QNB
CORP.
[LOGO OMITTED] PROXY STATEMENT
APRIL 19, 2004
QNB
CORP.
[LOGO OMITTED]
P.O. Box 9005
Quakertown, PA 18951-9005
TEL (215)538-5600
FAX (215)538-5765
April 19, 2004
Dear Shareholder:
The 2004 Annual Meeting of Shareholders of QNB Corp. will be held at the
offices of The Quakertown National Bank, 320 West Broad Street, Quakertown,
Pennsylvania 18951 on Tuesday, May 18, 2004, at 11:00 a.m., local time.
Notice of the annual meeting, QNB's proxy statement, proxy card and 2003
annual report are enclosed.
At this year's annual meeting, you are being asked to elect three Class I
directors. This proposal is fully described in the accompanying proxy
statement, which you are urged to read carefully.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY ENDORSED THE NOMINEES FOR ELECTION.
WE RECOMMEND THAT YOU VOTE "FOR" ALL THREE NOMINEES.
YOUR VOTE IS IMPORTANT. Whether or not you plan to attend the meeting in
person, please mark, date and sign the enclosed proxy card and return it in
the envelope provided.
If you have any questions with regard to the annual meeting, please contact
Jean Scholl at (215) 538-5600, extension 5707.
Thank you for your cooperation and continuing support.
Sincerely,
/S/THOMAS J. BISKO
Thomas J. Bisko
President and
Chief Executive Officer
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
QNB CORP.
-------------------------------
TO BE HELD ON MAY 18, 2004
Notice is hereby given that the 2004 Annual Meeting of Shareholders of
QNB Corp. will be held at the offices of The Quakertown National Bank, 320 West
Broad Street, Quakertown, Pennsylvania 18951, on Tuesday, May 18, 2004 at 11:00
a.m., local time, for the following purposes:
(1) To elect three Class I directors; and
(2) To transact any other business properly presented at the
annual meeting or any adjournment(s) or postponement(s) of
the meeting.
The Board of Directors fixed the close of business on April 2, 2004 as
the record date for the purpose of determining those shareholders entitled to
notice of and to vote at the annual meeting, either in person or by proxy.
All shareholders are cordially invited to attend the annual meeting.
Whether or not you plan to attend the annual meeting, you are requested to mark,
date, sign and mail the enclosed proxy in the envelope supplied, as soon as
possible. At any time prior to the proxy being voted, it is revocable by written
notice to QNB in accordance with the instructions set forth in the enclosed
proxy statement including by voting at the meeting in person. If you attend the
annual meeting, you may withdraw your proxy before it is voted and then vote
your shares in person.
By Order of the Board of Directors,
/S/CHARLES M. MEREDITH
Charles M. Meredith, III
Secretary
Quakertown, Pennsylvania
April 19, 2004
QNB CORP.
15 NORTH THIRD STREET
P.O. BOX 9005
QUAKERTOWN, PENNSYLVANIA 18951
(215) 538-5600
------------------
PROXY STATEMENT
2004 ANNUAL MEETING OF SHAREHOLDERS - MAY 18, 2004
This proxy statement is being furnished to holders of the common stock,
par value $0.625 per share, of QNB Corp. in connection with the solicitation of
proxies by the Board of Directors for use at the 2004 Annual Meeting of
Shareholders. The annual meeting will be held at the offices of The Quakertown
National Bank at 320 West Broad Street, Quakertown, Pennsylvania 18951, on May
18, 2004 at 11:00 a.m., local time.
As of the date of this proxy statement, the Board of Directors knows of
no business that will be presented for consideration at the annual meeting other
than that referred to in the accompanying Notice of Annual Meeting and described
in this proxy statement. As to other business, if any, properly presented at the
annual meeting, executed proxies will be voted in accordance with the judgment
of the person or persons voting the proxy or the recommendation of the Board of
Directors.
The cost of solicitation of proxies will be paid by QNB. QNB will
reimburse brokerage firms and other custodians, nominees, and fiduciaries for
reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of QNB's common stock. In addition to solicitations by mail,
directors, officers, and employees of QNB and the Bank may solicit proxies
personally, by telephone or other electronic means without additional
compensation.
These proxy materials are first being mailed to shareholders on or about
April 19, 2004.
DATE, TIME AND PLACE OF MEETING
The annual meeting will be held on Tuesday, May 18, 2004 at 11:00 a.m.,
local time, at the Bank's offices at 320 West Broad Street, Quakertown,
Pennsylvania 18951.
OUTSTANDING SECURITIES; QUORUM; VOTING RIGHTS; AND RECORD DATE
The close of business on April 2, 2004 was fixed as the record date for
the purpose of determining those shareholders entitled to notice of, and to vote
at, the annual meeting and any adjournments or postponements of the meeting. As
of the close of business on the record date, QNB had issued and outstanding
3,095,379 shares of common stock.
Shareholders are entitled to one vote for each share of common stock held
of record on the record date with respect to each matter to be voted on at the
annual meeting.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of the common stock on the record date is necessary to
constitute a quorum at the annual meeting.
1
SOLICITATION OF PROXIES
The Board of Directors solicits this proxy for use at QNB's 2004 annual
meeting of shareholders.
VOTING AND REVOCABILITY OF PROXIES
Shares of common stock represented by properly executed proxies will,
unless the proxies have previously been revoked, be voted in accordance with the
instructions indicated on the proxies. If no instructions are indicated on the
proxies, the shares will be voted FOR the election of QNB's nominees to the
Board of Directors. The Board of Directors does not anticipate that any matters
will be presented at the annual meeting other than as set forth in the
accompanying Notice of Annual Meeting. In the event that any other matters are
properly presented at the annual meeting, proxies will be voted in the
discretion of the proxy holders as to such matters upon the recommendation of
the Board of Directors.
A shareholder who executes and returns a proxy has the power to revoke it
at any time before it is voted by delivering to Mr. Charles M. Meredith, III,
Secretary of QNB, at the offices of QNB, at the address indicated above, either
a written notice of the revocation or a duly executed later-dated proxy, or by
attending the annual meeting and voting in person after giving notice of the
revocation.
2
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of April 2, 2004, the number of shares
of common stock, par value $.0625 per share, beneficially owned by each current
director and nominee for director, by each executive officer, and by all
directors, nominees and executive officers of QNB and the Bank, as a group.
Unless otherwise indicated, shares are held individually. The address for each
person is 320 West Broad Street, P.O. Box 9005, Quakertown, Pennsylvania 18951.
Amount and Nature of Percentage of
Name of Beneficial Owner Beneficial Ownership (1) Class (2) (3)
- ---------------------------- ----------------------------- -------------------
Norman L. Baringer, Director 13,996 (4) *
Thomas J. Bisko, Director 42,221 (5) 1.31%
President/Chief Executive Officer (Corp. and Bank)
Kenneth F. Brown, Jr., Director 140,120 (6) 4.35%
Heather J. Gossler, Senior Vice President/ 11,651 (7) *
Sales and Branch Administration (Bank)
Dennis Helf, Director 15,422 (8) *
Bret H. Krevolin, Executive Vice President/ 25,692 (9) *
Chief Financial Officer (Bank)
Chief Financial Officer (Corp.)
Bryan S. Lebo, Senior Vice President/Senior 24,003 (10) *
Lending Officer (Bank)
G. Arden Link, Director 6,412 (11) *
Charles M. Meredith III, Director 81.644 (12) 2.53%
Scott G. Orzehoski, Senior Vice President/ 11,782 (13) *
Commercial Lending (Bank)
Gary S. Parzych, Director 8,324 (14) *
Henry L. Rosenberger, Director 33,872 (15) 1.05%
Mary Ann Smith, Senior Vice President/ 29,589 (16) *
Chief Information Officer (Bank)
Edgar L. Stauffer, Director 99,462 (17) 3.08%
Robert C. Werner, Executive Vice President/ 28,009 (18) *
Chief Operating Officer (Bank)
Vice President (Corp.)
Current Directors, Nominee
& Executive Officers
AS A GROUP (15 PERSONS) 572,199 17.75%
- -----------------
* Less than 1.00%
3
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission and may include securities owned by or for the individual's
spouse and minor children and any other relative who has the same home,
as well as securities that the individual has, or shares, voting or
investment power or has the right to acquire beneficial ownership
within 60 days after April 2, 2004. Beneficial ownership may be
disclaimed as to certain of the securities.
(2) Numbers are rounded-off to the nearest one-hundredth percent.
(3) Includes 61,612 immediately exercisable options in the aggregate and
67,200 options in the aggregate that become exercisable over time or
that could be exercisable immediately upon a change of control of QNB
by the named executive officers; thus, the percentages calculation is
based upon an aggregate of 3,224,191 shares outstanding.
(4) Includes 5,924 shares owned jointly by Mr. Baringer with his wife,
Nancy, and 3,320 shares held in her individual capacity.
(5) Includes 15,290 shares owned jointly by Mr. Bisko with his wife,
Barbara, and 10,416 exercisable options and 12,000 options that become
exercisable over time awarded under the Stock Incentive Plan.
(6) Includes 138,356 shares owned jointly by Mr. Brown with his wife,
Pamela.
(7) Includes 1,273 shares owned jointly by Ms. Gossler with her husband,
Barry; and 4,766 exercisable options and 5,600 options that become
exercisable overtime awarded under the Stock Incentive Plan.
(8) Includes 13,658 shares owned jointly by Mr. Helf with his wife, Mary.
(9) Includes 4,276 shares owned jointly by Mr. Krevolin with his wife,
Susan, and 10,416 exercisable options and 11,000 options that become
exercisable over time awarded under the Stock Incentive Plan.
(10) Includes 1,914 shares owned jointly by Mr. Lebo with his wife, Elaine,
and 10,416 exercisable options and 11,000 options that become
exercisable over time awarded under the Stock Incentive Plan.
(11) Includes 800 shares owned jointly by Mr. Link with his wife, Dorothy.
(12) Includes 11,112 shares owned jointly by Mr. Meredith with his wife,
Elizabeth; 5,030 shares held in her individual capacity; and 3,738
shares held of record by Franklin & Meredith, Inc.
(13) Includes 4,766 exercisable options and 5,600 options that become
exercisable over time awarded under the Stock Incentive Plan.
(14) Includes 2,438 shares owned by Mr. Parzych's wife, Karen, and 2,204
shares held of record by Eugene T. Parzych, Inc.
(15) Includes 6,296 shares owned by Mr. Rosenberger's wife, Charlotte.
(16) Includes 1,788 shares owned jointly by Ms. Smith with her husband,
Randall, and 10,416 exercisable options and 11,000 options that become
exercisable over time awarded under the Stock Incentive Plan.
(17) Includes 65,034 shares owned jointly by Mr. Stauffer with his wife,
Mary Blake, and 9,664 shares held in her individual capacity.
(18) Includes 6,593 shares owned jointly by Mr. Werner with his wife,
Judith, and 10,416 exercisable options and 11,000 options that become
exercisable over time awarded under the Stock Incentive Plan.
4
BENEFICIAL OWNERSHIP OF SECURITIES
On April 2, 2004, 3,095,379 shares of common stock, par value $0.625 per
share were issued, outstanding and entitled to vote. The following table sets
forth the names of persons who, directly or indirectly, are known to QNB's
management to be the beneficial owners (as determined in accordance with Rule
13d-3 under the Securities Exchange Act of 1934), of at least 5% of QNB's
outstanding common stock as of April 2, 2004.
Name and Address of Number of Shares Percentage of
Beneficial Owner Owned (1) Class (2)
- ------------------- ----------------- -------------
James C. Ebbert 259,368 8.38%
303 Edgemont Avenue
Quakertown, PA 18951
(1) The securities "beneficially owned" by an individual are determined in
accordance with the definitions of "beneficial ownership" set forth in
the General Rules and Regulations of the Securities and Exchange
Commission and may include securities owned by or for the individual's
spouse and minor children and any other relative who has the same home,
as well as securities to which the individual has, or shares, voting or
investment power or has the right to acquire beneficial ownership within
60 days after April 2, 2004. Beneficial ownership may be disclaimed as to
certain of the securities.
(2) Numbers are rounded off to the nearest one-hundredth percent.
5
PROPOSAL 1
ELECTION OF DIRECTORS
THE BOARD OF DIRECTORS
QNB's Articles of Incorporation and By-Laws provide that the Board of
Directors consists of nine members divided into three classes, Class I, Class
II, and Class III, as nearly equal in number as possible. The three directors
currently constituting Class I have been nominated for re-election at the annual
meeting. Directors in Class II and Class III will hold office until the 2005 and
2006 annual meetings, respectively.
THE NOMINEES
At the annual meeting, three directors will be elected. Each director so
elected will hold office until the 2007 annual meeting of shareholders and until
his successor in office is duly qualified and elected.
To the extent given discretion, the persons named in the accompanying
proxy intend to vote FOR each of the nominees listed below. In the event that
any nominee should decline to serve or be unable to serve, the persons named as
proxies may vote for the election of such person or persons as the Board of
Directors recommends.
Set forth below, with respect to each director and director nominee, is
his name, age, the time period served as a director and his principal
occupation(s) or employment and business affiliation(s) at present and during
the last five years.
VOTING REQUIREMENTS
The three director candidates are required to be elected by the
affirmative vote of a majority of the outstanding shares on the record date.
Votes may be cast in favor or withheld for any or all of the nominees.
Abstentions and broker non-votes will neither be counted for nor against
a nominee, but the shares represented by any abstention or broker non-vote will
be considered present at the annual meeting for quorum purposes.
RECOMMENDATION
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT EACH OF THESE
NOMINEES BE ELECTED AS A CLASS I DIRECTOR.
6
CURRENT CLASS I DIRECTORS AND NOMINEES FOR THREE YEAR TERM EXPIRING IN 2007
GARY S. PARZYCH
Age 48; President, Eugene T. Parzych, Inc. (construction company),
Trumbauersville, PA from 1980 to present; President, Finland Leasing
Company, Inc. (real estate holding company), Trumbauersville, PA from
June 1986 to present; Director of Quakertown Community School Board from
January 1987 to present; a Director of QNB and the Bank since 1995.
NORMAN L. BARINGER
Age 73; Retired, Baringer Assoc. Inc. (insurance, real estate brokerage),
Quakertown, PA; a Director of QNB and the Bank since 1992.
CHARLES M. MEREDITH, III
Age 68; Newspaper Columnist; Co-owner, Franklin & Meredith Inc.
(commercial publisher), Quakertown, PA; Secretary of QNB and the Bank
from April 1994 to present; a Director of the Bank since 1968; a Director
of QNB since 1984.
CONTINUING DIRECTORS SERVING UNTIL 2005 (Class II Directors)
KENNETH F. BROWN, JR.
Age 48; President, McAdoo & Allen, Inc. (manufacturer of pigment
dispersions and high performance coatings), Quakertown, PA from September
1989 to present; a Director of QNB and the Bank since 1993.
HENRY L. ROSENBERGER
Age 58; President of Rosenberger Companies, Ltd. from 1998 to present;
President, Dock Woods Community, Inc. (retirement community) from January
1978 to December 2002; a Director of QNB and the Bank since 1984.
EDGAR L. STAUFFER
Age 66; Co-Owner, Stauffer Manufacturing Corporation (manufacturer and
importer of industrial work gloves and safety equipment), Red Hill, PA
from August 1959 to present; Co-Owner, H. Texier Glove Corporation, Inc.
from September 1983 to December 1999; a Director of the Bank since 1983;
a Director of QNB since 1984.
CONTINUING DIRECTORS SERVING UNTIL 2006 (Class III Directors)
DENNIS HELF
Age 57; Registered Investment Advisor from 1995 to present; a Director of
the Bank since January 1996; a Director of QNB since 1997.
G. ARDEN LINK
Age 64; Owner, Link Beverages, Inc.; a Director of the Bank since March
1997; a Director of QNB since December 2001.
THOMAS J. BISKO
Age 56; Chief Executive Officer of the Bank and QNB from March 1988 to
present; President of the Bank from September 1985 to present; Treasurer
of QNB from February 1986 to present; President of QNB from May 1986 to
present; a Director of QNB and the Bank since 1985.
7
GOVERNANCE OF THE COMPANY
Our Board of Directors believes that the purpose of corporate
governance is to ensure that we maximize shareholder value in a manner
consistent with legal requirements and the highest standards of integrity. The
Board has adopted and adheres to corporate governance practices which the Board
and senior management believe promote this purpose, are sound and represent best
practices. We continually review these governance practices, Pennsylvania law
(the state in which we are incorporated), the rules and listing standards of the
Nasdaq Stock Market, and SEC regulations, as well as best practices suggested by
recognized governance authorities.
Currently, our Board of Directors has 9 members. Under the SEC and NASD
listing standards for independence, Norman L. Baringer, Kenneth F. Brown, Jr.,
Dennis Helf, G. Arden Link, Charles M. Meredith, III, Henry L. Rosenberger and
Edgar L. Stauffer, meet the standards for independence. This constitutes more
than a majority of our Board of Directors. Only independent directors serve on
our Audit Committee, Compensation Committee and Nominating Committee.
CODE OF ETHICS
We have adopted a Code of Ethics for directors, officers and employees
of QNB. It is intended to promote honest and ethical conduct, full and accurate
reporting and compliance with laws as well as other matters. A copy of the Code
of Ethics is posted on our website at www.qnb.com. We have also filed a copy of
the Code of Ethics with the SEC as an exhibit to our December 31, 2003 annual
report on Form 10-K.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS OF QNB AND THE BANK
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
BOARD MEMBER BOARD AUDIT COMPENSATION EXECUTIVE LOAN NOMINATING TRUST
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Norman L. Baringer X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Thomas J. Bisko X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Kenneth F. Brown, Jr. X X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Dennis Helf X X X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
G. Arden Link X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Charles M. Meredith, III X X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Gary S. Parzych X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Henry L. Rosenberger X X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Edgar L Stauffer X X X X X
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Meetings Held in 2003 13 6 2 0 19 0 5
- ------------------------------- --------- --------- ------------------ ------------- ---------- ------------------- -----------
Each current director of QNB is also a current member of the Bank's Board
of Directors.
Both QNB's and the Bank's Board of Directors met 13 times in 2003. All
current directors attended at least 75% of the aggregate of (1) the total number
of meetings of the Board of Directors (held for the period for which he has been
a director) and (2) the total number of meetings held by all committees of the
Board on which he served (during the periods that he served).
QNB has no specific policy requiring directors to attend the Annual
Meeting of Shareholders. All members of the Board of Directors were present at
the 2003 Annual Meeting of Shareholders. It is anticipated that all members of
the Board of Directors will be attending the 2004 Annual Meeting of
Shareholders.
8
QNB's Board of Directors established and maintains the following
committees, among others:
AUDIT COMMITTEE. The Audit Committee recommends the engagement and
dismissal of the independent certified public accountants, reviews their annual
audit plan and the results of their auditing activities, and considers the range
of audit and non-audit fees. It also reviews the general audit plan, scope and
results of QNB's procedures for internal auditing. The reports of examination of
QNB and its subsidiary by state and federal bank regulatory examiners are also
reviewed by the Audit Committee. The Audit Committee also reviews all SEC
filings and earnings press releases. The Audit Committee, consistent with the
Sarbanes-Oxley Act of 2002 and the rules adopted thereunder, meets with
management and the auditors prior to the filing of officers' certifications with
the SEC to receive information concerning, among other things, significant
deficiencies in the design or operation of internal controls.
The Bank also has a standing Audit Committee which performs the same
functions as QNB's Audit Committee. All members of both committees are
non-executives and independent (as "independence" is currently defined in Rule
4200(a)(15) of the NASD listing standards. The members of QNB's and the Bank's
Audit Committee are Directors Baringer, Link, Meredith, and Rosenberger. The
Audit Committee of QNB and the Bank met six times in 2003.
We currently have no "audit committee financial expert." However, the
Board of Directors believes that each audit committee member has sufficient
knowledge in financial and auditing matters to serve on the committee. The
committee has the authority to engage legal counsel or other experts or
consultants as it deems appropriate to carry out its responsibilities. The
Nominating Committee will continue to search for a Board candidate to serve on
the Audit Committee who meets the "financial expert" requirements.
The Audit Committee operates under a formal charter that governs its
duties and conduct. The Audit Committee Charter is attached as Appendix A to
this proxy statement and is available on our website at www.qnb.com.
The Audit Committee has also adopted a Whistleblower Policy to enable
confidential and anonymous reporting to the Audit Committee. The policy is also
available on our website at www.qnb.com.
COMPENSATION COMMITTEE. The Compensation Committee's primary function is
to review and determine the compensation of present and proposed senior members
of QNB's management. In addition, the committee reviews the general guidelines
on compensation for all employees. All members of the Compensation Committee are
independent (as independence is currently defined in Rule 4200(a)(15) of the
NASD listing standards). The members of the Compensation Committee are Directors
Baringer, Helf, Meredith, Rosenberger, and Stauffer. The Compensation Committee
met two times in 2003.
EXECUTIVE COMMITTEE. The Executive Committee is authorized to exercise
all of the authority of the Board of Directors in the management of QNB between
Board meetings, unless otherwise provided in QNB's By-Laws. The members of the
Executive Committee are Directors Bisko, Brown, Helf, Meredith and Stauffer. The
Executive Committee did not meet in 2003.
LOAN COMMITTEE. The Board Loan Committee's primary function is to review
and approve loan relationships where the total exposure exceeds certain
designated thresholds. The members of the Board Loan Committee are Directors
Brown, Helf and Parzych. In the event they are unable to attend, alternate
directors are requested to attend. The Board Loan Committee met 19 times in
2003.
NOMINATING COMMITTEE. The Committee was formed in December 2003 and held
its first meeting March 16, 2004. All members of the Nominating Committee are
independent (as independence is currently defined in Rule 4200(a)(15) of the
NASD listing standards). The principal duties of the Nominating Committee
9
include developing and recommending to the Board criteria for selecting
qualified director candidates, identifying individuals qualified to become Board
members, evaluating and selecting, or recommending to the Board, director
nominees for each election of directors, considering committee member
qualifications, appointment and removal, recommending codes of conduct and codes
of ethics applicable to the Company and providing oversight in the evaluation of
the Board and each committee. The Nominating Committee has no formal process for
considering director candidates recommended by shareholders, but its policy is
to give due consideration to any and all such candidates. If a shareholder
wishes to recommend a director candidate, the shareholder should mail the name,
background and contact information for the candidate to the Nominating Committee
at the Company's offices at P.O. Box 9005, Quakertown, PA 18951. The Nominating
Committee intends to develop a process for identifying and evaluating all
nominees for director, including any recommended by shareholders, and minimum
requirements for nomination. Members of the Nominating Committee include
Directors Brown, Link, Rosenberger and Stauffer. The Nominating Committee did
not meet in 2003.
TRUST COMMITTEE. The Trust Committee's responsibilities include the
review of the operations, investment selection and investment performance of The
Trust Company of Lehigh Valley. The members of the Trust Committee are Directors
Helf, Parzych and Stauffer. The Trust Committee met five times in 2003.
COMPENSATION OF THE BOARD OF DIRECTORS
Each director of QNB is also a member of the Bank's Board of Directors.
During 2003, directors, with the exception of those who are full-time employees
of QNB or the Bank, received an annual fee of $5,500. The Chairman of the Board
received additional compensation of $10,000 and the Corporate Secretary received
an additional $2,000. In addition, each director received a fee of $450 for each
Bank Board meeting attended. Directors are not reimbursed for QNB Board
meetings. Members of the committees of the Board of Directors also received $175
for each committee meeting attended, provided the committee meeting was not held
as part of a scheduled Board meeting.
AUDIT COMMITTEE REPORT
Pursuant to rules adopted by the SEC designed to improve disclosures
related to the functioning of corporate audit committees and to enhance the
reliability and credibility of financial statements of public companies, QNB's
Audit Committee submits the following report:
AUDIT COMMITTEE REPORT TO BOARD OF DIRECTORS
The Audit Committee oversees QNB's financial reporting process on
behalf of the Board of Directors. In that connection, the committee, along with
the Board of Directors, has formally adopted an Audit Committee Charter setting
forth its responsibilities. In addition, appropriate policies have been
established to further strengthen disclosure procedures required under the
Sarbanes-Oxley Act of 2002.
Management has the primary responsibility for the financial statements
and the reporting process, including the systems of internal control. In
fulfilling its oversight responsibilities, the committee reviewed the audited
financial statements in the annual report with management, including a
discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments and the clarity of
disclosures in the financial statements.
The committee reviewed with the independent auditors, who are
responsible for expressing an opinion on the conformity of those audited
financial statements with generally accepted accounting principles, their
judgments as to the quality, not just the acceptability, of QNB's accounting
principles and such other matters as are required to be discussed with the
10
committee under generally accepted auditing standards. In addition, the
committee has discussed with the independent auditors, the auditors'
independence from management and QNB, including the matters in the written
disclosures required by the Independence Standards Board, and considered the
compatibility of non-audit services with the auditors' independence.
The committee discussed with QNB's internal and independent auditors
the overall scope and plans for their respective audits. The committee meets
with the internal and independent auditors, with or without management present,
to discuss the results of their examinations, their evaluations of QNB's
internal controls and the overall quality of QNB's financial reporting.
In reliance on the reviews and discussion referred to above, the
committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K for the year ended December 31, 2003, for filing with the Securities and
Exchange Commission. The committee and the Board of directors have also approved
the selection of QNB's independent auditors for 2004.
Respectfully submitted,
THE AUDIT COMMITTEE
Henry L. Rosenberger, Chairman
Norman L. Baringer
G. Arden Link
Charles M. Meredith, III
AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT SERVICES OF
INDEPENDENT AUDITORS
The Audit Committee has a policy for the pre-approval of services
provided by the independent auditors. The policy requires the Audit Committee to
pre-approve all audit and permissible non-audit services provided by the
independent auditors. These services may include audit services, audit related
services, tax services, and other services. Under the policy, pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is subject to a specific budget.
In addition, the Audit Committee may also pre-approve particular services on a
case by case basis. For each proposed service, the independent auditor is
required to provide detailed back-up documentation at the time of approval. The
Audit Committee has delegated to the Chairman of the Audit Committee the
authority to pre-approve services not prohibited by law to be performed by our
independent auditors and associated fees up to a maximum for any one service of
$5,000. None of the services related to the Audit Related Fees, Tax Fees, or All
Other Fees described above was approved by the Audit Committee pursuant to the
waiver of pre-approval provisions set forth in applicable rules of the SEC.
CONSIDERATION OF NON-AUDIT SERVICES PROVIDED BY THE INDEPENDENT AUDITOR
The Audit Committee considered whether the services provided under
other non-audit services are compatible with maintaining the auditor's
independence.
11
AUDIT FEES, AUDIT RELATED FEES, TAX FEES, AND ALL OTHER FEES
Aggregate fees billed to QNB by KPMG, LLP for services rendered are presented
below:
2003 2002
-----------------------------
Audit fees $88,800 $59,200
Audit related fees 8,500 8,500
Audit and audit related fees 97,300 67,700
Tax fees 12,665 9,500
All other fees - -
-----------------------------
Total fees $109,965 $77,200
AUDIT FEES include fees billed for professional services rendered for
the audit of annual financial statement and fees billed for the review of
financial statements included in QNB Forms 10-Q or services that are normally
provided by KPMG, LLP in connection with statutory and regulatory filings or
engagements.
AUDIT RELATED FEES include fees billed for assurance and related
services by KPMG, LLP that are reasonably related to the performance of the
audit or review of the registrants financial statements and are not reported
under the Audit Fees section of the table above. These services include audits
of financial statements of certain employee benefit plans.
TAX FEES include fees billed for professional services rendered by
KPMG, LLP for tax consultation and tax compliance services.
ALL OTHER FEES include fees billed for products and services provided
by KPMG, LLP, other than the services reported under the Audit Fees, Audit
Related Fees, or Tax Fees sections of the table above.
The Audit Committee has considered whether, and determined that, the
provision of the non-audit services is compatible with maintaining KPMG, LLP's
independence.
EXECUTIVE COMPENSATION
Since the formation of QNB in 1984, none of its executive officers have
received any separate compensation from QNB. All compensation is paid by the
Bank. Thomas J. Bisko, Robert C. Werner, and Bret H. Krevolin are the only
executive officers of QNB that are also executive officers of the Bank. The
following information is furnished concerning the chief executive officer and
the executive officers of QNB or the Bank whose aggregate remuneration from the
Bank exceeded $100,000 during the fiscal years ended December 31, 2003, 2002 and
2001.
12
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------- ----------------------
AWARDS PAY-OUTS
------ --------
OTHER RESTRICTED ALL OTHER
ANNUAL STOCK OPTIONS/ COMPEN-
SALARY BONUS COMPEN- AWARDS SARS PAY-OUTS SATION
NAME AND POSITION YEAR ($) (1) ($) SATION ($) (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Bisko 2003 $218,082 $21,808 $0 $0 6,000 $0 $16,904 (2)
President and 2002 $198,588 $19,859 $0 $0 6,000 $0 $15,430 (2)
Chief Executive Officer 2001 $193,556 $111,361 $0 $0 3,360 $0 $13,190 (2)
Robert C. Werner 2003 $152,654 $15,265 $0 $0 5,500 $0 $12,212 (3)
Executive Vice President 2002 $138,176 $13,818 $0 $0 5,500 $0 $11,054 (3)
Chief Operating Officer 2001 $132,226 $13,223 $0 $0 3,360 $0 $10,578 (3)
Bret H. Krevolin 2003 $140,192 $14,019 $0 $0 5,500 $0 $11,260 (4)
Executive Vice President 2002 $127,215 $12,722 $0 $0 5,500 $0 $10,222 (4)
Chief Financial Officer 2001 $121,737 $12,173 $0 $0 3,360 $0 $9,739 (4)
Bryan S. Lebo 2003 $121,538 $12,154 $0 $0 5,500 $0 $9,768 (5)
Senior Vice President 2002 $112,266 $11,227 $0 $0 5,500 $0 $9,026 (5)
Senior Lending Officer 2001 $107,432 $10,743 $0 $0 3,360 $0 $8,595 (5)
Mary Ann Smith 2003 $118,223 $11,822 $0 $0 5,500 $0 $9,503 (6)
Senior Vice President 2002 $109,203 $10,920 $0 $0 5,500 $0 $8,781 (6)
Chief Information Officer 2001 $104,500 $10,450 $0 $0 3,360 $0 $8,405 (6)
<FN>
(1) Salary for 2003 includes 27 pay periods while salary for 2002 and 2001 includes 26 pay periods.
(2) Includes the Bank's contributions on behalf of Mr. Bisko to the Retirement Savings Plan of $16,904, $15,430 and
$13,190 for 2003, 2002 and 2001, respectively.
(3) Includes the Bank's contributions on behalf of Mr. Werner to the Retirement Savings Plan of $12,212, $11,054 and
$10,578 for 2003, 2002 and 2001, respectively.
(4) Includes the Bank's contributions on behalf of Mr. Krevolin to the Retirement Savings Plan of $11,260, $10,222
and $9,739 for 2003, 2002 and 2001, respectively.
(5) Includes the Bank's contributions on behalf of Mr. Lebo to the Retirement Savings Plan of $9,768, $9,026 and
$8,595 for 2003, 2002 and 2001, respectively.
(6) Includes the Bank's contributions on behalf of Ms. Smith to the Retirement Savings Plan of $9,503, $8,781 and
$8,405 for 2003, 2002, and 2001, respectively.
</FN>
STOCK OPTION GRANTS FOR 2003
The following table reflects grants of stock options to Mr. Bisko, Mr.
Werner, Mr. Krevolin, Mr. Lebo and Ms. Smith in fiscal year 2003.
13
OPTION/SAR GRANTS IN LAST FISCAL YEAR (1)
POTENTIAL
% OF TOTAL REALIZABLE VALUE
OPTIONS AT ASSUMED
GRANTED TO EXERCISE ANNUAL RATES OF
OPTIONS EMPLOYEES OR BASE STOCK APPRECIATION
GRANTED IN FISCAL PRICE EXPIRATION FOR OPTION TERM (2)
NAME (#) YEAR ($/SHARE) DATE 5% 10%
($) ($)
- -------------------------------------------------------------------------------------------------------------------------
Thomas J. Bisko 6,000 15.0% $20.00 01/21/2013 $75,480 $191,220
Robert C. Werner 5,500 13.8% $20.00 01/21/2013 $69,190 $175,285
Bret H. Krevolin 5,500 13.8% $20.00 01/21/2013 $69,190 $175,285
Bryan S. Lebo 5,500 13.8% $20.00 01/21/2013 $69,190 $175,285
Mary Ann Smith 5,500 13.8% $20.00 01/21/2013 $69,190 $175,285
- -------------------------
(1) Options granted include both incentive and non-qualified stock options
pursuant to the 1998 Stock Option Plan. The options granted vest and
become exercisable after the third anniversary of their grant date.
(2) In order to realize the potential value of the stock options, QNB's common
stock would be approximately $38.58 and $51.87 at a 5% and 10%
appreciation rate, respectively. The dollar amounts under these columns
are the result of calculations at the 5% and the 10% annualized rates set
by the Securities and Exchange Commission and therefore are not intended
to forecast possible future appreciation, if any, of QNB's common stock
price.
AGGREGATE OPTION EXERCISES AND OPTION VALUES
The following table provides information as to stock options exercised by
Mr. Bisko, Mr. Werner, Mr. Krevolin, Mr. Lebo and Ms. Smith in 2003 and the
value of stock options held by each officer at year-end 2003 measured in terms
of the $33.60 closing bid price of QNB's common stock on December 31, 2003.
Some stock options are immediately exercisable while others become exercisable
over time.
AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END STOCK OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED ON VALUE OPTIONS AT 12/31/03 OPTIONS AT 12/31/03
EXERCISE REALIZED (EXERCISABLE/UNEXERCISABLE) (EXERCISABLE/UNEXERCISABLE)
NAME (#) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas J. Bisko 886 $18,163 7,056/15,360 $132,009/$254,658
Robert C. Werner 886 $18,163 7,056/14,360 $132,009/$239,121
Bret H. Krevolin 886 $18,163 7,056/14,360 $132,009/$239,121
Bryan S. Lebo 886 $18,163 7,056/14,360 $132,009/$239,121
Mary Ann Smith 886 $18,163 7,056/14,360 $132,009/$239,121
14
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes our equity compensation plan information
as of December 31, 2003. Information is included for both equity compensation
plans approved by QNB shareholders and equity compensation plans not approved by
QNB shareholders.
- -------------------------------------------------- ----------------------- --------------------- -------------------------
NUMBER OF SHARES
AVAILABLE FOR FUTURE
NUMBER OF SHARES TO WEIGHTED-AVERAGE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE PRICE OF COMPENSATION PLANS
EXERCISE OF OUTSTANDING (EXCLUDING SECURITIES
OUTSTANDING OPTIONS, OPTIONS, WARRANTS REFLECTED IN COLUMN
PLAN CATEGORY WARRANTS AND RIGHTS AND RIGHTS (A))
- -------------------------------------------------- ----------------------- --------------------- -------------------------
(A) (B) (C)
- -------------------------------------------------- ----------------------- --------------------- -------------------------
Equity compensation plans approved by
QNB Corp. shareholders
1998 Stock Option Plan 162,412 $16.15 48,836
2001 Employee Stock Purchase Plan - - 33,567
- -------------------------------------------------- ----------------------- --------------------- -------------------------
Equity compensation plans not approved by QNB
Corp. shareholders
None - - -
- -------------------------------------------------- ----------------------- --------------------- -------------------------
TOTALS 162,412 $16.15 82,403
- -------------------------------------------------- ----------------------- --------------------- -------------------------
EMPLOYMENT AGREEMENTS
On September 2, 1986, as amended on April 3, 2002, QNB and Mr. Bisko
entered into an employment agreement for a term of 27 years, commencing
immediately and terminating on December 31, 2013 provided however, that the
employment agreement may be terminated by either party upon three years' prior
written notice. Under the terms of the employment agreement, Mr. Bisko is to be
employed as the President of the Bank and to render services as may be
reasonably required of him from time to time by the Board of Directors. Mr.
Bisko may be discharged at any time for just and proper cause, except that,
following a change of control of QNB (which is defined as any one person or
group obtaining voting control of 25% or more of QNB's outstanding common
stock), Mr. Bisko's employment may only be terminated if he materially breaches
his obligations under the employment agreement, fails or refuses to comply with
the proper and reasonable written policies of the Board of Directors, or is
convicted of a felony. If Mr. Bisko's employment is terminated for reasons other
than, among others, discharge for cause, a change in control of QNB, or death or
disability, Mr. Bisko is entitled to receive a lump sum severance payment equal
to 2.99 times his then current base salary. If Mr. Bisko were terminated at the
minimum base salary of $222,075 as of January 1, 2004, he would be entitled to
receive a maximum lump sum payment equal to $664,004. Such a provision may be
deemed to be "anti-takeover" in nature inasmuch as it may discourage a potential
acquiror who may desire to replace Mr. Bisko with a new president. In the event
of Mr. Bisko's death or disability, QNB shall pay either to Mr. Bisko, his
estate, or his designated beneficiary, an amount equal to his then current base
salary in equal monthly installments, which amounts may be reduced based upon
the receipt of any life or disability insurance proceeds from policies
maintained by and at the expense of QNB.
CHANGE OF CONTROL AGREEMENTS
On July 18, 2000, QNB and the Bank entered into change of control
agreements with Bret H. Krevolin, Executive Vice President and Chief Financial
15
Officer of the Bank, and Robert C. Werner, Executive Vice President and Chief
Operating Officer of the Bank. These agreements provide certain benefits to
Mr. Krevolin and Mr. Werner in the event of a change of control of QNB or the
Bank. The agreements become operative only if Mr. Krevolin and Mr. Werner are
employees of QNB and the Bank upon a change in control of QNB or the Bank, as
defined in the agreement. The agreements specify payments to Mr. Krevolin and
Mr. Werner upon their termination on or before the three year anniversary of
the date of the change of control in an amount equal to the product of the
average aggregate annual compensation paid by QNB and the Bank to the
respective executive which is includable in the executive's gross income for
Federal income tax purposes during the five calendar years preceding the
taxable year in which the date of the termination occurs, multiplied by two.
COMPENSATION COMMITTEE REPORTS ON EXECUTIVE COMPENSATION
QNB's Board of Directors is responsible for the governance of QNB and its
subsidiary. In fulfilling its fiduciary duties, the Board of Directors acts in
the best interests of QNB's shareholders, customers and the communities served
by QNB and its subsidiary. To accomplish QNB's strategic goals and objectives,
the Board of Directors engages competent persons who undertake to accomplish
these objectives with integrity and in a cost-effective manner. The compensation
of these individuals is part of the Board of Directors' fulfillment of its
duties to accomplish QNB's strategic mission.
The fundamental philosophy of QNB's and the Bank's compensation program
is to offer competitive compensation opportunities for all employees based on
the individual's contribution and personal performance. The compensation program
is administered by a compensation committee comprised of four outside directors
who are listed below. The objective of the committee is to establish a fair
compensation policy to govern all salaries in order to attract and motivate
competent, dedicated and ambitious employees whose efforts will enhance the
products and services of QNB, the results of which may include improved
profitability, increased dividends to our shareholders and subsequent
appreciation in the market value of our shares. While general guidelines are
provided for all employees, the compensation committee makes specific
recommendations for Mr. Bisko.
Mr. Bisko's compensation is reviewed and approved annually by the Board
of Directors. As a guideline for determining Mr. Bisko's salary, the committee
reviews information provided by a human resource consultant who compares
salaries of Pennsylvania financial institutions operating within QNB's general
market area. The compensation committee focuses on the survey data for peer
financial institutions operating in Southeastern Pennsylvania. Pennsylvania peer
group banks have been used because of common industry issues and competition for
the same executive talent group.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Bisko's base salary is $222,075 for 2004, subject to an annual review
and adjustment. Mr. Bisko's base pay is determined annually by the compensation
committee. In addition, Mr. Bisko is eligible to receive a cash bonus, in each
of the next three years, equivalent to 5% to 10% of his salary based on QNB
increasing its earnings per share at an average rate of 7.5% to 10%. The bonus
percentage increases by 1% for each .5% increase in earnings per share up to a
maximum of 10%. For 2003, Mr. Bisko received a bonus of $21,808 for the
successful achievement of the plan.
The Bank provides Mr. Bisko, for the benefit of his named beneficiary,
with a salary continuation agreement. In the event of Mr. Bisko's death, the
agreement provides his beneficiary with monthly income for 180 consecutive
months. The agreement is enforceable only while Mr. Bisko remains employed by
the Bank. If Mr. Bisko's employment is terminated for any reason other than
death, all rights under the agreement will be terminated. The benefits are
funded through an insurance policy with the cost limited to the annual premium
on the policy. Mr. Bisko is also reimbursed for all reasonable and necessary
expenses related to his duties.
16
The Bank provides Mr. Bisko with a membership to a country club. Mr.
Bisko is also reimbursed for the cost of all business related meals at the club.
Mr. Bisko is not reimbursed for any personal meals at the country club.
Respectfully submitted,
THE COMPENSATION COMMITTEE
Edgar L. Stauffer, Chairman
Norman L. Baringer
Henry L. Rosenberger
Charles M. Meredith, III
Dennis Helf
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee makes recommendations to the Board of
Directors concerning general guidelines on compensation of employees and
specific recommendations for Mr. Bisko. The membership of the committee consists
solely of outside directors.
STOCK INCENTIVE PLAN
QNB maintains a stock option plan, the 1998 Plan, administered by QNB's
Compensation Committee. The committee determines, among other things, the
employees to whom awards are granted, the type of awards, and the amount, size,
timing and terms of such awards.
The plan provides for the granting of either non-qualified stock options
or incentive stock options. The exercise price of an option is the fair market
value of QNB's common stock at the date of grant as defined in the plan.
Participation in the plan is limited to those full-time officers and other key
executive employees of QNB or the Bank who are in positions in which their
decisions, actions, and counsel have a significant impact upon QNB's
profitability and success. QNB directors who are not otherwise full-time
officers or employees of QNB or the Bank are not eligible to participate in the
plan.
The plan authorized the issuance of 220,500 shares, as adjusted. The time
periods by which any option is exercisable under the plan is determined by the
committee but may not commence before the expiration of six months or continue
beyond the expiration of ten years after the date the option is awarded. As of
April 2, 2004, 176,558 options were granted, 162,412 options were outstanding
and 3,932 shares have been issued.
EMPLOYEE STOCK PURCHASE PLAN
QNB's 2001 Employee Stock Purchase Plan offers eligible employees an
opportunity to purchase from QNB shares of it's common stock at a 10% discount
from the lesser of fair market value on the first or last day of each offering
period. The offering periods are May 1st through November 30th and December 1st
through April 30th. The plan authorizes the issuance of 42,000 shares, as
adjusted. As of April 2, 2004, 8,433 shares were issued under the plan. This
plan expires by its terms on June 1, 2006.
17
STOCK PERFORMANCE GRAPH
Set forth below is a performance graph comparing the yearly cumulative
total shareholder return on QNB's common stock with:
o the yearly cumulative total shareholder return on stocks included in the
NASDAQ Market Index, a broad market index,
o the yearly cumulative total shareholder return on the SNL $250M to $500M
Bank Index, a group encompassing 79 publicly traded banking companies with
assets between $250 million and $500 million.
All of these cumulative total returns are computed assuming the
reinvestment of dividends at the frequency with which dividends were paid
during the applicable years.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL SHAREHOLDER RETURN
QNB CORP., SNL $250M - $500M BANK INDEX & NASDAQ MARKET INDEX
[LINE CHART OMITTED]
- ------------------------------------------------------------------------------------------------------------------
PERIOD ENDING
- ------------------------------------------------------------------------------------------------------------------
INDEX 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
- ------------------------------------------------------------------------------------------------------------------
QNB Corp. 100.00 77.26 82.49 101.80 144.35 223.71
- ------------------------------------------------------------------------------------------------------------------
NASDAQ - Total US 100.00 185.95 113.19 89.65 61.67 92.90
- ------------------------------------------------------------------------------------------------------------------
SNL $250M-$500M Bank Index 100.00 93.03 89.58 127.27 164.11 237.11
- ------------------------------------------------------------------------------------------------------------------
Source: SNL Financial LLP
18
<page>
EXECUTIVE OFFICERS OF QNB AND/OR THE BANK
The following list sets forth the names of the executive officers of QNB,
and other significant employees of the Bank, their respective ages, positions
held, recent business experience with QNB and the Bank, and the period they have
served in their respective capacities.
THOMAS J. BISKO
Age 56; Chief Executive Officer of QNB and the Bank from March 1988 to present;
President of QNB from May 1986 to present; Treasurer of QNB from February 1986
to present; President of the Bank from September 1985 to present.
ROBERT C. WERNER
Age 46; Vice President of QNB from October 1988 to present; Executive Vice
President/Chief Operating Officer of the Bank from January 1994 to present;
Senior Vice President/Chief Financial Officer of the Bank from January 1989 to
December 1993.
BRET H. KREVOLIN
Age 41; Chief Financial Officer of QNB from May 2003 to present; Chief
Accounting Officer of QNB from January 1992 to present; Executive Vice
President/Chief Financial Officer of the Bank from January 2000 to present;
Senior Vice President/Chief Financial Officer of the Bank from January 1995 to
December 1999; Vice President/Controller of the Bank from August 1989 to
December 1994.
BRYAN S. LEBO
Age 47; Senior Vice President/Senior Lending Officer of the Bank from January
1995 to present.
MARY ANN SMITH
Age 50; Senior Vice President/Chief Information Officer of the Bank from January
1999 to present; Senior Vice President/Operations of the Bank from January 1995
to December 1998; Vice President/Operations of the Bank from January 1988 to
December 1994.
HEATHER J. GOSSLER
Age 40; Senior Vice President/Branch Administration of the Bank from January
2002 to present; Vice President/Branch Administration of the Bank from May 1995
to December 2001.
SCOTT G. ORZEHOSKI
Age 38; Senior Vice President/Commercial Lending Officer of the Bank from
January 2002 to present; Vice President/Commercial Lending Officer of the Bank
from August 1997 to December 2001; Assistant Vice President/Commercial Lending
Officer of the Bank from February 1996 to July 1997.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
QNB and the Bank have not entered into any material transactions,
proposed or consummated, with any director or executive officer of QNB or the
Bank, or any associate of the foregoing persons, with the exception of that
disclosed below. QNB and the Bank have engaged in and intend to continue to
engage in banking and financial transactions in the ordinary course of business
with directors and officers of QNB and the Bank and their associates on
comparable terms with similar interest rates as those prevailing from time to
time for other bank customers.
Total loans outstanding from the Bank at December 31, 2003, to QNB's and
the Bank's officers and directors as a group, members of their immediate
families and companies in which they had an ownership interest of 10% or more
amounted to $1,740,000, or approximately 4.4% of the bank's total equity
19
<page>
capital. The Bank made these loans 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, and did
not involve more than the normal risk of collection or present other unfavorable
features. The aggregate amount of indebtedness outstanding as of the latest
practicable date, March 12, 2004, to the above described group was $2,287,000.
During 2003, QNB entered into an agreement with a Director's construction
company of which he is the President for the renovation of the Bank's operation
center. This agreement was approved by the Board of Directors. The total paid in
2003 was $62,000.
SHAREHOLDER COMMUNICATIONS
The Board of Directors does not have a formal process for shareholders to
send communications to the Board. Due to the infrequency of shareholder
communications to the Board of Directors, the Board does not believe that a
formal process is necessary. Written communications received by QNB from
shareholders are shared with the full Board no later than the next regularly
scheduled Board meeting.
NOMINATIONS AND SHAREHOLDER PROPOSALS
Nominations for election to the Board of Directors may be made by any
shareholder if made in writing and delivered or mailed to the President of QNB,
not less than 14 days or more than 50 days prior to any shareholder meeting
called for the election of directors, provided however, that if less than 21
days notice of the meeting is given to shareholders, the nomination shall be
mailed or delivered to the President of QNB not later than the close of business
on the 7th day following the day on which the notice of the meeting was mailed.
The notification must contain the following information to the extent known to
the notifying shareholder:
(a) the name and address of each proposed nominee;
(b) the principal occupation of each proposed nominee;
(c) the total number of shares of QNB common stock that will be voted for each
proposed nominee;
(d) the name and residential address of the notifying shareholder;
(e) the number of shares of QNB common stock owned by the notifying shareholder.
Nominations not made in accordance with these provisions may be disregarded by
the Chairman at the annual meeting.
Any shareholder proposal for the 2005 annual meeting must be submitted,
in writing, to the Secretary of QNB in accordance with the proxy rules of the
Securities and Exchange Commission prior to December 20, 2004. Any shareholder
proposal not submitted in accordance with the foregoing may be disregarded by
the Chairman at the annual meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires QNB's
officers and directors and persons who own more than 10% of QNB's common stock
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% owners are
required by Securities and Exchange Commission regulations to furnish QNB with
copies of all Section 16(a) forms they file.
To the Board of Directors' knowledge, based solely on review of the
copies of such reports furnished to QNB during fiscal year ended December 31,
2003, all Section 16(a) filing requirements applicable to its executive officers
and directors were complied with except for G. Arden Link who inadvertently
filed one form late reporting one transaction.
20
<page>
OTHER MATTERS
Management is not aware of any business to come before the annual meeting
other than those matters described in the proxy statement and the accompanying
notice of annual meeting. However, if any other matters should properly come
before the annual meeting, it is intended that the proxies hereby solicited will
be voted with respect to those other matters in accordance with the judgment of
the persons voting the proxies.
If there are not sufficient votes for approval of any of the matters to
be acted upon at the annual meeting, the annual meeting may be adjourned to
permit the further solicitation of proxies.
21
<page>
APPENDIX A
QNB CORP.
AUDIT COMMITTEE CHARTER
I. Authorization
The Audit Committee of QNB Corp. and The Quakertown National Bank
(the "Company") is a standing committee of the Board of Directors ("Board")
authorized by the Company's Bylaws.
II. Purpose
The purpose of the Audit Committee is to assist the Board in fulfilling
its oversight responsibility relating to (i) the integrity of the Company's
financial statements and financial reporting process and the Company's systems
of internal accounting and financial controls; (ii) the performance of the
internal audit function; (iii) the annual independent audit of the Company's
financial statements, the engagement of the independent auditors and the
evaluation of the independent auditors' qualifications, independence and
performance; (iv) the Company's compliance with legal and regulatory
requirements, including the Company's disclosure controls and procedures; (v)
the fulfillment of the other responsibilities set out herein; and (vi) monitor
the Company's compliance with the Code of Conduct. The report of the Audit
Committee required by the rules of the Securities and Exchange Commission
("SEC") shall be included in the Company's annual proxy statement.
While the Audit Committee has the responsibilities and powers set forth
in this Charter, it is not the duty of the Audit Committee to plan or conduct
audits or to determine that the Company's financial statements and disclosures
are complete and accurate and are in accordance with generally accepted
accounting principles and applicable rules and regulations. These are the
responsibilities of management and the independent auditors. In carrying out its
oversight responsibilities, as permitted under the Pennsylvania Business
Corporation Law of 1988, as amended, the Audit Committee members are entitled to
rely in good faith on the expertise, integrity and knowledge of management, the
internal and independent auditors and corporate counsel.
III. Membership and Structure
The Audit Committee shall be comprised of at least three members of the
Board, and the members shall meet the independence requirements of the NASDAQ
Stock Market and other applicable laws and regulations (including the
Sarbanes-Oxley Act of 2002).
All members of the Audit Committee will have a general understanding of
finance and accounting practices and each member shall be free of any
relationship that, in the opinion of the Board would, under applicable laws and
regulations, make the director not independent. The Board will determine if any
member is a "financial expert" as defined by the SEC.
IV. Authority
The Audit Committee shall have the sole authority to select, evaluate,
appoint, and replace the independent auditors (subject to shareholder
1
<page>
ratification) and shall approve in advance all audit engagement fees and terms
and all non-audit engagements with the independent auditors. The Audit Committee
shall consult with management, but shall not delegate these responsibilities.
The Audit Committee shall have the authority, to the extent it deems
necessary or appropriate, to retain special legal, accounting, or other
consultants to advise the Audit Committee. The Company shall provide funding, as
determined by the Audit Committee, for payment of compensation to the
independent auditors and to any advisors employed by the Audit Committee. Any
communications between the Audit Committee and legal counsel in the course of
obtaining legal advice will be considered privileged communications of the
Company, and the Audit Committee will take all necessary steps to preserve the
privileged nature of those communications.
The Audit Committee may form and delegate authority to subcommittees,
comprised of one or more members of the Committee, as necessary or appropriate.
Each subcommittee shall have the full power and authority of the Audit
Committee.
The Audit Committee may conduct or authorize investigations into any
matter, within the Audit Committee's scope of responsibilities, brought to its
attention.
V. Duties and Responsibilities
The Audit Committee shall have the following duties and
responsibilities:
MEETINGS AND ACCESS
Meet on a regular basis at least four times each year, including at
least once each quarter. The Audit Committee may hold special meetings upon the
call of the Chair of the Committee. At Committee meetings, a majority of the
total members will constitute a quorum.
Meet separately, periodically, with management, independent auditors,
the lead or coordinating auditor and any other Company Committees that the Audit
Committee determines appropriate.
Minutes shall be kept by a member of the Audit Committee or a person
designated by the Audit Committee.
Regularly report to the Board on the Audit Committee's activities.
Annually review and evaluate its own performance.
Review and assess the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval.
FINANCIAL STATEMENT AND DISCLOSURE MATTERS
Review and discuss with management and the independent auditors the
annual audited financial statements, including disclosures made in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
recommend to the Board whether the audited financial statements should be
included in the Company's Form 10-K.
2
<page>
Prepare annually a report for inclusion in the Company's proxy
statement relating to its annual shareholders meeting. In that report, the Audit
Committee will state whether it has: (i) reviewed and discussed the audited
financial statements with management; (ii) discussed with the independent
auditors the matters required to be discussed by Statement on Auditing Standards
No. 61, as that statement may be modified or supplemented from time to time;
(iii) received from the independent auditors written disclosures and the letter
required by Independence Standards Board Standard 1, as that standard may be
modified or supplemented from time to time, and has discussed with the
independent auditors, the independent auditors' independence.
Review and discuss with management and the independent auditors the
Company's quarterly financial statements prior to the filing of its Form 10-Q,
including the results of the independent auditors' reviews of the quarterly
financial statements.
Discuss generally the Company's earnings press releases, including the
use of "pro forma" or "adjusted" non-GAAP information, as well as financial
information and earnings guidance provided to analysts and rating agencies to
the extent required by applicable law or listing standards. The Committee need
not discuss in advance each earnings release or each instance in which the
Company may provide earnings guidance.
Receive a disclosure from the Chief Executive Officer and Chief
Financial Officer during their certification process for the 10-K and 10-Q's
about (i) any significant deficiencies in design or operation of internal
controls or material weaknesses therein and (ii) any fraud, whether or not
material, involving management or other employees who have a significant role in
the Company's internal controls.
At least annually prior to the filing of the Audit Report with the SEC
(and more frequently if appropriate), review and discuss reports from the
independent auditors on, among other things, certain:
Critical accounting policies and practices to be used;
Alternative treatments of financial information within generally
accepted accounting principles;
Other material written communications between the independent auditors
and management, such as any management letter and the Company's response to such
letter or schedule of unadjusted differences; and
Difficulties encountered in the course of the audit work, including any
restrictions on the scope of activities or access to requested information, any
significant disagreements with management, and communications between the audit
team and the audit firm's national office with respect to difficult auditing or
accounting issues presented by the engagement.
Discuss with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61 relating to the conduct of
the audit.
Review and discuss with management and the independent auditors, at
least annually, significant accounting and financial reporting issues, including
complex or unusual transactions and judgments concerning significant estimates
or significant changes in the Company's selection or application of accounting
principles, and recent professional, accounting and regulatory pronouncements
and initiatives, and understand their impact on the Company's financial
statements.
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Review with management the Audit Committee's evaluation of the
Company's internal control structure and procedures for financial reporting and
review periodically, but in no event less frequently than quarterly,
management's conclusions about the effectiveness of such internal controls and
procedures, including any significant deficiencies in, or material noncompliance
with such controls and procedures.
Discuss with management the Company's major financial risk exposures
and the steps management has taken to monitor and control such exposures,
including the Company's risk assessment and risk management policies.
AUTHORIZATION OF THE COMPANY'S WHISTLEBLOWER'S POLICY
Establish procedures for the receipt, retention, and treatment of
complaints received by the Company regarding accounting, internal accounting
controls, or auditing matters, and the confidential, anonymous submission by
Company employees of concerns regarding questionable accounting or auditing
matters.
OVERSIGHT OF THE COMPANY'S RELATIONSHIP WITH THE INDEPENDENT AUDITORS
The independent auditor shall report directly to the Audit Committee;
Receive and discuss a report from the independent auditors at least
annually regarding:
The independent auditors' internal quality-control procedures;
Any material issues raised by the most recent quality-control review,
or peer review (if applicable), of the independent auditors, or by any inquiry
or investigation by governmental professional authorities within the preceding
five years respecting one or more independent audits carried out by the
independent auditors;
Any steps taken to deal with any such issues; and
All relationships between the independent auditors and the Company, in
order to assess the independent auditors' independence.
Approve guidelines for the retention of the independent auditors for
any non-audit services and determine procedures for the approval of audit and
non-audit services in advance. In accordance with such procedures, the Audit
Committee shall approve in advance any audit or non-audit services provided to
the Company by the independent auditors, as required by applicable law or
listing standards. Pre-approval authority may be delegated to the Chairman of
the Audit Committee up to $5,000 for any one service.
Review and discuss the scope and plan of the independent audit.
Evaluate the qualifications, performance and independence of the
independent auditors, including whether the provision of non-audit services is
compatible with maintaining the auditors' independence, and taking into account
the opinions of management and the Company's legal counsel. This shall include a
review and discussion of the annual communication as to independence delivered
4
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by the independent auditors (Independence Standards Board Standard No. 1 -
"Independence Discussions with Audit Committees.") The Audit Committee shall
present its conclusions to the Board, and if so determined by the Audit
Committee, recommend that the Board take additional action to satisfy itself of
the qualifications, performance and independence of the auditors.
Recommend to the Board, policies for the Company's hiring of employees
or former employees of the independent auditors which guidelines shall meet the
requirements of applicable law and listing standards.
OVERSIGHT OF AUDIT AND RISK REVIEW ("ARR")
The Audit Committee may contract for internal audit services as
necessary to assess the adequacy and effectiveness of internal accounting
controls, financial systems or financial statements, and the accuracy of
management reporting and compliance with laws, regulations and Company policy.
As used in this section, the "lead or coordinating auditor" refers to the
Company's internal auditor or if such services are outsourced, to the auditor of
the public accounting firm primarily responsible for the Company's internal
audit functions.
Review and discuss the appointment and replacement of the lead or
coordinating auditor.
Review and discuss the ARR findings that have been reported to
management, management's responses, and the progress of the related corrective
action plans.
Review and evaluate the adequacy of the work performed by the lead or
coordinating auditor and ARR, and ensure that ARR is independent and has
adequate resources to fulfill its duties, including implementation of the annual
audit plan.
COMPLIANCE OVERSIGHT RESPONSIBILITIES
Review periodically with management and the independent auditors any
correspondence with, or other action by, regulators or governmental agencies,
any material legal affairs of the Company and the Company's compliance with
applicable law and listing standards.
Review and discuss the report of the lead or coordinating auditor
regarding the expenses of, the perquisites paid to, and the conflicts of
interest, if any, of members of the Company's senior management.
Review and discuss with management and the independent auditor any
correspondence with, or the findings of any examinations by, regulatory
agencies, published reports or auditor observations that raise significant
issues regarding the Company's financial statements or accounting policies.
Obtain regular updates from management and Company counsel regarding
compliance matters and legal matters that may have a significant impact on the
financial statements or the Company's compliance policies.
Advise the Board with respect to policies and procedures regarding
compliance with the Company's Code of Conduct including review of the process
for communicating the Code of Conduct to Company personnel and for monitoring
compliance
5
REOVCABLE PROXY
QNB CORP.
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
ANNUAL MEETING OF SHAREHOLDERS
MAY 18, 2004
The undersigned hereby appoints James Ebbert, Donald T. Knauss and Philip D.
Miller, and each of them, with full powers of substitution, to act as attorneys
and proxies for the undersigned to vote all shares of QNB Corp. common stock
that the undersigned is entitled to vote at the Annual Meeting of Shareholders
to be held at the offices of The Quakertown National Bank, 320 West Broad
Street, Quakertown, PA at 11:00 a.m., local time on Tuesday, May 18, 2004, and
at any and all adjournments of the meeting.
1. The election as Class I directors of all nominees listed (except as marked to
the contrary), for three year terms. FOR WITHHOLD FOR ALL EXCEPT
[ ] [ ] [ ]
GARY S. PARZYCH NORMAN L. BARINGER
CHARLES M. MEREDITH, III
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK "FOR
ALL EXCEPT" AND WRITE THAT NOMINEE OR NOMINEE'S NAME(S) IN THE SPACE PROVIDED
BELOW.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE NOMINEES LISTED.
2. In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment or postponement
of the meeting.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR ALL NOMINEES LISTED ABOVE. IF ANY OTHER BUSINESS IS
PROPERLY PRESENTED AT THE MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN
THIS PROXY IN THEIR BEST JUDGMENT. ATTHE PRESENTTIME, THE BOARD OF DIRECTORS
KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
Please be sure to sign and date this Proxy in the box below. Date
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Shareholder Sign Above Co-Holder (if any) sign Above
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN POSTAGE PAID ENVELOPE PROVIDED.
QNB CORP.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the above signed be present and choose to vote at the Annual Meeting or
at any adjournments or postponements of the meeting, and after notification to
the Secretary of the Company at the Annual Meeting of the shareholder's decision
to terminate this proxy, then the powers of such attorneys or proxies shall be
deemed terminated and of no further force and effect. This proxy may also be
revoked by filing written notice of revocation with the Secretary of the Company
or by duly executing a proxy bearing a later date.
The above signed acknowledges receipt from the Company, prior to the execution
of this proxy, of the Notice of Annual Meeting of Shareholders, Proxy Statement
and Annual Report.
Please sign exactly as your name(s) appear(s) above. When signing as an
attorney, executor, administrator, trustee, or guardian, please give your full
title. If signer is a corporation, please sign full corporate name by authorized
officer. If shares are held jointly, each holder should sign.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE PROVIDED
BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE PROVIDED.
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