FINANCIAL REVIEW CONTENTS QNB Corp. and Subsidiary
Management's Discussion and Analysis 8
Consolidated Balance Sheets 26
Consolidated Statements of Income 27
Consolidated Statements of Shareholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Independent Auditor's Report 39
Corporate Information 39
Directors, Officers & Office Locations 40
7
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
CONSOLIDATED FINANCIAL REVIEW
The intention of this section is to provide the reader with a better
understanding of the consolidated results of operations and financial condition
of QNB Corp. and its wholly owned subsidiary, The Quakertown National Bank, for
the years 1996, 1995 and 1994. 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." QNB's consolidated financial condition
and results of operations consist almost entirely of The Quakertown National
Bank's financial condition and results of operations. This section should be
read in conjunction with the financial statements and notes beginning on page
26. Current performance may not be indicative of future performance. Tabular
information is presented in thousands, except share data.
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 119 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties.
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 Quarterly Reports on Form 10-Q to
be filed by the Corporation in 1997, and any Current Reports on Form 8-K filed
by the Corporation.
RESULTS OF OPERATIONS
In 1995's Annual Report management described the strategies implemented by QNB
to enhance its position in the extremely competitive financial services
industry. These strategies included a corporate reorganization, a further
strengthening of the allowance for possible loan losses, and a realignment of a
segment of the investment portfolio to enhance future yields. These strategies
were implemented to strengthen the balance sheet and position the company for
future growth and increased profitability. As a direct result of these actions,
as well as the continued reduction in non-performing assets and non-interest
expense, QNB reported record earnings in 1996 of $2,801,000 or $1.97 per share.
This represents an increase of $1,114,000 or 66.0 percent from the net income of
$1,687,000 or $1.19 per share reported in 1995. Net income in 1994 was
$2,004,000 or $1.41 per share. The lower net income in 1995 reflects the costs
associated with implementing the strategies mentioned above. Non-performing
assets, non-interest expense and the efficiency ratio all improved during each
of the three years.
Two important measures of profitability in the banking industry are an
institution's return on average assets and return on average shareholders'
equity. Return on average assets and return on average shareholders' equity were
1.02 percent and 12.94 percent, respectively, in 1996 compared with .63 percent
and 8.46 percent in 1995 and .77 percent and 10.56 percent in 1994.
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 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.
For purposes of this discussion, interest income, and the average yield earned
on loans and investment securities, is adjusted to a tax-equivalent basis as
detailed in the Average Balances, Rates, and Interest Income and Expense Summary
that appears on page 24. This provides a basis for comparison of tax-exempt
loans and investments with taxable loans and investments by giving effect to
interest earned on tax-exempt loans and investments by an amount equivalent to
the Federal income taxes which would have been paid if the interest earned on
those assets were taxable at the statutory tax rate of 34 percent.
The net interest rate spread is the difference between average rates received on
earning assets and average rates paid on interest-bearing liabilities, while the
net interest rate margin includes interest-free sources of funds.
On a fully tax-equivalent basis, net interest income for 1996 increased $99,000
or .8 percent to $11,871,000. A 1.9 percent increase in average earning assets
offset a decline in both the net interest rate spread and net interest rate
margin. The net interest rate spread decreased to 4.06 percent in 1996 from 4.16
percent in 1995 while the net interest rate margin decreased to 4.58 percent in
1996 from 4.64 percent in 1995. A 6.3 percent increase in non-interest-bearing
deposits reduced the impact of lower yielding earning assets on the net interest
margin and is a major reason that the net interest rate margin did not decline
to the same degree as the net interest rate spread.
It is necessary to review the changes in market interest rates during 1996 to
understand the impact of interest rates on interest income. Market interest
rates were volatile during 1996 as expectations regarding interest rates
changed. Most economists entered the year believing that the economy was poised
to head into a recession and that the Federal Reserve would be forced to lower
interest rates. At the end of January 1996 the Federal Reserve did just that by
lowering the Federal funds rate 25 basis points to 5.25 percent. The national
prime rate also dropped 25 basis points to 8.25 percent at that time. This would
be the only Federal Reserve action with respect to interest rates during 1996.
In February, as it became apparent that the economy was stronger than expected,
wage pressures emerged as a concern and market interest rates began to head
upward, with the peak in interest rates coming during the summer. In the fall,
interest rates headed back down as it appeared likely that the Federal Reserve
would not raise
8
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
interest rates during 1996. As an example of the volatility
during the year, the benchmark 30-year Treasury bond yield started the year at
5.95 percent and moved as high as 7.20 percent in July before finishing the year
at 6.64 percent.
Total interest income increased $175,000 in 1996 to $20,284,000. The Rate-Volume
Analysis table below highlights the impact of changing rates and volumes on
total interest income and interest expense. Lower rates on earning assets,
particularly the rates earned on loans, negatively impacted total interest
income by approximately $301,000. The yield on earning assets decreased 10 basis
points to 7.83 percent with the average rates on Federal funds sold,
held-to-maturity investment securities and loans decreasing 60 basis points, 14
basis points and 22 basis points, respectively, during 1996. The yield on
available-for-sale investment securities increased 21 basis points during the
year. The increase in the yield on these securities is the result of the
realignment of the portfolio that took place in the fourth quarter of 1995;
investing more in callable agency securities which provide a higher yield than
non-callable agencies; and, slightly lengthening the average life of the
portfolio. The decrease in the yield on loans can be attributed in part to the
drop in the prime rate. The average prime rate for 1996 was 8.27 percent, a
decrease of 56 basis points from the average prime rate for 1995. QNB's yield on
its loan portfolio did not decline proportionately, since only approximately 20
percent of the entire portfolio reprices immediately with the prime rate. During
1996, the amount of fixed rate loans as a percentage of total loans increased.
To mitigate the interest rate risk associated with fixed rates, many of these
loans have call options. Higher volumes of earning assets, particularly loans
and held-to-maturity investment securities, account for $476,000 of the increase
in interest income. One of the primary goals of management during 1996 was to
increase the amount of loans outstanding. Average loans increased $3,336,000 or
2.2 percent, and contributed $317,000 of the increase in interest income related
to volume.
Non-accrual loans of $2,700,000 in 1996 and $4,488,000 in 1995 resulted in the
non-recognition of $265,000 and $320,000 in interest income for the respective
periods. Non-accrual loans are included in the impact of rate changes.
Total interest expense increased $76,000 in 1996 to $8,413,000. A .6 percent
increase in average interest-bearing liabilities resulted in an increase in
interest expense of $116,000. Interest rates on total interest-bearing
liabilities were basically unchanged from 1995 at 3.77 percent. While the
overall rate paid on interest-bearing liabilities did not change, the mix of
deposits as well as the rates paid on the different products did change. While
average NOW account balances increased 4.3 percent to $38,936,000, the rate paid
on these accounts declined by 39 basis points to 1.81 percent. A portion of
these accounts are indexed to the Federal funds rate, and the reduction in that
rate during 1996 accounts for the decline in the yield on NOW accounts. The
interest rate on money market accounts was basically unchanged during 1996. As a
result, the average balance in these accounts decreased by $4,091,000 or 10.1
percent. Customers moved their balances from these accounts to higher paying
time deposits. Time deposits were more sensitive to rising rates as financial
institutions were more likely to increase rates on these deposits as opposed to
non-maturity deposits. Time deposits under $100,000 increased $4,868,000 or 5.8
percent while the rate paid on these deposits increased 17 basis points to 5.36
percent.
Management expects the net interest margin to decline slightly during 1997 as a
result of increased competition for both loans and deposits. One of QNB's goals
for 1997 is deposit growth and increased market share. Over the past five years
deposit growth has been modest, averaging about 2.5 percent. The achievement of
this goal may require an increase in the rates paid on money market and NOW
accounts, which would negatively impact the net interest margin. Also negatively
RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
- ------------------------------------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
- ------------------------------------------------------------------------------------------------------------------------------
Change due to Total Change due to Total
Volume Rate Change Volume Rate Change
- ------------------------------------------------------------------------------------------------------------------------------
Interest income:
Interest-bearing balances ......................... __ __ __ $ (1) __ $ (1)
Federal funds sold ................................ $ (50) $ (29) $ (79) (2) $ 98 96
Investment securities available-for-sale .......... (217) 117 (100) 282 120 402
Investment securities held-to-maturity:
Taxable ......................................... 244 (50) 194 383 155 538
Tax-exempt ...................................... 182 (17) 165 73 (46) 27
Loans ............................................. 317 (322) (5) 10 771 781
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income ......................... 476 (301) 175 745 1,098 1,843
- ------------------------------------------------------------------------------------------------------------------------------
Interest expense:
NOW accounts ...................................... 35 (148) (113) 77 123 200
Money market accounts ............................. (110) 2 (108) (421) 47 (374)
Savings ........................................... (3) (20) (23) (65) 8 (57)
Time .............................................. 261 158 419 566 908 1,474
Time over $100,000 ................................ (80) (23) (103) 306 225 531
Short-term borrowings ............................. 13 (9) 4 80 24 104
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense ........................ 116 (40) 76 543 1,335 1,878
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income ............................... $ 360 $(261) $ 99 $ 202 $ (237) $ (35)
==============================================================================================================================
Variances which were not specifically attributed to volume or rate were
allocated proportionately between volume and rate. Tax-exempt securities and
loans were adjusted to a tax-equivalent basis and are based on the marginal
Federal corporate tax rate of 34 percent. Non-performing assets are treated as a
change due to rate.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
NET INTEREST INCOME (CONTINUED)
impacting the net interest margin is the increased competition for both retail
and commercial loans. This increased competition has reduced the rates charged
for these loans. Another goal of management continues to be an increase in the
loan-to-deposit ratio. An increase in the amount of loans should help lessen the
impact on the net interest margin of higher deposit rates and declining loan
rates, as QNB can generally yield more on its loans than it can on its
investment securities.
Net interest income for 1995 decreased $35,000 or .3 percent to $11,772,000,
from $11,807,000 reported in 1994. This slight decline in net interest income
was a result of a narrowing net interest rate spread and net interest rate
margin, which decreased to 4.16 percent and 4.64 percent in 1995 from 4.52
percent and 4.89 percent in 1994. The decline in the net interest rate spread
and the net interest rate margin offset a 5.0 percent increase in average
earning assets during 1995.
When comparing 1995 to 1994, total interest income increased $1,843,000 to
$20,109,000. Higher volumes of earning assets accounted for $745,000 of the
increase in interest income, while higher interest rates on earning assets
accounted for $1,098,000 of the increase. The yield on earning assets increased
37 basis points to 7.93 percent with the average rates on Federal funds sold,
investment securities and loans increasing 175 basis points, 24 basis points and
51 basis points, respectively, during 1995. The increase in the yield on earning
assets was due to the increase in interest rates during 1994 and the beginning
of 1995. For example, the prime rate, the index on which many loans are priced,
increased from 6.00 percent on January 1, 1994, to 9.00 percent by February
1995. This rate subsequently declined to 8.75 percent in July 1995 and to 8.50
percent in December 1995. The average prime rate increased from 7.13 percent in
1994 to 8.83 percent in 1995. QNB's interest rate sensitivity position during
this period prevented full benefit from these increases, as it held many loans
and securities that either have fixed rates or had repriced, for a fixed period
of time, when interest rates were lower.
[GRAPH]
In the printed version there appears a Bar Chart depicting the following
information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Net Interest Income $10,674 $11,159 $11,807 $11,772 $11,871
NET INTEREST MARGIN COMPARISON
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Rate on earning assets............... 7.83% 7.93% 7.56%
Rate paid on
interest-bearing liabilities........ 3.77 3.77 3.04
- --------------------------------------------------------------------------------
Net interest rate spread............. 4.06 4.16 4.52
Effect of
interest-free sources of funds...... .52 .48 .37
- --------------------------------------------------------------------------------
Net interest rate margin............. 4.58% 4.64% 4.89%
- --------------------------------------------------------------------------------
Earning assets averaged $253,503,000 and $241,478,000, respectively, in 1995 and
1994. While loan demand did increase during the fourth quarter of 1995, it
remained on average relatively flat for most of 1995. This resulted in funding
sources being directed into investment securities during the year. Average
investment securities increased $12,015,000 or 14.3 percent. Since investment
securities generally have lower yields than loans, the increase in average
investment securities relative to average loans has negatively impacted the
yield on earning assets and the net interest margin.
Total interest expense increased $1,878,000 in 1995 to $8,337,000. A 4.0 percent
increase in average interest-bearing liabilities resulted in an increase in
interest expense of $543,000, while higher interest rates contributed $1,335,000
to the increase in total interest expense. The rates paid on interest-bearing
liabilities increased 73 basis points to 3.77 percent for 1995. Average interest
rates on NOW accounts, money market accounts, savings accounts and time deposits
increased 33 basis points, 12 basis points, 2 basis points and 115 basis points,
respectively. Interest rates paid on interest-bearing deposits lagged the rates
received on earning assets when rates increased during 1994 and the first part
of 1995. As interest rates declined since their peak in the first quarter of
1995, interest rates on earning assets also reacted more rapidly to the decline
than interest rates on interest-bearing liabilities. The increase in the cost of
interest-bearing liabilities is also a result of a change in the mix of deposits
as customers moved their balances from lower paying savings and money market
accounts to higher paying time deposits. As a result, average time deposits
increased $20,356,000 while average money market and savings accounts decreased
$15,868,000 and $2,900,000, respectively.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents management's determination of
the amount necessary to be charged to operations to bring the allowance for
possible loan losses to a level considered adequate in relation to the risk of
possible losses in the loan portfolio. Actual loan losses, net of recoveries,
serve to reduce the allowance. The provision was $400,000 in 1996 compared to
$1,010,000 and $600,000 in 1995 and 1994, respectively. QNB was able to reduce
the provision in 1996 because of continuing improvement in asset quality and the
substantial reduction in charged-off loans. Net charge-offs for 1996 were
$199,000 versus $650,000 for 1995 and $797,000 for 1994. The primary reason for
the significant provision for loan losses in 1995 was the increase in the amount
of charged-off loans collateralized by real estate, both residential and
commercial. Since the majority of the loan portfolio is collateralized by real
estate, charge-offs of real estate collateralized loans have a significant
impact on the
10
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
Change from Prior Year
----------------------
NON-INTEREST INCOME COMPARISON 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
Fees for services to customers ........... $1,095 $ 927 $ 866 $168 18.1% $ 61 7.0 %
Mortgage servicing fees .................. 208 229 241 (21) (9.2) (12) (5.0)
Net gain (loss) on investment securities . 102 (79) 215 181 __ (294) (136.7)
Net gain on sale of loans ................ 89 108 __ (19) (17.6) 108 100.0
Other operating income ................... 356 208 276 148 71.2 (68) (24.6)
- ---------------------------------------------------------------------------------------------------------------------------
Total ................................ $1,850 $1,393 $1,598 $457 32.8% $(205) (12.8)%
===========================================================================================================================
allowance for loan loss model, which is heavily weighted for historical
charge-offs. Management's decision to strengthen the balance sheet by increasing
the coverage of the allowance for possible loan losses to non-performing loans
and total loans also contributed to the higher provision for possible loan
losses in 1995. Management anticipates the provision for possible loan losses in
1997 to remain near 1996 levels if asset quality continues to improve as
expected.
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 mortgage loans and student loans, and other
miscellaneous fee income. QNB reviews all service charges and fee schedules
related to its products and services on an annual basis. QNB prices its products
and services competitively. The continual development of new products and
services should help generate additional non-interest income. Total non-interest
income was $1,850,000 in 1996, compared to $1,393,000 in 1995 and $1,598,000 in
1994.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees increased $168,000 or 18.1 percent in 1996. Charges related to overdrafts
account for approximately $128,000 of the increase in fee income. QNB increased
the overdraft fee in November of 1995. Also during 1995, QNB implemented a
transaction fee for customers that use an out-of-network ATM. The income
generated by this fee increased by approximately $7,000 or 33.3 percent. This is
a result of the fee being in place for an entire year, and an increase in
volume. QNB does not surcharge for the use of its ATM machines. Service charges
on business deposit accounts, monthly fees and transaction activity fees,
increased $24,000 or 18.1 percent in 1996. A reduction in the earnings credit
rate resulted in businesses paying for more of their services.
Fees for services to customers increased $61,000 or 7.0 percent from 1994 to
1995. Charges related to a greater volume of overdrafts, as well as an increase
in the overdraft fee in November of 1995, accounted for approximately $32,000 of
the increase. The implementation of a transaction fee for customers that use an
out-of-network ATM increased service charge income by $22,000. A reduction in
waived service charges of approximately $16,000 also added to the increase in
total service charge income. Partially offsetting these positive factors were
lower monthly fees and transaction fees on business deposit accounts, which
decreased $24,000. Higher interest rates created higher earnings credits for
businesses to help offset their monthly fees and transaction costs.
To date, when QNB sells its residential mortgages in the secondary market, it
retains servicing rights. A normal servicing fee is retained on all loans sold
and serviced. Mortgage servicing fees decreased $21,000 or 9.2 percent in 1996,
to $208,000. This followed a decrease of $12,000 or 5.0 percent in 1995, to
$229,000. The level of mortgages serviced decreased $6,495,000 to $73,413,000 at
December 31, 1996. This 8.1 percent decrease in mortgages serviced from year-end
1995 to year-end 1996 followed a 6.7 percent decline between 1994 and 1995. The
average balance of mortgages serviced for others decreased 8.3 percent in 1996
to $76,260,000 and 5.2 percent in 1995 to $83,152,000. The decrease in the
volume of mortgages serviced for others during both 1996 and 1995 was a result
of fewer residential mortgage originations and management's decision to retain
15 and 20 year mortgages, which would have been sold in prior years. Management
anticipates that mortgage servicing fees will continue to decline as principal
reductions outpace loans sold.
Effective January 1, 1996 QNB adopted Statement of Financial Accounting
Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires the recognition of separate assets relating to the rights
to service mortgage loans based on their fair value if it is practicable to
estimate the value. Additionally, the fair value of servicing assets is required
to be measured at each reporting date to determine any potential impairment.
SFAS No. 122 applies to transactions entered into in 1996; therefore, there is
no cumulative effect adjustment upon adoption of this statement. SFAS No. 122
did not have a significant effect on the financial position, equity or results
of operations of QNB in 1996.
QNB recorded net gains on the sale of investment securities of $102,000 in 1996.
Sales of equity securities, with a cost of $75,000, netted a $77,000 gain. Sales
of approximately $18,350,000 in available-for-sale debt securities netted a gain
of $25,000. During the second quarter of 1996 QNB sold approximately $5,500,000
in U.S. Treasury and agency securities. QNB took advantage of a steep slope in
the short end of the Treasury yield curve to "pre-fund" bonds that were maturing
over the next year and a half and reinvested in bonds in the three to four year
range. This allowed QNB to record a profit on the sale of $23,000 and also to
increase the overall book yield of the portfolio. During the third and fourth
quarters QNB sold approximately $12,850,000 of U.S. Treasury and agency
securities and netted a gain of $2,000. These sales were for liquidity purposes
and were in direct response to the seasonality of a customer's deposits.
Net losses on investment securities were $79,000 in 1995, while net gains on
investment securities were $215,000 in 1994. To assist in increasing future
profitability, QNB sold approximately $7,885,000 of lower yielding investment
securities at a loss of $79,000 in the fourth
11
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
NON-INTEREST INCOME (CONTINUED)
quarter of 1995 and reinvested the proceeds in higher yielding investment
securities which would provide for higher interest income in future years. Net
gains on the sale of approximately $16,426,000 in debt securities
available-for-sale were $47,000 in 1994. The sales transactions executed in 1994
were primarily in response to liquidity needs. Also during 1994, the Corporation
sold $129,000 of marketable equity securities at a gain of $168,000.
QNB owns a small portfolio of marketable equity securities. At December 31,
1996, these securities had an amortized cost of $468,000 and a market value of
$693,000. Management anticipates realizing some of this gain during 1997.
Student and residential mortgage loans to be sold are identified at time of
origination. The net gain on the sale of loans was $89,000 and $108,000 in 1996
and 1995, respectively. There were no gains on the sale of loans in 1994.
Included within these amounts are gains on the sale of student loans of $32,000
and $68,000. QNB sold approximately $1,495,000 of loans to SallieMae during
1996. In June of 1995 QNB sold approximately $2,558,000 of student loans to
SallieMae. Since then, QNB changed the manner in which it originates and sells
student loans to SallieMae. This change provides a lower cost method of
originating student loans while also providing an opportunity for gains on the
sale of the originated loans. The amount of the gain depends upon the size and
volume of loans originated.
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. Net gains on the sale of residential mortgages were $57,000 in
1996, $40,000 in 1995 and zero in 1994. Volatile interest rate swings have had a
major impact on the volume of mortgages originated and the gains recorded on the
sale of these mortgages. QNB was operating in contrasting interest rate cycles
during 1996 and 1995. Higher rates at the end of 1994 and the beginning of 1995
negatively impacted the volume of mortgages originated and sold. A downturn in
rates at the end of the first quarter and during the second and third quarters
of 1995 provided the environment to sell mortgages at a gain. Interest rates
reached their low during the beginning of 1996 before rapidly increasing towards
the end of February and throughout the second quarter and most of the third
quarter of 1996. This rapid increase in rates created a loss on the mortgages
sold or held for sale during the first half of the year. The Federal Reserve
Bank's inaction with respect to rates, as well as economic information released
towards the end of summer caused interest rates to fall dramatically which
enabled QNB to sell mortgages at a gain in the third and fourth quarters of
1996. Rapidly rising interest rates during 1994 negatively impacted the volume
of mortgages originated and sold and the profits earned on these sales. QNB sold
approximately $3,512,000, $2,598,000 and $10,934,000 of residential mortgages in
the secondary market in 1996, 1995 and 1994, respectively. Management decided in
1995 to sell primarily only 30-year fixed rate mortgage originations. The
implementation of SFAS No. 122 increased the gain on the sale of residential
mortgages in 1996 by approximately $41,000.
Other operating income was $356,000, $208,000 and $276,000 in 1996, 1995 and
1994, respectively. Net gains on the sale of other real estate owned and rental
income on other real estate owned account for $67,000 and $20,000 of the
increase in 1996. During the third quarter of 1995, QNB began offering retail
investment products through a third party vendor. QNB received commissions of
$30,000 in 1996 versus $3,000 in 1995. Commission income on the sale of consumer
loan life and disability insurance contributed approximately $16,000 more to
other operating income in 1996. Increased loan volume, in addition to a more
concerted sales effort resulted in the increased commissions. Higher ATM card
income, a result of an increase in the number of cards outstanding as well as an
increase in the annual fee charged, resulted in a $13,000 increase in income.
Other operating income in 1995 included a $10,000 gain on the sale of equipment.
There were no equipment sales during 1996 or 1994. Included in other operating
income in 1994 was a net gain on the sale of other real estate owned of $82,000.
QNB anticipates an increase in other operating income in 1997 as a result of
fees received on the newly introduced check card, increased rental income on
other real estate owned as a result of properties foreclosed upon late in 1996,
and higher commissions on the sale of retail investment products.
NON-INTEREST EXPENSE
Non-interest expense is comprised of costs related to salaries and employee
benefits, net occupancy, furniture and equipment, marketing, supplies,
professional fees, insurance, other real estate owned and various other
operating expenses. The positive trend of expense reduction that began in 1994
continued for the third consecutive year. Total non-interest expense declined
5.6 percent in 1996 to $9,004,000. This followed a 1.9 percent decline in 1995
and a 7.8 percent decline in 1994.
Salaries and benefits expense is the largest component of non-interest expense.
Salaries and benefits expense for 1996 declined $200,000 or 3.7 percent, to
$5,143,000. Salary expense for 1996 decreased by $141,000 to $4,120,000 while
benefits expense decreased by $59,000
Change from Prior Year
----------------------
NON-INTEREST EXPENSE COMPARISON 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits............ $5,143 $5,343 $5,307 $(200) (3.7)% $ 36 .7 %
Net occupancy expense..................... 687 675 693 12 1.8 (18) (2.6)
Furniture and equipment expense........... 697 721 764 (24) (3.3) (43) (5.6)
Marketing expense......................... 287 247 256 40 16.2 (9) (3.5)
Supplies expense.......................... 209 222 226 (13) (5.9) (4) (1.8)
Professional fees......................... 160 263 249 (103) (39.2) 14 5.6
Insurance expense......................... 104 404 688 (300) (74.3) (284) (41.3)
Other real estate owned expense........... 253 356 186 (103) (28.9) 170 91.4
Other expense............................. 1,464 1,308 1,350 156 11.9 (42) (3.1)
- ---------------------------------------------------------------------------------------------------------------------------
Total................................. $9,004 $9,539 $9,719 $(535) (5.6)% $(180) (1.9)%
===========================================================================================================================
12
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
to $1,023,000. The reduction in salary expense relates to the reorganization
plan implemented during the second quarter of 1995. The cost of the severance
packages expensed in 1995 was approximately $244,000. If the severance expense
was excluded from 1995 figures, salary expense in 1996 would have increased by
approximately 2.6 percent as a result of performance increases and a slight
increase in the number of full-time equivalent employees. The decrease in
benefits expense is also directly related to the decline in the number of
employees resulting from the reorganization. Payroll tax expense declined by
$14,000 as a result of lower salary expense. Medical premiums declined by
$57,000 while life and disability premiums declined by $7,000. Lower rates for
medical premiums also positively impacted the amount of benefits expense.
Partially offsetting these reductions was an increase in pension expense of
approximately $13,000 and higher unemployment taxes of $6,000.
Salaries and benefits expense increased .7 percent or $36,000 to $5,343,000 when
comparing 1995 to 1994. This followed a 1.1 percent increase in 1994 to
$5,307,000. Salary expense increased $11,000 or .3 percent in 1995 to $4,261,000
and $39,000 or .9 percent in 1994 to $4,250,000.
During both 1995 and 1994 corporate reorganization plans were implemented to
improve communication and efficiency. As a result the number of full-time
equivalent employees was reduced from 153 at December 31, 1993, to 134 at
December 31, 1995. The cost of the reorganizations was approximately $244,000 in
1995 and $113,000 in 1994. If the cost of the severance packages was excluded,
salary expense would have declined by approximately $120,000 or 2.9 percent in
1995 and $76,000 or 1.8 percent in 1994.
Employee benefits increased $25,000 in 1995 to $1,082,000. The 2.4 percent
increase is primarily the result of higher medical, life and disability
insurance costs and higher state unemployment taxes. Lower retirement plan
expense in 1995, a result of the reduction in the number of employees and the
corresponding reduction in eligible compensation, partially offset these
increases.
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation" became effective January 1, 1996. SFAS No. 123
provides an alternative method of accounting for stock-based compensation
arrangements. This method is based on the fair value of the stock-based
compensation determined by an option pricing model utilizing various assumptions
regarding the underlying attributes of the options and QNB's stock, rather than
the existing method of accounting for stock-based compensation which is provided
in Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for
Stock Issued to Employees." The Financial Accounting Standards Board (FASB)
encourages entities to adopt the fair value based method, but does not require
the adoption of this method. QNB continues to apply APB No. 25 and related
Interpretations in accounting for its Stock Option Plan. Therefore, there was no
impact on its financial position, equity and results of operations.
Net occupancy expense increased $12,000 or 1.8 percent in 1996 to $687,000.
Increases in utilities costs, building insurance premiums, real estate taxes and
higher rental expense for branch locations contributed to the increase in 1996.
A decline in depreciation expense for owned buildings and leasehold improvements
offset some of the impact of the higher costs. Net occupancy expense decreased
$18,000 or 2.6 percent in 1995 to $675,000. A $41,000 decrease in building
repairs and maintenance expense offset increases in utilities expense, security
expense and real estate taxes totaling $19,000. The higher repairs and
maintenance cost in 1994 was a result of renovations to several existing
locations as well as maintenance associated with damage to buildings caused by a
severe winter. Net occupancy expense will likely increase slightly in 1997 as a
result of increases in utility costs, insurance costs, real estate taxes, and
branch rent expense.
Furniture and equipment expense was $697,000, $721,000 and $764,000 for the
years ended 1996, 1995 and 1994, respectively. Depreciation expense on furniture
and equipment continues to decline. Depreciation expense on furniture and
equipment decreased $74,000 in 1996 to $372,000. This followed a decrease of
$36,000 to $446,000 in 1995. 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 purchased approximately $326,000 of furniture and
equipment in 1996 compared to $143,000 in 1995, $628,000 in 1994 and $552,000 in
1993. The smaller amounts of furniture and equipment purchased in the past two
years, along with lower depreciation expense as an asset ages, accounted for the
decrease. Partially offsetting the reduction in depreciation expense in 1996 was
an increase in equipment maintenance costs of $44,000. These costs have
increased as a result of more equipment being placed under maintenance
agreements as well as an increase in maintenance needed as the equipment ages.
Furniture and equipment expense may increase in 1997 as a result of higher
depreciation expense associated with QNB's expansion of its investment in new
technology and as older equipment is replaced.
Marketing expense increased $40,000 or 16.2 percent in 1996, to $287,000. A more
focused marketing strategy using targeted mailings as well as an increase in
specific product advertising directed at customers of consolidating banks
contributed to the increase. The promotion and advertising of QNB's new
products: Youth Trek, Account Access and check cards, also contributed to the
increase in marketing expense. Marketing expense in 1995 was $247,000, a
decrease of $9,000 from the $256,000 reported in 1994. Increased advertising
necessitated by the opening of a new branch location and the introduction of a
new theme, "Your Future is Our Future," contributed to the higher marketing
expense in 1994.
Supplies expense was $209,000, $222,000 and $226,000 for the years ended 1996,
1995 and 1994, respectively. A more aggressive competitive bidding process in
addition to improved monitoring procedures and a reduction in the number of
employees contributed to the decline in supplies expense. This trend should
continue in 1997 as a result of benefits achieved through the competitive
bidding process.
Professional fees include legal, accounting and consulting expense. These costs
showed dramatic improvement in 1996, declining $103,000 to $160,000. Legal
expense and accounting expense declined $40,000 and $31,000, respectively, while
consulting expense declined $32,000. Less reliance on legal counsel for loan
workout situations resulting from the improvement in asset quality reduced the
amount of legal expense. Costs associated with outplacement services for
terminated employees was the primary reason for the higher consulting expense in
1995. Professional fees expense was $263,000 and $249,000 in 1995 and 1994.
Higher legal costs relating to asset quality account for the increase in 1995.
These costs should show further improvement in 1997 as the reliance on legal
counsel lessens if asset quality improves as expected.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
[GRAPH]
In the printed version there appears a Bar Chart depicting the following
information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Non-Interest Expense $9,184 $10,545 $9,719 $9,539 $9,004
NON-INTEREST EXPENSE (CONTINUED)
Insurance expense, which includes Federal Deposit Insurance Corporation (FDIC)
premiums, was $104,000, $404,000 and $688,000 for the years ended 1996, 1995 and
1994, respectively. The FDIC has been granted unlimited assessment authority to
increase or decrease premiums under the Federal Deposit Insurance Corporation
Act of 1991. FDIC insurance premiums are based on assigned risk classifications.
FDIC premiums account for $2,000, $306,000 and $588,000 of total insurance
expense for the three years. In August 1995, the FDIC announced that the Bank
Insurance Fund (BIF) had met its legally set coverage ratios as of May 1995, and
as a result FDIC premiums for "well capitalized" institutions decreased by 83
percent starting with the third quarter assessment. In addition, since the BIF
met its required ratios in May, the FDIC refunded approximately $37,000 of the
premium QNB paid during the second quarter of 1995. By obtaining the coverage
ratios, the FDIC premiums for "well capitalized" institutions in 1996 were
eliminated except for the legally set annual minimum of $2,000. This minimum has
subsequently been eliminated in 1997. However, as a result of the Deposit
Insurance Act of 1996, QNB will contribute to the payment of Financing
Corporation (FICO) obligations. The FICO rate is not tied to the FDIC risk
classifications. QNB anticipates these payments to be approximately $33,000 for
1997.
Other real estate owned expense in 1996 was $253,000, a decrease of $103,000
from the $356,000 reported in 1995. Other real estate owned expense for 1994 was
$186,000. Included in other real estate owned expense in 1995 were net losses on
write-downs and sales of properties of $149,000. In 1996 and 1994, QNB recorded
$67,000 and $82,000 of net gains on other real estate owned. These gains are
reflected in other non-interest income. Expenses related to the maintenance of
other real estate owned, which consists of insurance, utilities and real estate
taxes, increased approximately $46,000 when comparing 1996 to 1995 and $21,000
when comparing 1995 to 1994. The payment of real estate taxes on a group of
properties foreclosed upon in the fourth quarter of 1996 accounts for the
increase from 1995. The payment of real estate taxes on one property accounts
for most of the increase between 1995 and 1994.
The major categories that comprise other expense are postage, telecommunications
costs, Comptroller of the Currency expense, state taxes and loan related costs.
Other expense was $1,464,000 in 1996, $1,308,000 in 1995 and $1,350,000 in 1994.
One reason for the increase between 1996 and 1995 is the increase in loan
related costs. These costs, which include property appraisals, credit reports
and expense associated with foreclosures and repossessions, increased
approximately $80,000 in 1996. The increase in foreclosure costs is related to
the payment of real estate taxes and insurance for several loans where the
borrower failed to make the payments. Costs associated with the development and
production of the new check card were $34,000 in 1996. Postage expense increased
in 1996 by approximately $29,000. A significant portion of this increase was
related to direct mail marketing promotions.
The reduction in other expense between 1995 and 1994 can be attributed to a
reduction in ATM network fees, costs associated with third party vendors and
loan related costs. Partially offsetting these positive factors were increases
in sales department expense and costs for check printing. The increase in sales
department expense was related to costs associated with the training of customer
service representatives and tellers. QNB will continue to invest in training for
its employees so that they can further improve the quality of service that QNB
provides to its customer base. The increase in check printing costs was a result
of a deposit account promotion. At the end of 1994 and during 1995 QNB offered a
free NOW account to customers. As part of the promotion, customers received
their first supply of checks free.
INCOME TAXES
QNB uses the asset and liability method of Statement of Financial Accounting
Standard No. 109 (SFAS No. 109), "Accounting for Income Taxes," to provide for
income taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
Applicable income taxes and effective tax rates were $1,048,000 or 27.2 percent
for 1996 compared to $536,000 or 24.1 percent for 1995, and $681,000 or 25.4
percent for 1994. The increase in the effective tax rate in 1996 is a result of
higher pre-tax income and a decrease in the percentage of income derived from
non-taxable loans and investments. The decrease in the effective tax rate
between 1994 and 1995 was primarily the result of an increase in the percentage
of QNB's income which was derived from non-taxable loans and investments.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
FINANCIAL CONDITION
The completion of several large bank mergers during 1995 and 1996 changed the
landscape in which QNB operates. QNB's primary competition in the banking
segment of the financial services industry is comprised of a large regional
bank, several large community banks and a thrift institution. The consolidation
of the banking industry and the increased availability of loans by financial
institutions has led to increased price competition for both deposits and loans.
Record highs in the stock markets as well as record inflows of cash into mutual
funds have also had a direct impact on the competition for deposits.
As a result, QNB experienced only modest growth in both 1996 and 1995. Total
assets at year-end 1996 were $280,447,000, compared with $276,049,000 at
December 31, 1995, an increase of 1.6 percent. This followed growth of 2.9
percent in 1995. Despite the modest level of growth over the last few years,
QNB's market share of deposits continues to increase. Average total assets
increased 1.7 percent or $4,700,000 in 1996 to $274,533,000. Average total
assets increased 4.0 percent or $10,489,000 in 1995 to $269,833,000. Total loans
at December 31, 1996 were $159,278,000, an increase of 2.1 percent from December
31, 1995. This followed a 1.3 percent increase from December 31, 1994. Average
total loans increased 2.2 percent in 1996 and .1 percent in 1995. Funding
sources, which include deposits and short-term borrowings, increased 1.0 percent
from year-end 1995 to year-end 1996 and 1.8 percent from year-end 1994 to
year-end 1995. Average funding sources increased 1.2 percent in 1996 and 4.0
percent in 1995. The following discussion will further detail QNB's financial
condition during 1996 and 1995.
INVESTMENT SECURITIES AND OTHER
SHORT-TERM INVESTMENTS
Investment policies, approved annually by QNB's Board of Directors, include
strict standards regarding permissible investment categories, credit quality,
maturity intervals and investment concentrations. At both December 31, 1996 and
1995, approximately 90 percent of QNB's investment securities were either U.S.
Government or Government agency debt securities, or U.S. Government agency
issued mortgage-backed securities.
QNB did not hold any securities which, in the aggregate from any issuer
(excluding the U.S. Government and its agencies), were in excess of 10 percent
of shareholders' equity. In addition, Federal funds sold, which would be
affected by the economic status of the banking industry, are short-term in
nature and sold to banks with a minimum "A" rating at the date of the sale.
Average investment securities increased $2,334,000 or 2.4 percent to $98,376,000
in 1996 compared with a $12,015,000 or 14.3 percent increase in 1995. Average
Federal funds sold decreased 15.5 percent in 1996 to $4,731,000 and .8 percent
in 1995 to $5,598,000. The significant reduction in the rate of growth in the
investment portfolio in 1996 was a result of slower growth in funding sources
and an increase in average loans. Total investment securities at December 31,
1996 and 1995 were $95,478,000 and $97,895,000. While the average growth rate of
the portfolio was low, the amount of activity in the portfolio was not. Over
$42,000,000 of the portfolio matured, was called or was sold during the year.
Purchases during the year were approximately $40,000,000. Despite the amount of
activity, the composition of the portfolio did not change significantly. The
percentage of U.S. Treasury securities declined to approximately 10.0 percent of
the portfolio from 15.0 percent while mortgage-backed securities increased to
36.8 percent from 33.5 percent. State and municipal securities increased to 11.1
percent from 9.7 percent of the portfolio at December 31, 1996 and 1995,
respectively. The reduction in the amount of U.S. Treasury securities was
primarily a result of a decrease in the amount of securities required to be
pledged. Management anticipates that the investment portfolio will continue to
experience high levels of activity with slow overall growth in 1997.
At December 31, 1996 and 1995, investment securities totaling $34,381,000 and
$37,551,000 were pledged as collateral for repurchase agreements, public
deposits and other deposits as provided by law.
QNB accounts for its investments based on Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt
and Equity Securities." The Statement requires that these securities be
classified into three categories. Securities that QNB has the positive intent
and ability to hold to maturity are classified as held-to-maturity securities
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses, net of tax, excluded from earnings and reported as a separate
component of shareholders' equity. Management determines the appropriate
classification of securities at the time of purchase. QNB held no trading
securities as of December 31, 1996 and 1995.
INVESTMENTS AVAILABLE-FOR-SALE
Investment securities available-for-sale include securities that management
intends to use as part of its asset/liability management strategy. They may be
sold in response to changes in market interest rates and related changes in the
security's prepayment risk or in response to the need for liquidity. The
available-for-sale portfolio is primarily comprised of U.S. Treasuries and U.S.
Government agencies due to their high degree of liquidity. Also chosen were
certain mortgage-backed securities to ensure QNB's ability to react to changes
in prepayment activity. At December 31, 1996, the fair value of investment
securities available-for-sale was $52,779,000 or $170,000 above the amortized
cost of $52,609,000. This compares to a fair value of $55,380,000 or $336,000
below the amortized cost of $55,044,000 at December 31, 1995. An unrealized
holding gain, net of taxes, of $112,000 and $222,000 was recorded as an increase
to shareholders' equity at December 31, 1996 and 1995, respectively. The
available-for-sale portfolio had a weighted average maturity of approximately 4
years and 1 month and 3 years and 5 months and a weighted average tax-equivalent
yield of 6.38 percent and 6.21 percent at December 31, 1996 and 1995,
respectively.
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 of the debt securities and because of prepayments on
mortgage-backed securities. The interest rate sensitivity analysis on page 23
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 2 years and 1 month at December 31, 1996, and 1
year and 4 months at December 31, 1995, based on these assumptions.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
INVESTMENT PORTFOLIO HISTORY
- --------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Investment Securities Available-for-Sale
U.S. Treasuries ................................................ $ 9,555 $12,732 $13,301
U.S. Government agencies ....................................... 39,422 40,415 34,152
Mortgage-backed securities ..................................... 3,045 1,859 1,932
Equity and other debt securities ............................... 757 374 453
- --------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale ............... $52,779 $55,380 $49,838
- --------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries ................................................ __ $ 2,006 $ 2,017
State and municipal securities ................................. $10,563 9,531 7,253
Mortgage-backed securities ..................................... 32,058 30,900 26,288
Equity securities .............................................. 78 78 78
- --------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity ................. $42,699 $42,515 $35,636
- --------------------------------------------------------------------------------------------------------------------
Total investment securities .................................. $95,478 $97,895 $85,474
====================================================================================================================
INVESTMENT PORTFOLIO WEIGHTED AVERAGE YIELDS
- -----------------------------------------------------------------------------------------------------------------------------
Under 1-5 5-10 Over 10
December 31, 1996 1 Year Years Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities Available-for-Sale
U.S. Treasuries:
Fair value................................................. $4,029 $ 5,526 __ __ $ 9,555
Weighted average yield..................................... 6.13% 6.09% 6.11%
U.S. Government agencies:
Fair value................................................. __ $26,869 $12,553 __ $39,422
Weighted average yield..................................... 6.08% 7.24% 6.45%
Mortgage-backed securities:
Fair value................................................. $ 543 $ 2,502 __ __ $ 3,045
Weighted average yield..................................... 7.00% 6.32% 6.44%
Equity and other debt securities:
Fair value................................................. $ 705 $ 52 __ __ $ 757
Weighted average yield..................................... 6.13% 7.50% 6.26%
- -----------------------------------------------------------------------------------------------------------------------------
Total fair value............................................. $5,277 $34,949 $12,553 __ $52,779
Weighted average yield ...................................... 6.22% 6.10% 7.24% 6.38%
- -----------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
State and municipal securities:
Amortized cost............................................. __ $ 1,501 $ 9,062 __ $10,563
Weighted average yield..................................... 7.52% 7.30% 7.33%
Mortgage-backed securities:
Amortized cost............................................. $2,879 $28,692 $ 487 __ $32,058
Weighted average yield..................................... 6.81% 6.42% 6.85% 6.46%
Equity securities:
Amortized cost............................................. $ 78 __ __ __ $ 78
Weighted average yield..................................... 6.00% 6.00%
- -----------------------------------------------------------------------------------------------------------------------------
Total amortized cost......................................... $2,957 $30,193 $ 9,549 __ $42,699
Weighted average yield ...................................... 6.78% 6.48% 7.28% 6.68%
- -----------------------------------------------------------------------------------------------------------------------------
Securities are assigned to categories based on stated contractual maturity
except for mortgage-backed securities which are based on anticipated payment
periods. See interest rate sensitivity section for practical payment and
repricing characteristics. Tax-exempt securities were adjusted to a
tax-equivalent basis and are based on the marginal Federal corporate tax rate of
34 percent. Weighted average yields on investment securities available-for-sale
are based on historical cost.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
INVESTMENTS HELD-TO-MATURITY
Investment securities held-to-maturity are recorded at amortized cost. Included
in this portfolio are state and municipal securities and most mortgage-backed
securities. They are designated as held-to-maturity as they represent a large
component of QNB's core earnings and are purchased with the intent and ability
to hold to maturity. Certain mortgage-backed securities with the highest degree
of yield and average life stability are included in this classification. At
December 31, 1996 and 1995, the amortized cost of investment securities
held-to-maturity was $42,699,000 and $42,515,000 and the fair value was
$42,760,000 and $42,861,000, respectively. The held-to-maturity portfolio had a
weighted average maturity of approximately 3 years and 6 months and 3 years and
8 months and a weighted average tax-equivalent yield of 6.68 percent and 6.77
percent at December 31, 1996 and 1995, respectively.
LOANS
QNB's primary function and responsibility is to accept deposits and to make
loans to meet the credit needs of the communities it serves. Loans are the most
significant component of earning assets. Inherent within the lending function is
the evaluation and acceptance of credit risk and interest rate risk along with
the opportunity cost of alternative deployment of funds. QNB manages credit risk
associated with its lending activities through portfolio diversification,
underwriting policies and procedures, and loan monitoring practices.
QNB's commercial lending activity is focused on small businesses within the
local community. Commercial and industrial loans represent commercial purpose
loans that are either secured by collateral other than real estate or unsecured.
Real estate commercial loans include commercial purpose loans collateralized at
least in part by commercial real estate. These loans may not be for the
expressed purpose of conducting commercial real estate transactions. Real estate
residential loans include loans secured by one-to-four family units. These loans
include home equity loans, loans to individuals for residential mortgages and
commercial purpose loans. Prior to 1995, substantially all originations of loans
to individuals for residential mortgages were sold in the secondary market.
Beginning in 1995, QNB decided it would sell primarily only 30-year mortgages in
the secondary market. Included in real estate residential loans at December 31,
1996 and 1995 are $103,000 and $661,000 of residential mortgage loans
held-for-sale.
The loan portfolio composition remained relatively unchanged from year-end 1995.
Loans collateralized by commercial and residential properties increased from
72.1 percent of the portfolio at December 31, 1995 to 77.5 percent of the
portfolio at December 31, 1996. Commercial and industrial loans declined to 14.4
percent of the portfolio at year-end 1996 versus 17.3 percent at December 31,
1995. Construction loans and consumer loans also declined from 4.2 and 4.8
percent at year-end 1995 to 2.3 percent and 4.0 percent at December 31, 1996,
respectively.
Loans, net of unearned income, increased $3,321,000 to $159,278,000 at December
31, 1996. Loans secured by commercial real estate and residential real estate
increased $6,221,000 and $4,864,000, respectively. Commercial and industrial
loans, construction loans and consumer loans decreased $4,029,000, $3,001,000
and $1,061,000, respectively. The increase in loans secured by commercial real
estate is a function of management's desire to obtain real estate collateral
whenever possible, and to increase total loans outstanding. QNB booked several
large new loans secured by commercial properties during 1996. The increase in
residential real estate loans is the result of the change in strategy in selling
loans in the secondary market, and a new plan to accept a small percentage of
quality loans that are nonconforming to Freddie Mac standards and therefore are
not salable to them. These include loans that have excess land value or loans
that exceed a dollar threshold. QNB originated $2,679,000 of non-conforming
loans during 1996. An aggressive fixed rate home equity loan promotion offered
during 1996 also impacted the growth of loans secured by residential real
estate. The increase in home equity loans also negatively impacted the amount of
consumer loans outstanding. Customers chose to benefit from the competitive rate
of the home equity loans as well as the tax deductibility of the interest by
paying off other loans with home equity loans. QNB continues to pursue new
commercial banking relationships and to develop new residential mortgage
products and consumer loan products to meet the needs of the community.
[GRAPH]
In the printed version there appears a Pie Chart depicting the following
information:
Loans
-----
Commercial & Industrial $22,973
Agricultural $2,828
Construction $3,640
Real Estate -- Commercial $57,589
Real Estate -- Residential $66,203
Consumer $6,477
Management's primary focus during recent years has been asset quality and the
reduction of non-performing assets. QNB has made great strides in reducing the
level of non-performing assets. While one of QNB's goals in 1997 is to continue
to reduce the amount of non-performing assets, its primary focus will be loan
and deposit growth. This will be accomplished through the expansion of its
formal business development and calling program started in 1996. This program
includes lending personnel and branch personnel. The focus of this program is to
both develop new lending and deposit relationships as well as to strengthen
existing relationships.
NON-PERFORMING ASSETS
Non-performing assets are defined as accruing loans past due 90 days or more,
non-accruing loans, restructured loans and other real estate owned. QNB
continues to make significant progress in reducing its level of non-performing
assets. The table on the next page shows the dramatic improvement in
non-performing assets over the past five years. Total non-performing assets were
$4,260,000 at December 31, 1996, their lowest level since 1990. This represents
a reduction of 23.0 percent from the December 31, 1995 balance of $5,535,000 and
a 64.2 percent reduction from their highest level recorded in April 1993.
Non-performing assets at December 31, 1996 represent 1.52 percent of total
assets, an improvement from 2.01 percent of total assets at December 31, 1995.
It is management's goal to reduce non-performing assets to under 1.00 percent of
total assets.
Non-accrual loans are those on which the accrual of interest has ceased.
Commercial loans are placed on non-accrual status immediately if, in the opinion
of management, collection is doubtful, or when principal or interest is past due
90 days or more and collateral is insufficient to cover principal and interest.
Interest accrued, but not collected at the date a loan is placed on non-accrual
status, is reversed and charged against interest income. Subsequent cash
receipts are applied either to
17
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
NON-PERFORMING ASSETS (CONTINUED)
the outstanding principal or recorded as interest income, depending on
management's assessment of ultimate collectibility of principal and interest.
Loans are returned to an accrual status when the borrower's ability to make
periodic principal and interest payments has returned to normal (i.e. - brought
current with respect to principal or interest or restructured) and the paying
capacity of the borrower and/or the underlying collateral is deemed sufficient
to cover principal and interest. Consumer loans, including residential mortgage
loans, are not automatically placed on non-accrual status when principal or
interest payments are 90 days past due, but; in most instances, are charged-off
when deemed uncollectible or after reaching 120 days past due.
Included in the loan portfolio are loans on non-accrual status of $2,700,000 and
$4,488,000 at December 31, 1996 and 1995. The significant decline in non-accrual
loans is a result of several factors: the payment of loans by borrowers, the
foreclosure and movement to other real estate owned for subsequent disposition,
and the sale of a group of loans. These activities were performed with minimal
loss to QNB. If interest had been accrued throughout the period, interest income
for the years ended December 31, 1996 and 1995, would have increased
approximately $265,000 and $320,000, respectively. The amount of interest income
on these loans included in net income in 1996 and 1995 was $50,000 and $220,000.
[GRAPH]
In the printed version there appears a Bar Chart depicting the following
information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Non-Performing Assets $10,328 $8,221 $6,599 $5,535 $4,260
There were no restructured loans as of December 31, 1996 or 1995, 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.
Other real estate owned totaled $1,395,000 at December 31, 1996 and $775,000 at
December 31, 1995. This real estate is recorded at the fair value of the
property less estimated costs to sell.
Loans not included in past due, non-accrual or restructured categories, but
where known information about possible credit problems causes management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms totaled $1,721,000 and $2,592,000 at December 31, 1996 and 1995,
respectively.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The determination of an appropriate level of the allowance for possible loan
losses is based upon an analysis of the risk inherent in QNB's loan portfolio.
Management uses various tools to assess the adequacy of the allowance for
possible loan losses. One tool is a model recommended by the Office of the
Comptroller of the Currency. This model 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.
QNB utilizes a risk weighting system that assigns a risk code to every
commercial loan. This risk weighting system is supplemented with a program that
encourages account officers to identify potentially deteriorating loan
situations. The officer analysis program is used to complement the on-going
analysis of the loan portfolio performed by the loan review officer. In
addition, QNB has a committee that meets quarterly to review the adequacy of the
allowance for possible loan losses based on the current and projected status of
all relevant factors pertaining to the loan portfolio.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for possible loan losses. They may require
additions to the allowance based upon their judgements about information
available to them at the time of examination.
During the first quarter of 1995, 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". Under this standard, 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 effective interest rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. The adoption
of SFAS Nos. 114 and 118 resulted in no additional provision for loan losses.
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114 and 118 totaled
$2,604,000 and $4,345,000, respectively, of which $1,288,000 and $3,733,000
related to loans with no valuation allowance and $1,316,000 and $612,000 related
to loans with corresponding valuation allowances of approximately $408,000 and
$179,000. Most of the loans identified as impaired are collateral-dependent.
Net charge-offs were $199,000 in 1996 compared with $650,000 in 1995 and
$797,000 in 1994. This level of charge-offs represents .13 percent of average
loans in 1996, compared with .43 percent and .53 percent in 1995 and 1994,
respectively. The improvement in the net charge-off level reflects QNB's loan
recovery efforts and the continued improvement in overall asset quality.
The allowance for possible loan losses was $2,585,000 at December 31, 1996,
which represents 1.62 percent of total loans, compared to $2,384,000 and 1.53
percent of total loans at December 31, 1995. While the allowance is allocated to
specific loans or loan categories, the total allowance is considered available
for losses in the entire loan portfolio. 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.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
LOAN PORTFOLIO
- ------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
Commercial and industrial ...... $ 22,973 $ 27,002 $ 24,599 $ 20,405 $ 18,245
Agricultural ................... 2,828 2,451 2,823 1,268 1,726
Construction ................... 3,640 6,641 5,253 6,019 4,199
Real estate-commercial* ........ 57,589 51,368 54,015 56,510 83,069
Real estate-residential* ....... 66,203 61,339 57,486 59,154 38,531
Consumer ....................... 6,477 7,538 10,208 9,830 10,050
- ------------------------------------------------------------------------------------------------------
Total loans .................. 159,710 156,339 154,384 153,186 155,820
Less unearned income ........... 432 382 391 422 470
- ------------------------------------------------------------------------------------------------------
Total loans, net of
unearned income ............ $159,278 $155,957 $153,993 $152,764 $155,350
======================================================================================================
* Reclassification of approximately $17,861,000 from real estate-commercial to
real estate-residential occurred in 1993.
LOAN MATURITIES AND INTEREST SENSITIVITY
- -----------------------------------------------------------------------------------
Under 1-5 Over
December 31, 1996 1 Year Years 5 Years Total
- -----------------------------------------------------------------------------------
Commercial and industrial .... $ 7,444 $11,581 $ 3,948 $ 22,973
Agricultural ................. 502 12 2,314 2,828
Construction ................. 3,631 9 __ 3,640
Real estate-commercial ....... 5,803 8,648 43,138 57,589
Real estate-residential ...... 9,925 18,406 37,872 66,203
Consumer ..................... 2,466 3,751 260 6,477
- -----------------------------------------------------------------------------------
Total ...................... $29,771 $42,407 $87,532 $159,710
===================================================================================
Demand loans, loans having no stated schedule of repayment and no stated
maturity, are included in under one year.
The following shows the amount of loans due after one year that have fixed,
variable or adjustable interest rates at December 31, 1996:
Loans with fixed predetermined interest rates $64,242
Loans with variable or adjustable interest rates $65,697
NON-PERFORMING ASSETS
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------
Loans past due 90 days or more not on non-accrual status
Commercial and industrial............................... __ $ 66 $ 5 __ $ 6
Construction............................................ __ __ 299 __ __
Real estate-commercial.................................. __ 107 100 $ 191 643
Real estate-residential................................. $ 162 96 313 253 230
Consumer................................................ 3 3 4 78 67
- ----------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing .... 165 272 721 522 946
Loans accounted for on a non-accrual basis
Commercial and industrial............................... 43 120 123 312 849
Construction............................................ __ 686 846 1,132 165
Real estate-commercial.................................. 1,790 2,588 1,157 2,097 4,474
Real estate-residential................................. 867 1,084 1,755 1,543 __
Consumer................................................ __ 10 24 11 23
- ----------------------------------------------------------------------------------------------------------------------
Total non-accrual loans............................... 2,700 4,488 3,905 5,095 5,511
Other real estate owned................................... 1,395 775 1,973 2,604 3,871
- ----------------------------------------------------------------------------------------------------------------------
Total non-performing assets........................... $4,260 $5,535 $6,599 $ 8,221 $10,328
======================================================================================================================
Total as a percent of total assets........................ 1.52% 2.01% 2.46% 3.20% 4.04%
19
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
ALLOWANCE FOR POSSIBLE LOAN LOSS ALLOCATION
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of period applicable to:
Commercial and industrial............ $ 115 14.4% $ 792 17.3% $ 749 15.9% $ 936 13.3% $ 696 11.7%
Agricultural......................... 13 1.8 13 1.6 12 1.8 11 .9 12 1.1
Construction......................... 34 2.3 43 4.2 56 3.4 53 3.9 198 2.7
Real estate-commercial............... 643 36.1 363 32.9 535 35.0 436 36.9 1,344 53.3
Real estate-residential.............. 378 41.4 547 39.2 289 37.3 273 38.6 230 24.7
Consumer............................. 39 4.0 44 4.8 36 6.6 97 6.4 247 6.5
Unallocated.......................... 1,363 582 347 415 201
- -----------------------------------------------------------------------------------------------------------------------------------
Total.............................. $2,585 100.0% $2,384 100.0% $2,024 100.0% $2,221 100.0% $2,928 100.0%
===================================================================================================================================
Gross loans represent loans before unamortized net loan fees. Percentage gross
loans lists the percentage of each loan type to total loans.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Allowance for possible loan losses:
Balance, January 1................................... $2,384 $2,024 $2,221 $2,928 $2,826
Charge-offs
Commercial and industrial.......................... 44 4 567 1,038 278
Real estate-commercial............................. 115 320 222 115 102
Real estate-residential............................ 52 325 62 82 48
Consumer........................................... 48 54 38 66 88
- -----------------------------------------------------------------------------------------------------------------------------
Total charge-offs.................................. 259 703 889 1,301 516
Recoveries
Commercial and industrial.......................... 35 12 55 106 6
Real estate-commercial............................. __ 10 11 __ __
Real estate-residential............................ 8 4 3 3 3
Consumer........................................... 17 27 23 15 16
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries................................... 60 53 92 124 25
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs...................................... (199) (650) (797) (1,177) (491)
Provision for possible loan losses................... 400 1,010 600 470 593
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31................................. $2,585 $2,384 $2,024 $ 2,221 $2,928
=============================================================================================================================
Total loans:
Average............................................ $155,175 $151,839 $151,726 $151,076 $156,982
Year-end........................................... 159,278 155,957 153,993 152,764 155,350
Ratios:
Net charge-offs to:
Average loans...................................... .13% .43% .53% .78% .31%
Loans at year-end.................................. .12 .42 .52 .77 .32
Allowance for possible loan losses................. 7.70 27.27 39.38 52.99 16.77
Provision for possible loan losses................. 49.75 64.36 132.83 250.43 82.80
Allowance for possible loan losses to:
Average loans...................................... 1.67% 1.57% 1.33% 1.47% 1.87%
Loans at year-end.................................. 1.62 1.53 1.31 1.45 1.88
20
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
DEPOSITS
QNB primarily attracts deposits from within its market area by offering various
deposit products, including demand deposits, NOW accounts, money market
accounts, savings accounts and certificates of deposit.
Total deposits increased 1.6 percent to $246,744,000 at December 31, 1996, from
$242,887,000 at year-end 1995. An analysis of the change in average deposits
provides a more meaningful measure of deposit change. Average total deposits
increased 1.1 percent in 1996 and 2.9 percent in 1995. Average
non-interest-bearing deposits increased 6.3 percent to $28,072,000 in 1996. This
followed a 4.3 percent increase in 1995. Non-interest-bearing deposits are an
important source of funds for QNB because they are low cost. Average NOW
accounts increased 4.3 percent in 1996 to $38,936,000 and 12.5 percent in 1995
to $37,335,000. The increase in NOW accounts is primarily the result of
obtaining the deposit relationship of a local school district in 1995 and the
impact of free NOW account promotions in both 1995 and 1996. Average time
deposits increased 3.5 percent in 1996 and 25.5 percent in 1995, while average
money market accounts decreased 10.1 percent and 28.2 percent for the same time
periods. The change in the mix of deposits from money market accounts to time
deposits started in 1994 as rates on time deposits began to increase and
substantially outperform bank money market products. The yield on QNB's money
market accounts was basically unchanged during 1996. Time deposits were more
sensitive to rising rates as financial institutions were more likely to increase
rates on these deposits as opposed to non-maturity deposits. In order to
generate deposit growth in 1997 it is likely that QNB will increase its rates on
its money market and NOW account products. Additional deposit growth will be
accomplished through time deposit promotions and the business development
program.
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 totaled $71,821,000 at December 31, 1996 and $71,898,000 at
December 31, 1995. These sources were adequate to meet seasonal deposit
withdrawals during 1996 and should be adequate to meet normal fluctuations in
loan demand and deposit withdrawals. The Bank will be considering membership in
the Federal Home Loan Bank during 1997. This would provide QNB with an
additional source of liquidity.
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 $491,000 to $12,459,000 at December 31, 1996. This
follows increases in 1995 and 1994 of $1,523,000 and $2,791,000, respectively.
After adjusting net income for non-cash transactions, operating activities
provided $3,453,000 in cash flow in 1996, compared to $3,307,000 in 1995.
Net cash used by investing activities of $5,595,000 in 1996 is primarily a
result of loan growth and an increase in Federal funds sold. Net activity in the
investment portfolio provided $2,305,000, while the sale of loans and other real
estate owned provided cash of $5,096,000 and $1,072,000, respectively. Net cash
used by investing activities of $5,657,000 in 1995 resulted largely from the
growth in the investment portfolio and the slight increase in loans outstanding.
Net usage from purchases, sales, maturities and calls of investment securities
was $9,471,000. Investing activities which provided cash during 1995 were the
sale of student loans, residential mortgage loans and other real estate owned
which provided cash of $2,626,000, $2,638,000 and $1,320,000, respectively. A
$5,493,000 decrease in Federal funds sold also provided cash in 1995.
Cash provided by financing activities of $1,651,000 in 1996 was a result of
growth in time deposits of $8,177,000. This offset withdrawals of money market
accounts of $5,006,000, a decrease in short-term borrowings of $1,424,000 and
the payment of $797,000 in common stock dividends. Growth in
non-interest-bearing deposits and
AVERAGE DEPOSITS BY MAJOR CLASSIFICATION
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate
- ------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits ........... $ 28,072 __ $ 26,416 __ $ 25,334 __
NOW accounts ............................ 38,936 1.81% 37,335 2.20% 33,197 1.87%
Money market accounts ................... 36,301 2.78 40,392 2.77 56,260 2.65
Savings ................................. 34,932 2.20 35,044 2.27 37,944 2.25
Time .................................... 89,208 5.36 84,340 5.19 70,582 4.12
Time deposits of $100,000 or more........ 14,633 5.88 15,986 6.04 9,388 4.63
- ------------------------------------------------------------------------------------------------------------
Total ............................... $242,082 3.36% $239,513 3.37% $232,705 2.71%
============================================================================================================
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Three months or less..................... $ 3,083 $ 2,815 $ 6,609
Over three months through six months..... 3,615 4,508 3,115
Over six months through twelve months.... 1,797 2,062 824
Over twelve months....................... 5,638 5,067 6,398
- ------------------------------------------------------------------------------------------------------------
Total................................ $14,133 $14,452 $16,946
============================================================================================================
21
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
LIQUIDITY (CONTINUED)
short-term borrowings of $3,692,000 and $2,562,000 was primarily responsible for
the cash provided from financing activities of $3,873,000 in 1995. A decline in
interest-bearing deposits, primarily money market accounts and savings accounts,
and the payment of dividends were financing activities which used cash in 1995.
An increase in NOW accounts and time deposits minimized the impact of the
decline in money market and savings accounts.
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 December 31, 1996 was
$22,775,000 or 8.12 percent of total assets, compared to shareholders' equity of
$20,866,000 or 7.56 percent at year-end December 31, 1995. At December 31, 1996,
shareholders' equity included a positive adjustment of $112,000 related to the
unrealized holding gains, net of taxes, on investment securities
available-for-sale, while shareholders' equity at December 31, 1995 included a
positive adjustment of $222,000. Without these adjustments shareholders' equity
to total assets would have been 8.08 percent and 7.48 percent at December 31,
1996 and 1995, respectively.
CAPITAL ANALYSIS
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Tier I
Shareholders' equity ............................. $ 22,775 $ 20,866
Net unrealized securities gains .................. (112) (222)
- ------------------------------------------------------------------------------
Total Tier I risk-based capital .................. 22,663 20,644
Tier II
Allowable portion of the allowance
for possible loan losses ....................... 2,160 2,125
- ------------------------------------------------------------------------------
Total risk-based capital ......................... $ 24,823 $ 22,769
==============================================================================
Risk-weighted assets ............................. $172,348 $169,701
==============================================================================
Capital Ratios
- ------------------------------------------------------------------------------
December 31, ..................................... 1996 1995
- ------------------------------------------------------------------------------
Tier I capital/risk-weighted assets .............. 13.15% 12.16%
Total risk-based capital/risk-weighted assets .... 14.40 13.42
Tier I capital/total assets (leverage ratio) ..... 8.14 7.48
Shareholders' equity averaged $21,653,000 during 1996, an increase of 8.6
percent compared to 1995. The ratio of average total equity to average total
assets improved to 7.89 percent for 1996, compared to 7.39 percent for 1995. The
increase in the equity to asset ratio is a function of significantly higher net
income, an increase in capital retention despite a 12.0 percent increase in the
cash dividend and slow asset growth.
The Corporation is subject to restrictions on the payment of dividends to its
stockholders pursuant to the Pennsylvania Business Corporation Law as amended
(the "BCL"). The BCL operates generally to preclude dividend payments if the
effect thereof would render the Corporation insolvent, as defined. As a
practical matter, the Corporation's payment of dividends is contingent upon its
ability to obtain funding in the form of dividends from the Bank. Payment of
dividends to the Corporation by the Bank is subject to the restrictions set
forth in the National Bank Act. Generally, the National Bank Act would permit
the Bank to declare dividends in 1997 of approximately $2,732,000, plus an
amount equal to the net profits of the Bank in 1997 up to the date of any such
dividend declaration.
QNB is 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 Tier II). Risk-based capital ratios are
expressed as a percentage of risk-weighted assets. Risk-weighted assets are
determined by assigning various weights to all assets and off-balance sheet
arrangements, such as letters of credit and loan commitments, based on
associated risk. Regulators have also adopted minimum Tier I leverage ratio
standards, which measure the ratio of Tier I capital to total assets.
[GRAPH]
In the printed version there appears a Bar Chart depicting the following
information:
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
Total risk based
capital/risk-
weighted assets 11.38% 12.23% 12.79% 13.42% 14.40%
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for total risk-based capital and 3.00 percent for leverage. Under the
requirements, QNB has a Tier I capital ratio of 13.15 percent and 12.16 percent,
a total risk-based ratio of 14.40 percent and 13.42 percent and a leverage ratio
of 8.14 percent and 7.48 percent at December 31, 1996 and 1995, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At December 31, 1996 and 1995 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
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 either 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 December 31, 1996, interest-earning assets scheduled to
mature, or likely to be called, repriced or repaid in one year were $91,221,000.
Interest sensitive liabilities scheduled to mature or reprice within one year
were $92,893,000. The one year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a negative $1,672,000 at December 31,
1996. The cumulative one-year gap equals (.64) 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.
During 1995, QNB began using 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 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 in 1997 is expected to increase compared with 1996 net interest
income. The projected increase in net interest income is primarily the result of
forecasted growth in total assets and a change in the composition of earning
assets, with the loan to earning assets ratio increasing. 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 exceed the most likely scenario. Conversely, if
interest rates are 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.
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.
INTEREST RATE SENSITIVITY
- ---------------------------------------------------------------------------------------------------------------------------------
Within 4 to 6 7 months 1 to 3 3 to 5 After
December 31, 1996 3 months months to 1 year years years 5 years Total
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Federal funds sold ..................... $ 6,480 __ __ __ __ __ $ 6,480
Investment securities .................. 5,761 $ 5,066 $ 4,829 $ 37,852 $ 15,411 $ 26,559 95,478
Loans .................................. 46,161 7,599 15,325 49,900 22,669 17,624 159,278
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets ............ 58,402 12,665 20,154 87,752 38,080 44,183 $261,236
Total cumulative assets ................ $58,402 $71,067 $ 91,221 $178,973 $217,053 $261,236
=================================================================================================================================
Liabilities
NOW, money market and savings deposits.. $ 5,421 $ 2,093 $ 12,052 $ 58,050 $ 14,042 $ 14,042 $105,700
Time deposits less than $100,000 ....... 23,107 15,141 17,909 36,387 2,316 18 94,878
Time deposits over $100,000 ............ 3,083 3,615 1,797 4,833 677 128 14,133
Short-term borrowings .................. 8,675 __ __ __ __ __ 8,675
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities ....... 40,286 20,849 31,758 99,270 17,035 14,188 $223,386
Total cumulative liabilities ........... $40,286 $61,135 $ 92,893 $192,163 $209,198 $223,386
=================================================================================================================================
Gap during period ...................... $18,116 $(8,184) $(11,604) $(11,518) $ 21,045 $ 29,995 $ 37,850
=================================================================================================================================
Cumulative gap ......................... $18,116 $ 9,932 $ (1,672) $(13,190) $ 7,855 $ 37,850
=================================================================================================================================
Cumulative gap/earning assets .......... 6.93% 3.80% (.64)% (5.05)% 3.01% 14.49%
=================================================================================================================================
Cumulative gap ratio ................... 1.45 1.16 .98 .93 1.04 1.17
=================================================================================================================================
23
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY
(TAX-EQUIVALENT BASIS)
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Interest Balance Rate Interest Balance Rate Interest
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing balances............... $ 26 2.35% $ 1 $ 24 3.10% $ 1 $ 82 2.65% $ 2
Federal funds sold ..................... 4,731 5.31 252 5,598 5.91 331 5,643 4.16 235
Investment securities
available-for-sale ................... 54,810 6.28 3,449 58,497 6.07 3,549 53,678 5.86 3,147
Investment securities held-to-maturity:
Taxable .............................. 33,035 6.46 2,140 29,419 6.61 1,946 23,132 6.09 1,408
Tax-exempt ........................... 10,531 7.30 771 8,126 7.46 606 7,217 8.02 579
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities ........ 98,376 6.45 6,360 96,042 6.35 6,101 84,027 6.11 5,134
Loans, net of unearned income .......... 155,175 8.79 13,671 151,839 9.01 13,676 151,726 8.50 12,895
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets ............... 258,308 7.83 20,284 253,503 7.93 20,109 241,478 7.56 18,266
Cash and due from banks ................ 9,011 8,497 8,148
Allowance for possible loan losses ..... (2,499) (2,232) (2,119)
Other assets ........................... 9,713 10,065 11,837
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets ....................... $274,533 7.37% $269,833 7.45% $259,344 7.04%
===================================================================================================================================
Liabilities and
Shareholders' Equity
Interest-bearing deposits
NOW accounts ........................... $ 38,936 1.81% 707 $ 37,335 2.20% 820 $ 33,197 1.87% 620
Money market deposit accounts .......... 36,301 2.78 1,011 40,392 2.77 1,119 56,260 2.65 1,493
Savings accounts ....................... 34,932 2.20 772 35,044 2.27 795 37,944 2.25 852
Time deposits .......................... 89,208 5.36 4,799 84,340 5.19 4,380 70,582 4.12 2,906
Time deposits of $100,000 or more ...... 14,633 5.88 863 15,986 6.04 966 9,388 4.63 435
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .... 214,010 3.80 8,152 213,097 3.79 8,080 207,371 3.04 6,306
Short-term borrowings .................. 8,317 3.13 261 7,955 3.23 257 5,225 2.93 153
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities . 222,327 3.77 8,413 221,052 3.77 8,337 212,596 3.04 6,459
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing deposits .......... 28,072 26,416 25,334
Other liabilities ...................... 2,481 2,432 2,434
Shareholders' equity ................... 21,653 19,933 18,980
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity............... $274,533 3.06% $ 269,833 3.09% $259,344 2.49%
===================================================================================================================================
Net interest rate spread ............... 4.06% 4.16% 4.52%
===================================================================================================================================
Margin/net interest income ............. 4.58% $11,871 4.64% $11,772 4.89% $11,807
===================================================================================================================================
Tax-exempt securities and loans were adjusted to a tax-equivalent basis and are
based on the marginal Federal corporate tax rate of 34 percent. Non-accrual
loans are included in earning assets.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS QNB Corp. and Subsidiary
SELECTED FINANCIAL AND OTHER DATA
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
Income and Expense
Interest income...................................... $ 19,816 $ 19,716 $ 17,865 $ 17,663 $ 19,127
Interest expense..................................... 8,413 8,337 6,459 6,849 8,787
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income................................. 11,403 11,379 11,406 10,814 10,340
Provision for possible loan losses................... 400 1,010 600 470 593
Non-interest income.................................. 1,850 1,393 1,598 2,484 2,364
Non-interest expense................................. 9,004 9,539 9,719 10,545 9,184
- -----------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle ......... 3,849 2,223 2,685 2,283 2,927
Provision for income taxes........................... 1,048 536 681 517 566
- -----------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle............................ 2,801 1,687 2,004 1,766 2,361
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change
in tax accounting method........................... __ __ __ 52 __
- -----------------------------------------------------------------------------------------------------------------------------
Net income........................................... $ 2,801 $ 1,687 $ 2,004 $ 1,818 $ 2,361
=============================================================================================================================
Per Share Data
Net income before cumulative effect of
change in accounting principle..................... $ 1.97 $ 1.19 $ 1.41 $ 1.25 $ 1.67
Cumulative effect of change
in tax accounting method........................... __ __ __ .03 __
Net income........................................... 1.97 1.19 1.41 1.28 1.67
Book value........................................... 15.97 14.66 12.53 13.31 12.14
Cash dividends....................................... .56 .50 .50 .50 .50
Average common shares outstanding.................... 1,424,112 1,421,378 1,417,395 1,415,828 1,414,160
Balance Sheet at Year-end
Loans, net of unearned income........................ $ 159,278 $ 155,957 $153,993 $ 152,764 $ 155,350
Investment securities available-for-sale............. 52,779 55,380 49,838 54,366 __
Investment securities held-to-maturity............... 42,699 42,515 35,636 27,894 76,375
Other earning assets................................. 6,488 2,915 8,439 5,395 926
Total assets......................................... 280,447 276,049 268,260 257,062 255,380
Deposits............................................. 246,744 242,887 240,896 231,125 231,185
Other interest-bearing liabilities................... 8,675 10,099 7,537 5,179 4,354
Shareholders' equity................................. 22,775 20,866 17,784 18,859 17,176
Selected Financial Ratios
Net interest margin.................................. 4.58% 4.64% 4.89% 4.79% 4.68%
Net income as a percentage of:
Average total assets............................... 1.02 .63 .77 .73 .97
Average shareholders' equity....................... 12.94 8.46 10.56 10.06 14.05
Average shareholders' equity
to average total assets ........................... 7.89 7.39 7.32 7.22 6.88
Dividend payout ratio................................ 28.47 42.13 35.36 38.95 29.94
25
CONSOLIDATED BALANCE SHEETS QNB Corp. and Subsidiary
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks............................................................................ $ 12,459 $ 12,950
Federal funds sold................................................................................. 6,480 2,907
Investment securities
available-for-sale............................................................................. 52,779 55,380
held-to-maturity (market value $42,760 and $42,861)............................................ 42,699 42,515
Total loans, net of unearned income of $432 and $382............................................... 159,278 155,957
Allowance for possible loan losses............................................................. (2,585) (2,384)
- ------------------------------------------------------------------------------------------------------------------------------
Net loans................................................................................. 156,693 153,573
Premises and equipment, net........................................................................ 4,358 4,536
Other real estate owned............................................................................ 1,395 775
Accrued interest receivable ....................................................................... 1,689 1,943
Other assets....................................................................................... 1,895 1,470
- ------------------------------------------------------------------------------------------------------------------------------
Total assets....................................................................................... $280,447 $276,049
==============================================================================================================================
Liabilities
Deposits
Demand, non-interest-bearing................................................................... $ 32,033 $ 31,882
NOW accounts................................................................................... 39,566 39,477
Money market accounts.......................................................................... 31,847 36,853
Savings........................................................................................ 34,287 33,841
Time .......................................................................................... 94,878 86,382
Time over $100,000............................................................................. 14,133 14,452
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits............................................................................ 246,744 242,887
Short-term borrowings.............................................................................. 8,675 10,099
Accrued interest payable........................................................................... 1,012 1,040
Other liabilities.................................................................................. 1,241 1,157
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities.................................................................................. 257,672 255,183
- ------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued 1,425,951 shares and 1,423,838 shares...................... 1,782 1,780
Surplus............................................................................................ 4,296 4,283
Retained earnings.................................................................................. 16,585 14,581
Unrealized holding gains, net of taxes,
on investment securities available-for-sale.................................................... 112 222
- ------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity......................................................................... 22,775 20,866
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity......................................................... $280,447 $276,049
==============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
26
CONSOLIDATED STATEMENTS OF INCOME QNB Corp. and Subsidiary
(in thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
Interest Income
Interest and fees on loans..................................................... $13,470 $13,492 $12,691
Interest and dividends on investment securities available-for-sale............. 3,445 3,547 3,149
Interest and dividends on investment securities held-to-maturity:
Taxable.................................................................... 2,140 1,946 1,408
Tax-exempt................................................................. 509 400 382
Interest on Federal funds sold................................................. 252 331 235
- ------------------------------------------------------------------------------------------------------------------
Total interest income................................................. 19,816 19,716 17,865
- ------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits
NOW accounts............................................................... 707 820 620
Money market accounts...................................................... 1,011 1,119 1,493
Savings.................................................................... 772 795 852
Time ...................................................................... 4,799 4,380 2,906
Time over $100,000......................................................... 863 966 435
Interest on short-term borrowings.............................................. 261 257 153
- ------------------------------------------------------------------------------------------------------------------
Total interest expense................................................ 8,413 8,337 6,459
- ------------------------------------------------------------------------------------------------------------------
Net interest income................................................... 11,403 11,379 11,406
Provision for possible loan losses............................................. 400 1,010 600
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses.......... 11,003 10,369 10,806
- ------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Fees for services to customers................................................. 1,095 927 866
Mortgage servicing fees........................................................ 208 229 241
Net gain (loss) on investment securities....................................... 102 (79) 215
Net gain on sale of loans...................................................... 89 108 __
Other operating income......................................................... 356 208 276
- ------------------------------------------------------------------------------------------------------------------
Total non-interest income............................................. 1,850 1,393 1,598
- ------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits................................................. 5,143 5,343 5,307
Net occupancy expense.......................................................... 687 675 693
Furniture and equipment expense................................................ 697 721 764
Marketing expense.............................................................. 287 247 256
Supplies expense............................................................... 209 222 226
Professional fees.............................................................. 160 263 249
Insurance expense.............................................................. 104 404 688
Other real estate owned expense................................................ 253 356 186
Other expense.................................................................. 1,464 1,308 1,350
- ------------------------------------------------------------------------------------------------------------------
Total non-interest expense............................................ 9,004 9,539 9,719
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes ............................................... 3,849 2,223 2,685
Provision for income taxes..................................................... 1,048 536 681
- ------------------------------------------------------------------------------------------------------------------
Net Income................................................................. $ 2,801 $ 1,687 $ 2,004
==================================================================================================================
Net Income Per Share....................................................... $ 1.97 $ 1.19 $ 1.41
==================================================================================================================
Average Common Shares Outstanding..........................................1,424,112 1,421,378 1,417,395
==================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
27
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY QNB Corp. and Subsidiary
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized
Number Common Retained Treasury Holding
(in thousands, except share data) of Shares Stock Surplus Earnings Stock Gain (Loss) Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 ..................... 1,417,112 $1,771 $4,237 $12,310 __ $ 541 $18,859
Net income ..................................... __ __ __ 2,004 __ __ 2,004
Cash dividends paid
($.50 per share) ............................. __ __ __ (709) __ __ (709)
Treasury stock acquired ........................ (800) __ __ __ $(15) __ (15)
Stock issue - 401(k) plan ...................... 568 __ 5 __ 6 __ 11
Stock issued for options exercised ............. 2,820 3 16 __ 9 __ 28
Change in net unrealized holding
gains (losses), net of taxes,
on investment securities available-for-sale.. __ __ __ __ __ (2,394) (2,394)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ..................... 1,419,700 1,774 4,258 13,605 __ (1,853) 17,784
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ..................................... __ __ __ 1,687 __ __ 1,687
Cash dividends paid
($.50 per share) ............................. __ __ __ (711) __ __ (711)
Stock issue - 401(k) plan ...................... 462 1 10 __ __ __ 11
Stock issued for options exercised ............. 3,676 5 15 __ __ __ 20
Change in net unrealized holding
gains (losses), net of taxes,
on investment securities available-for-sale.. __ __ __ __ __ 2,075 2,075
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 ..................... 1,423,838 1,780 4,283 14,581 __ 222 20,866
- -----------------------------------------------------------------------------------------------------------------------------------
Net income ..................................... __ __ __ 2,801 __ __ 2,801
Cash dividends paid
($.56 per share) ............................. __ __ __ (797) __ __ (797)
Stock issue - 401(k) plan ...................... 435 __ 14 __ __ __ 14
Stock issued for options exercised ............. 1,678 2 (1) __ __ __ 1
Change in net unrealized holding
gains (losses), net of taxes,
on investment securities available-for-sale.. __ __ __ __ __ (110) (110)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 ..................... 1,425,951 $1,782 $4,296 $16,585 __ $ 112 $ 22,775
===================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
28
CONSOLIDATED STATEMENTS OF CASH FLOWS QNB Corp. and Subsidiary
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income................................................................................ $ 2,801 $ 1,687 $ 2,004
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses...................................................... 400 1,010 600
Depreciation and amortization........................................................... 521 602 636
Securities (gains) losses .............................................................. (102) 79 (215)
Net gain on sale of loans............................................................... (89) (108) __
Gain on disposal of premises and equipment.............................................. __ (10) __
Writedowns, net of losses (gains) on sales of other real estate owned................... (67) 149 (82)
Deferred income tax provision........................................................... (69) 21 169
Change in income taxes payable.......................................................... (183) 146 (132)
Net decrease (increase) in interest and dividends receivable............................ 254 (261) (114)
Net amortization of premiums and discounts.............................................. 48 115 258
Net (decrease) increase in interest payable............................................. (28) (42) 180
Increase in other assets ............................................................... (196) (198) (340)
Increase in other liabilities........................................................... 163 117 96
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities............................................... 3,453 3,307 3,060
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities and calls of investment securities
available-for-sale...................................................................... 16,170 13,026 13,208
held-to-maturity........................................................................ 7,531 2,928 5,055
Proceeds from sales of investment securities
available-for-sale...................................................................... 18,526 8,888 16,758
Purchase of investment securities
available-for-sale...................................................................... (32,233) (24,501) (29,027)
held-to-maturity........................................................................ (7,689) (9,812) (12,880)
Net (increase) decrease in Federal funds sold............................................. (3,573) 5,493 (3,014)
Proceeds from sales of student loans...................................................... 1,527 2,626 __
Proceeds from sales of residential mortgages.............................................. 3,569 2,638 10,934
Originations of residential mortgages held-for-sale....................................... (3,069) (3,859) __
Net increase in loans..................................................................... (7,083) (4,182) (13,683)
Net purchases of premises and equipment................................................... (343) (222) (804)
Proceeds from the sale of other real estate owned......................................... 1,072 1,320 1,740
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities................................................... (5,595) (5,657) (11,713)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase in non-interest-bearing deposits............................................. 151 3,692 1,119
Net increase (decrease) in interest-bearing deposits...................................... 3,706 (1,701) 8,652
Net (decrease) increase in short-term borrowings.......................................... (1,424) 2,562 2,358
Cash dividends paid....................................................................... (797) (711) (709)
Proceeds from issuance of common stock.................................................... 15 31 39
Acquisition of treasury stock............................................................. __ __ (15)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities............................................... 1,651 3,873 11,444
- ------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents........................................ (491) 1,523 2,791
Cash and cash equivalents at beginning of year.......................................... 12,950 11,427 8,636
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year................................................ $ 12,459 $ 12,950 $11,427
==============================================================================================================================
Supplemental Cash Flow Disclosures
Interest paid............................................................................. $ 8,441 $ 8,379 $ 6,279
Income taxes paid......................................................................... 1,250 370 655
Non-Cash Transactions
Transfer of loans to other real estate owned............................................ 1,625 271 723
Change in net unrealized holding gains (losses), net of taxes, on investment securities. (110) 2,075 (2,394)
The accompanying notes are an integral part of the consolidated financial
statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------------------------------------------------------------------------------
QNB Corp. through its subsidiary bank, The Quakertown National Bank, provides a
full range of banking services to individual and corporate customers through its
branch banking system located in Upper Bucks, Northern Montgomery and Southern
Lehigh Counties in Pennsylvania. The Quakertown National Bank is subject to
competition from other financial institutions and other financial services
companies with respect to these services and customers. QNB Corp. is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by such regulatory authorities.
Basis of Financial Statement Presentation
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of QNB Corp. and its
wholly owned subsidiary, The Quakertown National Bank (QNB). Such statements
have been prepared in accordance with generally accepted accounting principles
and general practice within the banking industry. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Tabular information other than share data is presented in thousands
of dollars. Certain previously reported amounts have been reclassified to
conform to current presentation standards. These reclassifications had no effect
on net income.
Use of Estimates
- --------------------------------------------------------------------------------
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from such estimates.
Investment Securities
- --------------------------------------------------------------------------------
Investment securities that QNB has the positive intent and ability to hold to
maturity are classified as held-to-maturity securities and reported at amortized
cost. Debt and equity securities that are bought and held principally for the
purpose of selling in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as either held-to-maturity securities
or trading securities are classified as available-for-sale securities and
reported at fair value, with unrealized gains and losses, net of tax, excluded
from earnings and reported as a separate component of shareholders' equity.
Management determines the appropriate classification of securities at the time
of purchase.
Available-for-sale securities include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in market interest rates and related changes in the
securities' prepayment risk or to meet liquidity needs.
Premiums and discounts on debt securities are recognized in interest income
using a constant yield method. Gains and losses on sales of investment
securities are computed on the specific identification method and included in
non-interest income.
Loans
- --------------------------------------------------------------------------------
Loans are stated at the principal amount outstanding, net of deferred loan fees
and costs. Interest income is accrued on the principal amount outstanding. Loan
origination fees and related direct costs are deferred and amortized to income
over the term of the respective loan and loan commitment period as a yield
adjustment.
Non-accrual loans are those on which the accrual of interest has ceased.
Commercial loans are placed on non-accrual status immediately if, in the opinion
of management, collection is doubtful, or when principal or interest is past due
90 days or more and collateral is insufficient to cover principal and interest.
Interest accrued, but not collected at the date a loan is placed on non-accrual
status, is reversed and charged against interest income. Subsequent cash
receipts are applied either to the outstanding principal or recorded as interest
income, depending on management's assessment of ultimate collectibility of
principal and interest. Loans are returned to an accrual status when the
borrower's ability to make periodic principal and interest payments has returned
to normal (i.e. - brought current with respect to principal or interest or
restructured) and the paying capacity of the borrower and/or the underlying
collateral is deemed sufficient to cover principal and interest. Consumer loans,
including residential mortgage loans, are not automatically placed on
non-accrual status when principal or interest payments are 90 days past due,
but; in most instances, are charged-off when deemed uncollectible or after
reaching 120 days past due.
Residential mortgages held-for-sale are carried at the lower of aggregate cost
or market value. Gains and losses on residential mortgages held-for-sale are
included in non-interest income.
Effective January 1, 1996 QNB adopted Statement of Financial Accounting
Standards No. 122 (SFAS No. 122), "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires the recognition of separate assets relating to the rights
to service mortgage loans based on their fair value if it is practicable to
estimate the value. Additionally, the fair value of servicing assets is required
to be measured at each reporting date to determine any potential impairment.
SFAS No. 122 applies to transactions entered into in 1996, therefore, there is
no cumulative effect adjustment upon adoption of this statement. SFAS No. 122
did not have a significant effect on the financial position, equity or results
of operations of QNB.
Allowance for Possible Loan Losses
- --------------------------------------------------------------------------------
The provision for possible loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and foreseeable risk characteristics of the existing loan portfolio.
Management's judgement is based on the evaluation of individual loans, past
experience, the assessment of current economic conditions, and other relevant
factors. Loan losses are charged directly against the allowance for loan losses
and recoveries on previously charged-off loans are added to the allowance.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
Significant estimates are made by management in determining the allowance for
possible loan losses. Consideration is given to a variety of factors in
establishing these estimates including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows, and other relevant factors. Since the allowance for
possible loan losses is dependent, to a great extent, on conditions that may be
beyond QNB's control, it is at least reasonably possible that management's
estimates of the allowance for possible loan losses, and actual results could
differ in the near term.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for possible loan losses. They may require
additions to the allowance based upon their judgements about information
available to them at the time of examination.
QNB adopted Statements of Financial Accounting Standards No. 114 and No. 118
(SFAS No. 114 and No. 118), "Accounting by Creditors for Impairment of a Loan"
and amendment thereto effective January 1, 1995. Under the requirements of these
Statements, recognition of impairment in the performance of a loan is required
when it is probable that all amounts, including both principal and interest,
will not be collected in accordance with the loan agreement. Impaired loans are
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Impairment criteria are applied to the loan portfolio
exclusive of smaller homogeneous loans such as residential mortgage and consumer
loans which are evaluated collectively for impairment. The adoption of SFAS Nos.
114 and 118 resulted in no additional provision for loan losses.
Premises and Equipment
- --------------------------------------------------------------------------------
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated principally on an
accelerated or straight-line basis over the estimated useful lives of the assets
as follows: buildings--10 to 40 years, and equipment--3 to 10 years, or, in the
case of leasehold improvements, over the term of the lease. Expenditures for
maintenance and repairs are charged to operations as incurred. Gains or losses
upon disposition are reflected in earnings as realized.
Other Real Estate Owned
- --------------------------------------------------------------------------------
Other real estate owned is comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Other real estate
owned is recorded at the lower of the carrying value of the loan or the fair
value of the property. Loan losses arising from the acquisition of such
properties are charged against the allowance for possible loan losses. After
acquisition, such properties are carried at the lower of cost or fair value
minus estimated costs to sell. Holding expenses related to the operation and
maintenance of properties are expensed as incurred. Gains and losses upon
disposition are reflected in earnings as realized.
Income Taxes
- --------------------------------------------------------------------------------
QNB Corp. and its subsidiary file a consolidated Federal income tax return and
the amount of income tax expense or benefit is computed and allocated on a
separate return basis. To provide for income taxes, QNB uses the asset and
liability method under which deferred tax assets and liabilities are recognized
for the future tax consequences attributable to the difference between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect of a change in tax rates on deferred tax assets and liabilities is
recognized in income in the period which includes the enactment date.
Net Income Per Share
- --------------------------------------------------------------------------------
Net income per share is calculated on the basis of the weighted average number
of shares outstanding, after giving retroactive effect to the four-for-one stock
split paid on July 15, 1994. Fully diluted per common share data is not
presented because there are no material differences between those amounts and
the primary per share data as presented.
Statement of Cash Flows
- --------------------------------------------------------------------------------
Cash and cash equivalents for purposes of this statement consist of cash and due
from banks.
NOTE 2 - STOCK SPLIT
On June 7, 1994, QNB declared a four-for-one stock split, which was distributed
July 15, 1994, to shareholders of record as of July 1, 1994. The number of
shares and per share amounts have been restated to reflect this event.
NOTE 3 - CASH AND DUE FROM BANKS
Included in cash and due from banks are reserves in the form of deposits with
the Federal Reserve Bank of $509,000 and $536,000 to satisfy federal regulatory
requirements as of December 31, 1996 and 1995.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 4 - INVESTMENT SECURITIES
Available-For-Sale
The amortized cost and estimated fair values of investment securities
available-for-sale at December 31, 1996 and 1995 were as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
Gross Gross Gross Gross
Aggregate unrealized unrealized Aggregate unrealized unrealized
fair holding holding Amortized fair holding holding Amortized
value gains losses cost value gains losses cost
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury..................... $ 9,555 $ 42 $ 13 $ 9,526 $12,732 $139 $ 2 $12,595
U.S. Government agencies.......... 39,422 149 197 39,470 40,415 195 156 40,376
Mortgage-backed securities........ 3,045 1 39 3,083 1,859 12 25 1,872
Equity and other debt securities.. 757 227 __ 530 374 173 __ 201
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available-for-sale.............. $52,779 $ 419 $ 249 $52,609 $55,380 $519 $183 $55,044
===================================================================================================================================
The amortized cost and estimated fair value of debt securities
available-for-sale by contractual maturity at December 31, 1996 are shown in the
following table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Mortgage-backed securities are shown
separately due to the amortization and prepayment of principal occurring
throughout the life of these instruments.
- -------------------------------------------------------------------------------
Aggregate
fair Amortized
December 31, 1996 value cost
- -------------------------------------------------------------------------------
Due in one year or less......................... $ 4,029 $ 4,015
Due after one year through five years........... 32,447 32,583
Due after five years through ten years.......... 12,553 12,448
Due after ten years............................. __ __
Mortgage-backed securities...................... 3,045 3,083
- -------------------------------------------------------------------------------
Total investment securities available-for-sale . $52,074 $52,129
===============================================================================
Proceeds from sales of investment securities available-for-sale are as follows:
- -------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------
Proceeds..................................... $18,526 $ 8,888 $16,758
Gross gains.................................. 122 1 238
Gross losses................................. 20 88 23
Held-To-Maturity
The amortized cost and estimated fair values of investment securities
held-to-maturity at December 31, 1996 and 1995 were as follows:
- ------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 1995
Gross Gross Gross Gross
unrealized unrealized Aggregate unrealized unrealized Aggregate
Amortized holding holding fair Amortized holding holding fair
cost gains losses value cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury.................. __ __ __ __ $ 2,006 $ 23 __ $ 2,029
State and municipal securities. $10,563 $136 $ 16 $10,683 9,531 201 $ 1 9,731
Mortgage-backed securities..... 32,058 129 188 31,999 30,900 254 131 31,023
Equity securities.............. 78 __ __ 78 78 __ __ 78
- ------------------------------------------------------------------------------------------------------------------------------
Total investment securities
held-to-maturity............. $42,699 $265 $204 $42,760 $42,515 $478 $132 $42,861
==============================================================================================================================
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
The amortized cost and estimated fair values of debt securities held-to-maturity
by contractual maturity at December 31, 1996 are shown in the following table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
Aggregate
Amortized fair
December 31, 1996 cost value
- --------------------------------------------------------------------------------
Due in one year or less..................... -- --
Due after one year through five years....... $ 1,501 $ 1,521
Due after five years through ten years...... 9,062 9,162
Due after ten years......................... -- --
Mortgage-backed securities.................. 32,058 31,999
- --------------------------------------------------------------------------------
Total investment securities held-to-maturity $42,621 $42,682
================================================================================
There were no sales of investment securities classified as held-to-maturity
during 1996, 1995 or 1994.
NOTE 5 - LOANS
- -------------------------------------------------------------------------------
December 31, 1996 1995
- -------------------------------------------------------------------------------
Commercial and industrial ............................. $ 22,973 $ 27,002
Agricultural .......................................... 2,828 2,451
Construction .......................................... 3,640 6,641
Real estate-commercial ................................ 57,589 51,368
Real estate-residential ............................... 66,203 61,339
Consumer .............................................. 6,477 7,538
- -------------------------------------------------------------------------------
Total loans ........................................... 159,710 156,339
Less unearned income .................................. 432 382
- -------------------------------------------------------------------------------
Total loans, net of unearned income ................... $159,278 $155,957
===============================================================================
Real estate commercial loans include all loans collateralized at least in part
by commercial real estate. These loans may not be for the expressed purpose of
conducting commercial real estate transactions.
Included in real estate residential loans at December 31, 1996 and 1995, are
$103,000 and $661,000 of residential mortgage loans held-for-sale.
At December 31, 1996 and 1995, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS Nos. 114 and 118 totaled
$2,604,000 and $4,345,000, respectively, of which $1,288,000 and $3,733,000
related to loans with no valuation allowance and $1,316,000 and $612,000 related
to loans with a corresponding valuation allowance of approximately $408,000 and
$179,000. Most of the loans identified as impaired are collateral-dependent. For
the years ended December 31, 1996 and 1995, the average recorded investment in
impaired loans was approximately $4,288,000 and $3,676,000. QNB recognized
$50,000 and $220,000 of interest income on these loans in 1996 and 1995.
Included within the loan portfolio are loans on non-accrual status of $2,700,000
and $4,488,000 at December 31, 1996 and 1995, respectively. If interest had been
accrued throughout the period, interest income for the years ended December 31,
1996, 1995 and 1994, would have increased approximately $265,000, $320,000 and
$254,000, respectively. The amount of interest income on these loans that was
included in net income in 1996, 1995 and 1994 was $50,000, $220,000 and
$182,000, respectively.
QNB generally lends in its trade area which is comprised of Quakertown and
surrounding communities. To a large extent QNB makes loans collateralized at
least in part by real estate. Its lending activities could be affected by
changes in the general economy, the regional economy, or real estate values.
NOTE 6 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is shown below:
- --------------------------------------------------------------------------------
December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Balance at beginning of year ............ $ 2,384 $ 2,024 $ 2,221
- --------------------------------------------------------------------------------
Charge-offs ............................. (259) (703) (889)
Recoveries .............................. 60 53 92
- --------------------------------------------------------------------------------
Net charge-offs ......................... (199) (650) (797)
Provision for possible loan losses ...... 400 1,010 600
- --------------------------------------------------------------------------------
Balance at end of year .................. $ 2,585 $ 2,384 $ 2,024
================================================================================
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized below:
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Land and buildings ......................... $ 4,835 $ 4,817
Furniture and equipment .................... 4,658 4,362
Leasehold improvements ..................... 469 469
- --------------------------------------------------------------------------------
Book value ................................. 9,962 9,648
Accumulated depreciation
and amortization ........................ (5,604) (5,112)
- --------------------------------------------------------------------------------
Net book value ............................. $ 4,358 $ 4,536
================================================================================
Depreciation and amortization expense on premises and equipment amounted to
$521,000, $602,000 and $636,000, for the years ended December 31, 1996, 1995 and
1994, respectively.
Rental expense on operating leases amounted to approximately $131,000, $133,000
and $147,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Most leases have options for renewal. Required minimum annual rentals due on
non-cancelable leases expiring after one year approximate $266,000 in the
aggregate at December 31, 1996. Future minimum annual rental payments due on
non-cancelable leases for each of the years 1997 through 2001 are approximately
$105,000, $63,000, $52,000, $27,000 and $19,000, respectively.
NOTE 8 - TIME DEPOSITS
The aggregate amount of time deposits including deposits in denominations of
$100,000 or more was $109,011,000 and $100,834,000 at December 31, 1996 and
1995, respectively. The scheduled maturities of time deposits as of December 31,
1996 for the years 1997 through 2001 and thereafter are approximately
$62,524,000, $33,270,000, $10,077,000, $2,910,000, $83,000 and $147,000,
respectively.
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 9 - SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Securities
Sold under Other
Agreements Short-term
December 31, to Repurchase(a) Borrowings(b)
- --------------------------------------------------------------------------------
1996
Balance ................................... $ 8,156 $ 519
Maximum indebtedness at any month end ..... 13,118 600
Daily average indebtedness outstanding .... 7,832 485
Average rate paid for the year ............ 3.01% 5.19%
Average rate on period-end borrowings ..... 3.01 5.15
- --------------------------------------------------------------------------------
1995
Balance ................................... $ 9,896 $ 203
Maximum indebtedness at any month end ..... 11,328 600
Daily average indebtedness outstanding .... 7,417 538
Average rate paid for the year ............ 3.06% 5.61%
Average rate on period-end borrowings ..... 3.01 5.15
================================================================================
(a) Securities sold under agreements to repurchase mature within 30 days. The
repurchase agreements were collateralized by U.S. Treasury and U.S. Government
agency securities with an amortized cost of $9,831,000 and $11,162,000 and a
fair value of $9,821,000 and $11,171,000 at December 31, 1996 and 1995,
respectively.
(b) Other short-term borrowings include Treasury tax and loan notes and Federal
Reserve borrowings.
NOTE 10 - INCOME TAXES
The components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Federal income taxes
currently payable ............ $1,117 $ 515 $ 512
Deferred income taxes .......... (69) 21 169
- --------------------------------------------------------------------------------
Net provision .................. $1,048 $ 536 $ 681
================================================================================
At December 31, 1996, 1995 and 1994, the tax effects of temporary differences
that represent the significant portion of deferred tax assets and liabilities
are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets
Allowance for possible loan losses .......... $ 637 $ 569 $ 446
Other real estate owned reserves ............ 21 22 126
Deferred compensation ....................... 143 149 154
Deferred loan fees .......................... 40 20 44
Net unrealized holding losses on
investment securities
available-for-sale ................ __ __ 954
Other ....................................... __ 6 __
- --------------------------------------------------------------------------------
Total deferred tax assets ........... 841 766 1,724
Deferred tax liabilities
Net unrealized holding gains on
investment securities
available-for-sale ................ 58 114 __
Other ....................................... 51 45 28
- --------------------------------------------------------------------------------
Total deferred tax liabilities ...... 109 159 28
- --------------------------------------------------------------------------------
Net deferred tax asset ...................... $ 732 $ 607 $1,696
================================================================================
The realizability of deferred tax assets is dependent upon a variety of factors,
including the generation of future taxable income, the existence of taxes paid
and recoverable, the reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management believes it is more
likely than not that QNB will realize the benefits of these deferred tax assets.
The net deferred tax asset is included in other assets on the consolidated
balance sheet.
A reconciliation between the statutory and effective tax rate for net income was
as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Provision at statutory rate ........ $1,309 $ 756 $ 913
Tax-exempt interest income ......... (270) (229) (242)
Other .............................. 9 9 10
- --------------------------------------------------------------------------------
Total provision .................... $1,048 $ 536 $ 681
================================================================================
NOTE 11 - EMPLOYEE BENEFIT PLANS
QNB maintains a money purchase defined contribution plan which covers all
employees who meet the age and service requirements. QNB makes contributions to
the money purchase plan equivalent to 5 percent of total compensation (as
defined by the plan). QNB contributed and expensed $187,595, $174,393 and
$178,225 to this plan in 1996, 1995 and 1994, respectively. QNB also has a
401(k) profit sharing plan pursuant to the provisions of 401(k) of the Internal
Revenue Code. The plan covers substantially all employees who meet the age and
service requirements. The 401(k) plan provides for elective employee
contributions up to 9 percent of compensation and a matching company
contribution limited to 3 percent. QNB makes contributions to the profit sharing
plan as directed by its Board of Directors. For 1996, 1995 and 1994, QNB
contributed and expensed $100,792, $100,195 and $102,686, respectively, to the
401(k) profit sharing plan.
At QNB's annual meeting of Shareholders held on May 7, 1996, the Employee Stock
Purchase Plan (the "Plan") was approved by the shareholders. The Plan offers
eligible employees an opportunity to purchase from the Corporation shares of QNB
Corp. Common Stock at a 5 percent discount from fair market value (as defined by
the plan). The Plan authorizes the issuance of 25,000 shares. The initial
offering period of the Plan commenced on December 1, 1996 and as such no shares
were issued under the Plan as of December 31, 1996.
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 12 - STOCK OPTION PLAN
QNB sponsors a Stock Option Plan (the "Plan") administered by a committee which
consists of three or more members of QNB's Board of Directors. The Plan provides
to key employees the granting of either (i) Non-Qualified Stock Options (NQSOs)
or (ii) Incentive Stock Options (ISOs). The exercise price of an option is the
fair market value of QNB's common stock at the date of grant. The plan
authorizes the issuance of 82,000 shares. ISOs expire 5 years from the date of
grant. Changes in total options outstanding during 1996, 1995 and 1994, were as
follows:
- --------------------------------------------------------------------------------
Number Exercise Price Average
of Options per Option Exercise Price
- --------------------------------------------------------------------------------
December 31, 1993 .......... 22,200 $ 16.38 - $17.63 $ 16.99
ISOs Exercised ..... (8,400) 16.38 - 19.50 17.10
ISOs Granted ....... 9,400 19.50 19.50
- --------------------------------------------------------------------------------
December 31, 1994 .......... 23,200 16.50 - 19.50 17.96
ISOs Exercised ..... (9,440) 16.50 - 21.00 18.00
ISOs Granted ....... 9,200 21.00 21.00
- --------------------------------------------------------------------------------
December 31, 1995 .......... 22,960 16.88 - 21.00 19.17
ISOs Exercised ..... (3,410) 16.88 - 17.63 16.89
ISOs Granted ....... 9,200 29.50 29.50
- --------------------------------------------------------------------------------
December 31, 1996 .......... 28,750 $ 17.63 - $29.50 $ 22.75
================================================================================
The following table summarizes information about stock options outstanding at
December 31, 1996:
Exercisable
-------------------------------------------
Average
Exercise Price Range Options Average Life(1) Exercise Price
- --------------------------------------------------------------------------------
$ 17.63 - $ 19.50 11,750 1.56 $18.61
21.00 - 29.50 17,000 3.59 25.60
- --------------------------------------------------------------------------------
Total 28,750 2.76 $22.74
================================================================================
(1) Average contractual life remaining in years
Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting
for Stock-Based Compensation," became effective January 1, 1996. SFAS No. 123
provides an alternative method of accounting for stock-based compensation
arrangements. This method is based on fair value of the stock-based compensation
determined by an option pricing model utilizing various assumptions regarding
the underlying attributes of the options and QNB's stock, rather than the
existing method of accounting for stock-based compensation which is provided in
Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock
Issued to Employees." The Financial Accounting Standards Board encourages
entities to adopt the fair value based method, but does not require the adoption
of this method.
QNB applies APB No. 25 and related Interpretations in accounting for the Plan.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1996 and 1995: dividend yield of 2.5 percent for both years; expected
volatility of 20 percent for both years; risk-free interest rates of 5.32
percent and 7.86 percent for 1996 and 1995 options, respectively; and expected
lives of five years for both years. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, QNB's net income and earnings per share
would have been reduced to the pro forma amounts indicated as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Net income As Reported........... $ 2,801 $ 1,687
Pro forma ............ 2,763 1,654
Earnings per share As Reported........... 1.97 1.19
Pro forma ............ 1.94 1.16
================================================================================
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various legal proceedings,
commitments, and contingent liabilities which are not reflected in the financial
statements. Management does not anticipate any material losses as a result of
these transactions and activities. They include, among other things, commitments
to extend credit and standby letters of credit. Outstanding standby letters of
credit amounted to $1,583,000 and $2,941,000 and commitments to extend credit
totaled $33,883,000 and $28,683,000 at December 31, 1996 and 1995, respectively.
The maximum exposure to credit loss, which represents the possibility of
sustaining a loss due to the failure of the other parties to a financial
instrument to perform according to the terms of the contract, is represented by
the contractual amount of these instruments. QNB uses the same lending standards
and policies in making credit commitments as it does for on-balance sheet
instruments. The activity is controlled through credit approvals, control
limits, and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. QNB evaluates each customer's
creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit are essentially the same as those
involved in extending loan commitments.
The amount of collateral obtained for letters of credit and commitments to
extend credit is based on management's credit evaluation of the customer.
Collateral varies but may include real estate, accounts receivable, marketable
securities, pledged deposits, inventory or equipment.
NOTE 14 - RELATED PARTY TRANSACTIONS
The following table presents the amounts due from directors, principal officers,
and their related interests. All of these transactions were made in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. Also, they did not involve a more than normal risk of
collectibility or present any other unfavorable features.
- --------------------------------------------------------------------------------
Balance, December 31, 1995............................... $ 4,626
New loans................................................ 11,381
Repayments and other changes............................. (12,652)
- --------------------------------------------------------------------------------
Balance, December 31, 1996............................... $ 3,355
================================================================================
QNB allowed its directors to defer a portion of their compensation. The amount
of deferred compensation accrued as of December 31, 1996 and 1995, was $422,000
and $439,000, respectively.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 15 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENT
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
all entities to disclose estimated fair values for its financial instruments,
whether or not recognized in the balance sheet. For QNB, as for most financial
institutions, substantially all of its assets and liabilities are considered
financial instruments as defined by SFAS No. 107.
Estimates of fair value are made at a specific point in time, based upon, where
available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions regarding the
amount and timing of estimated future cash flows which are discounted to reflect
varying degrees of risk. Given the uncertainties surrounding these assumptions,
the reported fair values may not represent actual values of financial
instruments that could have been realized as of year-end or that will be
realized in the future. Use of different assumptions or methodologies is likely
to result in significantly different fair value estimates.
Under SFAS No. 107, the fair value of non-interest bearing demand deposits, NOW
accounts, money market accounts and savings accounts is equal to the carrying
amount because these deposits have no stated maturity. This approach to
estimating fair value excludes the significant benefit that results from the
low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence SFAS No. 107 may distort the
actual fair value of a banking organization that is a going concern.
The estimated fair values and carrying amounts are summarized as follows:
- ----------------------------------------------------------------------------------------------
December 31, 1996 1995
- ----------------------------------------------------------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
- ----------------------------------------------------------------------------------------------
Financial Assets
Cash and due from banks ................ $ 12,459 $ 12,459 $ 12,950 $ 12,950
Federal funds sold ..................... 6,480 6,480 2,907 2,907
Investment securities
available-for-sale ................... 52,779 52,779 55,380 55,380
Investment securities
held-to-maturity ..................... 42,760 42,699 42,861 42,515
Net loans .............................. 157,679 156,693 158,355 153,573
Financial Liabilities
Deposits with no stated maturities ..... 137,733 137,733 142,053 142,053
Deposits with stated maturities ........ 109,307 109,011 101,360 100,834
Short-term borrowings .................. 8,673 8,675 10,089 10,099
The following methods and assumptions were used to estimate the fair value of
each major classification of financial instruments at December 31, 1996 and
1995.
Cash and due from banks and Federal funds sold:
Current carrying amounts approximate estimated fair value.
Investment securities:
Current quoted market prices were used to determine fair value.
Loans:
Fair values were estimated using the present value of the estimated cash flows,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.
Deposit liabilities:
The fair value of deposits with no stated maturity (e.g. demand deposits, NOW
accounts, money market accounts and savings accounts) are by definition, equal
to the amount payable on demand at the reporting date (i.e. their carrying
amounts). Deposits with a stated maturity (time deposits) have been valued using
the present value of cash flows discounted at rates approximating the current
market for similar deposits.
Short-term borrowings:
Short-term borrowings have been valued using the present value of cash flows
discounted at rates approximating the current market for similar liabilities.
Off-balance-sheet instruments:
Off-balance-sheet instruments are primarily comprised of loan commitments which
are generally priced at market at the time of funding. Fees on commitments to
extend credit and standby letters of credit are deemed to be immaterial and
these instruments are expected to be settled at face value or expire unused. It
is impractical to assign any fair value to these instruments.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION
Condensed financial statements of QNB Corp. only:
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1996 1995
- --------------------------------------------------------------------------------
Assets
Cash and due from banks ............................ $ 8 $ 8
Investment securities available-for-sale ........... 694 309
Investment in subsidiary ........................... 22,155 20,597
Other assets ....................................... 5 10
- --------------------------------------------------------------------------------
Total assets ....................................... $22,862 $20,924
================================================================================
Liabilities
Other liabilities .................................. $ 87 $ 58
Shareholders' equity
Common stock ....................................... 1,782 1,780
Surplus ............................................ 4,296 4,283
Retained earnings .................................. 16,585 14,581
Unrealized holding gains (losses),
net of taxes, on investment
securities available-for-sale ............ 112 222
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity ......... $22,862 $20,924
================================================================================
Statements of Income
- --------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- --------------------------------------------------------------------------------
Dividends from subsidiary ............... $1,098 $ 673 $ 496
Interest and dividend income ............ 14 10 15
Securities gains ........................ 77 __ 168
Other income ............................ 2 __ __
- --------------------------------------------------------------------------------
Total income .................... 1,191 683 679
Expenses ........................ 99 34 14
- --------------------------------------------------------------------------------
Income before applicable income
taxes and equity in undistributed
income of subsidiary .......... 1,092 649 665
Income taxes (benefit) .................. (5) (10) 54
- --------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary ............ 1,097 659 611
Equity in undistributed
income of subsidiary ............ 1,704 1,028 1,393
- --------------------------------------------------------------------------------
Net income ...................... $2,801 $1,687 $2,004
================================================================================
Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income ..................................................... $2,801 $ 1,687 $ 2,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income from subsidiary ......... (1,704) (1,028) (1,393)
Securities gains ....................................... (77) -- (168)
Decrease (increase) in other assets .................... 5 (10) --
Increase (decrease) in other liabilities ............... 9 -- (25)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ...... 1,034 649 418
- -----------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchase of investment securities .............................. (404) -- --
Proceeds from sale of investment securities .................... 152 -- 297
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing
activities ................................... (252) -- 297
- -----------------------------------------------------------------------------------------------------------------------
Financing Activities
Cash dividends paid ............................................ (797) (711) (709)
Stock issue - 401(k) plan and stock options exercised .......... 15 31 39
Acquisition of treasury stock .................................. -- -- (15)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities .......... (782) (680) (685)
- -----------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents -- (31) 30
Cash and cash equivalents at beginning of year . 8 39 9
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year ....... $ 8 $ 8 $ 39
=======================================================================================================================
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QNB Corp. and Subsidiary
NOTE 17 - CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited):
- ----------------------------------------------------------------------------------------------------------------
Quarters Ending 1996 Quarters Ending 1995
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------------------------
Interest income .................... $4,840 $4,896 $5,031 $5,049 $4,707 $4,899 $5,061 $5,049
Interest expense.................... 2,041 2,014 2,174 2,184 1,933 2,057 2,175 2,172
- ----------------------------------------------------------------------------------------------------------------
Net interest income ................ 2,799 2,882 2,857 2,865 2,774 2,842 2,886 2,877
Provision for possible loan losses.. 100 100 100 100 250 560 100 100
Non-interest income ................ 496 380 427 547 329 418 332 314
Non-interest expense ............... 2,140 2,200 2,271 2,393 2,470 2,721 2,187 2,161
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes .. 1,055 962 913 919 383 (21) 931 930
Provision (benefit) for income taxes 294 262 245 247 81 (16) 214 257
- ----------------------------------------------------------------------------------------------------------------
Net Income (loss) .................. $ 761 $ 700 $ 668 $ 672 $ 302 $ (5) $ 717 $ 673
================================================================================================================
Net Income Per Share ............... $ .53 $ .49 $ .48 $ .47 $ .21 -- $ .50 $ .48
================================================================================================================
NOTE 18 - REGULATORY RESTRICTIONS
Dividends payable by QNB Corp. and its bank subsidiary are subject to various
limitations imposed by statutes, regulations and policies adopted by bank
regulatory agencies. Under current regulations regarding dividend availability,
the bank subsidiary may declare dividends in 1997 to the holding company
totaling $2,732,000, plus additional amounts equal to the net profit earned by
the bank subsidiary for the period from January 1, 1997, through the date of
declaration, less dividends previously declared in 1997.
QNB is subject to regulatory capital requirements administered by Federal
banking agencies. Failure to meet minimum capital requirements can initiate
actions by regulators that could have an effect on the company's financial
statements. Under the framework for prompt corrective action, the company must
meet capital guidelines that involve quantitative measures of the company's
assets, liabilities, and certain off-balance-sheet items. The company's capital
amounts and classification are also subject to qualitative judgements by the
regulators. Management believes, as of December 31, 1996, that the company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the Federal Reserve Bank and the Comptroller of the
Currency considered the company to be "well capitalized" under the regulatory
framework. To be categorized as well capitalized, the company must maintain
minimum ratios set forth in the table. There are no conditions or events since
that notification that management believes have changed the company's category.
The company's actual capital amounts and ratios are presented below:
Capital Levels
- ---------------------------------------------------------------------------------------------------------------------
Actual Adequately Capitalized Well Capitalized
------------------ ---------------------- --------------------
As of December 31, 1996 Amount Ratio Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------
Total risk-based capital (to risk weighted assets):(1)
Consolidated ............................... $24,823 14.40% $ 13,788 8.00% $ 17,235 10.00%
Quakertown National Bank ................... 24,345 14.16 13,750 8.00 17,188 10.00
Tier I capital (to risk weighted assets):(1)
Consolidated ............................... 22,663 13.15 6,894 4.00 10,341 6.00
Quakertown National Bank ................... 22,191 12.91 6,875 4.00 10,313 6.00
Tier I capital (to average assets):(1)
Consolidated ............................... 22,663 8.14 8,357 3.00 13,928 5.00
Quakertown National Bank ................... 22,191 7.98 8,342 3.00 13,903 5.00
======================================================================================================================
(1) As defined by the regulators
38
INDEPENDENT AUDITOR'S REPORT
LOGO
To the Board of Directors and Shareholders of QNB Corp:
We have audited the accompanying consolidated balance sheet of QNB Corp. and
subsidiary as of December 31, 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The accompanying consolidated financial
statements of QNB Corp. and subsidiary as of December 31, 1995 and for each of
the years in the two year period ended December 31, 1995, were audited by other
auditors whose report thereon dated January 25, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of QNB Corp.
and subsidiary as of December 31, 1996, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
January 27, 1997
CORPORATE INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of QNB Corp. will be held at the offices of
The Quakertown National Bank, 320 West Broad Street, Quakertown, PA on May 6,
1997, at 11:00 a.m.
MARKET MAKERS
As of December 31, 1996, the following firms made a market in QNB Corp.
common stock:
Legg Mason Wood Walker, Inc. Ryan, Beck & Company
Allentown, PA 18105 West Orange, NJ 07052
Wheat First Butcher Singer
Quakertown, PA 18951
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
FORM 10-K
A copy of QNB Corp.'s Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available, without charge to shareholders, by
writing Tara E. Zuck, QNB Corp., P.O. Box 9005, Quakertown, PA 18951-9005.
The Annual Report and other Company reports are also filed electronically
through the Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR")
which performs automated collection, validation, indexing, acceptance, and
forwarding of submissions to the Securities and Exchange Commission (SEC) and is
accessible by the public using the Internet at http://www.sec.gov./edgarhp.htm.
AUDITORS
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia, PA 19103
STOCK INFORMATION
QNB Corp. common stock is traded in the over-the-counter market. Quotations for
QNB Corp. common stock appear in the pink sheets published by the National
Quotations Bureau, Inc.
The following table sets forth representative high and low bid and ask stock
prices for QNB Corp. common stock on a quarterly basis during 1996 and 1995:
- ----------------------------------------------------------------------------------------------
High Low Cash
-------------------- -------------------- Dividend
Bid Ask Bid Ask Per Share
- ----------------------------------------------------------------------------------------------
1996
First Quarter $ 35 $ 36 1/2 $ 29 1/8 $ 30 1/2 $ .14
Second Quarter 32 1/4 33 1/2 32 1/4 33 1/2 .14
Third Quarter 32 1/4 33 1/4 32 1/4 33 .14
Fourth Quarter 32 1/2 33 5/8 32 1/4 33 .14
1995
First Quarter $ 22 1/2 $ 23 1/2 $ 20 1/2 $ 22 1/4 $ .125
Second Quarter 25 26 22 3/4 23 3/4 .125
Third Quarter 27 1/2 29 1/2 26 1/2 27 3/4 .125
Fourth Quarter 29 31 27 1/4 28 .125
- ----------------------------------------------------------------------------------------------
39
DIRECTORS, OFFICERS & OFFICE LOCATIONS
DIRECTORS OF QNB CORP. AND
THE QUAKERTOWN NATIONAL BANK
Norman L. Baringer
Thomas J. Bisko
Kenneth F. Brown, Jr.
Dennis Helf *
Donald T. Knauss
G. Arden Link*
Charles M. Meredith, III
Philip D. Miller**
Gary S. Parzych
Henry L. Rosenberger
Edgar L. Stauffer
* Director of The Quakertown National Bank only.
** Director Emeritus of The Quakertown National Bank and
Director of QNB Corp.
OFFICERS OF QNB CORP.
Philip D. Miller, Chairman of the Board
Thomas J. Bisko, President/Treasurer/CEO
Robert C. Werner, Vice President
Bret H. Krevolin, Chief Accounting Officer
Charles M. Meredith, III, Secretary
Tara E. Zuck, Assistant Secretary
EXECUTIVE MANAGEMENT
OF THE QUAKERTOWN NATIONAL BANK
Thomas J. Bisko, President/Chief Executive Officer
Robert C. Werner, Executive Vice President/Chief Operating Officer
Bret H. Krevolin, Senior Vice President/Chief Financial Officer/Cashier
Bryan S. Lebo, Senior Vice President, Lending
Mary Ann Smith, Senior Vice President, Operations
Charles M. Meredith, III, Secretary
OFFICERS OF THE QUAKERTOWN NATIONAL BANK
Stephen W. Bauder, Assistant Vice President, Commercial Lending
Robert D. Beck, IT Department Director
Linda M. Berean, Programmer/Analyst
Jane S. Cygan, Loan Origination Officer
Walter C. Derr, Senior Vice President, Lending
Paul T. Dotzman, Assistant Vice President, Commercial Lending
Michael J. Fina, Esq., Vice President/Special Assets Officer
Fawn L. Frankenfield-Rupp, Retail Loan Documentation Supervisor
Lynn C. Geesaman, Assistant Vice President, Loan Services
Joseph C. Giacini, Programmer/Analyst, Technical Operations Supervisor
Heather J. Gossler, Vice President, Branch Administration
Linda A. Grawe, Vice President, Retail Lending
Scott W. Groner, Information Technology Officer
Patrick D. Iampietro, Controller
Shari L. Jarrell, Loan Services Officer
Carl P. Kessler, Assistant Vice President, Security/Compliance
Richard J. King Jr., Assistant Vice President, Commercial Lending
Thomas R. Klee, Credit Department Manager
Christine S. Knerr, Banking Officer, Electronic Banking
Stacy A. Moyer, Human Resources Administrator
Ray C. Myers, Loan Review Officer
Scott G. Orzehoski, Assistant Vice President, Commercial Lending
Lisa A. Otery, Banking Officer, Deposit Services
Jean L. Quier, Banking Officer, IRA/Savings
David W. Quinn, Assistant Vice President/Internal Auditor
Charles E. Rairdon, Collection Officer
Shirley A. Rhodes, Assistant Cashier, General Ledger
Brian K. Schaffer, Marketing Director
Maryann S. Thompson, Commercial Loan Documentation Supervisor
Robert L. Wieand, Vice President, Commercial Lending
OFFICE LOCATIONS
MAIN OFFICE
10 North Third Street
Quakertown, PA 18951
(215) 538-5651
Carol J. Schroding, Assistant Vice President/Branch Manager
April B. Donahue, Banking Officer
COUNTRY SQUARE OFFICE
Country Square Shopping Center
240 South West End Boulevard
Quakertown, PA 18951
(215) 538-5692
Jacquelin N. Kunsman, Branch Manager
Sharon L. Rotenberger, Banking Officer
DUBLIN VILLAGE OFFICE
Dublin Village Plaza
161 North Main Street
Dublin, PA 18917
(215) 249-9600
Jeffrey S. MacWhorter, Branch Manager
COOPERSBURG OFFICE
51 South Third Street
Coopersburg, PA 18036
(610) 282-1697
Jeanette M. Shurow, Branch Manager
PENNSBURG OFFICE
Pennsburg Square Shopping Center
410-420 Pottstown Avenue
Pennsburg, PA 18073
(215) 679-0401
Brian L. Heilman, Branch Manager
PERKASIE OFFICE
607 Chestnut Street
Perkasie, PA 18944
(215) 257-0126
Deborah K. McDonald, Branch Manager
Linda E. Nicholson, Banking Officer
TOWNE BANK CENTER
320 West Broad Street
Quakertown, PA 18951
(215) 538-5600
40