PO Box 9005
[QNB LOGO] Quakertown PA 18951-9005
215.538.5600
1.800.491.9070
www.QNB.com
FOR IMMEDIATE RELEASE
QNB CORP. REPORTS SECOND QUARTER RESULTS
QUAKERTOWN, PA (20 July 2005) QNB Corp. (OTC Bulletin Board: QNBC), the parent
company of The Quakertown National Bank (QNB), reported net income for the
second quarter of 2005 of $483,000, or $.15 per share on a diluted basis. This
compares to net income of $1,519,000, or $.48 per share on a diluted basis, for
the same period in 2004. Net income for the first six months of 2005 was
$2,402,000, or $.76 per share diluted, a decrease from the $3,241,000, or $1.02
per share diluted, for the comparable period in 2004.
The results for the 2005 quarter and six-month periods were significantly
impacted by a $1,253,000 unrealized loss as an other-than-temporary impairment
related to certain Fannie Mae (FNMA) and Freddie Mac (FHLMC) preferred stock
issues recorded in accordance with U.S. generally accepted accounting principles
(GAAP). On an after-tax basis, the non-cash, non-operating impairment charge was
approximately $1,017,000 after-tax, or $.32 per diluted share. The market values
of these securities have been negatively impacted by accounting issues at both
FNMA and FHLMC and by the low interest rate environment compared to when the
securities were purchased in 1999 and 2000. The securities that were subject to
the impairment charge are $4,500,000 of variable rate securities that are rated
AA- and Aa3 by S&P and Moody's, respectively. These investment grade securities
are held as part of the available for sale portfolio; therefore, the unrealized
losses have already been recorded as a reduction in other comprehensive income
and no additional charges to capital are required. The after-tax impact of the
write-down was greater than 66 percent of the gross write-down because QNB
established a $190,000 valuation allowance to offset a portion of the tax
benefits associated with the write-down of these securities that may not be
realizable. Excluding the non-cash securities write-down, second quarter
earnings were $1,500,000, or $.47 per share diluted, and net income for the
six-month period was $3,419,000, or $1.08 per share on a diluted basis.
"Our decision to take the write-down reflects the current accounting
guidelines, our projection of interest rates over the next twelve months and the
current valuation of these securities," said Thomas J. Bisko, President and
Chief Executive Officer. "Like many of our industry peers who have taken similar
action, we believe that the market value of these securities will improve over
time. Excluding the impairment charge, our 2005 results were generally
consistent with the results for the corresponding 2004 periods."
Net interest income increased $158,000, or 4.0 percent, when comparing the two
quarters ended June 30, 2005 and 2004, as a 7.1 percent increase in average
earning assets offset a 10 basis point decline in the net interest margin.
Average loans increased 11.9 percent when comparing the quarters ended June 30,
2005 and 2004. Most of this increase was attributable to small business,
residential mortgage and home equity loans.
The net interest margin was 3.28 percent for the second quarter of 2005,
compared to 3.38 percent for the same period in 2004. The decline in the margin
is a result of funding costs, particularly money market and time deposit
interest rates, increasing to a greater degree than rates earned on assets. The
yield curve continues to flatten as short-term treasury rates increase in
response to the Federal Reserve Bank (FRB) raising the Federal Funds target
rate, while mid-term and longer term interest rates have increased to a smaller
degree or even declined. The FRB has increased the Federal Funds target rate
from 1.00 percent to 3.25 percent over the past twelve months. The increase in
short-term interest rates, along with the extremely competitive environment for
deposits, has led to higher funding costs.
Total non-interest income for the three months ended June 30, 2005 and 2004 was
$(172,000) and $1,173,000, respectively. Non-interest income for the second
quarter of 2005 included the $1,253,000 reduction for the impairment on the FNMA
and FHLMC securities. Excluding this adjustment, non-interest income decreased
$92,000 from the second quarter of 2004. Gains on the sales of investment
securities declined by $153,000 when comparing the two quarters, while gains on
the sale of residential mortgages increased by $62,000 during the same period.
Total non-interest expense increased $135,000, or 4.2 percent, to $3,316,000 for
the three month period ended June 30, 2005 compared to the same period in 2004.
Higher personnel expense was the primary factor for the increase in non-interest
expense with increases in salary expense, payroll taxes and retirement plan
expense.
QNB Corp. offers commercial and retail banking services through the eight
banking offices of its subsidiary, The Quakertown National Bank. In addition,
QNB provides trust and investment management services in conjunction with The
Trust Company of Lehigh Valley, retail brokerage services through Raymond James
Financial Services, Inc. and title insurance as a member of Laurel Abstract
Company LLC.
This press release may contain forward-looking statements as defined in the
Private Securities Litigation Act of 1995. Actual results and trends could
differ materially from those set forth in such statements due to various
factors. Such factors include the possibility that increased demand or prices
for the Company's financial services and products may not occur, changing
economic and competitive conditions, technological developments, and other risks
and uncertainties, including those detailed in the company's filings with the
Securities and Exchange Commission.
QNB CORP.
(Dollars in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
INCOME:
Total interest income $ 6,956 $ 6,172 $ 13,715 $ 12,308
Total interest expense 2,845 2,219 5,519 4,429
Net interest income 4,111 3,953 8,196 7,879
Provision for loan losses - - - -
Total non-interest income (172) 1,173 1,497 2,543
Total non-interest expense 3,316 3,181 6,552 6,259
Income before income taxes 623 1,945 3,141 4,163
Provision for income taxes 140 426 739 922
Net income $ 483 $ 1,519 $ 2,402 $ 3,241
NET INCOME PER SHARE:
Basic $ 0.16 $ 0.49 $ 0.77 $ 1.05
Diluted 0.15 0.48 0.76 1.02
Dividends 0.195 0.185 0.39 0.37
SELECTED PERIOD END BALANCES:
Total assets $574,544 $558,070
Federal funds sold 2,442 -
Investments 257,950 255,394
Loans held-for sale 433 125
Total loans 273,002 260,194
Allowance for loan losses 2,585 2,898
Deposits 457,953 435,569
Borrowed funds 67,313 70,043
Shareholders' equity 47,085 41,778
SELECTED RATIOS:
Return on average assets .33% 1.12% .83% 1.20%
Return on average shareholders' equity 4.15% 14.39% 10.49% 15.50%
Net interest margin-tax equivalent 3.28% 3.38% 3.29% 3.40%
Efficiency ratio-tax equivalent 76.88% 58.02% 62.80% 56.21%
Average shareholders' equity to total 7.99% 7.76% 7.92% 7.74%
average assets
Nonperforming assets to total assets .00% .08%
Allowance as a % of loans .95% 1.11%
The following table presents the adjustment to convert net income to net income excluding the impairment
write-down for the quarter and year ended June 30, 2005.
Net income $ 483 $ 2,402
Impairment charge 1,253 1,253
Tax effect (236) (236)
Net Income excluding impairment $ 1,500 $ 3,419
Basic $ 0.48 $ 1.10
Diluted 0.47 1.08
Return on average assets 1.03% 1.18%
Return on average shareholders' equity 12.89% 14.93%
Efficiency ratio-tax equivalent 59.58% 56.07%
# # #
Contact: Thomas J. Bisko
215-538-5612
tbisko@qnb.com