UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17706
QNB CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2318082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215)538-5600
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of class)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
[Cover page 1 of 2 pages]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 21, 1996, 1,423,998 shares of Common Stock of the registrant
were outstanding and the aggregate market value of the Common Stock of the
registrant, held by nonaffiliates was approximately $38,982,292.(1)
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for 1995 - Part I, Item 3
Part II, Items 6, 7 and 8
Proxy Statement dated April 8, 1996 - Part III, Items 10, 11, 12 and 13
- -------------------
(1) Such figure excludes the shares of Common Stock held by the Company's
executive officers and directors. The information provided shall in no way
be construed as an admission that any person whose holdings are excluded
from the figure is not an affiliate or that any person whose holdings are
included is an affiliate and any such admission is hereby disclaimed.
FORM 10-K INDEX
PART I PAGE
- ------ ----
Item 1 Business...........................................................................................4
Item 2 Properties.........................................................................................8
Item 3 Legal Proceedings..................................................................................9
Item 4 Submission of Matters to a Vote of Security Holders................................................9
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters...............................9
Item 6 Selected Financial Data...........................................................................10
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................................10
Item 8 Financial Statements and Supplementary Data.......................................................10
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................10
PART III
Item 10 Directors and Executive Officers of the Registrant................................................10
Item 11 Executive Compensation............................................................................10
Item 12 Security Ownership of Certain Beneficial Owners and Management....................................11
Item 13 Certain Relationships and Related Transactions....................................................11
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................11
PART I
ITEM 1. BUSINESS
QNB CORP.
QNB Corp. (the "Corporation") was incorporated under the laws of the
Commonwealth of Pennsylvania on June 4, 1984. The Corporation is registered with
the Federal Reserve Board as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and conducts its business through its
wholly-owned subsidiary, The Quakertown National Bank (the "Bank"). The
principal business of the Corporation, through the Bank, is commercial banking
and consists of, among other things, attracting deposits from the general public
and using these funds in making commercial loans, residential mortgage loans,
consumer loans, and purchasing investment securities.
QNB Corp. was organized for the purpose of becoming the holding
company of The Quakertown National Bank. Pursuant to a Plan of Reorganization
approved by the Bank's stockholders, the holding company was approved as a bank
holding company by the Federal Reserve Board of Governors on September 11, 1984.
In accordance with the terms of the Plan of Reorganization, each share of the
Bank's common stock previously outstanding was automatically converted into one
share of the Corporation's common stock and the Bank became a wholly owned
subsidiary of the Corporation. The Corporation's primary asset is its investment
in the Bank. The Corporation's assets also include a portfolio consisting of
stock in various financial institutions. The stock portfolio accounts for less
than .12% of the Corporation's total consolidated assets.
THE QUAKERTOWN NATIONAL BANK
The Quakertown National Bank is a national banking association
organized in 1877. The Bank is chartered under the National Banking Act to
engage in the various activities of a commercial bank and is subject to federal
and state laws applicable to commercial banks.
The Bank is a full-service commercial bank that provides most major
financial services. The Bank's principal office is located in Bucks County,
Pennsylvania. The Bank also operates five other full-service branches, an
operations facility and an administrative office. See Item 2. Properties. The
Bank had a total of 113 full-time employees and 43 part-time employees, at
December 31, 1995. There are no employees of the Corporation who are not
employees of the Bank.
As of December 31, 1995 the Corporation, on a consolidated basis,
had total assets of $276,049,000, total deposits of $242,887,000, and total
shareholders' equity of $20,886,000.
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MARKET AREA
The Bank's primary market area is Quakertown and its surrounding
communities and includes parts of Upper Bucks County, Southern Lehigh County,
and Northern Montgomery County.
LENDING ACTIVITIES
General. The Bank offers a variety of loan products to its
customers; including residential real estate mortgages, commercial,
construction, home equity, business, consumer, and student loans. The Bank's
loan portfolio totaled $155,957,000 and $153,993,000 at December 31, 1995 and
1994, respectively. The portfolio represented approximately 56.5% and 57.4% of
the Bank's total assets at December 31, 1995 and 1994, respectively.
Residential Mortgage Loans. The Bank offers primarily 1 and 3 year
adjustable rate mortgages, 7 year balloon mortgages, and 15, 20 and 30 year
fixed rate loans. Since 1984 the Bank has generally sold, without recourse, its
mortgage loans in the secondary mortgage market. During 1995, the Bank sold
primarily only 30 year fixed rate mortgage loans in the secondary market.
The Bank originates mortgage loans up to a 95% maximum loan-to-value
ratio provided the amount above 80% is covered by private mortgage insurance.
Premiums for private mortgage insurance are paid by the borrower.
All mortgages sold in the secondary market conform to the
loan-to-value ratios and underwriting standards dictated by the secondary
market. A majority of the mortgages are sold to the Federal Home Loan Mortgage
Corporation (Freddie Mac), with servicing retained by the Bank.
The Bank also offers home equity loans and lines of credit which are
included in real estate residential loans. Real estate residential loans in the
aggregate amount of $61,339,000 and $57,486,000 represented 39.2% and 37.3% of
gross loans at December 31, 1995 and 1994, respectively. An aggressive fixed
rate home equity loan promotion during 1995, and the change in strategy in
selling loans in the secondary market account for the increase.
Commercial Loans. The Bank offers commercial loans, including lines
of credit or commitment, term loans, commercial mortgages, letters of credit,
and tax-free loans.
The Bank's commercial and industrial loan portfolio totaled
$27,002,000 and $24,599,000 at December 31, 1995 and 1994, respectively.
Commercial and industrial loans represented approximately 17.3% and 15.9% the
Bank's total gross loans at December 31, 1995 and 1994 respectively.
Commercial real estate loans in the aggregate amount of $51,368,000
and $54,015,000 represented 32.9% and 35.0% of the Bank's gross loan portfolio
at December 31, 1995 and 1994, respectively, while construction loans, including
commercial and residential, totaled $6,641,000 and $5,253,000 for the same
periods. Commercial real estate loans include all loans collateralized at least
in part by commercial real estate, but may not be for the expressed purpose of
conducting commercial real estate transactions.
5
Construction, commercial and industrial, and commercial real estate
lending generally entails significant additional risk as compared with
residential mortgage lending. These loans typically involve larger loan balances
to single borrowers or groups of related borrowers.
Consumer Loans. The Bank's consumer loan portfolio totaled
$7,538,000 and $10,208,000 at December 31, 1995 and 1994, respectively. Consumer
loans represented 4.8% and 6.6% of the Bank's total gross loans at December 31,
1995 and 1994, respectively. Consumer loans include automobile loans, student
loans and other consumer type credit not secured by real estate. The decline in
consumer loans is the result of the sale of approximately $2,558,000 of student
loans to SallieMae in 1995.
INVESTMENT ACTIVITIES
At December 31, 1995 and 1994, the Corporation's investment
portfolio, on a consolidated basis, in the aggregate amount of $97,895,000 and
$85,474,000 consisted primarily of U.S. Government and Federal agency
obligations, mortgage-backed securities, and state and municipal securities.
Subject to applicable limits the Bank is also permitted to invest in corporate
bonds and the Corporation is permitted to invest in equity securities. On
December 31, 1993 the Bank adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". To
comply with this statement the investment portfolio was segregated into two
classifications, investment securities available-for-sale and investment
securities held-to-maturity. Investment securities available-for-sale are
recorded at market value with the unrealized holding gain or loss, net of taxes,
included in shareholders' equity, while investment securities held-to-maturity
are recorded at amortized cost. At December 31, 1995 and 1994, the balance of
the available-for-sale portfolio was $55,380,000 and $49,838,000 and the balance
of the held-to-maturity portfolio was $42,515,000 and $35,636,000, respectively.
The Bank views its investment portfolio as a secondary source of
liquidity and stable earnings. Decisions regarding the selection of investments
for the Bank's portfolio are made by the Chief Operating Officer and the Chief
Financial Officer, or either of them, together with one other member of the
asset/liability committee. Decisions on maturity and type of investment are
dictated by the Bank's investment policy as approved annually by the Board of
Directors. To enhance the liquidity and interest rate sensitivity of the
portfolio, the Bank's strategy has been to invest seventy-five percent in short
and medium term U.S. Government and Federal Agency obligations and callable
bonds and twenty-five percent in longer term mortgage-backed securities and
state and municipal securities. The available-for-sale and held-to-maturity
investment portfolios had weighted average maturities of 3 years and 5 months
and 3 years and 8 months respectively, at December 31, 1995.
6
SOURCES OF FUNDS
Deposits. The Bank offers a variety of deposit products including
checking accounts, passbook and statement savings, money market accounts, Super
N.O.W. accounts, certificates of deposit, and jumbo certificates of deposit.
Deposits of the Bank are insured up to $100,000 by the Federal Deposit Insurance
Corporation (the "FDIC").
COMPETITION
The Bank competes actively with other commercial banks in its market
area. Competition exists for new deposits, in the scope and type of services
offered, in interest rates on interest-bearing deposits and loans, and in other
aspects of banking. In addition, the Bank, like other commercial banks,
encounters competition from other non-bank financial institutions including
savings banks, savings and loans, insurance companies, credit unions, finance
companies, mutual funds and certain governmental agencies. Furthermore, large
regional and national banks located in Philadelphia and Allentown are active in
servicing companies based in the Bank's market area.
SUPERVISION AND REGULATION
Holding Company Regulation
As a registered holding company under the Bank Holding Company Act,
(the "BHCA"), the Corporation is regulated by the Federal Reserve Board (the
"FRB"). The Corporation is also subject to the provisions of section 115 of the
Pennsylvania Banking Code of 1965.
As a bank holding company, the Corporation is required to file with
the FRB an annual report and such additional information regarding the holding
company and its subsidiary bank as required pursuant to the BHCA. The FRB may
also make examinations of the holding company and its subsidiary. The FRB
possesses cease-and-desist powers over bank holding companies and their non-bank
subsidiaries where their actions would constitute an unsafe or unsound practice
or violation of law.
In addition to the restrictions imposed by the BHCA relating to a
bank holding company's ability to acquire control of additional banks, the BHCA
generally prohibits a bank holding company from (i) acquiring a direct or
indirect interest in, or control of 5% or more of the outstanding voting shares
of any company, and (ii) engaging directly or indirectly in activities other
than that of banking, managing or controlling banks or furnishing services to
subsidiaries. However, a bank holding company may engage in, and may own shares
of companies engaged in, certain activities deemed by the FRB to be closely
related to banking or managing or controlling banks.
7
Bank Regulation
The Bank operates as a national bank subject to regulation and
examination by the Office of the Comptroller of the Currency (the "OCC").
The OCC regulates all areas of a national bank's commercial banking
operations including loans, mergers, establishment of branches and other aspects
of operations. The OCC also regulates the level of dividends which can be
declared by the Corporation. See the Corporation's 1995 Annual Report to
Shareholders ("Annual Report"), "Management Discussion and Analysis,"
incorporated by reference herein.
The Bank is also regulated by the Federal Reserve System and the
FDIC. The major function of the FDIC with respect to insured member banks is to
pay depositors to the extent provided by law in the event an insured bank is
closed without adequately providing for payment of the claims of depositors.
FDIC insured banks are subject to certain FDIC requirements designed
to maintain the safety and soundness of individual banks and the banking system.
In addition, the FDIC along with the Comptroller of the Currency and the FRB
have adopted regulations which define and set the minimum requirements for
capital adequacy based on risk. See the Corporation's Annual Report, "Capital
Adequacy," incorporated by reference herein. The FRB, the FDIC and Federal and
State law extensively regulate other various aspects of the banking business,
including, but not limited to, permissible types and amounts of loans,
investments and other activities, branching, interest rates on loans and the
safety and soundness of banking practices.
Federal Reserve Board Requirements
Regulation D of the FRB imposes reserve requirements on all
depository institutions, including the Bank, that maintain transaction accounts
or non-personal time and savings accounts. These reserves may be in the form of
cash or non-interest bearing deposits with the Philadelphia Federal Reserve
Bank. Under current Regulation D, the Bank must establish reserves equal to 3.0%
of the first $47.7 million of net transaction accounts and 10.0% of the
remainder. The reserve requirement on non-personal savings and time deposits
with an original maturity of less than 18 months is 3.0%. Cash and due from
banks are used as a deduction against the reserve. At December 31, 1995, the
Bank met applicable FRB reserve requirements.
ITEM 2. PROPERTIES
The Bank and Corporation's main office is located at 10 North Third
Street, Quakertown, Pennsylvania. The Bank conducts business from its main
office and five other retail offices located in Upper Bucks, Southern Lehigh,
and Northern Montgomery Counties. The Bank owns its main office, two retail
locations, its operations facility, and the computer facility. The
8
Bank leases its remaining retail properties. The leases on the properties
generally contain renewal options. Management considers that its facilities are
adequate for its business.
The following table details the Bank's properties:
Location
1) Quakertown, Pa. - Main Office - owned
2) Quakertown, Pa. - Towne Bank Center - owned
3) Quakertown, Pa. - Computer Center - owned
4) Quakertown, Pa. - Country Square Branch - net lease requiring rental
payments of $25,000 per year.
5) Dublin, Pa. - Dublin Branch - net lease requiring rental payments of $19,600 per year.
6) Pennsburg, Pa. - Pennsburg Square Branch - net lease requiring
rental payments of $40,000 per year.
7) Coopersburg, Pa. - Coopersburg Branch - owned
8) Perkasie, Pa. - Perkasie Branch - owned
ITEM 3. LEGAL PROCEEDINGS
The information required by Item 3 is incorporated by reference to Note
13 Commitments and Contingencies, to the Consolidated Financial Statements,
appearing on page 36 of the Annual Report which is attached as Exhibit 13.1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There were 586 shareholders of record as of March 21, 1996; however,
the Corporation believes, based on the number of annual reports and proxy
statements requested by nominee holders of the Corporation's Common Stock, that
the number of beneficial holders exceeds 675. The other information required by
Item 5 is incorporated by reference to the information appearing under the
caption "Stock Information" on page 40 of the Annual Report.
9
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The information required by Item 6 is incorporated by reference to the
information appearing under the caption "Selected Financial and Other Data" on
page 26 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated by reference to the
information appearing under the caption "Management's Discussion and Analysis"
on pages 8 to 25 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 and the auditor's report are
incorporated by reference to the Corporation's consolidated financial
statements, on pages 27 to 40 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the sections captioned
"Election of Directors" and "Executive Officers of the Registrant" in the
definitive proxy statement of the Registrant, filed with the Securities and
Exchange Commission on or about March 29, 1996 (The "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
10
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Securities Ownership of Management" in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Related Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements to be included in Part II, Item 8
are incorporated by reference to the 1995 Annual Report of the
Corporation to Shareholders, a copy of which accompanies this report as
Exhibit 13.1.
2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
financial statements or in the notes thereto included in the 1995
Annual Report.
3. The following exhibits are incorporated by reference herein or
annexed to this 10-K:
3.1- Registrants Articles of Incorporation, as amended, are
incorporated by reference to Exhibit 3 of Registrant's Current
Report on Form 8-K filed with the Commission on April 30, 1989
"Form 8-K".
3.2- Registrants By-Laws, as amended, are incorporated by reference
to Exhibit 3 of Form 8-K.
4.1- Registrant's specimen certificate of Common Stock is
incorporated by reference to Exhibit 4 of Form 8-K.
11
10.1- Employment Agreement between the Registrant and Thomas J.
Bisko is incorporated by reference to Exhibit 10(a) of Form
8-K.
10.2- Salary Continuation Agreement between the Registrant and
Thomas J. Bisko is incorporated by reference to Exhibit 10(b)
of Form 8-K.
10.3- Deferred Compensation Agreement between the Registrant and
Philip D. Miller is incorporated by reference to Exhibit 10(c)
of Form 8-K.
10.4- The Registrant's Stock Incentive Plan is incorporated by
reference to Exhibit 28 of Form 8-K.
13.1- 1995 Annual Report to Shareholders.
21.1- Subsidiaries of the Registrant.
23.1- Consent of Coopers & Lybrand L.L.P., filed herewith.
(b) Reports on Form 8-K
None
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes thereto.
12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 26, 1996
BY: /s/ Thomas J. Bisko
-------------------------------
Thomas J. Bisko
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Philip D. Miller Chairman of the Board and March 26, 1996
- ----------------------------- Director
Philip D. Miller
/s/ Thomas J. Bisko President, Chief Executive March 26, 1996
- ----------------------------- Officer and Director
Thomas J. Bisko
/s/ Robert C. Werner Vice President March 26, 1996
- -----------------------------
Robert C. Werner
/s/ Bret H. Krevolin Chief Accounting Officer March 26, 1996
- -----------------------------
Bret H. Krevolin
/s/ Norman L. Baringer Director March 26, 1996
- -----------------------------
Norman L. Baringer
/s/ Kenneth G. Brown Jr. Director March 26, 1996
- -----------------------------
Kenneth G. Brown Jr.
13
SIGNATURES (Continued)
/s/ Gary S. Parzych Director March 26, 1996
- -----------------------------
Gary S. Parzych
/s/ Donald T. Knauss Director March 26, 1996
- -----------------------------
Donald T. Knauss
/s/ Charles M. Meredith, III Director March 26, 1996
- -----------------------------
Charles M. Meredith, III
/s/ Henry L. Rosenberger Director March 26, 1996
- -----------------------------
Henry L. Rosenberger
/s/ Edgar L. Stauffer Director March 26, 1996
- -----------------------------
Edgar L. Stauffer
14