net cash provided by financing activities ............................................. 6,954 7,424
-------- --------
Decrease9,833 12,092
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents ................................................. (834) (807)387 1,810
Cash and cash equivalents at beginning of year ........................................ 12,574 12,459
-------- --------- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period ............................................ $ 11,740 $ 11,652
======== ========$12,961 $14,269
- --------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures
Interest paid ........................................................................... $ 2,2244,664 $ 2,0654,379
Income taxes paid ....................................................................... -- --700 730
Non-Cash Transactions
Change in net unrealized holding gains (losses),
net of taxes, on investment securities 133 (622)43 (29)
Transfer of loans to other real estate owned 49 --
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997
(Unaudited)
1. REPORTING AND ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of QNB
Corp. and its wholly owned subsidiary, The Quakertown National Bank, (QNB). All
significant intercompany accounts and transactions are eliminated in the
consolidated statements.
The consolidated balance sheet as of March 31,June 30, 1998, as well as the respective
statements of income and cash flows for the three and six month periodperiods ended
March 31,June 30, 1998 and 1997, are unaudited. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in QNB's 1997 Annual Report incorporated in the Form 10-K.
The financial statements reflect all adjustments, which in the opinion of
management are necessary for a fair presentation of the results of the interim
periods and are of a normal and recurring nature. The results for the periods
presented are not necessarily indicative of the full year. Certain accounts in
last year's financial statements have been reclassified to conform to the
current year's presentation. These reclassifications had no effect on net
income.
2. PER SHARE DATA
The following sets forth the computation of basic and diluted earnings per share
(share and per share data are not in thousands):
For the Three Months
Ended March 31,
1998 1997
---------- ----------
Numerator for basic and diluted earnings...... $ 977 $ 821
per share-net income
Denominator for basic earnings per share-
Weighted average shares outstanding......... 1,431,240 1,426,709
Effect of dilutive securities-employee
Stock options............................... 7,845 5,690
Denominator for diluted earnings per
share- adjusted weighted average
shares outstanding.......................... 1,439,085 1,432,399
Earnings per share-basic...................... $ .68 $ .58
Earnings per share-diluted.................... $ .68 $ .57
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator for basic and diluted
earnings per share-net income $941 $ 781 $1,918 $1,602
Denominator for basic earnings
per share- Weighted average
shares outstanding 1,431,483 1,427,643 1,431,362 1,427,178
Effect of dilutive securities-
employee Stock options 10,560 5,543 9,262 5,608
Denominator for diluted earnings
per share- adjusted weighted
average shares outstanding 1,442,043 1,433,186 1,441,624 1,432,786
Earnings per share-basic $.66 $.55 $1.34 $1.12
Earnings per share-diluted $.65 $.54 $1.33 $1.12
Form 10-Q
Page 4
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires the inclusion of
comprehensive income, either in a separate statement, or as part of a combined
statement of income and comprehensive income in a full set of general-purpose
financial statements.
Comprehensive income is defined as the change in equity of a business entity
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For QNB, the
primarysole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.
The following shows the components and activity of comprehensive income during
the period (net of the income tax effect):
Unrealized holding gains arising during the period on securities held at March 31, 1998... $ 166
Reclassification adjustment equal to beginning unrealized for all sold securities ........ (30)
-------
Net change in unrealized during the period .......................................... 133
Unrealized, beginning of period .......................................................... 873
-------
Unrealized, end of period ................................................................ $ 1,006
Unrealized holding gains arising during the period on
securities held at June 30, 1998 $ 73
Reclassification adjustment equal to beginning unrealized
for all sold securities (30)
-----
Net change in unrealized during the period 43
Unrealized, beginning of period 873
-----
Unrealized, end of period $916
Net income $1,918
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period 43
----
Comprehensive Income $1,962
======
Form 10-Q
Page 5
QNB CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania which provides a full range of commercial and retail
banking services through its banking subsidiary, The Quakertown National Bank
(the "Bank"), a 120121 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties. The results of operations and
financial condition discussed herein are presented on a consolidated basis and
the consolidated entity is referred to herein as "QNB."
In addition to historical information, this management discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Corporation files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
filed by the Corporation in 1998, and any Current Reports on Form 8-K filed by
the Corporation.
RESULTS OF OPERATIONS - OVERVIEW
QNB recorded record earnings of $977,000$941,000 or $.68$.65 per share on a diluted basis
for the three month period ending March 31,June 30, 1998. This represents a 19.020.5 percent
increase from net income of $821,000$781,000 or $.57$.54 per share-diluted reported for the
first quartersame period in 1997. For the six month periods ending June 30, 1998 and 1997,
net income was $1,918,000 and $1,602,000, respectively an increase of 1997.
Continued improvement in core operating19.7
percent. Net income accountedper share-diluted was $1.33 and $1.12 for most of the corresponding
six month periods.
The increase in net income for the both the three and six month periods was
primarily a result of higher net interest income. Net interest income which represents
interest income, dividends, and fees on earning assets, less interest expense incurred on
funding sources,sources. Net interest income increased 8.1 percent to $3,135,000$3,276,000 for the quarter
ending March 31,June 30, 1998 as compared to $2,901,000from $3,005,000 for the same quarter in 1997. An 8.8
percent increase in average earning assets and a three basis point increase in
the net interest margin contributed to the increase in net interest income. The
recovery of interest on a non-accrual loan contributed $88,000 to net interest
income during the second quarter of 1998. Excluding this recognition, the net
interest margin would have declined by approximately nine basis points when
comparing the two quarters. Declining interest rates on both loans and
investment securities negatively impacted the net interest margin.
Non-interest income increased $70,000 or 15.6 percent when comparing the two
quarters. Gains on the sale of both residential mortgages and student loans were
$110,000 and $8,000 for the respective quarters ending June 30, 1998 and 1997.
The $72,000 increase in the gains on residential mortgages sales in the second
quarter of 1998 was a result of the refinancing boom resulting from extremely
low mortgage rates. The $30,000 variance in the gain on the sale of student
loans was a function of timing. Most of the gain on student loans for 1997 was
recorded during the first quarter.
Total non-interest expense increased $154,000 or 6.8 percent when comparing the
two quarters. Higher personnel costs and marketing costs contributed to the
increase. A $40,000 pledge to the Main Street Program, a program designed for
the revitalization of downtown Quakertown, contributed to the increase in
marketing expense.
Form 10-Q
Page 6
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (Continued)
For the six month period ending March 31, 1997.June 30, 1998, net interest income increased
$505,000 or 8.6 percent to $6,411,000. Significant growth in average earning
assets accounts for most of the improvement in net interest income. Average
earning assets increased 7.88.4 percent when comparing the two quarters.periods. Also
positively impacting net interest income was a slight increase in the net
interest margin from 4.654.64 percent to 4.674.66 percent. Excluding the recognition of
interest on a non-accrual loan, the net interest margin would have declined to
4.60 percent for the six months ending June 30, 1998.
Non-interest income declined $14,000increased $56,000 or 2.25.2 percent and non-interest expense
declined $11,000increased $143,000 or .53.2 percent when comparing the twosix month periods. Contributing to
the results during the first quarter of 1998 were pre-tax gainsGains on
the sale of loans, securitiesresidential mortgages and other real estate ownedincreased fees from checkcard income
contributed to the increase in non-interest income. Slightly higher personnel
expense as well as an increase in marketing costs and the amortization of $164,000. This comparesthe
deposit premium related to pre-tax gainsthe acquisition of $196,000deposits from First Lehigh Bank
during the firstfourth quarter of 1997.1997 contributed to the increase in non-interest
expense.
Return on average assets was 1.311.21 percent and 1.191.09 percent while the return on
average equity was 15.6314.49 percent and 14.5013.34 percent for the quartersthree months ending
March
31,June 30, 1998 and 1997, respectively. For the six month periods ending June 30,
1998 and 1997, return on average assets was 1.26 percent and 1.14 percent and
the return on average equity was 15.05 percent and 13.91 percent, respectively.
NET INTEREST INCOME
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 and Federal funds sold. Sources used to fund these
assets include deposits, borrowed funds and shareholders' equity. Net interest
income is affected by changes in 6
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (Continued)
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 and shareholders' equity.
Net interest income for the three months ended March 31,June 30, 1998 was $3,135,000$3,276,000
compared to $2,901,000$3,005,000 for the period ending March 31,June 30, 1997. A 7.8An 8.8 percent
increase in average earning assets and a 23 basis point increase in the net
interest margin contributed to the increase in net interest income between the
periods. The yield on earning assets on a fully taxable equivalent basis was
7.997.95 percent for the firstsecond quarter of 1998 versus 7.987.96 percent for the firstsecond
quarter of 1997, while the rate paid on interest-bearing liabilities was 3.89
percent and 3.88 percent for the sameboth periods. The net interest margin on a fully taxable equivalent
basis for the three month period ended March 31,June 30, 1998 was 4.674.66 percent compared
to 4.654.63 percent for the same period in 1997. The slightly higherPositively impacting the yield on
earning assets isand the net interest margin was the recognition of approximately
$88,000 in interest income on a resultnon-accrual loan. The loan had been in
non-accrual status since September of an increase in1995 and was paid off during the second
quarter of 1998. Excluding the recognition of this interest, the yield on
earning assets would have been 7.83 percent, a decline of 13 basis points, while
the net interest margin would have been 4.54 percent, a decline of nine basis
points from the second quarter of 1997.
Declining interest rates during 1998, particularly during the second quarter,
negatively impacted the yield on both investment securities and loans. While the
yield on investment securities. The yield on investment securities increased to
6.73for the second quarter of 1998 of 6.60 percent
represents a slight increase from the 6.59 percent whileyield recorded in the second
quarter of 1997, it represents a 13 basis point decline from the yield recorded
during the first quarter of 1998. The lower rate
Form 10-Q
Page 7
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (Continued)
environment has increased the prepayments on loans decreased slightlymortgage-backed securities and
callable agency bonds. The reinvestment of these proceeds has been at lower
rates. Helping to 8.89 percent from 8.90 percent when comparingmitigate some of the three months ended March 31,
1998 to March 31, 1997. The increase inimpact of lower rates on the yield on investmentstotal
portfolio was primarily
the result of the sale of approximately $9,000,000 in securities with a weighted
average yield of 5.80 percent at the end of 1997 and the beginning of 1998.
These funds were reinvested in higher yielding securities with slightly longer
maturities. Approximately $2,675,000The yield on average loans, excluding the impact of the interest
recognized on the non-accrual loan, was invested8.77 percent for the second quarter.
This represents a decline from the yield of 8.92 percent recorded during the
second quarter of 1997 and the 8.89 percent for the first quarter of 1998. The
decline in ten year tax-exempt
municipal securities.the yields on loans is a result of falling market interest rates as
well as the reduction of rates for existing commercial loan customers. The
extreme competition for loans is causing the pricing of loans to decline.
Average loans to average earning assets was 59.258.3 percent and 60.859.5 percent for
the three month periods ending March 31,June 30, 1998 and 1997. This ratio declined
despite a 5.06.5 percent increase in average loans.
Net interest income for the six month period ending June 30, 1998 was
$6,411,000, an increase of $505,000 over the $5,906,000 recorded in 1997. An 8.4
percent increase in average earning assets and a 2 basis point increase in the
net interest margin contributed to the increase. Total interest income increased
$828,000 from $10,315,000 to $11,143,000 when comparing the six month periods
ending June 30, 1997 to June 30, 1998. The yield on earning assets, excluding
the impact of the interest on the non-accrual loan decreased from 7.97 percent
to 7.90 percent, with the yield on loans declining from 8.91 percent to 8.81
percent. During the six month period the yield on investment securities
increased from 6.59 percent to 6.66 percent. Average investment securities
increased 9.3 percent to $112,354,000 while average loans increased 6.0 percent
to $170,002,000. Total interest expense increased $323,000 from $4,409,000 to
$4,732,000 for the six month periods. The yield on interest-bearing liabilities
increased slightly from 3.88 percent to 3.89 percent, with the yield on
interest-bearing deposits falling one basis point to 3.90 percent and the rate
paid on short-term borrowings increasing 49 basis points to 3.71 percent.
Average interest-bearing deposits increased 7.6 percent to $236,281,000 for the
six month period ending June 30, 1998.
The small increase in the rate paid on interest-bearing liabilities was
primarily the result of higher rates on time deposits and short-term borrowings
offset by lower rates on NOW and savings accounts.NOW. The average rate paid on time deposits increased
6three basis points while the rate paid on NOW and savings
accounts decreased 3330 basis points and 4 basis points, respectively.points. QNB
lowered the rate paid on its interest-checking NOW accounts because these
accounts are relatively insensitive to changes in interest rates and to
partially offset higher rates paid on other more rate sensitive accounts. The
yield on short-term borrowings, primarily cash management accounts, increased 5849
basis points when comparing the two quarters.six month periods. During the third quarter of
1997 QNB changed the rate structure on its cash management accounts to a tiered
structure that pays a higher rate of interest on higher balances. This was done
to compete with brokerage house and mutual fund money market products.
Management expects the net interest margin to decline throughout the rest of
1998 as a result of lower yields on earning assets, particularlyboth investment securities
and loans. The low rate environment and the flat yield curve will cause
prepayments on mortgage-backed securities and the call of agency bonds to
increase. This additional cash flow will most likely be reinvested in lower
yielding securities. Yields on loans willmay continue to decline as existing
commercial loan customers continue to seek to have their rates lowered.
The extreme competition forlowered as well as new loans
is causing the pricing of loans to decline.being booked at lower rates. If QNB can achieve its primary goals of loan growth
and an increase in the loan-to-average earning asset ratio, the impact on
interest income and the net interest margin of lower rates maybe lessened as QNB
can generally yield more on its loans than it can on its investment securities.
With regard to deposits, management anticipates that rates will remain near
current levels as the competition for funding sources remains strong.
Form 10-Q
Page 8
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION 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 considered adequate in relation to the risk of possibleprobable losses
in the loan portfolio. Actual loan losses, net of recoveries, serve to reduce
the allowance.
7
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (Continued)
Management uses various tools to assess the adequacy of the allowance for loan
losses. One tool is a methodology recommended by the Office of the Comptroller
of the Currency. This methodology considers a number of relevant factors
including: historical loan loss experience, the assigned risk rating of the
credit, current and projected credit worthiness of the borrower, current value
of the underlying collateral, levels of and trends in delinquencies and
non-accrual loans, trends in volume and terms of loans, concentrations of credit
and national and local economic trends and conditions. Other tools include ratio
analysis and peer group analysis. The implementation of SFAS No. 118,Accounting requirements, as discussed below,
also impactsimpact the determination of the allowance for loan losses.
The provision for loan losses was $100,000 for both three month periods and
$200,000 for both six month periods ending June 30, 1998 and 1997. Net
charge-offs in the firstsecond quarter of 1998 andwere $1,000 compared to $117,000 for
the same period in 1997. QNB had a net recovery of $17,000$16,000 for the first quartersix
months of 1998. This compares to a net charge-off $125,000 during the same
period of 1997. The partial charge-off of a group of investment property loans
to one borrower account for $94,000 of the charge-offs in the firstsecond quarter of
1997 of $8,000.1997. Management anticipates the provision for loan losses in 1998 will remain
near 1997 levels despite the expected continuing improvement in asset quality.
Anticipated loan growth will make any reduction in the provision for loan losses
unlikely.
Non-performing assets (non-accruing loans, loans past due 90 days or more, and
other real estate owned) continued their positive trend downward during the
first quarterhalf of 1998 and amounted to .74.55 percent of total assets at March 31,June 30, 1998.
This compares to 1.191.26 percent at March 31,June 30, 1997 and .96 percent at December 31,
1997. Non-accrual loans were $1,172,000$937,000 and $2,180,000$2,491,000 at March 31,June 30, 1998 and 1997.
Non-accrual loans at December 31, 1997 were $1,209,000. Other real estate owned
was $822,000$773,000 at March 31,June 30, 1998 compared to $1,175,000$1,080,000 at March
31,June 30, 1997 and
$1,564,000 at December 31, 1997. Management anticipates non-performing assets to
continue to decline resulting fromfurther as a result of the sale of other real estate owned and through
payments received on non-performing loans.
There were no restructured loans as of March 31,June 30, 1998, December 31, 1997 or March 31,June
30, 1997 as defined in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," that
have not already been included in loans past due 90 days or more or non-accrual
loans.
The allowance for loan losses was $2,787,000$2,886,000 and $2,670,000 at March 31,June 30, 1998 and
December 31, 1997, respectively. The ratio of the allowance to total loans was
1.621.71 percent and 1.59 percent for the respective periods. While QNB believes
that its allowance is adequate to cover losses in the loan portfolio, there
remain inherent uncertainties regarding future economic events and their
potential impact on asset quality.
Form 10-Q
Page 9
QNB adopted Statement of Financial Accounting Standards No. 114 (SFAS No. 114),
"Accounting by Creditors for Impairment of a Loan" as amended by Statement of
Financial Accounting Standards No. 118 (SFAS No. 118), "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" on January 1,
1995. Under the standard, aCORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (Continued)
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.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
8
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (Continued)
At March 31,June 30, 1998 and 1997, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totaled $1,098,000$866,000 and $2,086,000,$2,247,000, respectively, of which
$1,089,000$816,000 and $1,082,000$1,454,000 related to loans with no valuation allowance and $9,000$50,000
and $1,004,000$793,000 related to loans with a corresponding valuation allowance of
approximately $9,000$50,000 and $197,000,$544,000, respectively. Most of the loans identified
as impaired are collateral-dependent.
NON-INTEREST INCOME
QNB, through its core banking business, generates various fees and service
charges. Total non-interest income is composed of service charges on deposit
accounts, mortgage servicing fees, gains on the sale of investment securities,
gains on the sale of residential mortgages and student loans, and other
miscellaneous fee income. Total non-interest income decreased $14,000increased $70,000 or 2.215.6
percent to $613,000$519,000 for the quarter ending March 31,June 30, 1998 when compared to March
31,June
30, 1997. For the six month period total non-interest income increased $56,000
or 5.2 percent to $1,132,000.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees decreased 3.74.8 percent, to $259,000$256,000 from $269,000, when comparing the two
quarters.quarters and 4.3 percent to $515,000 when comparing the six month periods.
Charges related to a lower volume of overdrafts account for most of the decline.
QNB reviews all service charges and fee schedules related to its products and
services on an ongoing basis. QNB prices its products and services
competitively.
To date, when QNB sells its residential mortgages in the secondary market, it
retains servicing rights. A normal servicing fee is retained on all mortgage
loans sold and serviced. Mortgage servicing fees for the quarter ending March
31,June 30,
1998 were $42,000$44,000 which represents a $3,000$4,000 decline from the same period in
1997. The decrease in mortgage servicing fees for the quarter is a result of a
6.85.5 percent decline in the average balance of mortgages sold and serviced to
$67,650,000.$67,036,000. For the six month period mortgage servicing fees decreased $7,000
or 7.5 percent to $86,000. The average balance of mortgages serviced was
approximately $67,681,000 for the six month period ending June 30, 1998 compared
to $71,998,000 for the first six months of 1997. The decrease in the volume of
mortgages serviced for others is a result of payments, both recurring and from
refinances, outpacing the origination and sale of new residential mortgages.
Management's decision to retain most 15 and some 20 year mortgages, which would
have been sold in prior years has also reduced the amount of mortgages sold and
serviced. The timing of mortgage payments and delinquencies also impacts the
amount of servicing fees recorded. The implementation of Statement of Financial Accounting Standards No. 125 (SFAS
No. 125), also impacts the level ofQNB anticipates mortgage servicing income recorded. In June 1996,
SFAS No. 125, "Accounting for Transfers and Servicingto
increase slightly during the remainder of Financial Assets and
Extinguishment of Liabilities," was issued. This statement is effective for
transactions entered into after December 31, 1996 and is required1998 due to be applied
prospectively. This statement superceded SFAS No. 122 "Accounting for Mortgage
Servicing Rights" which was effective January 1, 1996.
SFAS No. 125 requires an entity to recognize its obligation to service financial
assets that are retained in a transfer of assetsthe increase in the
formorigination and sale of a servicing
asset or liability. The servicing asset or liability is to be amortized in
proportion to and overresidential mortgages resulting from lower interest
rates.
Form 10-Q
Page 10
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued)
There were no gains on sale of investment securities during the second period of
1998. This compares to net servicing income or loss.gains of $5,000 for the same period in 1997. The amortizationgain
on the sale in 1997 was a result of the servicing asset reduces the amountsale of servicing income
recorded. Servicing assetsapproximately $6,500,000 of U.S.
Treasury and liabilities are to be assessedU.S. agency securities. These securities were primarily sold for
impairment
based on their fair value.liquidity reasons. Gains on the sale of investment securities were $68,000 for
the first quartersix months of 1998, compared to $160,000$165,000 for the first threesix months of
1997. QNB owns a small portfolio of marketable equity securities, bank stocks.
During the first quarter of 1998 QNB sold a holding with a cost basis of $28,000
at a gain of $62,000. This compares to a similar sale during the first quarter
of 1997 when QNB sold securities with a cost basis of
9
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued) $329,000 for a gain of
$159,000. During the first quarter of 1998 QNB sold approximately $5,000,000 in
lower yielding agency securities at a gain of $6,000. These securities had a
weighted average yield of 5.81 percent and were sold for both liquidity purposes
and to reposition the portfolio. During the first quarter of 1997 QNB sold
approximately $3,467,000 of available-for-sale agency debt securities at a gain
of $1,000. This sale was also done for liquidity purposes. QNB historically
experiences deposit outflows at the beginning of the year.
QNB recorded a gain of $54,000$110,000 on the sale of loans during the firstsecond quarter
of 1998. This compares to a $34,000$8,000 gain for the same period in 1997. TheFor the six
month periods ending June 30, 1998 and 1997 net gains on the sale of residential mortgagesloans was
$164,000 and the$42,000, respectively. The sale of student loans accounts for
$52,000$33,000 and $2,000$3,000 of the gains, respectivelyduring the second quarter of 1998 and 1997. QNB
sold approximately $1,256,000 and $251,000 in 1998. Forstudent loans during the same periodsecond
quarter of 1998 and 1997. Gains on the sale of student loans accounted for
$36,000 and $32,000 of the total gains during the six month periods ending June
30, 1998 and 1997, respectively. Most of the student loan sale during 1997
occurred during the first quarter. QNB anticipates that the gains recorded on
the sale of student loans will decline dramatically in 19971999 as a result of the
reduction in prices paid by the student loan agencies.
The net gain on the sale of residential mortgage loans accountedwas $77,000 and 5,000 for
$6,000 of the gain while the sale of
student loans represented $28,000 of the gain. QNB sold approximately $209,000
and $1,098,000 in student loans during the first quarter ofthree month periods ending June 30, 1998 and 1997. The
bulk of1997 and $128,000 and $10,000
for the student loan sales in 1998 occurred in April at a gain of $33,000.respective six month periods. 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. The larger gain ingains during 1998 is a
result of both events. Proceeds from the sale of residential mortgages was
approximately $2,051,000$5,148,000 and $325,000$268,000 during the firstsecond quarter of 1998 and 1997.1997
and $7,199,000 and $593,000 for the six month periods. Declining interest rates
during the first quarterhalf of 1998 presented an opportunity for many borrowers to
refinance their mortgages at lower rates. This provided an opportunity for QNB
to originate and sell more mortgages. As of March 31,June 30, 1998 QNB had approximately
$1,243,000$267,000 in mortgage loans classified as held for sale. These loans are
accounted for at lower of cost or market.
Form 10-Q
Page 11
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued)
Other operating income increased $71,000decreased $10,000 to $190,000$109,000 when comparing the three
month periods ending March 31,June 30, 1998 and 1997.1997, but increased $61,000 when
comparing the six month periods. For the quarter, increases in check card and
ATM interchange income totaling $15,000 were offset by lower rental income on
other real estate owned of $6,000 and the net loss on the writedown and sale of
other real estate owned of $25,000. The increase in other income when comparing
the six month periods includes increases in check card and ATM interchange
income of $20,000 and $8,000, respectively. The net gain on the sale of other
real estate owned accounts for $39,000$16,000 of the increase; while the recognition of
rental income on other real estate ownedfees from official checks contributed $11,000 ofto the increase.
Check card and ATM interchange income increased $10,000 and $5,000,
respectively.total increase in other
operating income.
NON-INTEREST EXPENSE
Non-interest expense includes salaries and employee benefits, net occupancy
expense, furniture and equipment expense, marketing expense, supplies expense,
professional fees expense, insurance expense, other real estate owned expense,
and various other operating expenses. Total non-interest expense of $2,268,000$2,408,000
for the quarter ending March 31,June 30, 1998 represents a decreasean increase of $11,000$154,000 or .56.8
percent from levels reported in the firstsecond quarter of 1997. Total non-interest
expense for the six months ending June 30, 1998 was $4,676,000, an increase of
$143,000 or 3.2 percent over 1997 levels.
Salaries and benefits, the largest component of non-interest expense, increased
$10,000$60,000 or .74.6 percent to $1,361,000$1,363,000 for the quarter ending March 31,June 30, 1998
compared to the same quarter in 1997. Salaries expense increased $4,000$73,000 or .47.2
percent during the period to $1,059,000$1,092,000 while benefits expense increased $6,000decreased $13,000
or 2.04.6 percent to $302,000. Included$271,000. Excluding the accrual for bonuses, core salary
expense increased 5.1 percent when comparing the two quarters. Annual merit
increases in addition to a slight increase in the number of employees account
for the increase during 1998. The decline in benefits expense is a result of
lower medical costs and unemployment compensation costs.
Salaries and benefit expense for the six month period ending June 30, 1998 was
$2,724,000, an increase of $70,000 or 2.6 percent from the same period in 1997.
Salary expense was $78,000 or 3.8 percent higher, while benefit expense was
$8,000 or 1.4 percent lower. The increase in salary expense during the period ended
March 31, 1997 was $27,000 in severance expense. Excluding this item salary
expense increased $31,000 or 3.0 percent. An increaseis primarily a
reflection of annual merit increases. Lower medical costs and unemployment
compensation costs were partially offset by increases in the accrual for
retirement plan expense accounts for the increase in benefits expense.
Net occupancy expense decreased $7,000$2,000 or 4.31.2 percent while furniture and
equipment expense decreased $30,000 or 16.0 percent when comparingfor the three month periods ending March 31, 1998period
and 1997, respectively.
10
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (Continued)$9,000 or 2.8 percent for the six month period. Lower utility costs, due to
the relatively mild winter and spring account for the decline in net occupancy
expense. Furniture and equipment expense increased $4,000 or 2.5 percent when
comparing the three month periods ending June 30, 1998 and 1997, but decreased
$26,000 or 7.5 percent when comparing the six month periods. The increase during
the quarter was a result of higher costs for the maintenance of equipment,
particularly computer equipment. The $13,000 increase in equipment maintenance
costs was partially offset by a $9,000 decrease in depreciation expense during
the quarter.
The significant decrease in furniture and equipment expense when comparing the
six month periods is the result of lower depreciation expense of $23,000 and equipment
maintenance expense of $8,000.$33,000. QNB
uses an accelerated method of depreciation on its furniture and equipment. This
provides for higher expense in the earlier years of an asset's life. QNB has
purchased relatively little furniture and equipment during the past three years.
These smaller amounts of purchases along with lower depreciation expense as an
asset ages, account for the decline in depreciation expense. Depreciation
expense is
Form 10-Q
Page 12
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (Continued)
anticipated to increase during the year as QNB invests in new computer
technology and as older equipment is replaced.
The decrease in equipment maintenanceMarketing expense relatesincreased $42,000 to the removal
of some older equipment from maintenance agreements.
Supplies expense decreased $7,000 or 14.0 percent to $43,000$124,000 for the quarter ending March 31, 1998. This improvement isJune 30,
1998 and $47,000 to $188,000 for the six month period. A $40,000 pledge to the
Main Street Program, a functionprogram designed for the revitalization of betterdowntown
Quakertown, contributed to the increase in marketing expense. An increase in
advertising expense control
through a competitive bid process andin response to local banking mergers also contributed to the
timing of purchases. In addition, QNB
has replaced many of its purchased forms, which are expensive, with documents
printed from a desktop printer.increase.
Professional fees decreased $17,000$11,000 or 34.727.5 percent when comparing the quarters
ending March 31,June 30, 1998 and 1997.1997 and $28,000 or 31.5 percent when comparing the six
month periods. Less reliance on legal counsel for loan workout situations
resulting from the improvement in asset quality along with the reimbursement of
some previously expensed legal costs account for the decline.
Other real estate owned expense increased $11,000decreased $36,000 to $46,000$35,000 when comparing the
firstsecond quarter of 1998 to the same quarter of 1997.1997 and $25,000 to $81,000 when
comparing the six month periods. The higherlower amount in 1998 relates tois a reflection in the
paymentreduction in the number of properties owned and the costs of taxes, insurance
and maintenance on these properties. Other real estate taxesexpense in 1997 includes
the loss on several properties as well as the costsale of repairs on one property.a property of $9,000. Management anticipates other real
estate expense to continue to decline during the year as the costs associated
with these properties are eliminated as they are sold.
Total other expense for the three months ending March 31,June 30, 1998 was $385,000,$460,000, an
increase of $27,000$88,000 or 7.523.7 percent over the same period in 1997. An increase in
the accrual for a director's deferred compensation plan accounted for $61,000 of
the increase. This increase reflects an adjustment to the interest rate
assumption caused by the decline in market interest rates. The amortization of
the deposit premium relating to the acquisition completed during the fourth
quarter of 1997 accounts for an additional $13,000 of the increase.
For the six month period ending June 30, 1998, other non-interest expense
increased $115,000 or 15.8 percent to $845,000 when compared to the same period
in 1997. The adjustment for the directors' deferred compensation plan
contributed $61,000 while the amortization of the deposit premium accounted for
$26,000 of the increase. Increases in postage expense, directors fees, check printing costsstate
taxes and appraisalloan origination costs were partially offset by declines in check card
expense and fraud losses. Other expense in the first quarter of 1997 included
costs related to the startup and distribution of the check card.
INCOME TAXES
Applicable income taxes and effective tax rates were $403,000$346,000 or 29.226.9 percent
for the three month period ending March 31,June 30, 1998, and $328,000$319,000 or 28.629.0 percent
for the same period in 1997. For the six month period applicable income taxes
and effective rates were $749,000 or 28.1 percent and $647,000 or 28.8 percent,
respectively. The slightly higherlower effective tax rate during the second quarter of 1998 is
mainly the result of tax credits received on an investment in 1998
compared to 1997 is a function of higher taxablelow income
and the relationship
between tax-exempt income to total income before taxes.housing project.
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of March 31,June 30, 1998 QNB's net deferred tax asset was
$319,000.$412,000. A deferred tax asset of $699,000$739,000 relating to the allowance for loan
losses was partially offset by a deferred tax liability of $518,000$472,000 resulting
from the SFAS No.115 adjustment for available-for-sale investment securities. As
of March 31,June 30, 1997 QNB's net deferred tax asset was $1,082,000$769,000 of which $668,000$663,000
related to the allowance for loan losses and $263,000 resulted from the SFAS No.
115 adjustment.
11losses.
Form 10-Q
Page 13
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the threesix months
ended March 31,June 30, 1998 and 1997, as well as the period ending balances as of March 31,June
30, 1998 and December 31, 1997.
Average earning assets for the threesix month period ended March 31,June 30, 1998 increased
$20,587,000$22,499,000 or 7.88.4 percent to $283,539,000$289,182,000 from $262,952,000$266,683,000 for the quartersix months
ending March 31,June 30, 1997. Average loans and average investments increased $8,009,000$9,565,000
and $10,962,000,$9,575,000, respectively while Federal funds sold increased $1,644,000.$3,374,000. The
increase in average loans is a result of the business development program
developed over the past couple of years, competitive pricing and participation
relationships with other local community banks. Average commercial, residential
mortgage and consumer loans increased $6,371,000$6,851,000, $1,549,000 and average residential mortgage loans
increased $1,039,000.$1,165,000,
respectively. The increase in commercial loans is primarily in the area of
commercial and industrial loans. Although a certain amount of these loans are
considered unsecured, the majority are secured by non-real estate collateral
such as equipment, vehicles, accounts receivable and inventory. The growth in
the residential mortgage portfolio is a result of increased mortgage
originations spurred by the refinancing resulting from lower interest rates.
QNB's decision to retain in portfolio more residential mortgage loans also
positively impacted the balance of the portfolio. The increase in the consumer
loan portfolio is a result of home equity loan promotions and attractive
interest rates.
The growth in average investment securities were primarily in the categories of
U.S Government agency bonds, municipal bonds and mortgage-backed securities.
Agency securities, primarily callable bonds, increased $6,582,000, while
municipal bonds increased $1,629,000 when comparing the six month periods.
The growth in average earning assets was primarily funded by increased
interest-bearing deposits, principally time deposits. Average interest-bearing
deposits increased $16,252,000$16,602,000 or 7.57.6 percent while non-interest bearing
deposits increased $4,503,000$4,556,000 or 16.716.1 percent when comparing the two quarters.
Average time deposits increased $10,692,000$10,790,000 while average NOW accounts and
savings accounts increased $2,831,000$2,749,000 and $1,990,000,$2,175,000, respectively. The purchase
of approximately $6,800,000 in deposits from First Lehigh Bank contributed to
the increase in total deposits. A significant portion of the increase in time
deposits were accounts with balances over $100,000. These average balances
increased $4,586,000.$4,306,000. Attractive rates on these products compared to rates on
money market accounts contributed to the increase. These deposits tend to have
short maturities. Average shareholders' equity increased $2,391,000$2,470,000 to
$25,356,000.$25,698,000.
Total assets at March 31,June 30, 1998 were $314,169,000,$317,662,000, compared with $305,772,000 at
December 31, 1997, an increase of 2.83.9 percent for the quarter.six month period. Total
deposits increased from $267,166,000 at December 31, 1997 to $273,411,000$276,326,000 at
March 31,June 30, 1998. This trend is encouraging as QNB historically has experienced
deposit run-off during the first half of the year. The increase in assets from
December 31, 1997 to March 31,June 30, 1998 is primarily centered in Federal funds sold
and loansinvestment securities which increased $8,225,000$6,188,000 and $3,957,000,$5,199,000,
respectively during the period. Total
investment securities decreased $2,075,000 during the quarter. The higher balance of Federal funds sold at March 31,June
30, 1998 is in response to the increase in short-term $100,000 time deposits as
well as the increase in balances held by abstract companies who clear mortgage
settlements through QNB. These deposits tend to be short-term in nature. Total
time deposits increased $6,966,000,$8,950,000, with time deposits over $100,000 increasing
$5,106,000.$3,618,000. Savings accounts increased $1,729,000$1,249,000 while non-interest bearing
deposits declined by $2,984,000$842,000 from December 31, 1997 to March 31,June 30, 1998.
At March 31,June 30, 1998 the fair value of investment securities available-for-sale was
$73,754,000$76,690,000 or $1,525,000$1,388,000 above the amortized cost of $72,229,000.$75,302,000. This compares
to a fair value of $75,920,000 or $1,323,000 above
Form 10-Q
Page 14
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
(Continued)
the amortized cost of $74,597,000 at December 31, 1997. An unrealized holding
gain, net of taxes, of $1,006,000$916,000 and $873,000 was recorded as an increase to
shareholders' equity at March 31,June 30, 1998 and December 31, 1997. Falling interest
rates as well as continued price appreciation in the stock market contributed to
the increase in the fair value of the investment portfolio.
12
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS (Continued)
The available-for-sale portfolio had a weighted average maturity of
approximately 54 years and 511 months at June 30, 1998 and 5 years at March 31, 1998 and December 31,
1997, respectively.1997. The weighted average maturity is based on the stated contractual maturity
of all securities except for mortgage-backed securities which are based on
estimated average life. The maturity of the portfolio may be shorter because of
call features in many debt securities and because of prepayments on
mortgage-backed securities. The interest rate sensitivity analysis reflects the
expected maturity distribution of the securities portfolio based upon estimated
call dates and anticipated cash flows assuming management's most likely interest
rate environment. The expected weighted average life of the available-for-sale
portfolio was 21 years and 1 month8 months at March 31,June 30, 1998 and 1 year and 10 months at
December 31, 1997, based on these assumptions. The slight extensioncontraction of the
expected average life of the portfolio is a result of the saledecline in interest
rates thereby increasing the likelihood of some shorter maturity securities,of the pre-fundingcallable agency bonds to
be called earlier and an increase in the level of some callable securities
and the reinvestment of these funds into securities with slightly longer
maturities and call dates.prepayments on mortgage-backed
securities.
Investment securities held-to-maturity are reported at amortized cost. As of
March 31,June 30, 1998 and December 31, 1997, QNB had securities classified as
held-to-maturity with an amortized cost of $40,491,000$44,829,000 and $40,400,000 and a
market value of $40,872,000$45,154,000 and $40,713,000, respectively. The held-to-maturity
portfolio had a weighted average maturity of approximately 36 years and 6 monthsat June 30,
1998 and 2 years and 10 months at MarchDecember 31, 1997. The expected weighted
average life of the held-to-maturity portfolio was 3 years and 6 months at June
30, 1998 and 2 years and 10 months at December 31, 1997. The increase in the
average maturity is a result of the purchase of approximately $2,675,000$4,214,000 of ten
year tax-exempt municipal securities.securities and $8,793,000 of mortgage-backed
securities with average lives of five years. The purchase of mortgage-backed
securities replaced the run-off of approximately $7,479,000 in principal
reduction caused by prepayments.
LIQUIDITY
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers and demands
of depositors. QNB tries to manage the coordination of its mix of cash, Federal
funds sold, investment securities and loans in order to match the volatility,
seasonality, interest sensitivity and growth trends of its deposit funds.
Liquidity is provided from asset sources through maturities and repayments of
loans and investment securities, net interest income and fee income. The
portfolio of investments available-for-sale and QNB's policy of selling certain
residential mortgage originations and student loans in the secondary market also
provide sources of liquidity.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $98,365,000$98,427,000 and $91,915,000 at March 31,June 30, 1998 and
December 31, 1997. These sources were adequate to meet seasonal deposit
withdrawals and loan demand during the first quarterhalf of 1998 and should be adequate
to meet normal fluctuations in loan demand and or deposit withdrawals.
Approximately $35,163,000$35,583,000 and $36,510,000 of available-for-sale securities at
March 31,June 30, 1998 and December 31, 1997 were pledged as collateral for repurchase
agreements, public deposits and other deposits as provided by law. The Bank is
currently in the process of applying for membership in the Federal Home Loan
Bank. This would provide QNB with an
Form 10-Q
Page 15
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY (Continued)
additional source of liquidity through the ability to borrow both short-term and
longer term funds from the Federal Home Loan Bank. Approval is expected during
the third quarter of 1998.
The consolidated statements of cash flows present the changes in cash and cash
equivalents from operating, investing and financing activities. QNB's cash and
cash equivalents decreased $834,000increased $387,000 to $11,740,000$12,961,000 at March 31,June 30, 1998. This
compares to a $807,000 decrease$1,810,000 increase during the first threesix months of 1997. After
adjusting net income for non-cash transactions, operating activities provided
$1,332,000$4,101,000 in cash flow in the first threesix months of 1998, compared to $754,000$1,719,000
in the same period of 1997. HigherAn increase in residential mortgage loan activity
and higher net income along with the change in accrued
interest receivable account for most of the difference between the periods.
13
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY (Continued)
Net cash used by investing activities was $9,120,000$13,547,000 during the first quarterhalf of
1998. The $8,225,000$6,188,000 increase in Federal funds sold was the largest factor. Loan
growth also was an investing activity that used cash. Proceeds from the sale,
maturity and call of securities of $17,418,000 exceeded the cost of theThe
purchase of investment securities in excess of $15,073,000proceeds from maturities, calls
or sales of $5,071,000 and was athe net providerincrease in loans of $4,280,000 were also
activities that used cash. Proceeds from the sale of other real estate owned was also a providerand
student loans provided $2,323,000 of cash. Net cash used by investing activities
was $8,985,000$12,001,000 during the first threesix months of 1997. This resulted largely from
the purchase of investment securities exceeding sales and maturities by
$6,788,000$10,128,000 and a net increase in loans of $3,440,000. The$6,016,000. A decrease in Federal
funds sold provided $2,510,000 while proceeds from the sale of one other real estate owned propertystudent loans
provided $221,000 in cash.$1,381,000.
Net cash provided by financing activities of $6,954,000$9,833,000 during the first quartersix months of
1998 was the result of an increase in interest-bearing deposits, primarily time
deposits. An increase in the balances of repurchase agreements, also provided
cash. A reduction in non-interest bearing deposits of $842,000 was a use of cash
during the period. Net cash provided by financing activities of $7,424,000$12,092,000
during the first threesix months of 1997 was the result of an increase in both
non-interest-bearing deposits and interest-bearing deposits, primarily time
deposits and short-term borrowingsmoney market accounts, of $6,105,000$6,636,000 and $1,662,000, respectively.$6,048,000.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and
profitability, to serve the needs of depositors, and to yield an attractive
return for shareholders. QNB's shareholders' equity at March 31,June 30, 1998 was
$26,685,000$27,303,000 or 8.498.59 percent of total assets compared to shareholders' equity of
$25,832,000 or 8.45 percent at December 31, 1997.
Shareholders' equity at March
31, 1998 includes a positive adjustment of $1,006,000 related to unrealized
holding gains, net of taxes, on investment securities available-for-sale, while
shareholders' equity at December 31, 1997 includes a positive adjustment of
$873,000. Without these adjustments shareholders' equity to total assets would
have been 8.17 percent and 8.16 percent at March 31,1998 and December 31, 1997.
Shareholders' equity averaged $25,356,000$25,698,000 for the first threesix months of 1998 and
$23,886,000 during all of 1997, an increase of 6.27.6 percent. The ratio of average
total equity to average total assets improved to 8.418.38 percent for 1998, compared
to 8.27 percent for 1997. The increase in the equity to asset ratio is a
function of significantly higher net income, an increase in capital retention
despite increasing the cash dividend in both 1998 and 1997 and modest growth in
average assets.
QNB Corp. and the Quakertown National Bank are subject to various regulatory
capital requirements as issued by Federal regulatory authorities. Regulatory
capital is defined in terms of Tier I capital (shareholders' equity excluding
unrealized gains or losses on available-for-sale securities), Tier II capital
which includes a portion of the allowance for loan losses, and total capital
(Tier I plus II). Risk-based capital ratios are
Form 10-Q
Page 16
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL ADEQUACY (Continued)
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. Regulators have also adopted minimum Tier I leverage ratio
standards, which measure the ratio of Tier I capital to total assets.
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for the total risk-based and 4.00 percent for leverage. Under the requirements,
QNB has a Tier I capital ratio of 13.6214.06 percent and 13.49
14
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL ADEQUACY (Continued) percent, a total
risk-based ratio of 14.8815.32 percent and 14.74 percent and a leverage ratio of 8.378.33
percent and 8.23 percent at March 31,June 30, 1998 and December 31, 1997, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At March 31,June 30, 1998 and December 31, 1997 QNB met the "well
capitalized" criteria which requires minimum Tier I and total risk-based capital
ratios of 6.00 percent and 10.00 percent, respectively and a Tier I leverage
ratio of 5.00 percent.
INTEREST RATE SENSITIVITY
Since the assets and liabilities of QNB have diverse repricing characteristics
that influence net interest income, management analyzes interest sensitivity
through the use of gap analysis and simulation models. Interest rate sensitivity
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. The Asset/Liability Management
Committee (ALCO) is responsible for managing interest rate risk and for
evaluating the impact of changing interest rate conditions on net interest
income.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at their contractual maturity, estimated likely call date, or earliest
repricing opportunity. Mortgage-backed securities and amortizing loans are
scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market, and NOW accounts, do not have a
stated maturity or repricing term and can be withdrawn or repriced at any time.
This may impact QNB's margin if more expensive alternative sources of deposits
are required to fund loans or deposit runoff. Management projects the repricing
characteristics of these accounts based on historical performance and
assumptions that it believes reflect their rate sensitivity. A positive gap
results when the amount of interest rate sensitive assets exceeds interest rate
sensitive liabilities. A negative gap results when the amount of interest rate
sensitive liabilities exceeds interest rate sensitive assets.
QNB primarily focuses on the management of the one-year interest rate
sensitivity gap. At March 31,June 30, 1998, interest-earning assets scheduled to mature
or likely to be called, repriced or repaid in one year were $110,129,000.$107,149,000.
Interest-sensitive liabilities scheduled to mature or reprice within one year
were $115,972,000.$119,236,000. The one year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a negative $5,843,000$12,07,000 at March 31,June 30, 1998.
The cumulative one-year gap equals 1.994.08 percent of total earning assets. This
negative or liability sensitive gap will generally benefit QNB in a falling
interest rate environment, while rising interest rates could negatively impact
QNB.
Form 10-Q
Page 17
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued)
QNB also uses a simulation model to assess the impact of changes in interest
rates on net interest income. The model reflects management's assumptions
related to asset yields and rates paid on liabilities, deposit sensitivity, and
the size, composition and maturity or repricing characteristics of the balance
sheet. The
15
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued) assumptions are based on what management believes at that time to be
the most likely interest rate environment. Management also evaluates the impact
of higher and lower interest rates.
Actual results may differ from simulated results due to various factors
including time, magnitude and frequency of interest rate changes, the
relationship or spread between various rates, loan pricing and deposit
sensitivity, and asset/liability strategies. Based on management's estimate of
balance sheet growth and composition and interest rates for the next year, net
interest income for the next twelve months is expected to increase modestly
compared to the prior twelve months. The projected increase in net interest
income is primarily the result of forecasted growth in total earning assets and
a change in the composition of earning assets, with the loan to earning assets
ratio increasing.increasing slightly. These factors will be partially offset by a slight decrease
in the net interest margin.
If interest rates are 100 basis points lower than management's most likely
interest rate environment, the simulation model projects net interest income for
the next twelve months to slightly exceed the most likely scenario. Conversely,
if interest rates were 100 basis points higher, net interest income for the most
likely scenario would decline slightly. These results are consistent with the
results of the gap analysis described above.
Management believes that the assumptions utilized in evaluating the
vulnerability of QNB's net interest income to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of QNB's
assets and liabilities as well as the estimated effect of changes in interest
rates on net interest income could vary substantially if different assumptions
are used or actual experience differs from the experience on which the
assumptions were based.
In the event QNB should experience a mismatch in its desired gap ranges or an
excessive decline in its net interest income subsequent to an immediate and
sustained change in interest rates, it has a number of options which it could
utilize to remedy such a mismatch. QNB could restructure its investment
portfolio through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
The nature of QNB's current operation is such that it is not subject to foreign
currency exchange or commodity price risk. Additionally, neither the Corporation
nor the Bank owns trading assets. At March 31,June 30, 1998, QNB did not have any hedging
transactions in place such as interest rate swaps, caps or floors.
The table below summarizes estimated changes in net interest income over a
twelve month period, under alternative interest rate scenarios.
Change in Interest Rates Net Interest Income Dollar Change Percent Change
- ------------------------ ------------------- ------------- --------------
+300 Basis Points $11,751 $(1,084) (8.45)%
+200 Basis Points 12,136 (699) (5.45)
+100 Basis Points 12,519 (316) (2.46)
FLAT RATE 12,835 -- --
- -100 Basis Points 13,207 372 2.90
- -200 Basis Points 13,322 487 3.79
- -300 Basis Points 13,282 447 3.48
16- --------------------------------------------------------------------------------
Change in Interest Rates Net Interest Income Dollar Change Percent Change
- --------------------------------------------------------------------------------
+300 Basis Points $11,412 $(1,318) (10.35)%
+200 Basis Points 11,824 (906) (7.12)
+100 Basis Points 12,316 (414) (3.25)
FLAT RATE 12,730 - -
-100 Basis Points 13,135 405 3.18
-200 Basis Points 13,309 579 4.55
-300 Basis Points 13,233 503 3.95
Form 10-Q
Page 18
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF YEAR 2000
QNB is currently in the process of addressing the challenge that faces all users
of automated systems, including information systems. Many computer systems
process transactions based on two digits representing the year of transaction,
rather than a full four digits. These computer systems may not operate properly
when the last two digits become "00", as will occur on January 1, 2000. The
problem could affect a wide variety of automated information systems, such as
mainframe applications, personal computers, communication systems, environmental
systems and other information systems.
At the beginning of 1997, QNB developed a five phase plan to address the year
2000 issue. These phases are Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness phase included the establishment of a team of
employees, including executive management, and the development of strategies to
make employees and customers aware of the situation. The Assessment phase
included the identification of areas of operations critical for the delivery of
products and services. This phase also included the inventory of all hardware
and software applications and the identification of customer and vendor
interdependencies. The majority of the programs and applications used by QNB are
purchased from outside vendors. The vendors providing the software are
responsible for maintenance of the systems and modifications to enable
uninterrupted usage after December 31, 1999. These two phases have been
completed.
The Renovation phase includes code enhancement, vendor certification code enhancement, and
hardware and software upgrades as needed. The vendor of QNB's core operating
system has informed management that changes are approximately 95 percent
complete and that certification of compliance should be receivedproxy testing was
satisfactorily completed by June, 1998.six user banks. QNB has installed the updated
software on a mainframe test system and will begin on site testing early in the
third quarter.
The Validation phase includes testing of all of the impacted applications, both
internally developed and third party provided. Testing of the systems has begun
and will continue throughout 1998. Contingency plans, if any are needed, will be
developed during 1998 to address any shortcomings that are identified. The
Implementation phase includes incorporating all changes, achieving certification
of year 2000 compliance and implementing contingency plans, if necessary. QNB's
plan also includes reviewing any potential risks associated with the loan and
investment portfolios due to the year 2000 issue. QNB's goal is to have the plan
complete and be fully compliant by December 31, 1998.
Based on the currently available information, management does not anticipate
that the cost to address year 2000 issues will have an impact on QNB's financial
condition, results of operations, liquidity or capital resources. A significant
portion of the anticipated costs are not expected to be incremental, but rather
will represent the redeployment of existing information technology resources.
OTHER ITEMS
Management is not aware of any current specific recommendations by regulatory
authorities or proposed legislation, which if they were implemented, would have
a material adverse effect upon the liquidity, capital resources, or results of
operations, although the general cost of compliance with numerous and multiple
federal and state laws and regulations does have, and in the future may have, a
negative impact on QNB's results of operations.
17ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.
The information required herein is set forth in Item 2, above.
Form 10-Q
Page 19
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
MARCH 31,JUNE 30, 1998
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. DefaultDefaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The 1998 Annual Meeting (the "Meeting") of the shareholders of
QNB Corp. (the "Registrant") was held on May 5, 1998. Notice
of the Meeting was mailed to shareholders of record on or
about April 3, 1998, together with proxy solicitation
materials prepared in accordance with Section 14(a) of the
Securities Holders
None.Exchange Act of 1934, as amended, and the
regulations promulgated thereunder.
The Meeting was held for the following purposes:
(1) To elect three (3) Directors; and
(2) To approve and adopt the 1998 Stock Incentive Plan.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors and
all such nominees were elected. The number of votes cast for
or withheld, as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board
of Directors were as follows:
Nominee For Withhold
------- --- -------
Gary S. Parzych 1,182,441 2,662
Norman L. Baringer 1,183,377 1,726
Charles M. Meredith, III 1,182,996 2,107
The continuing directors of the Registrant are:
Kenneth F. Brown, Jr.
Henry L. Rosenberger
Edgar L. Stauffer
Dennis Helf
Donald T. Knauss
Thomas J. Bisko
There was no solicitation in opposition to Proposal No. 2 to approve and
adopt the Registrant's 1998 Stock Incentive Plan, and the Plan was
approved. The number of votes cast for or against as well as the number of
abstentions and broker nonvotes, for the proposal were as follows:
For Against Abstentions
------- ------- -------------
1,143,798 32,975 8,330
Item 5. Other Informationinformation. None.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits.
The following Exhibits 27.1are included in this Report:
Exhibit 3.1 Articles of Incorporation of Registrant, as amended.
Exhibit 3.2 Bylaws of Registrant, as amended.
Exhibit 10.1 Employment Agreement between the Registrant and Thomas
J. Bisko. (Incorporated by reference to Exhibit 10(a)
of Registrant's Current Report on Form 8-K filed with
the Commission on April 30, 1989).
Exhibit 10.2 Salary Continuation Agreement between the Registrant
and Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(b) of Registrant's Current Report on Form 8-K
filed with the Commission on April 30, 1989).
Exhibit 10.3 Deferred Compensation Agreement between the Registrant
and Philip D. Miller. (Incorporated by reference to
Exhibit 10(c) of Registrant's Current Report on Form 8-K
filed with the Commission on April 30, 1989).
Exhibit 10.4 QNB Corp. Stock Incentive Plan. (Incorporated by reference
to Exhibit 4A to Registration Statement No. 333-16627 on
Form S-8, filed with the Commission on November 22, 1996.)
Exhibit 10.5 QNB Corp. Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 4B to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission on
November 22, 1996.)
Exhibit 10.6 The Quakertown National Bank Profit Sharing and Section
401(k) Salary Deferral Plan. (Incorporated by reference
to Exhibit 4C to Registration Statement No. 333-16627
on Form S-8, filed with the Commission on November 22,
1996.)
Exhibit 11 Statement Re: Computation of Earnings Per Share.
(Included in Part I, Item I, hereof.)
Exhibit 27 Financial Data Schedule.
Exhibit 99 Financial Data Schedule for June 30, 1997, revised
to reflect changes in Earnings Per Share.
(b) Reports on Form 8-K
None
18
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: May 14,August 13, 1998 By:
------------
/s/ Thomas J. Bisko
------------------------
Thomas J. Bisko
President/CEO
Date: May 14, 1998 By:
------------ /s/ Robert C. Werner
--------------------------------------------------
Robert C. Werner
Vice President
Date: May 14,August 13, 1998 By:
------------ /s/ Bret H. Krevolin
---------------------------------------------------
Bret H. Krevolin
Chief Accounting Officer
19Form 10-Q
Page 20
EXHIBIT INDEX
Sequential Page
Number in Manually
Exhibit Number Signed Original
- -------------- ------------------
Exhibit 3.1 Articles of Incorporation of Registrant,
as amended.
Exhibit 3.2 Bylaws of Registrant, as amended.
Exhibit 10.1 Employment Agreement between the Registrant and
Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(a) of Registrant's Current Report
on Form 8-K filed with the Commission on April
30, 1989).
Exhibit 10.2 Salary Continuation Agreement between the Registrant
and Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(b) of Registrant's Current Report on Form
8-K filed with the Commission on April 30, 1989).
Exhibit 10.3 Deferred Compensation Agreement between the Registrant
and Philip D. Miller. (Incorporated by reference to
Exhibit 10(c) of Registrant's Current Report on Form
8-K filed with the Commission on April 30, 1989).
Exhibit 10.4 QNB Corp. Stock Incentive Plan. (Incorporated by
reference to Exhibit 4A to Registration Statement No.
333-16627 on Form S-8, filed with the Commission
on November 22, 1996.)
Exhibit 10.5 QNB Corp. Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 4B to Registration Statement No.
333-16627 on Form S-8, filed with the Commission on
November 22, 1996.)
Exhibit 10.6 The Quakertown National Bank Profit Sharing and
Section 401(k) Salary Deferral Plan. (Incorporated
by reference to Exhibit 4C to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission
on November 22, 1996.)
Exhibit 11 Statement Re: Computation of Earnings Per Share.
(Included in Part I, Item I, hereof.)
Exhibit 27 Financial Data Schedule.
Exhibit 99 Financial Data Schedule for June 30, 1997,
revised to reflect changes in Earnings Per Share.
Form 10-Q
Page 21