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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June, 30, 2003
-------------------------------------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- ------------------------
Commission file number 0-17706
--------
QNB Corp.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania
23-2318082
- -------------------------------- ----------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (215)538-5600
----------------------------
Not Applicable
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 11, 2003
Common Stock, par value $1.25 1,546,861
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED JUNE 30, 2003
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) PAGE
Consolidated Statements of Income for Three and
Six Months Ended June 30, 2003 and 2002...........................1
Consolidated Balance Sheets at June 30, 2003
and December 31, 2002.............................................2
Consolidated Statements of Cash Flows for Six
Months Ended June 30, 2003 and 2002...............................3
Notes to Consolidated Financial Statements............................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK........................................................28
ITEM 4. CONTROLS AND PROCEDURES..............................................28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................................29
ITEM 2. CHANGES IN SECURITIES................................................29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................................29
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS...............29
ITEM 5. OTHER INFORMATION....................................................30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................30
SIGNATURES
CERTIFICATIONS
QNB CORP. AND SUBSIDIARY
- ----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans........................................... $ 3,726 $ 3,755 $ 7,348 $ 7,440
Interest and dividends on investment securities:
Taxable.......................................................... 2,036 2,691 4,227 5,298
Tax-exempt....................................................... 504 495 1,046 950
Interest on Federal funds sold....................................... 40 31 76 79
Interest on interest-bearing balances................................ 1 2 2 3
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income....................................... 6,307 6,974 12,699 13,770
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits
Interest-bearing demand accounts................................. 123 83 238 157
Money market accounts............................................ 78 141 165 290
Savings.......................................................... 99 128 207 246
Time ............................................................ 1,152 1,510 2,317 3,102
Time over $100,000............................................... 276 444 565 900
Interest on short-term borrowings.................................... 24 68 53 140
Interest on Federal Home Loan Bank advances.......................... 719 728 1,431 1,438
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense...................................... 2,471 3,102 4,976 6,273
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income......................................... 3,836 3,872 7,723 7,497
Provision for loan losses............................................ - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses......... 3,836 3,872 7,723 7,497
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Fees for services to customers....................................... 461 381 875 739
ATM and debit card income............................................ 151 128 282 237
Income on cash surrender value of insurance.......................... 78 79 155 158
Mortgage servicing (loss) income..................................... (46) 21 (105) 36
Net gain (loss) on investment securities available-for-sale.......... 147 (95) 302 (159)
Net gain on sale of loans............................................ 489 81 850 222
Other operating income............................................... 146 114 305 210
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest income................................... 1,426 709 2,664 1,443
- ----------------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries and employee benefits....................................... 1,798 1,621 3,607 3,173
Net occupancy expense................................................ 210 200 425 406
Furniture and equipment expense...................................... 269 251 539 479
Marketing expense.................................................... 115 117 215 261
Third party services................................................. 169 145 359 279
Telephone, postage and supplies expense.............................. 126 135 263 268
State taxes.......................................................... 92 81 175 174
Other expense........................................................ 364 336 698 640
- ----------------------------------------------------------------------------------------------------------------------------
Total non-interest expense.................................. 3,143 2,886 6,281 5,680
- ----------------------------------------------------------------------------------------------------------------------------
Income before income taxes ..................................... 2,119 1,695 4,106 3,260
Provision for income taxes........................................... 489 341 945 631
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME....................................................... $ 1,630 $ 1,354 $ 3,161 $ 2,629
============================================================================================================================
NET INCOME PER SHARE - BASIC..................................... $ 1.05 $ .88 $ 2.05 $ 1.71
============================================================================================================================
NET INCOME PER SHARE - DILUTED................................... $ 1.04 $ .87 $ 2.02 $ 1.70
============================================================================================================================
CASH DIVIDENDS PER SHARE......................................... $ .33 $ .30 $ .66 $ .60
============================================================================================================================
Page 1
QNB CORP. AND SUBSIDIARY
- -------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
- -------------------------------------------------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks....................................................................... $ 25,313 $ 17,476
Federal funds sold............................................................................ 12,042 10,001
- -------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents...................................................... 37,355 27,477
Investment securities
Available-for-sale (cost $215,417 and $209,217).......................................... 221,327 214,741
Held-to-maturity (market value $18,229 and $30,386)...................................... 17,673 29,736
Total loans, net of unearned income of $211 and $263 ................................... 237,530 216,850
Allowance for loan losses................................................................ (2,937) (2,938)
- -------------------------------------------------------------------------------------------------------------------------
Net loans............................................................................ 234,593 213,912
Cash surrender value of insurance............................................................. 7,557 7,397
Premises and equipment, net................................................................... 5,269 5,497
Accrued interest receivable .................................................................. 2,574 2,710
Other assets.................................................................................. 2,114 1,960
- -------------------------------------------------------------------------------------------------------------------------
Total assets.................................................................................. $ 528,462 $ 503,430
=========================================================================================================================
LIABILITIES
Deposits
Demand, non-interest-bearing............................................................. $ 58,143 $ 47,079
Interest-bearing demand accounts......................................................... 74,343 70,478
Money market accounts.................................................................... 35,036 39,341
Savings.................................................................................. 52,332 45,338
Time..................................................................................... 154,800 145,849
Time over $100,000....................................................................... 42,729 40,828
- -------------------------------------------------------------------------------------------------------------------------
Total deposits....................................................................... 417,383 388,913
Short-term borrowings......................................................................... 7,946 14,485
Federal Home Loan Bank advances............................................................... 55,000 55,000
Accrued interest payable...................................................................... 1,460 1,555
Other liabilities............................................................................. 3,210 2,563
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities............................................................................. 484,999 462,516
=========================================================================================================================
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; 1,600,204 shares and 1,594,140 shares issued;
1,546,861 and 1,540,797 shares outstanding............................................... 2,000 1,993
Surplus ..................................................................................... 8,862 8,759
Retained earnings............................................................................. 30,194 28,053
Accumulated other comprehensive gain, net..................................................... 3,901 3,603
Treasury stock, at cost; 53,343 shares at June 30, 2003 and December 31, 2002................. (1,494) (1,494)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity.................................................................... 43,463 40,914
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 528,462 $ 503,430
=========================================================================================================================
Page 2
QNB CORP. AND SUBSIDIARY
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income................................................................................... $ 3,161 $ 2,629
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization.............................................................. 423 371
Securities gains (losses) ................................................................. (302) 159
Net gain on sale of loans.................................................................. (850) (222)
Loss on disposal of premises with equipment................................................ 9 -
Proceeds from sales of residential mortgages............................................... 25,693 10,230
Originations of residential mortgages held-for-sale........................................ (23,546) (9,734)
Proceeds from sales of student loans....................................................... 402 1,703
Recovery of charged-off loans.............................................................. - 34
Income on cash surrender value of insurance................................................ (155) (158)
Deferred income tax provision ............................................................. 14 18
Change in income taxes payable............................................................. 114 94
Net decrease (increase) in interest receivable............................................. 136 (356)
Net amortization of premiums and discounts................................................. 832 218
Net decrease in interest payable........................................................... (95) (267)
Increase in other assets................................................................... (412) (1,125)
Increase (decrease) in other liabilities................................................... 457 (1,594)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities.................................................. 5,881 2,000
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities
available-for-sale......................................................................... 47,323 30,177
held-to-maturity........................................................................... 12,048 7,848
Proceeds from sales of investment securities
available-for-sale......................................................................... 28,464 1,684
Purchase of investment securities
available-for-sale......................................................................... (82,275) (52,779)
held-to-maturity........................................................................... - (5,955)
Net increase in loans........................................................................ (22,380) (9,232)
Net purchases of premises and equipment...................................................... (204) (320)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities...................................................... (17,024) (28,577)
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in non-interest-bearing deposits................................................ 11,064 5,095
Net increase in interest-bearing deposits.................................................... 17,406 19,445
Net decrease in short-term borrowings........................................................ (6,539) (1,068)
Proceeds from Federal Home Loan Bank advances................................................ - 2,000
Cash dividends paid.......................................................................... (1,020) (923)
Proceeds from issuance of common stock....................................................... 110 59
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities.................................................. 21,021 24,608
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents........................................... 9,878 (1,969)
Cash and cash equivalents at beginning of year............................................. 27,477 23,881
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period................................................. $ 37,355 $21,912
==============================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Interest paid................................................................................ $ 5,071 $ 6,540
Income taxes paid............................................................................ 805 505
Non-Cash Transactions
Change in net unrealized holding gains, net of taxes, on available-for-sale securities..... 298 1,620
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THE CONSOLIDATED FINANCIAL STATEMENTS.
Page 3
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
1. REPORTING AND ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of QNB
Corp. and its wholly owned subsidiary, The Quakertown National Bank, (QNB). All
significant intercompany accounts and transactions are eliminated in the
consolidated statements.
The consolidated balance sheet as of June 30, 2003, as well as the respective
statements of income and cash flows for the three and the six-month periods
ended June 30, 2003 and 2002, are unaudited. These financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in QNB's 2002 Annual Report incorporated in the Form 10-K.
The financial statements reflect all adjustments, which in the opinion of
management are necessary for a fair presentation of the results of the interim
periods and are of a normal and recurring nature. The results for the periods
presented are not necessarily indicative of the full year. Tabular information
other than share date is presented in thousands of dollars.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amount 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.
STOCK BASED COMPENSATION
At June 30, 2003, QNB has two stock-based employee compensation plans. QNB
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of grant. The "fair
value" approach under SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
takes into account the time value of the option and will generally result in
compensation expense being recorded. Each year since the inception of SFAS No.
123, QNB has disclosed, in the notes to the financial statements contained in
its annual report to shareholders, what the earnings impact would have been had
QNB elected the "fair value" approach under SFAS No. 123. Such disclosure is now
required on a quarterly basis in accordance with SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB
STATEMENT NO. 123.
Form 10-Q
Page 4
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
The following table illustrates the effect of net income and earnings per share
if the company had applied the fair value recognition provisions of FASB
Statement No. 123 to stock-based employee compensation.
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ----- ------
Net income, as reported $1,630 $1,354 $3,161 $2,629
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 26 22 52 44
Pro forma net income $1,604 $1,332 $3,109 $2,585
Earnings per share
Basic - as reported $1.05 $.88 $2.05 $1.71
Basic - pro forma $1.04 $.87 $2.01 $1.68
Diluted - as reported $1.04 $.87 $2.02 $1.70
Diluted - pro forma $1.03 $.86 $1.99 $1.67
2. PER SHARE DATA
The following sets forth the computation of basic and diluted earnings per share
(share and per share data are not in thousands):
For the Three Months For the Six Months Ended
Ended June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Numerator for basic and diluted earnings
per share-net income $1,630 $1,354 $3,161 $2,629
Denominator for basic earnings per share-
weighted average shares outstanding 1,545,751 1,538,929 1,544,598 1,538,575
Effect of dilutive securities-employee
stock options 22,355 14,049 20,449 11,634
Denominator for diluted earnings per
share- adjusted weighted average
shares outstanding 1,568,106 1,552,978 1,565,047 1,550,209
Earnings per share-basic $1.05 $.88 $2.05 $1.71
Earnings per share-diluted $1.04 $.87 $2.02 $1.70
There were no stock options that were anti-dilutive for either the three-month
or the six-month periods ended June 30, 2003 or 2002.
Form 10-Q
Page 5
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business entity
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For QNB, the
sole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.
The following shows the components and activity of comprehensive income during
the periods ended June 30, 2003 and 2002 (net of the income tax effect):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
---- ---- ---- ----
Unrealized holding gains arising during the
period on securities held $434 $2,363 $497 $1,515
Reclassification adjustment for sold securities
(97) 63 (199) 105
---- ----- ----- ---
Net change in unrealized gains during the period 337 2,426 298 1,620
Unrealized holding gains, beginning of period 3,564 293 3,603 1,099
----- --- ----- -----
Unrealized holding gains, end of period $3,901 $2,719 $3,901 $2,719
====== ====== ====== ======
Net income $1,630 $1,354 $3,161 $2,629
Other comprehensive income, net of tax:
Unrealized holding gains arising during the
period 337 2,426 298 1,620
------ ------ ------ ------
Comprehensive Income $1,967 $3,780 $3,459 $4,249
====== ====== ====== ======
4. STOCK REPURCHASE PLAN
In March of 2000, the Board of Directors of QNB Corp. authorized the repurchase
of up to 4.99 percent or 79,180 shares of QNB Corp's outstanding common stock.
Such repurchases may be made in open market or privately negotiated
transactions. The repurchased shares will be held in treasury and will be
available for general corporate purposes. As of June 30, 2003 QNB Corp.
repurchased 53,343 shares at an average cost of $28.01 per share. No shares were
repurchased during the second quarter or first six months of 2003 or 2002.
Form 10-Q
Page 6
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
5. LOANS
The following table presents Loans by category as of June 30, 2003 and December
31, 2002:
June 30, December 31,
2003 2002
-------- ------------
Commercial and industrial $47,497 $39,546
Agricultural 1 176
Construction 7,343 7,687
Real estate-commercial 90,226 74,125
Real estate-residential 86,437 88,831
Consumer 6,237 6,748
-------- --------
Total loans 237,741 217,113
Less unearned income 211 263
-------- --------
Total loans net of unearned income $237,530 $216,850
======== ========
Included in total loans are loans classified as held for sale of $2,356,000 and
$4,159,000 at June 30, 2003 and December 31, 2002, respectively.
6. INTANGIBLE ASSETS
The following table presents Intangible Asset information as of June 30, 2003:
- ------------------------------------ ----------------------- ------------------------- ----------------------
Amortized Intangible Assets Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
- ------------------------------------ ----------------------- ------------------------- ----------------------
Purchased deposit premium $511 $289 $222
- ------------------------------------ ----------------------- ------------------------- ----------------------
Mortgage servicing asset 730 281 449
- ------------------------------------ ----------------------- ------------------------- ----------------------
Total $1,241 $570 $671
- ------------------------------------ ----------------------- ------------------------- ----------------------
The following table presents Intangible Asset information as of December 31,
2002:
- ------------------------------------ ----------------------- ------------------------- ----------------------
Amortized Intangible Assets Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
- ------------------------------------ ----------------------- ------------------------- ----------------------
Purchased deposit premium $511 $264 $247
- ------------------------------------ ----------------------- ------------------------- ----------------------
Mortgage servicing asset 679 250 429
- ------------------------------------ ----------------------- ------------------------- ----------------------
Total $1,190 $514 $676
- ------------------------------------ ----------------------- ------------------------- ----------------------
Included in accumulated amortization for the mortgage servicing asset is a
valuation allowance of $141,000 and $13,000 at June 30, 2003 and December 31,
2002, respectively.
Form 10-Q
Page 7
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
6. INTANGIBLE ASSETS (Continued)
AGGREGATE AMORTIZATION EXPENSE
For the Six Months ended June 30, 2003 $227
ESTIMATED AMORTIZATION EXPENSE
For the Year Ended 12/31/03 $328
For the Year Ended 12/31/04 180
For the Year Ended 12/31/05 137
For the Year Ended 12/31/06 105
For the Year Ended 12/31/07 76
7. RECENT ACCOUNTING PRONOUNCEMENTS
STOCK-BASED COMPENSATION
In December, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION- TRANSITION AND DISCLOSURE. This Statement amends SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based compensation. It also amends the disclosure
provisions of that Statement to require prominent disclosure about the effects
on reported net income of an entity's accounting policy decisions with respect
to stock-based employee compensation. Finally, this statement amends APB Opinion
No. 28, INTERIM FINANCIAL REPORTING, to require disclosure about those effects
in interim financial information. The requirements for SFAS No. 148 are
effective for financial statements for fiscal years ended and interim periods
beginning after December 15, 2002. QNB uses the "intrinsic value" approach to
accounting for stock-based compensation to account for stock-based compensation
as permitted under APB Opinion No. 25. QNB has adopted the disclosure provisions
of SFAS No. 148. The disclosure provisions had no impact on QNB's consolidated
earnings, financial condition, or equity.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In April 2003, the FASB issued SFAS No. 149, AMENDMENTS OF STATEMENT 133 ON
DERIVATIVE INSTRUMENTS AND HEDGING Activities, which establishes accounting and
reporting standards for derivative instruments, including derivatives embedded
in other contracts and hedging activities. The statement amends Statement No.
133 for decisions made by the Board as part of the Derivatives Implementation
Group (DIG) process. The statement also amends Statement No. 133 to incorporate
clarifications of the definition of a derivative. The statement is effective for
contracts entered into or modified and hedging relationships designated after
June 30, 2003. The provisions of this statement are not expected to have a
material impact on QNB's consolidated earnings, financial condition, or equity.
Form 10-Q
Page 8
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002, AND DECEMBER 31, 2002
(UNAUDITED)
7. RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES
AND EQUITY
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This Statement
establishes standards for how an issuer classifies financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify these financial instruments as a liability (or, in certain
circumstances, an asset). Previously these financial instruments would have been
classified entirely as equity, or between the liabilities section and equity
section of the statement of financial condition. This Statement also addresses
questions about the classification of certain financial instruments that embody
obligations to issue equity shares. The provisions of this Statement are
effective for interim periods beginning after June 15, 2003. Management does not
expect the adoption of this statement to have an impact on QNB's consolidated
earnings, financial condition, or equity.
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES
In November 2002, the FASB issued Interpretation No. (FIN) 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS. This Interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This Interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, DISCLOSURE OF
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS, which is being superseded. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. There was no
impact on earnings, financial condition or equity upon adoption of FIN 45. The
disclosure requirements in this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. The
adoption of the disclosure requirements of FIN 45 did not have an impact on the
financial statements or notes to the financial statements.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In January 2003, the FASB issued Interpretation No. (FIN) 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created or
obtained after January 31, 2003. For public enterprises with a variable interest
in a variable interest entity created before February 1, 2003, the
Interpretation applies to that enterprise no later than the beginning of the
first interim or annual reporting period beginning after June 15, 2003. There
was no impact on earnings, financial condition, or equity upon adoption of FASB
Interpretation No. 46.
Form 10-Q
Page 9
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania. The Corporation through its wholly owned subsidiary,
The Quakertown National Bank (the "Bank"), has been serving the residents and
businesses of Upper Bucks, Northern Montgomery and Southern Lehigh Counties in
Pennsylvania since 1877. The Bank is a locally managed community bank that
provides a full range of commercial, retail banking and trust and investment
management services. The consolidated entity is referred to herein as "QNB".
THIS REPORT INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT WITH RESPECT TO FINANCIAL PERFORMANCE
AND OTHER FINANCIAL AND BUSINESS MATTERS. FORWARD-LOOKING STATEMENTS ARE
TYPICALLY IDENTIFIED BY WORDS OR PHRASES SUCH AS "BELIEVE," "EXPECT,"
"ANTICIPATE," "INTEND," "ESTIMATE," "POSITION" AND VARIATIONS OF SUCH WORDS AND
SIMILAR EXPRESSIONS, OR FUTURE OR CONDITIONAL VERBS SUCH AS "WILL," "WOULD,"
"SHOULD," "COULD," "MAY" OR SIMILAR EXPRESSIONS. THE CORPORATION CAUTIONS THAT
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS AND
UNCERTAINTIES, ALL OF WHICH CHANGE OVER TIME, AND THE CORPORATION ASSUMES NO
DUTY TO UPDATE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS.
IN ADDITION TO FACTORS PREVIOUSLY DISCLOSED BY THE CORPORATION AND THOSE
IDENTIFIED ELSEWHERE HEREIN, THE FOLLOWING FACTORS, AMONG OTHERS, COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM FORWARD LOOKING STATEMENTS: INCREASED
CREDIT RISK; THE INTRODUCTION, WITHDRAWAL, SUCCESS AND TIMING OF BUSINESS
INITIATIVES AND STRATEGIES; CHANGES IN COMPETITIVE CONDITIONS; THE INABILITY TO
SUSTAIN REVENUE AND EARNINGS GROWTH; CHANGES IN ECONOMIC CONDITIONS, INTEREST
RATES AND FINANCIAL AND CAPITAL MARKETS; INFLATION; CHANGES IN INVESTMENT
PERFORMANCE; CUSTOMER DISINTERMEDIATION; CUSTOMER BORROWING, REPAYMENT,
INVESTMENT AND DEPOSIT PRACTICES; CUSTOMER ACCEPTANCE OF QNB PRODUCTS AND
SERVICES; AND THE IMPACT, EXTENT AND TIMING OF TECHNOLOGICAL CHANGES, CAPITAL
MANAGEMENT ACTIVITIES, ACTIONS OF THE FEDERAL RESERVE BOARD AND LEGISLATIVE AND
REGULATORY ACTIONS AND REFORMS.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Discussion and analysis of the financial condition and results of operations are
based on the consolidated financial statements of QNB, which are prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). The preparation of these financial statements requires QNB to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. QNB evaluates estimates on an on-going basis, including those
related to the allowance for loan losses, non-accrual loans, other real estate
owned, other-than-temporary investment impairments, intangible assets, stock
option plan and income taxes. QNB bases its estimates on historical experience
and various other factors and assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
QNB believes the following critical accounting policies affect its more
significant judgments and estimates used in preparation of its consolidated
financial statements: allowance for loan losses, income taxes and other-than-
Form 10-Q
Page 10
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
temporary investment security impairment. Each estimate is discussed below. The
financial impact of each estimate is discussed in the applicable sections of
Management's Discussion and Analysis.
ALLOWANCE FOR LOAN LOSSES
QNB maintains an allowance for loan losses, which is intended to absorb probable
known and inherent losses in the outstanding loan portfolio. The allowance is
reduced by actual credit losses and is increased by the provision for loan
losses and recoveries of previous losses. The provisions for loan losses are
charged to earnings to bring the total allowance for loan losses to a level
considered necessary by management.
The allowance for loan losses is based on management's continuing review and
evaluation of the loan portfolio. The level of the allowance is determined by
assigning specific reserves to individually identified problem credits and
general reserves to all other loans. The portion of the allowance that is
allocated to internally criticized and non-accrual loans is determined by
estimating the inherent loss on each credit after giving consideration to the
value of underlying collateral. The general reserves are based on the
composition and risk characteristics of the loan portfolio, including the nature
of the loan portfolio, credit concentration trends, historic and anticipated
delinquency and loss experience, as well as other qualitative factors such as
current economic trends.
Management emphasizes loan quality and close monitoring of potential problem
credits. Credit risk identification and review processes are utilized in order
to assess and monitor the degree of risk in the loan portfolio. QNB's lending
and loan administration staff are charged with reviewing the loan portfolio and
identifying changes in the economy or in a borrower's circumstances which may
affect the ability to repay debt or the value of pledged collateral. A loan
classification and review system exists that identifies those loans with a
higher than normal risk of uncollectibility. Each commercial loan is assigned a
grade based upon an assessment of the borrower's financial capacity to service
the debt and the presence and value of collateral for the loan. An independent
loan review group tests risk assessments and evaluates the adequacy of the
allowance for loan losses. Management meets monthly to review the credit quality
of the loan portfolio and quarterly to review the allowance for loan losses.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review QNB's allowance for losses on loans.
Such agencies may require QNB to recognize additions to the allowance based on
their judgments about information available to them at the time of their
examination.
Management believes that it uses the best information available to make
determinations about the adequacy of the allowance and that it has established
its existing allowance for loan losses in accordance with GAAP. If circumstances
differ substantially from the assumptions used in making determinations, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be affected. Because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
increases to the allowance will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above.
INCOME TAXES. QNB accounts for income taxes under the asset/liability method.
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, as well as operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
Form 10-Q
Page 11
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
INCOME TAXES (CONTINUED)
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is established
against deferred tax assets when in the judgment of management, it is more
likely than not that such deferred tax assets will not become available. Because
the judgment about the level of future taxable income is dependent to a great
extent on matters that may, at least in part go beyond QNB's control, it is at
least reasonably possible that management's judgment about the need for a
valuation allowance for deferred taxes could change in the near term. At June
30, 2003 QNB had a $138,000 valuation allowance for deferred taxes.
OTHER THAN TEMPORARY IMPAIRMENT OF INVESTMENT SECURITIES
Securities are evaluated periodically to determine whether a decline in their
value is other than temporary. Management utilizes criteria such as the
magnitude and duration of the decline, in addition to the reasons underlying the
decline, to determine whether the loss in value is other than temporary. The
term "other than temporary" is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support
realizable value equal to or greater than carrying value of the investment. Once
a decline in value is determined to be other than temporary, the value of the
security is reduced and a corresponding charge to earnings is recognized.
RESULTS OF OPERATIONS
QNB reported net income for the second quarter 2003 of $1,630,000 or $1.04 per
common share on a diluted basis. This compares to $1,354,000 or $.87 per share
for the same period in 2002. Net income for the first six months of 2003 was
$3,161,000 or $2.02 per share, a 20.2 percent increase over the $2,629,000 or
$1.70 per share for the comparable period in 2002. Results for both the second
quarter and six months of 2003 represent records for QNB.
A historically low interest rate environment has had both a positive and
negative impact on the results of operations for QNB during the second quarter
of 2003. On the positive side, the low interest rate environment has resulted in
a substantial increase in mortgage refinance activity. This additional activity
has contributed to the increase in non-interest income, specifically, the gain
on the sale of loans. During the second quarter of 2003, QNB originated over $15
million in mortgage loans. This compares to slightly less than $3 million for
the same period in 2002. As a result, non-interest income for the three months
ended June 30, 2003 was $1,426,000, a $717,000 increase from the second quarter
of 2002. When comparing these two periods gains on the sale of loans increased
$408,000 and net gains on the sale of investment securities increased $242,000.
Sales of equity securities contributed to the investment securities gain in
2003.
On the negative side, the low interest rate environment has reduced the net
interest margin. The net interest margin was 3.48 percent for the second quarter
of 2003 compared to 3.80 percent for the same period in 2002. The impact from
the decline in the net interest margin on net interest income was partially
offset by a 7.8 percent increase in average earning assets with average loans
increasing 12.9 percent. This growth was funded by an 11.0 percent increase in
average total deposits. The net result was a reduction in net interest income of
$36,000 when comparing the two quarters. Included in net interest income for the
second quarter of 2002 was the recognition of $94,000 in interest on non-accrual
loans. Excluding the impact of the non-accrual interest the net interest margin
for the second quarter of 2002 was 3.72%.
Return on average assets was 1.27 percent and 1.14 percent while the return on
average equity was 16.83 percent and 15.42 percent for the three months ended
Form 10-Q
Page 12
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (CONTINUED)
June 30, 2003 and 2002, respectively. For the six-month periods ended June 30,
2003 and 2002, return on average assets was 1.25 percent and 1.13 percent and
the return on average equity was 16.61 percent and 15.23 percent, respectively.
NET INTEREST INCOME
Net interest income is the primary source of operating income for QNB. Net
interest income is interest income, dividends, and fees on earning assets, less
interest expense incurred for funding sources. Earning assets primarily include
loans, investment securities and Federal funds sold. Sources used to fund these
assets include deposits, borrowed funds and shareholders' equity. Net interest
income is affected by changes in 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.
Net interest income decreased .9 percent to $3,836,000 for the quarter ended
June 30, 2003 as compared to $3,872,000 for the quarter ended June 30, 2002. On
a tax-equivalent basis, which allows for the comparison of tax-exempt loans and
investments to taxable loans and investments, net interest income decreased by
1.5 percent from $4,233,000 for the three months ended June 30, 2002 to
$4,171,000 for the same period ended June 30, 2003. Included in net interest
income for the three months ended June 30, 2002, was the recognition of $94,000
in interest on non-accrual loans that were paid in full. There was no such
recognition of income in the second quarter of 2003.
As mentioned previously, the growth in deposits and the investment of these
deposits into profitable loans and investment securities could only partially
offset the impact of the declining net interest margin on net interest income.
The growth in deposits is a continuation of the trend that began during 2001.
Despite improvement in the stock market during the second quarter of 2003, its
longer term lackluster performance, in conjunction with a slow growing United
States economy, and geopolitical uncertainty have contributed to the inflow of
funds into the banking system. Consumers are looking for the relative safely of
bank deposits despite the low interest rate environment. Average deposits
increased $40,449,000 or 11.0 percent when comparing the second quarters of 2003
and 2002. These deposits were primarily used to fund the $26,772,000 or 12.9
percent increase in average loans during this same time period.
The lower interest rate environment, which began in 2001, reached 45-year lows
in mid-June before rebounding slightly at the end of the quarter. For example,
the 10-year Treasury note, which started the year at 3.81 percent fell to 3.07
percent on June 16 and ended the quarter at 3.51 percent. This extended period
of low rates has had the impact of lowering the yield on earning assets and the
rate paid on interest-bearing liabilities, as loans, investment securities and
deposits either repriced at lower rates or were originated at lower interest
rates. The yield on earning assets on a tax-equivalent basis was 5.54 percent
for the second quarter of 2003 versus 6.59 percent for the second quarter of
2002, while the rate paid on interest-bearing liabilities was 2.34 percent and
3.16 percent for the same periods. The net interest margin, on a tax-equivalent
basis, declined 32 basis points to 3.48 percent for the three-month period ended
June 30, 2003 compared with 3.80 percent for the same period in 2002. The net
interest margin for the second quarter of 2003 represents a decline of 19 basis
points from the 3.67 percent recorded during the first quarter of 2003. At the
end of June 2003, the Federal Reserve Bank lowered the Federal Funds rate an
additional .25 percent to 1.00 percent. At the same time the prime lending rate
declined to 4.00 percent. These additional cuts may result in a further decline
in the net interest margin during 2003.
Form 10-Q
Page 13
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (CONTINUED)
The yield on loans decreased 91 basis points to 6.46 percent when comparing the
second quarter of 2002 to the second quarter of 2003. The average prime rate
when comparing the second quarter of 2002 to the second quarter of 2003
decreased 52 basis points, from 4.75 percent to 4.23 percent. While QNB was
negatively impacted from the decline in prime rate, the overall yield on the
loan portfolio did not decrease proportionately, since only a percentage of the
loan portfolio re-prices immediately with changes in the prime rate. A greater
contributor to the decline in yield on the loan portfolio was the impact of the
refinancing of residential mortgage, home equity and commercial loans into lower
yielding loans. The yield on the loan portfolio may continue to decline in 2003
as fixed rate loans are refinanced at lower rates, adjustable rate loans
re-price down as they reach their reset date and new loans are booked at the
current lower rates. In anticipation of rising rates in 2004, QNB, particularly
with regard to commercial loans, has attempted to originate floating rate loans
indexed to the prime rate. This should help increase the yield on the loan
portfolio as the prime rate increases.
When comparing the second quarter of 2003 to the second quarter of 2002, the
yield on investment securities decreased to 4.86 percent from 6.04 percent. With
the continuing low interest rate environment, cash flow from callable agency and
municipal securities, mortgage-backed securities and collateralized mortgage
obligations (CMOs) remains high. These funds as well as new funds from deposit
growth were reinvested in lower-yielding securities. Another result of the
increase in the prepayments on mortgage backed securities and CMOs purchased at
a premium was an increase in the amortization of the premium on these
securities. The net amortization on investment securities was $303,000 during
the second quarter of 2003 compared with $99,000 in the second quarter of 2002.
The increase in premium amortization has the impact of reducing interest income
and the yield on the portfolio. QNB has attempted to manage the prepayment and
amortization situation by selling out of certain faster paying CMOs and mortgage
backed securities and purchasing lower coupon, lower premium mortgage backed
securities and CMOs that will not pay as quickly should rates stay low or
decline further. The yield on the investment portfolio may continue to decline
during 2003, as higher yielding securities continue to be replaced at lower
rates.
While total interest income on a tax-equivalent basis decreased $693,000 when
comparing the second quarter of 2003 to the second quarter of 2002, total
interest expense decreased $631,000. The rate paid on interest bearing deposits
decreased from 2.84 percent to 1.93 for the quarters ended June 30, 2002 and
2003. The impact of lower rates on time deposits was the greatest contributor to
the decline in total interest expense and the rate paid on interest bearing
deposits. Total interest expense on time deposits decreased $526,000 when
comparing the two quarters. The average rate paid on time deposits declined from
4.06 percent to 2.89 percent when comparing the two periods. Like fixed-rate
loans, certificates of deposit reprice over time and therefore have less of an
immediate impact on yield in either a rising or falling rate environment.
However, given the extended period of low interest rates, most time deposits
have already re-priced lower and therefore the yield on time deposits will
likely not decline much further. Average time deposits increased $5,269,000 to
$196,275,000 when comparing the second quarter of 2003 to the same period in
2002. A $13,124,000 increase in average time deposits with balances less than
$100,000 offset a $7,855,00 decrease in average time deposits with balances of
$100,000 or more.
Lower rates paid on money market accounts and savings accounts contributed to
the $63,000 and $29,000 decrease in interest expense for these products. The
average rate paid on money market accounts declined 67 basis points when
comparing the second quarter of 2003 yield of .91 percent to the second quarter
of 2002 yield of 1.58 percent. Contributing to the decline in the yield on money
market accounts was the decline in the rate paid on the Treasury Select Money
Market Account. This product is a variable rate account indexed to the monthly
average of the 91-day Treasury bill based on balances in the account. The
decline in the 91-day Treasury rate resulted in significantly lower rates on
this product. In response to lower market rates of interest QNB lowered the
rates paid on savings accounts. The average rate paid on savings accounts
declined 46 basis points to .77 percent when comparing the second quarter of
Form 10-Q
Page 14
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (CONTINUED)
2003 to the second quarter of 2002. When comparing the second quarter of 2003 to
the second quarter of 2002 average money market accounts decreased $1,453,000 or
4.1 percent, while average savings accounts increased $9,608,000 or 23.0
percent.
Interest expense on interest bearing demand accounts increased from $83,000 to
$123,000, while the yield on these accounts increased from .58 percent to .63
percent, when comparing the three-month periods ended June 30, 2002 and 2003.
The average balance on these accounts increased from $57,607,000 to $77,951,000
when comparing the same two periods. The majority of the growth in interest
bearing demand deposits can be attributed to the successful development of a
relationship with a municipal organization.
With regard to the yield on non-maturity interest-bearing deposits, which
reprice immediately when their rates are changed, management does not expect the
rate paid to decline significantly as they have reached a level where only a
minimal reduction in rates is possible.
Interest expense on short-term borrowing decreased from $68,000 for the second
quarter of 2002 to $24,000 for the second quarter of 2003. This is a result of a
decline in both volume and rate. Average short-term borrowings decreased from
$13,122,000 to $8,193,000 when comparing the two periods while, the rate paid on
short-term borrowings decreased from 2.08 percent for the second quarter of 2002
to 1.17 percent for the second quarter of 2003. Most of these borrowings are
indexed with the Federal funds rate.
For the six-month period ended June 30, 2003, net interest income increased
$226,000 or 3.0 percent to $7,723,000. On a tax-equivalent basis net interest
income increased $220,000 or 2.7 percent. The significant growth in average
earning assets offset the decline in the net interest margin. Average earning
assets increased 7.8 percent while the net interest margin declined 19 basis
points. The net interest margin on a tax-equivalent basis was 3.57 percent for
the six-month period ended June 30, 2003 compared with 3.76 percent for the same
period in 2002. Excluding the impact of the recognition of interest on
non-accrual loans during the second quarter of 2002, the net interest margin
declined by 14 basis points.
Total interest income decreased $1,071,000 from $13,770,000 to $12,699,000 when
comparing the six-month periods ended June 30, 2002 to June 30, 2003. The
decline in interest income is a result of the extended period of lower interest
rates. The yield on earning assets decreased from 6.63 percent to 5.69 percent,
with the yield on investment securities declining from 6.16 percent to 5.06
percent and the yield on loans declining from 7.37 percent to 6.58 percent
between the six-month periods. Average loans increased 10.1 percent to
$228,482,000 while average investment securities increased 4.7 percent to
$233,510,000.
Total interest expense decreased $1,297,000 from $6,273,000 to $4,976,000 for
the six-month periods with interest on money market accounts, savings accounts
and time deposits accounting for $125,000, $39,000 and $1,120,000 of the
decrease. The yield on these accounts declined 67 basis points, 39 basis points
and 127 basis points when comparing the average rate paid for the six-month
periods ended June 30, 2003 and 2002. Interest expense on interest-bearing
demand accounts increased $81,000 to $238,000 as average balances increased
$19,968,000 to $76,196,000 for the six-month period ended June 30, 2003.
Interest expense on short-term borrowings declined by $87,000 as the average
rate paid on these accounts declined from 2.06 percent to 1.21 percent and the
average balances declined from $13,687,000 to $8,858,000.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to be charged to operations to bring the allowance for loan
losses to a level that represents management's best estimate of the known and
Form 10-Q
Page 15
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (CONTINUED)
inherent losses in the loan portfolio. Actual loan losses, net of recoveries,
serve to reduce the allowance.
The determination of an appropriate level of the allowance for 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 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. This model is supplemented with another analysis that
also incorporates exceptions to QNB's loan policy and QNB's portfolio exposure
to borrowers with large dollar concentration, defined as exceeding 50% of QNB's
legal lending limit. Other tools include ratio analysis and peer group analysis.
QNB's management determined no provision for loan losses was necessary for
either the three or six month periods ended June 30, 2003 or 2002 as charged off
loans, non-performing assets and delinquent loans remained at low levels
relative to the allowance for loan losses. QNB had net recoveries of $4,000 and
$3,000 for the three month periods ended June 30, 2003 and 2002. For the
six-month period ended June 30, 2003, QNB had net charge-offs of $1,000. This
compares to net recoveries of $34,000 for the six-month period ended June 30,
2002.
Non-performing assets (non-accruing loans, loans past due 90 days or more, other
real estate owned and other repossessed assets) remained low amounting to .10
percent of total assets at June 30, 2003. This compares to .08 percent at June
30, 2002 and .13 percent at December 31, 2002. Non-accrual loans were $477,000
and $363,000 at June 30, 2003 and 2002. Non-accrual loans at December 31, 2002
were $650,000. QNB did not have any other real estate owned as of June 30, 2003,
December 31, 2002 or June 30, 2002. Repossessed assets were $5,000 and $11,000
at June 30, 2003 and December 31, 2002. There were no repossessed assets as of
June 30, 2002.
Overall delinquency, including loans past due 90 days or more, also improved
during the second quarter of 2003 and represented .41 percent of total loans at
June 30, 2003. This compares to .60 percent and .49 percent at December 31, 2002
and June 30, 2002, respectively. QNB did not have any other real estate owned as
of June 30, 2002, December 31, 2001 or June 30, 2001.
There were no restructured loans as of June 30, 2003, December 31, 2002 or June
30, 2002 as defined in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," that
have not already been included in loans past due 90 days or more or non-accrual
loans.
The allowance for loan losses was $2,937,000 and $2,938,000 at June 30, 2003 and
December 31, 2002, respectively. The ratio of the allowance to total loans was
1.24 percent and 1.35 percent at both period end dates. The 9.5 percent growth
in total loans between December 31, 2002 and June 30, 2003 was the primary
factor in the decline in this ratio. 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.
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.
Form 10-Q
Page 16
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (CONTINUED)
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
At June 30, 2003 and 2002, the recorded investment in loans for which impairment
has been recognized in accordance with SFAS No. 114 totaled $452,000 and
$283,000, respectively. No valuation allowance was necessary on these loans.
Most of the loans identified as impaired are collateral-dependent.
Management in determining the allowance for loan losses makes significant
estimates. 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 loan reviews, borrowers' perceived
financial and managerial strengths, the adequacy of underlying collateral if
collateral dependent, or the present value of future cash flows. Since the
allowance for 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 loan losses and actual results could
differ in the near term. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review QNB's allowance
for losses on loans. Such agencies may require QNB to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination.
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, ATM and debit card income, income on bank owned life insurance,
mortgage servicing fees, gains or losses 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 has not materially
changed these fee schedules during 2002 or 2003. During the third quarter of
2002, QNB increased its overdraft fee by 7.1 percent.
Total non-interest income increased $717,000 or 101.1 percent to $1,426,000 for
the quarter ended June 30, 2003 when compared to June 30 2002. For the six-month
period total non-interest income increased $1,221,000 or 84.6 percent to
$2,664,000. Excluding gains and losses on the sale of investment securities and
loans during both periods, non-interest income for the three-month period
increased $67,000 or 9.3 percent and for the six-month period increased $132,000
or 9.6 percent.
Fees for services to customers, the largest component of total non-interest
income, are primarily comprised of service charges on deposit accounts. These
fees increased 21.0 percent or $80,000, to $461,000 when comparing the two
quarters and 18.4 percent or $136,000 to $875,000 when comparing the six-month
periods. The increase in the overdraft fee during the third quarter of 2002, as
well as an increase in the volume of overdrafts resulted in a $78,000 or 26.0
percent increase in overdraft income when comparing the three month periods and
$144,000 or 25.0 percent increase when comparing the six month periods ended
June 30, 2003 and 2002.
ATM and debit card income is primarily comprised of interchange income on debit
cards and ATM surcharge income for the use of QNB ATM machines by non-QNB
customers. ATM and debit card income was $151,000 for the second quarter of
2003, an increase of $23,000 or 18.0 percent from the amount recorded during the
second quarter of 2002. For the six-month periods ATM and debit card income
increased 19.0 percent to $282,000. Debit card income increased $23,000 or 26.0
percent for the three-month periods and $38,000 or 23.4 percent when comparing
the six-month periods ended June 30, 2003 and 2002. The increase in debit card
Form 10-Q
Page 17
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (CONTINUED)
income is a result of increased acceptance by consumers of the card as a means
of paying for goods and services. Debit card income is likely to decrease
beginning in the third quarter of 2003 as a result of the legal settlement
between the card companies and the retailers. This settlement will result in a
reduction in the amount earned per transaction.
ATM transaction surcharge income decreased $4,000 or 13.7 percent when comparing
the second quarter of 2003 to the second quarter of 2002. For the six-month
period, ATM transaction surcharge income decreased $8,000 or 13.4 percent. The
decline in ATM transaction surcharge income is a result of a reduction in the
number of transactions by non-QNB customers at QNB machines. Offsetting this
reduction in income was increases in ATM interchange income and card fee income.
ATM interchange income increased $3,000 for the quarter and $10,000 for the
six-month period while card fee income increased $3,000 for the quarter and
$6,000 for the six- month period.
When QNB sells its residential mortgages in the secondary market, it retains
servicing rights. A normal servicing fee is retained on all mortgage loans sold
and serviced. QNB recognizes its obligation to service financial assets that are
retained in a transfer of assets in the form of a servicing asset. The servicing
asset is amortized in proportion to and over the period of net servicing income
or loss. Servicing assets are assessed for impairment based on their fair value.
Mortgage servicing fees for the quarter ended June 30, 2003 were a loss of
$46,000. Included in this amount is a $53,000 valuation allowance for
impairment. For the six-month period ended June 30, 2003, the net mortgage
servicing income was a loss of $105,000 of which $128,000 was a result of a
valuation allowance. This impairment was a result of the historically high
prepayment speeds on mortgages resulting from the record level of mortgage
refinancing activity created by the low interest rate environment. Excluding the
valuation allowance mortgage servicing income would have been $7,000 for the
second quarter of 2003 compared to $21,000 for the second quarter of 2002. For
the six-month period ended June 30, 2003 mortgage servicing income would have
been $23,000 compared to $36,000 for the same period in 2002.
Other results from the increase in mortgage refinancing activity are an increase
in amortization expense and an increase in the amount of mortgages serviced.
When a loan is paid off, the servicing asset related to that mortgage must be
expensed. Amortization expense for the three-month periods ended June 30, 2003
and 2002 was $43,000 and $20,000, respectively. For the respective six-month
periods amortization expense was $74,000 and $39,000. The average balance of
mortgages serviced for others was $79,923,000 for the second quarter of 2003
compared to $67,323,000 for the second quarter of 2002, an increase of 18.7
percent. The average balance of mortgages serviced was approximately $77,413,000
for the six-month period ended June 30, 2003 compared to $66,611,000 for the
first six months of 2002, an increase of 16.2 percent. The timing of mortgage
payments and delinquencies also impacts the amount of servicing fees recorded.
Net gains on the sale of investment securities were $147,000 for the second
quarter of 2003. QNB recognized a gain of $137,000 on the sale of marketable
equity securities and a gain of $10,000 on the sale of debt securities. For the
six-month period net gains on investment securities was $302,000 of which
$277,000 is a result of sales of debt securities and $25,000 relates to activity
in the marketable equity securities portfolio. Included in the net gain on the
equity portfolio was a $126,000 write-down of securities whose decline in market
value below cost was deemed to be other than temporary. These securities were
determined to be impaired. With regard to the sale of debt securities, QNB has
sold approximately $28 million of mortgage-backed securities and CMO's that were
prepaying at very fast speeds. The proceeds were used to purchase lower coupon
mortgage backed securities and CMO's. The purpose of these transactions was to
reduce the amount of cash flow currently being received and also the amount of
premium amortization being recorded. Management will continue to look at
strategies that will result in an increase in the yield on the portfolio.
Form 10-Q
Page 18
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (CONTINUED)
QNB recorded a net loss of $95,000 on the sale or other than temporary
impairment of investment securities during the second quarter of 2002. For the
six-month period ended June 30, 2002 the net loss was $159,000. Included in
these amounts were losses of $118,000 for the quarter and $200,000 for the
six-month period related to the write-down of marketable equity securities that
declined in market value below cost, which was deemed to be other than
temporary.
QNB recorded a gain of $489,000 on the sale of loans during the second quarter
of 2003. This compares to a $81,000 gain for the same period in 2002. For the
six-month periods ended June 30, 2003 and 2002 net gains on the sale of loans
were $850,000 and $222,000, respectively. The sale of student loans accounts for
$2,000 and $15,000 of the gains during the second quarter of 2003 and 2002. QNB
sold approximately $138,000 and $785,000 in student loans during the second
quarter of 2003 and 2002. Gains on the sale of student loans accounted for
$7,000 and $32,000 of the total gains during the six-month periods ended June
30, 2003 and 2002, respectively. For the six-month periods ended June 30, 2003
and 2002, QNB sold approximately $395,000 and $1,671,000 of student loans. The
decrease in the gain on the sale relates to the lower volume of loans sold.
Effective June 30, 2002 QNB terminated its agreement with the Student Loan
Marketing Association (SLMA). QNB will no longer be originating student loans
for sale but will be working on a referral basis instead. The remaining balance
in the portfolio was sold during the second quarter of 2003.
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. As mentioned previously, the decline in interest rates has resulted
in record mortgage refinancing activity and significant gains on the sale of
these loans. Gains are usually recorded as rates fall while rising rates tend to
result in losses. This activity peaked during the second quarter of 2003 as
mortgage rates reached historical lows. The net gain on the sale of residential
mortgage loans were $487,000 and $66,000 for the three-month periods ended June
30, 2003 and 2002 and $843,000 and $190,000 for the respective six-month
periods. QNB originated $15,481,000 and $2,923,000 in residential mortgages held
for sale during the second quarter of 2003 and 2002 and $23,546,000 and
$9,734,000 during the respective six-month periods. Proceeds from the sale of
residential mortgages were approximately $15,785,000 and 2,593,000 during the
second quarters of 2003 and 2002, respectively. For the six-month periods
proceeds from the sale of residential mortgage loans amounted to $25,693,000 and
$10,230,000, respectively. At June 30, 2003 and 2002, QNB had approximately
$2,356,000 and $508,000 in mortgage loans classified as held for sale. These
loans are accounted for at lower of cost or market.
Other operating income increased $32,000 or 28.1 percent to $146,000 when
comparing the three-month periods ended June 30, 2003 and 2002. Contributing to
the increase for the quarter was $22,000 in dividends from QNB's minority
ownership of Bankers Settlement Services of Eastern Pennsylvania, LLC, a title
insurance company. A $13,000 increase in merchant income and a $7,000 increase
in income from the sale of checks offset a $15,000 decline in commissions from
consumer loan insurance premiums.
For the six-month period other operating income increased $95,000 or 45.2
percent to $305,000. Included in other operating income in 2003 was a $47,000
gain on residential mortgage loans held for sale that have been committed but
not settled. Dividends from the title insurance company increased $26,000 while
retail brokerage and trust income increased $16,000 and $4,000, respectively.
Merchant income increased $19,000 while consumer loan insurance commissions
decreased $20,000 when comparing the six-month periods.
NON-INTEREST EXPENSE
Non-interest expense is comprised of costs related to salaries and employee
benefits, net occupancy, furniture and equipment, marketing, third party
services and various other operating expenses. Total non-interest expense of
Form 10-Q
Page 19
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (CONTINUED)
$3,143,000 for the quarter ended June 30, 2003 represents an increase of
$257,000 or 8.9 percent from levels reported in the second quarter of 2002.
Total non-interest expense for the six months ended June 30, 2003 was
$6,281,000, an increase of $601,000 or 10.6 percent over 2002 levels.
Salaries and benefits, the largest component of non-interest expense, increased
$177,000 or 10.9 percent to $1,798,000 for the quarter ended June 30, 2003
compared to the same quarter in 2002. Salary expense increased $159,000 or 12.0
percent during the period to $1,480,000 while benefits expense increased $18,000
or 6.0 percent to $318,000. For the six-month period ended June 30, 2003
salaries and benefits expense increased $434,000 or 13.7 percent compared to
2002. Salary expense increased $361,000 or 14.1 percent while benefits expense
increased $73,000 or 11.9 percent.
QNB monitors, through the use of various surveys, the competitive salary
information in its markets and makes adjustments where appropriate. In addition,
in 2002 with the assistance of a consultant, QNB performed a complete analysis
of its compensation program. One result of this analysis was the development and
implementation of a new incentive program. This program has contributed an
additional $91,000 and $216,000 in salary expense when comparing the three and
six-month periods ended June 30, 2003 and 2002. Excluding the accruals for the
incentive program salary expense increased 5.4 percent for the three-month
period and 5.9 percent for the six-month period. Merit increases and an increase
in the number of employees also contributed to the increase in salary expense.
The number of full time-equivalent employees increased by five when comparing
both the three and six month periods.
An increase in medical, dental and workers compensation insurance premiums has
contributed to the increase in benefits expense for both the three and six month
periods. For the three and six month periods medical expense has increased
approximately 14.7 percent and 20.8 percent, respectively. For the six-month
period payroll tax expense and retirement plan expense increased $11,000 and
$18,000, respectively. Higher compensation expense contributes to the increase
in these areas.
Net occupancy expense increased $10,000 or 5.0 percent when comparing the second
quarter of 2003 to the second quarter of 2002. For the six-month period, net
occupancy expense increased $19,000 or 4.7 to $425,000. Utility expense
increased $6,000 for the quarter and $11,000 for the six-month period while
building maintenance expense increased $4,000 and $10,000 for the same periods.
Furniture and equipment expense increased $18,000 or 7.2 percent when comparing
the three-month periods ended June 30, 2003 and 2002 and $60,000 or 12.5 percent
when comparing the six-month periods. Depreciation and amortization expense
increased $25,000 and $52,000 when comparing the three-month and six-month
periods, respectively. The increase in depreciation and amortization expense is
a result of the completion of several large projects in the second half of 2002.
A $9,000 decline in equipment maintenance expense for the quarter partially
offset the increase in depreciation expense. For the six-month period equipment
maintenance expense is virtually unchanged.
Marketing expense decreased $2,000 to $115,000 for the quarter ended June 30,
2003 and $46,000 to $215,000 when comparing the six-month periods. The decrease
in marketing expense is primarily a result of the timing of advertising, sales
promotion and donation expenses. The advertising and sales promotion costs will
likely catch up during the remainder of the year. During the fourth quarter of
2002 QNB made several large long-term charitable pledges that would likely have
been made during the first half of 2003.
Form 10-Q
Page 20
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (CONTINUED)
Third party services are comprised of professional services including legal,
accounting and auditing and consulting services as well as fees paid to outside
vendors for support services of day-to-day operations. These include Trust
services, retail non-deposit services, correspondent banking services,
investment security safekeeping and supply management services, to name a few.
Third party services expense was $169,000 in the second quarter of 2003 compared
to $145,000 for the second quarter of 2002. For the six-month periods ended June
30, 2003 and 2002 third party service expense was $359,000 and 279,000,
respectively. The outsourcing of the statement printing and mailing function
contributed to the increase in third party services for both the three and six
month periods. This function was outsourced during the second quarter of 2003.
Also contributing to the increase were consulting and training cost related to
the installation of an upgrade to the item processing system. The use of an
executive search firm to fill an open Trust officer position was a major
contributor to the increase in third party services when comparing the six-month
periods.
For the three-month period ended June 30, 2003 telephone, postage and supplies
expense decreased $9,000 or 6.7 percent to $126,000. A $13,000 reduction in
supply costs contributed to the positive variance. For the six-month period
these expenses decreased $5,000 or 1.9 percent with supply costs decreasing
$19,000 while postage costs increased $11,000.
INCOME TAXES
Applicable income taxes and effective tax rates were $489,000 or 23.1 percent
for the three-month period ended June 30, 2003, and $341,000 or 20.1 percent for
the same period in 2002. For the six-month period applicable income taxes and
effective rates were $945,000 or 23.0 percent and $631,000 or 19.4 percent,
respectively. The increase in the effective tax rate when comparing 2003 to 2002
is a result of pre-tax income increasing at a rate faster than tax-exempt
income. Also contributing to the higher effective tax rate was the additional
valuation allowance on capital losses recorded during the first quarter for the
impairment of equity securities.
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of June 30, 2003, QNB's net deferred tax liability
was $1,168,000. The primary components of deferred taxes are a deferred tax
asset of $726,000 relating to the allowance for loan losses and a deferred tax
liability of $2,009,000 resulting from the SFAS No. 115 adjustment for
available-for-sale investment securities. As of June 30, 2002 QNB's net deferred
tax liability was $579,000. A deferred tax asset of $738,000 relating to the
allowance for loan losses was offset by a deferred tax liability of $1,401,000
resulting from the SFAS No. 115 adjustment for available-for-sale investment
securities. An increase in the market value of the available-for-sale investment
portfolio resulting from declining interest rates accounts for the change to a
deferred tax liability from a deferred tax asset.
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. A valuation allowance of $95,000 was established during the year
ended December 31, 2002, to offset a portion of the tax benefits associated with
certain impaired securities that management believes may not be realizable. For
the six month period ended June 30, 2003 the valuation allowance was increased
to $138,000. Based upon these and other factors, management believes it is more
likely than not that QNB will realize the benefits of these remaining deferred
tax assets.
Form 10-Q
Page 21
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the six months
ended June 30, 2003 and 2002, as well as the period ending balances as of June
30, 2003 and December 31, 2002.
Average earning assets for the six-month period ended June 30, 2003 increased
$35,040,000 or 8.0 percent to $475,049,000 from $440,009,000 for the six months
ended June 30, 2002. Average loans increased $21,024,000 while average
investment securities and Federal funds sold increased $10,523,000 and
$3,419,000, respectively.
The 10.1 percent increase in average loans is a result of the use of a business
development and calling program encompassing lending personnel, branch personnel
and executive management. The focus of this program is to both develop new
lending and deposit relationships as well as strengthen existing relationships.
This program was enhanced during 2002 with the development of a bank-wide sales
initiative that concentrated on sales training, particularly with regard to
identifying lending opportunities. This program has been expanded in 2003 to
include an incentive compensation program that will reward employees not only
for loan growth, but also for asset quality and profitability. The addition of
the Souderton branch location was also key to the growth in loans, especially
commercial loans. The growth in loans was achieved despite the relatively weak
economy during 2002 and the first half of 2003.
Average commercial loans increased $14,249,000, while average consumer loans
increased $6,761,000 when comparing the first half of 2003 to the first half of
2002. Average residential mortgage loans held in portfolio were relatively
unchanged despite the increase in originations because most residential mortgage
loans are sold. The increase in consumer loans is primarily in the category of
home equity loans, which increased $7,123,000 or 18.3 percent. Home equity loans
have been popular with consumers; especially those refinancing existing
residential mortgage loans, because they have lower origination costs than
residential mortgage loans.
The increase in average investment securities is a result of the growth in
deposits outpacing the growth in loans. The higher balance in average Federal
funds sold when comparing the six-month periods is a result of management's
decision to keep additional liquidity in light of the significant growth in
deposits.
The growth in average earning assets was funded by increases in
non-interest-bearing and interest-bearing deposit accounts. Average non-interest
bearing demand accounts increased $6,567,000 or 15.9 percent, while average
interest-bearing deposit accounts increased $33,172,000 or 10.3 percent. The
"Free Checking" promotion, as well as the acquisition of new business accounts
were significant factors in the increase in non-interest bearing deposits.
The growth in average interest-bearing deposit accounts is primarily centered in
interest bearing demand deposit accounts which increased $19,968,000 or 35.5
percent. The majority of this growth can be attributed to the successful
development of a relationship with a municipal organization. Average savings
accounts increased $9,043,000 or 22.4 percent. Lackluster performance of the
stock market, a slow growing United States economy, and geopolitical uncertainty
Form 10-Q
Page 22
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS (CONTINUED)
have contributed to the inflow of funds into the banking system. Consumers are
looking for the relative safety of bank deposits despite the low interest rate
environment.
Time deposit accounts continued to increase in 2003 but at a much slower rate
than in previous years. Average total time deposits increased $5,015,000 or 2.7
percent to $193,921,000 when comparing the first half of 2003 to the first half
of 2002. Average time deposits with balances less than $100,000 increased
$11,953,000 while those with balances greater than $100,000 decreased
$6,938,000. Another difference in the growth pattern in time deposits was in the
maturity time frame selected by customers. In 2001, the majority of the new time
deposits were opened with maturities under one year, while in 2002 and 2003
customers extended the maturities and opened accounts with maturities between
three and five years. It appears that customers are looking to achieve the
highest yields possible in this low interest rate environment.
Total assets at June 30, 2003 were $528,462,000, compared with $503,430,000 at
December 31, 2002, an increase of 5.0 percent. The increase in assets from
December 31, 2002 to June 30, 2003 is primarily centered in loans, which
increased $20,680,000. Cash and cash equivalents increased $9,878,000 when
comparing the two periods. This growth is a result of the desire to increase
liquidity as well as the timing of the reinvestment of approximately $9,000,000
in proceeds from the sale of investment securities during the second quarter of
2003. These proceeds were not reinvested until the third quarter.
The growth in assets was primarily funded by a $28,470,000 increase in total
deposits. Total deposits increased from $388,913,000 at December 31, 2002 to
$417,383,000 at June 30, 2003. The increase in deposits was spread across all
product lines except for money market accounts. Non-interest bearing demand
accounts and interest bearing demand accounts increased $11,064,000 and
$3,865,000, respectively when comparing balances at June 30, 2003 and December
31, 2002. Savings accounts increased $6,994,000 and total time deposits
increased $10,852,000 when comparing the same time periods. Money market
accounts decreased $4,305,000 during this time frame. The large increase in
non-interest bearing deposits at June 30, 2003 was the result of a couple of
large temporary deposits by customers on June 30, 2003.
At June 30, 2003 the fair value of investment securities available-for-sale was
$221,327,000 or $5,910,000 above the amortized cost of $215,417,000. This
compares to a fair value of $214,741,000 or $5,524,000 above the amortized cost
of $209,217,000 at December 31, 2002. An unrealized holding gain, net of taxes,
of $3,901,000 and $3,603,000 was recorded as an increase to shareholders' equity
at June 30, 2003 and December 31, 2002, respectively. Despite the amount of
activity in the portfolio through maturities, calls, prepayments and sales, the
composition of the portfolio has not changed significantly since December 31,
2002. During the second quarter of 2002, management and the Board of Directors
approved that all future purchases of investment securities will be categorized
as available-for-sale. While there is the potential for increased volatility of
shareholder's equity due to market value changes, management believes it will
provide for more flexibility in managing the portfolio.
The available-for-sale portfolio had a weighted average maturity of
approximately 3 years, 5 months at June 30, 2003 and 4 years, 7 months at
December 31, 2002. The weighted average tax-equivalent yield was 4.66 percent
and 5.35 percent at June 30, 2003 and December 31, 2002. The weighted average
maturity is based on the stated contractual maturity of all securities except
for mortgage-backed securities and CMOs, which are based on estimated average
life. The maturity of the portfolio may be shorter because of call features in
many debt securities and because of prepayments on mortgage-backed securities
and CMOs. The interest rate sensitivity analysis reflects the repricing term of
the securities portfolio based upon estimated call dates and anticipated cash
flows assuming management's most likely interest rate environment. The expected
repricing term of the available-for-sale portfolio was 2 years, 7 months at June
30, 2003 and 2 years, 11 months at December 31, 2002, based on these
assumptions. The reduction in both the weighted average maturity and the
repricing term is a result of the decline in interest rates that has led to a
significant increase in prepayment speeds on mortgage-backed securities and
CMOs.
Investment securities held-to-maturity are reported at amortized cost. As of
June 30, 2003 and December 31, 2002, QNB had securities classified as
held-to-maturity with an amortized cost of $17,673,000 and $29,736,000 and a
market value of $18,229,000 and $30,386,000, respectively. The held-to-maturity
portfolio had an expected repricing term of approximately 2 years, 6 months at
June 30, 2003 and 2 years, 1 month at December 31, 2002. The weighted average
tax-equivalent yield was 6.27 percent at June 30, 2003 and 6.14 percent at
December 31, 2002.
Form 10-Q
Page 23
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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 manages 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 investment
securities 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. Additional sources of liquidity are provided by The
Quakertown National Bank's membership in the Federal Home Loan Bank and a
$5,000,000 unsecured Federal funds line granted by the Bank's correspondent.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $261,038,000 and $246,377,000 at June 30, 2003 and
December 31, 2002. These sources were adequate to meet deposit withdrawals and
loan growth during the first half of 2003 and should be adequate to meet normal
fluctuations in loan demand and or deposit withdrawals. QNB has been able to
fund the growth in earning assets during the first half of 2003 through
increased deposits. QNB did not use its Federal funds line, overnight borrowings
from the FHLB or the Federal Reserve Bank discount window to fund loan growth or
deposit withdrawals during the first half of 2003. Approximately $56,575,000 and
$65,871,000 of available-for-sale securities at June 30, 2003 and December 31,
2002 were pledged as collateral for repurchase agreements and deposits of public
funds as required by law. In addition, under terms of its agreement with the
Federal Home Loan Bank, QNB maintains otherwise unencumbered qualifying assets
(principally 1-4 family residential mortgage loans and U.S. Government and
Agency notes, bonds, and mortgage-backed securities) in the amount of at least
as much as its advances from the Federal Home Loan Bank.
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 increased $9,878,000 to $37,355,000 at June 30, 2003. This
compares to a $1,969,000 decrease during the first six months of 2002. After
adjusting net income for non-cash transactions, operating activities provided
$5,881,000 in cash flow in the first six months of 2003, compared to $2,000,000
in the same period of 2002. Higher net income, an increase in mortgage activity
and an increase in amortization of premiums on investment securities accounted
for the increase in net cash provided by operating activities during the first
half of 2003. Changes in other assets and other liabilities also had an impact
when comparing the two periods. The primary change in other assets relates to
the maturity of an investment security on June 30, 2002, whose proceeds were not
received until July 1, 2002. The primary change in other liabilities relates to
the purchase of a security in December 2001, that the broker failed to deliver
until January 2002. The purchase was booked as an investment during 2001, since
QNB was the owner and a liability was recorded.
Net cash used by investing activities was $17,024,000 during the first half of
2003. The growth in loans during the first six months of 2003 was the primary
use of cash. Loans, excluding mortgage and student loan activity increased
$22,380,000 during the first half of 2003. Investment securities activity was a
net provider of cash of $5,560,000 during the first six months of 2003. Net cash
used by investing activities was $28,577,000 during the first six months of
2002. Loan growth, particularly during the second quarter of 2002, created a net
increase in loans and a use of cash of $9,232,000. In addition, the purchase of
investment securities exceeded the maturity, call and sale of securities by
$19,025,000 during the first half of 2002. Most of the activity relates to the
deployment of the deposit growth experienced during the first six months of
2002.
Net cash provided by financing activities was $21,021,000 during the first half
of 2003 and $24,608,000 during the first half of 2002. The increase in deposits
of $28,470,000 offset the decline in short-term borrowings of $6,539,000. The
decrease in short-term borrowings is primarily the reduction of balances held by
Form 10-Q
Page 24
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY (CONTINUED)
one repurchase agreement customer. A $19,445,000 increase in interest-bearing
deposits and a $5,095,000 increase in non-interest bearing demand deposits was
the main source of funding during the first six months of 2002. An additional
$2,000,000 advance from the FHLB also provided funding during the first half of
2002.
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 June 30, 2003 was
$43,463,000 or 8.22 percent of total assets compared to shareholders' equity of
$40,914,000 or 8.13 percent at December 31, 2002. Shareholders' equity at June
30, 2003 includes a positive adjustment of $3,901,000 related to unrealized
holding gains, net of taxes, on investment securities available-for-sale, while
shareholders' equity at December 31, 2002 includes a positive adjustment of
$3,603,000. Without these adjustments shareholders' equity to total assets would
have been 7.49 percent and 7.41 percent at June 30, 2003 and December 31, 2002.
On March 30, 2000, the Board of Directors of QNB Corp. approved a plan to
repurchase up to 4.99 percent or 79,180 shares of QNB Corp's outstanding common
stock in open market and privately negotiated transactions. As of June 30, 2003
and December 31, 2002, 53,343 shares had been repurchased at an average cost of
$28.01 per share. These shares are recorded as Treasury stock at cost and reduce
total shareholder's equity.
Shareholders' equity averaged $38,382,000 for the first six months of 2003 and
$35,707,000 during all of 2002, an increase of 7.5 percent. The ratio of average
total equity to average total assets increased to 7.56 percent for 2003,
compared to 7.45 percent for 2002. The increase in the equity to asset ratio is
a function of the growth in average equity outpacing the growth in total average
assets.
QNB Corp. and the Quakertown National Bank are subject to various regulatory
capital requirements as issued by Federal regulatory authorities. Regulatory
capital is defined in terms of Tier I capital (shareholders' equity excluding
unrealized gains or losses on available-for-sale securities and disallowed
intangible assets), Tier II capital which includes a portion of the allowance
for loan losses, and total capital (Tier I plus II). Risk-based capital ratios
are 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 quarterly average
assets.
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for the total risk-based and 4.00 percent for leverage. Under the requirements,
QNB has a Tier I capital ratio of 12.37 percent and 12.40 percent, a total
risk-based ratio of 13.30 percent and 13.39 percent and a leverage ratio of 7.55
percent and 7.44 percent at June 30, 2003 and December 31, 2002, respectively.
The decline in the risk based capital ratios reflects the growth in total loans
since December while the increase in the leverage ratio reflects the growth in
Tier I capital outpacing the growth in total average assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At June 30, 2003 and December 31, 2002 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.
Form 10-Q
Page 25
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY
Since the assets and liabilities of QNB have diverse repricing characteristics
that influence net interest income, management analyzes interest sensitivity
through the use of gap analysis and simulation models. Interest rate sensitivity
management seeks to minimize the effect of interest rate changes on net interest
margins and interest rate spreads and to provide growth in net interest income
through periods of changing interest rates. The Asset/Liability Management
Committee (ALCO) is responsible for managing interest rate risk and for
evaluating the impact of changing interest rate conditions on net interest
income.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at their contractual maturity, estimated likely call date, or earliest
repricing opportunity. Mortgage-backed securities, CMOs and amortizing loans are
scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market, and interest-bearing demand 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. The Treasury
Select Indexed Money Market account reprices monthly based on a percentage of
the average of the 91-day Treasury bill.
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 June 30, 2003, interest-earning assets scheduled to mature
or likely to be called, repriced or repaid in one year were $252,892,000.
Interest-sensitive liabilities scheduled to mature or reprice within one year
were $163,655,000. The one-year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a positive $89,237,000 at June 30, 2003.
The cumulative one-year gap equals 18.2 percent of total rate sensitive assets.
This positive or asset sensitive gap will generally benefit QNB in a rising
interest rate environment, while falling interest rates could negatively impact
QNB. At March 31, 2003 the cumulative one-year gap was 9.3 percent of total rate
sensitive assets. The increase in the positive gap position from March 2003 to
June 2003, reflects the significant increase in prepayment assumptions resulting
from the decline in interest rates between the periods.
QNB also uses a simulation model to assess the impact of changes in interest
rates on net interest income. The model reflects management's assumptions
related to asset yields and rates paid on liabilities, deposit sensitivity, and
the size, composition and maturity or repricing characteristics of the balance
sheet. The 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.
Form 10-Q
Page 26
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (CONTINUED)
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 the simulation model, net
interest income for the next twelve months is expected to decline compared to
the prior twelve months. The projected decrease in net interest income is
principally a result of the reduction in the net interest margin. The net
interest margin is anticipated to continue to decline based on the assumptions
used in the simulation.
If interest rates are 100 basis points higher than management's most likely
interest rate environment, the simulation model projects net interest income for
the next twelve months to be higher than the most likely scenario. If interest
rates are 100 basis points lower than management's most likely interest rate
environment, the model projects net interest income for the next twelve months
to be lower than the most likely scenario. These results are consistent with the
results indicated by the gap analysis.
Management believes that the assumptions utilized in evaluating the
vulnerability of QNB's net interest income to changes in interest rates
approximate actual experience. However, the interest rate sensitivity of QNB's
assets and liabilities as well as the estimated effect of changes in interest
rates on net interest income could vary substantially if different assumptions
are used or actual experience differs from the experience on which the
assumptions were based.
In the event QNB should experience a mismatch in its desired gap ranges or an
excessive decline in its net interest income subsequent to an immediate and
sustained change in interest rates, it has a number of options that it could
utilize to remedy such a mismatch. QNB could restructure its investment
portfolio through the sale or purchase of securities with more favorable
repricing attributes. It could also emphasize loan products with appropriate
maturities or repricing attributes, or it could attract deposits or obtain
borrowings with desired maturities.
The nature of QNB's current operation is such that it is not subject to foreign
currency exchange or commodity price risk. Additionally, neither the Corporation
nor the Bank owns trading assets. At June 30, 2003, QNB did not have any hedging
transactions in place such as interest rate swaps, caps or floors.
The table below summarizes estimated changes in net interest income over a
twelve-month period, under alternative interest rate scenarios.
- ---------------------------------------------- ---------------------- -------------------- ---------------------
Change in Interest Rates Net Interest Income Dollar Change Percent Change
- ---------------------------------------------- ---------------------- -------------------- ---------------------
+300 Basis Points............................ $16,379 $1,723 11.76%
+200 Basis Points............................ 16,119 1,463 9.98
+100 Basis Points............................ 15,663 1,007 6.87
FLAT RATE.................................... 14,656 - -
- -100 Basis Points............................ 13,066 (1,590) (10.85)
- -200 Basis Points............................ 11,762 (2,894) (19.75)
- -300 Basis Points............................ 10,528 (4,128) (28.17)
Form 10-Q
Page 27
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (CONTINUED)
Management believes, given the current interest rate environment that it is
unlikely that interest rates would decline by 200 or 300 basis points.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The information required herein is set forth in Item 2, above.
ITEM 4. CONTROLS AND PROCEDURES
We maintain a system of controls and procedures designed to provide reasonable
assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. We evaluated the effectiveness of the design
and operation of our disclosure controls and procedures under the supervision
and with the participation of management, including our Chief Executive Officer
and Chief Financial Officer, within 90 days prior to the filing date of this
report. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in our periodic Securities and Exchange Commission filings. No
significant changes were made to our internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
Form 10-Q
Page 28
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
JUNE 30, 2003
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULT UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
The 2003 Annual Meeting (the "Meeting") of the shareholders of QNB
Corp. (the Registrant") was held on May 20, 2003. Notice of the
Meeting was mailed to shareholders of record on or about April 21,
2003, together with proxy solicitation materials prepared in
accordance with Section 14(a) of the Securities Exchange Act of 1934,
as amended, and the regulations promulgated thereunder.
The Meeting was held for the following purpose:
(1) To elect three (3) Directors
There was no solicitation in opposition to the nominees of the Board
of Directors for election to the Board of Directors and all such
nominees were elected. The number of votes cast for or withheld, as
well as the number of abstentions and broker non-votes for each of
the nominees for election to the Board of Directors were as follows:
Nominee For Withhold
------- --------- --------
Dennis Helf 1,252,276 4,817
G. Arden Link 1,255,568 1,525
Thomas J. Bisko 1,212,381 44,712
The continuing directors of the Registrant are:
Gary S. Parzych, Norman L. Baringer, Charles M. Meridith, III,
Kenneth F. Brown, Henry L. Rosenberger, and Edgar L. Stauffer.
Form 10-Q
Page 29
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
JUNE 30, 2003
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant, as amended.
(Incorporated by reference to Exhibit 3(i) of Registrants
Form 10-Q filed with the Commission on August 13,1998).
Exhibit 3(ii) Bylaws of Registrant, as amended. (Incorporated by
reference to Exhibit 3(ii) of Registrants Form 10-Q filed
with the Commission on August 13,1998).
Exhibit 10.1 Employment Agreement between the Registrant and Thomas
J. Bisko. (Incorporated by reference to Exhibit 10.1 of
Registrants Form 10-K filed with the Commission on March
31, 1999 and amended on April 3, 2002 on Form 8-K filed
with the Commission on April 11, 2002).
Exhibit 10.2 Salary Continuation Agreement between the Registrant
and Thomas J. Bisko. (Incorporated by reference to Exhibit
10.2 of Registrants Form 10-K filed with the Commission on
March 31, 1999).
Exhibit 10.3 QNB Corp. 1998 Stock Incentive Plan. (Incorporated by
reference to Exhibit 4.3 to Registration Statement
No. 333-91201 on Form S-8, filed with the Commission on
November 18, 1999).
Exhibit 10.4 The Quakertown National Bank Retirement Savings Plan.
Exhibit 10.5 Change of Control Agreement between Registrant and
Robert C. Werner (Incorporated by reference to Exhibit
10.7 of Registrants Form 10-Q filed with the Commission on
November 13, 2000.)
Exhibit 10.6 Change of Control Agreement between Registrant and
Bret H. Krevolin (Incorporated by reference to Exhibit
10.8 of Registrants Form 10-Q filed with the Commission on
November 13, 2000.)
Form 10-Q
Page 30
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
JUNE 30, 2003
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit 10.7 QNB Corp. 2001 Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 99.1 to Registration Statement
No. 333-67588 on Form S-8, filed with the Commission on
August 15, 2001.)
Exhibit 11 Statement Re: Computation of Earnings Per Share.
(Included in Part I, Item I, hereof.)
Exhibit 32.1 Certification of Principal Executive Officer
Exhibit 32.2 Certification of Principal Financial Officer
(b) Reports on Form 8-K
Filed July 18, 2003, Press release dated July 15, 2003
reporting second quarter 2003 net income.
Form 10-Q
Page 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QNB Corp.
Date: August 13, 2003 By:
------------------------
---------------------------
Thomas J. Bisko
President/CEO
Date: August 13, 2003 By:
---------------------------
---------------------------
Robert C. Werner
Vice President
Date: August 13, 2003 By:
---------------------------
---------------------------
Bret H. Krevolin
Chief Financial Officer
Form 10-Q
Page 32