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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-17706
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QNB CORP.
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2318082
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15 NORTH THIRD STREET, QUAKERTOWN, PA 18951-9005
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 538-5600
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Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.625 PAR VALUE
(Title of class)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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[Cover page 1 of 2 pages]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
YES NO X
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As of March 18, 2004, 3,095,379 shares of Common Stock of the registrant
were outstanding. As of June 30, 2003, the aggregate market value of the Common
Stock of the registrant, held by nonaffiliates was approximately $55,124,864
based upon the average bid and asked price of the common stock as reported on
the OTC BB.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Annual Report to Stockholders for 2003 are incorporated
by reference in Part I and Part II.
Portions of Registrant's Proxy Statement dated April 19, 2004 are incorporated
by reference in Part III.
FORM 10-K INDEX
PART I PAGE
Item 1 Business.............................................................................4
Item 2 Properties..........................................................................13
Item 3 Legal Proceedings...................................................................14
Item 4 Submission of Matters to a Vote of Security Holders.................................14
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters
and Issuer Purchases of Equity Securities....................................15
Item 6 Selected Financial Data.............................................................15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................................15
Item 7A Quantitative and Qualitative Disclosures about Market Risk..........................15
Item 8 Financial Statements and Supplementary Data.........................................15
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................15
Item 9A Controls and Procedures.............................................................15
PART III
Item 10 Directors and Executive Officers of the Registrant..................................16
Item 11 Executive Compensation..............................................................16
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...............................................16
Item 13 Certain Relationships and Related Transactions......................................17
Item 14 Principal Accountant Fees and Services..............................................17
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K.....................18
PART I
ITEM 1. BUSINESS
QNB CORP.
QNB Corp. was incorporated under the laws of the Commonwealth of
Pennsylvania on June 4, 1984. QNB Corp. is registered with the Federal Reserve
Board as a bank holding company under the Bank Holding Company Act of 1956 and
conducts its business through its wholly-owned subsidiary, The Quakertown
National Bank. The principal business of QNB Corp., through The Quakertown
National Bank, is commercial banking and consists of, among other things,
attracting deposits from the general public and using these funds in making
commercial loans, residential mortgage loans, consumer loans, and purchasing
investment securities.
As of December 31, 2003, QNB Corp., on a consolidated basis, had total
assets of $550,831,000, total deposits of $438,639,000, and total shareholders'
equity of $43,440,000.
THE QUAKERTOWN NATIONAL BANK
The Quakertown National Bank is a national banking association
organized in 1877. The Quakertown National Bank is chartered under the National
Banking Act to engage in the various activities of a commercial bank and is
subject to federal and state laws applicable to commercial banks.
The Quakertown National Bank is a full-service commercial bank that
provides most major financial services. The Quakertown National Bank's principal
office is located in Bucks County, Pennsylvania. The Quakertown National Bank
also operates six other full-service branches, an operations facility and an
administrative office. For more information relating to The Quakertown National
Bank's properties, see Item 2. Properties. The Quakertown National Bank had 133
full-time employees and 34 part-time employees, at March 15, 2004. There are
employees of The Quakertown National Bank who are also employees of QNB Corp.
We have made forward-looking statements in this document and in
documents that we incorporate by reference that are subject to risks and
uncertainties. Forward-looking statements include the information concerning
possible or assumed future results of operations of QNB Corp., The Quakertown
National Bank or the combined company. When we use words such as "believes,"
"expects," "anticipates" or similar expressions, we are making forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. The legislation provides a safe harbor for forward-looking statements.
Readers should note that many factors, some of which are discussed
elsewhere in this document and in the documents that we incorporate by
reference, could affect the future financial results of QNB Corp., The
Quakertown National Bank or the combined company and could cause those results
to differ materially from those expressed in our forward-looking statements
contained or incorporated by reference in this document. These factors include,
but are not limited to, the following:
o operating, legal and regulatory risks;
o economic, political, and competitive forces affecting our banking,
securities, asset management and credit services businesses;
o rapidly changing technology;
o the risk that our analysis of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
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See also, page 9 of QNB Corp.'s 2003 Annual Report to Shareholders,
"Management's Discussion and Analysis-Consolidated Financial Review"
incorporated herein by reference, which page is included at Exhibit 13.
We caution readers not to place undue reliance on any forward-looking
statements, which speak only as of the date made, and advise readers that
various factors, including those described above, could affect QNB Corp.'s
financial performance and could cause our actual results or circumstances for
future periods to differ materially from those anticipated or projected.
Except as required by law, we do not undertake, and specifically
disclaim any obligation, to publicly release any revisions to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
MARKET AREA
The Quakertown National Bank's primary market area is Quakertown,
Pennsylvania and its surrounding communities and includes parts of Upper Bucks
County, Southern Lehigh County, and Northern Montgomery County. The Quakertown
National Bank is not dependent upon a single customer, or a few customers, the
loss of which would have a material adverse effect on The Quakertown National
Bank.
LENDING ACTIVITIES
GENERAL. The Quakertown National Bank offers a variety of loan products
to its customers; including residential real estate mortgages, commercial,
construction, home equity, business, consumer, and student loans. The Quakertown
National Bank's loan portfolio totaled $232,127,000 and $212,691,000 at December
31, 2003 and 2002, respectively. The portfolio represented approximately 42.1%
and 42.2% of The Quakertown National Bank's total assets at December 31, 2003
and 2002, respectively.
RESIDENTIAL MORTGAGE LOANS. The Quakertown National Bank offers
primarily 1 and 3 year adjustable rate mortgages, 7 year balloon mortgages, and
15, 20 and 30 year fixed rate loans. The Quakertown National Bank has generally
sold, without recourse, its mortgage loans in the secondary mortgage market.
During 2003 and 2002, substantially all originations of loans to individuals for
residential mortgages with maturities of 15 years or greater were sold in the
secondary market.
The Quakertown National Bank originates mortgage loans up to a 95%
maximum loan-to-value ratio provided the amount above 80% is covered by private
mortgage insurance. The borrower pays for private mortgage insurance.
All mortgages sold in the secondary market conform to the loan-to-value
ratios and underwriting standards dictated by the secondary market. The
Quakertown National Bank sells a majority of the mortgages to the Federal Home
Loan Mortgage Corporation. The Quakertown National Bank retains servicing
rights.
The Quakertown National Bank also offers home equity loans and lines of
credit which are included in real estate residential loans. Also included in
this category are commercial purpose loans that are secured by residential real
estate. Real estate residential loans in the aggregate amount of $83,703,000 and
$84,907,000 represented 36.1% and 39.9% of gross loans at December 31, 2003 and
2002.
COMMERCIAL LOANS. The Quakertown National Bank offers commercial loans,
including lines of credit or commitment, term loans, commercial mortgages,
letters of credit, and tax-free loans.
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The Quakertown National Bank's commercial and industrial loan portfolio
was $47,196,000 and $39,546,000 at December 31, 2003 and 2002, respectively.
Commercial and industrial loans represented approximately 20.3% and 18.6% of The
Quakertown National Bank's total gross loans at December 31, 2003 and 2002,
respectively. Although a certain amount of these loans are considered unsecured,
the majority are secured by non-real estate collateral, such as equipment,
vehicles, accounts receivable and inventory.
Commercial real estate loans, in the aggregate amount of $86,707,000
and $74,125,000, represented 37.3% and 34.8% of The Quakertown National Bank's
gross loan portfolio at December 31, 2003 and 2002, respectively, while
construction loans, including commercial and residential, were $9,056,000 and
$7,687,000 for the same periods. Commercial real estate loans include all loans
collateralized at least in part by commercial real estate, but may not be for
the express purpose of conducting commercial real estate transactions.
Construction, commercial and industrial, and commercial real estate
lending generally entails significant additional risk as compared with
residential mortgage lending. These loans typically involve larger loan balances
to single borrowers or groups of related borrowers.
CONSUMER LOANS. The Quakertown National Bank's consumer loan portfolio
totaled $5,604,000 and $6,513,000 at December 31, 2003 and 2002, respectively.
Consumer loans represented 2.4% and 3.0% of The Quakertown National Bank's total
gross loans at December 31, 2003 and 2002, respectively. Consumer loans include
automobile loans and other consumer type credit not secured by real estate.
INVESTMENT ACTIVITIES
At December 31, 2003 and 2002, QNB Corp.'s investment portfolio, on a
consolidated aggregate basis, was $276,453,000 and $244,477,000. The portfolio
consisted primarily of United States government and federal agency obligations,
mortgage-backed securities, collateralized mortgage obligations (CMO) and state
and municipal securities. Subject to applicable limits, The Quakertown National
Bank is also permitted to invest in corporate bonds and QNB Corp. is permitted
to invest in equity securities. The Quakertown National Bank accounts for its
investments based on Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Quakertown National Bank records investment securities available-for-sale at
market value with the unrealized holding gains and losses, net of tax, excluded
from earnings and reported as accumulated other comprehensive income, a separate
component of shareholders' equity. The Quakertown National Bank records
investment securities held-to-maturity at amortized cost. At December 31, 2003
and 2002, the balance of the available-for-sale portfolio was $264,441,000 and
$214,741,000 and the balance of the held-to-maturity portfolio was $12,012,000
and $29,736,000, respectively.
The Quakertown National Bank views its investment portfolio as a
secondary source of liquidity and stable earnings. The Chief Operating Officer,
the Chief Financial Officer, or either of them, together with one other member
of the investment committee, make decisions concerning the selection of
investments for The Quakertown National Bank's portfolio. The investment
committee meets at least quarterly to review the investment portfolio and future
investment strategies. The Quakertown National Bank's investment policy, as
approved by the Board of Directors, dictates the maturity and types of
investments for The Quakertown National Bank. The Quakertown National Bank's
strategy has been to invest in:
o Short and medium term United States government and federal agency
obligations and callable bonds;
o Medium to longer term collateralized mortgage obligations (CMOs) and
mortgage-backed securities;
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o State and municipal securities; and
o AAA and AA Corporate bonds.
With the sharp decline in interest rates during 2002 and 2003, the strategy
changed slightly to invest in shorter average life and duration mortgage-backed
securities and CMOs. These types of structures will provide cash flow to
reinvest when rates go higher.
SOURCES OF FUNDS
DEPOSITS. The Quakertown National Bank offers a variety of deposit
products, including:
o Checking accounts;
o Passbook and statement savings;
o Money market accounts;
o Interest-bearing demand accounts;
o Certificates of deposit; and
o Jumbo certificates of deposit.
The Federal Deposit Insurance Corporation insures deposits of The Quakertown
National Bank up to $100,000.
BORROWINGS. The Quakertown National Bank is a member of the Federal
Home Loan Bank of Pittsburgh. As a member, The Quakertown National Bank may
obtain advances from the Federal Home Loan Bank secured by otherwise
unencumbered qualifying assets including 1-4 family residential mortgage loans
and United States government agency notes, bonds and mortgage-backed securities.
The Quakertown National Bank pledges its Federal Home Loan Bank stock to secure
these advances. Advances are made under several different credit programs, each
of which has its own interest rate and range of maturities. Federal Home Loan
Bank advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to expand lending and investment activities. At December
31, 2003, The Quakertown National Bank had $55,000,000 in outstanding advances.
In addition, The Quakertown National Bank has a $5,000,000 unsecured federal
funds line granted by its correspondent bank.
COMPETITION
The banking business is highly competitive, and the profitability of
QNB Corp. depends principally upon The Quakertown National Bank's ability to
compete in its market area. We face intense competition within our market both
in making loans and attracting deposits. The Eastern Pennsylvania area has a
high concentration of financial institutions including large money centers and
regional banks, community banks, savings institutions and credit unions. Some of
our competitors offer products and services that we currently do not offer, such
as private banking. However, we have been able to compete effectively with other
financial institutions by emphasizing technology and customer service, including
local branch decision making on loans, the establishment of long-term customer
relationships and customer loyalty, and products and services designed to
address the specific needs of our customers.
Our competition for loans and deposits comes principally from
commercial banks, savings institutions, mortgage banking firms, and credit
unions. We face additional competition for deposits from short-term money market
funds, brokerage firms, mutual funds and insurance companies.
Our success is dependent to a significant degree on economic conditions
in Eastern Pennsylvania, especially Upper Bucks, Southern Lehigh and Northern
Montgomery counties, which we define as our primary market. The banking industry
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is affected by general economic conditions including the effects of inflation,
recession, unemployment, real estate values, trends in the national and global
economics, and other factors beyond our control. An economic recession or a
delayed recovery over a prolonged period of time in our market area could cause
an increase in the level of the bank's non-performing assets and loan losses,
thereby causing operating losses, impairing liquidity and eroding capital. We
cannot assure you that further adverse changes in the local economy would not
have a material adverse effect on QNB Corp.'s consolidated financial condition,
results of operations, and cash flows.
The Quakertown National Bank competes actively with other commercial
banks in its market area. Competition exists for:
o New deposits;
o Type and scope of services offered;
o Interest rates on interest-bearing deposits and loans; and
o Other aspects of banking, such as convenience and fee schedules.
In addition, The Quakertown National Bank, like other commercial banks,
encounters competition from other non-bank financial institutions including:
o Savings banks;
o Savings and loan associations;
o Insurance companies;
o Credit unions;
o Finance companies;
o Mutual funds;
o Securities brokerage firms;
o Money market funds; and
o Government agencies.
In addition, large regional and national banks located in Philadelphia and
Allentown are active in servicing companies based in The Quakertown National
Bank's market area.
For additional information with respect to QNB Corp.'s business
activities, see Part II, Item 7 of this Annual Report on Form 10-K.
SUPERVISION AND REGULATION
QNB Corp. and its subsidiary, The Quakertown National Bank, operate in
a heavily regulated environment. The general cost of compliance with numerous
federal and state laws and regulations currently has, and in the future may
have, a negative impact on the results of operations of QNB Corp. and The
Quakertown National Bank. See page 34 of QNB Corp.'s 2003 Annual Report to
Shareholders, incorporated herein by reference, which page is attached at
Exhibit 13.
From time to time, various types of federal and state legislation have
been proposed that could result in additional regulation of, and restrictions
on, the business of QNB Corp. and The Quakertown National Bank. We cannot
predict whether such legislation will be adopted or, if adopted, how such
legislation would affect the business of QNB Corp. and The Quakertown National
Bank. As a consequence of the extensive regulation of commercial banking
activities in the United States, QNB Corp.'s and The Quakertown National Bank's
business is particularly susceptible to being affected by federal legislation
and regulations that may increase the cost of doing business. Except as
specifically described below, management believes that the effect of the
provisions of the following legislation on the liquidity, capital resources, and
results of operations of QNB Corp. will be immaterial. Management is not aware
of any other current specific recommendations by regulatory authorities or
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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 federal and state laws and
regulations does have, and in the future may have, a negative impact on QNB
Corp.'s results of operations.
Further, the business of QNB Corp. is also affected by the state of the
financial services industry in general. As a result of legal and industry
changes, management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management believes that
such consolidations and mergers may enhance its competitive position as a
community bank.
Federal and state banking laws contain numerous provisions affecting
various aspects of the business and operations of QNB Corp. and The Quakertown
National Bank. QNB Corp. is subject to, among others, the regulations of the
Securities and Exchange Commission and the Federal Reserve Board and The
Quakertown National Bank is subject to, among others, the regulations of the
Officer of the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. The following descriptions of and references to applicable statutes
and regulations are not intended to be complete descriptions of these provisions
or their effects on QNB Corp. or The Quakertown National Bank; they are
summaries only and are qualified in their entirety by reference to such statutes
and regulations.
EFFECTS OF INFLATION. Inflation has some impact on QNB Corp.'s and The
Quakertown National Bank's operating costs. Unlike many industrial companies,
however, substantially all of QNB Corp.'s assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on QNB
Corp.'s and The Quakertown National Bank's performance than the general level of
inflation. Over short periods of time, interest rates may not necessarily move
in the same direction or in the same magnitude as prices of goods and services.
RISK-BASED CAPITAL. The Federal Reserve Board, the FDIC and the
Comptroller of the Currency have issued certain risk-based capital guidelines,
which supplement existing capital requirements. See page 31 of QNB Corp.'s 2003
Annual Report to Shareholders for information concerning QNB Corp.'s capital
ratios, incorporated here by reference, which page is included at Exhibit 13.
HOLDING COMPANY REGULATION
As a registered holding company under the Bank Holding Company Act, QNB
Corp. is regulated by the Federal Reserve Board. QNB Corp., as a Pennsylvania
business corporation, is also subject to the provisions of Section 115 of the
Pennsylvania Banking Code of 1965.
As a bank holding company, QNB Corp. is required to file with the
Federal Reserve Board an annual report and such additional information regarding
the holding company and its subsidiary bank as required under the Bank Holding
Company Act.
The Bank Holding Company Act prohibits QNB Corp. from acquiring:
o direct or indirect control of more than 5% of the voting stock of any
bank; or
o substantially all of the assets of any bank; or
o merging with another bank holding company;
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without the prior approval of the Federal Reserve. The Pennsylvania Department
of Banking also must approve any similar consolidation. Pennsylvania law permits
Pennsylvania bank holding companies to control an unlimited number of banks.
The Bank Holding Company Act restricts QNB Corp. from engaging in
activities that the Federal Reserve has found:
o to be closely related to banking; and
o which are expected to produce benefits for the public that will
outweigh any potential adverse effects.
To this end, the Bank Holding Company Act prohibits QNB Corp. from:
o engaging in most non-banking businesses; or
o acquiring ownership or control of more than 5% of the outstanding
voting stock of any company engaged in a
non-banking business; unless
o the Federal Reserve has determined that the non-banking business is
closely related to banking.
Under the Bank Holding Company Act, the Federal Reserve may require a
bank holding company to end a non-banking business if it constitutes a serious
risk to the financial soundness and stability of any bank subsidiary of the bank
holding company.
BANK REGULATION
The Quakertown National Bank operates as a national bank subject to
regulation and examination by the Office of the Comptroller of the Currency.
The Office of the Comptroller of the Currency regulates all areas of a
national bank's commercial banking operations including loans, mergers,
establishment of branches and other aspects of operations. The Office of the
Comptroller of the Currency also regulates the level of dividends which can be
declared. For more information, see page 53 of QNB Corp.'s 2003 Annual Report to
Shareholders, "Notes to Consolidated Financial Statements-Note 20-Regulatory
Restrictions," incorporated herein by reference, which page is included at
Exhibit 13.
The Quakertown National Bank is also regulated by the Federal Reserve
System and the Federal Deposit Insurance Corporation. The major function of the
Federal Deposit Insurance Corporation with respect to insured member banks is to
pay depositors to the extent provided by law in the event an insured bank is
closed without adequately providing for payment of the claims of depositors.
Federal Deposit Insurance Corporation insured banks are subject to
certain Federal Deposit Insurance Corporation requirements designed to maintain
the safety and soundness of individual banks and the banking system. In
addition, the Federal Deposit Insurance Corporation along with the Comptroller
of the Currency and the Federal Reserve Board has adopted regulations which
define and set the minimum requirements for capital adequacy based on risk. See
pages 31 of QNB Corp's 2003 Annual Report to Shareholders, "Management's
Discussion and Analysis-Capital Adequacy," incorporated by reference herein,
which pages are included at Exhibit 13. The Federal Reserve Board, the Federal
Deposit Insurance Corporation and federal and state law extensively regulate
other various aspects of the banking business, including, but not limited to,
permissible types and amounts of loans, investments and other activities,
branching, interest rates on loans and the safety and soundness of banking
practices.
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ENVIRONMENTAL LAWS. Neither QNB Corp. nor The Quakertown National Bank
anticipates that compliance with environmental laws and regulations will have
any material effect on capital, expenditures, earnings, or on its competitive
position. However, environmentally related hazards have become a source of high
risk and potentially unlimited liability for financial institutions.
Environmentally contaminated properties owned by an institution's borrowers may
result in a drastic reduction in the value of the collateral securing the
institution's loans to such borrowers, high environmental clean up costs to the
borrower affecting its ability to repay the loans, the subordination of any lien
in favor of the institution to a state or federal lien securing clean up costs,
and liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower. To
minimize this risk, The Quakertown National Bank may require an environmental
examination of and report with respect to the property of any borrower or
prospective borrower if circumstances affecting the property indicate a
potential for contamination, taking into consideration a potential loss to the
institution in relation to the borrower. Such examination must be performed by
an engineering firm experienced in environmental risk studies and acceptable to
the institution, and the cost of such examinations and reports are the
responsibility of the borrower. These costs may be substantial and may deter
prospective borrowers from entering into a loan transaction with The Quakertown
National Bank. QNB Corp. is not aware of any borrower who is currently subject
to any environmental investigation or clean up proceeding that is likely to have
a material adverse effect on the financial condition or results of operations of
The Quakertown National Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act
which, among other things, provides protection to lenders from environmental
liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in
the routine practices of commercial lending, including, but not limited to, the
providing of financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of property shall
not be liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substance on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violate an environmental act. The
Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
FEDERAL RESERVE BOARD REQUIREMENTS
Regulation D of the Federal Reserve Board imposes reserve requirements
on all depository institutions, including The Quakertown National Bank, that
maintain transaction accounts or non-personal time and savings accounts. These
reserves may be in the form of cash or non-interest bearing deposits with the
Philadelphia Federal Reserve Bank. Under current Regulation D, The Quakertown
National Bank must establish reserves equal to 3.0% of the first $42.1 million
of net transaction accounts and 10.0% of the remainder. The reserve requirement
on non-personal savings and time deposits is 0.0%. Demand balances due from
depository institutions in the United States are used as a deduction against the
reserve. At December 31, 2003, The Quakertown National Bank met applicable
Federal Reserve Board reserve requirements.
RECENT LEGISLATION
Transactions between The Quakertown National Bank and its affiliates
are governed by Sections 23A and 23B of the Federal Reserve Act. An "affiliate"
of a bank or savings institution is any company or entity that controls, is
controlled by, or is under common control with the bank or savings institution.
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Generally, a subsidiary of a depository institution that is not also a
depository institution is not treated as an affiliate of the bank for purposes
of Sections 23A and 23B. Sections 23A and 23B are intended to protect insured
depository institutions from suffering losses arising from transactions with
non-insured affiliates, by limiting the extent to which a bank or its
subsidiaries may engage in covered transactions with any one affiliate and with
all affiliates of the bank in the aggregate, and requiring that such
transactions be on terms that are consistent with safe and sound banking
practices.
On October 31, 2002, the Federal Reserve adopted a new regulation,
Regulation W, effective April 1, 2003, that comprehensively amends Sections 23A
and 23B. The regulation unifies and updates staff interpretations issued over
the years, incorporates several new interpretative proposals (such as to clarify
when transactions with an unrelated third party will be attributed to an
affiliate), and addresses new issues arising as a result of the expanded scope
of non-banking activities engaged in by bank and bank holding companies in
recent years and authorized for financial holding companies under the
Gramm-Leach-Bliley Act ("GLB Act").
Under the GLB Act, all financial institutions, including QNB Corp. and
The Quakertown National Bank, are required to adopt privacy policies, restrict
the sharing of nonpublic customer data with nonaffiliated parties at the
customer's request, and establish procedures and practices to protect customer
data from unauthorized access.
Under Title III of the USA PATRIOT Act, also known as the International
Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all
financial institutions, including QNB Corp and The Quakertown National Bank, are
required in general to identify their customers, adopt formal and comprehensive
anti-money laundering programs, scrutinize or prohibit altogether certain
transactions of special concern, and be prepared to respond to inquiries from
U.S. law enforcement agencies concerning their customers and their transactions.
Additional information-sharing among financial institutions, regulators, and law
enforcement authorities is encouraged by the presence of an exemption from the
privacy provisions of the GLB Act for financial institutions that comply with
this provision and the authorization of the Secretary of the Treasury to adopt
rules to further encourage cooperation and information-sharing. The
effectiveness of a financial institution in combating money laundering
activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to The Quakertown
National Bank.
The Sarbanes-Oxley Act, signed into law July 30, 2002, addresses, among
other issues, corporate governance, auditor independence and accounting
standards, executive compensation, insider loans, whistleblower protection, and
enhanced and timely disclosure of corporate information. The SEC and NASD have
adopted numerous implementing rules that affect QNB Corp. The changes are
intended to allow shareholders to monitor more effectively the performance of
companies and management.
The above is intended to be a brief summary of the regulatory
environment in which QNB Corp. and The Quakertown National Bank operate and is
not designed to be a complete discussion of all statutes and regulations
affecting such operations, including those statutes and regulations specifically
mentioned herein. Changes in the laws and regulations applicable to QNB Corp.
and The Quakertown National Bank can affect the operating environment in
substantial and unpredictable ways. We cannot accurately predict whether
legislation will ultimately be enacted, and if enacted, the ultimate effect that
it or implementing regulations would have on our financial condition or results
of operations. While banking regulations are material to the operations of QNB
Corp. and The Quakertown National Bank, it should be noted that supervision,
regulation, and examination of the company and the bank are intended primarily
for the protection of depositors, not shareholders.
12
ADDITIONAL INFORMATION
QNB Corp.'s principal executive offices are located at 15 North Third
Street, Quakertown, Pennsylvania 18951. Its telephone number is (215) 538-5600.
This annual report, including the exhibits and schedules filed as part
of the annual report on Form 10-K, may be inspected at the public reference
facility maintained by the Securities and Exchange Commission ("SEC") at its
public reference room at 450 Fifth Street, NW, Washington, DC 20549 and copies
of all or any part thereof may be obtained from that office upon payment of the
prescribed fees. You may call the SEC at 1-800-SEC-0330 for further information
on the operation of the public reference room and you can request copies of the
documents upon payment of a duplicating fee, by writing to the SEC. In addition,
the SEC maintains a website that contains reports, proxy and information
statements and other information regarding registrants, including QNB Corp.,
that file electronically with the SEC which can be assessed at www.sec.gov.
QNB Corp. also makes its periodic and current reports available, free
of charge, on its website, www.qnb.com., as soon as reasonable practicable after
such material is electronically filed with the SEC. Information available on our
website is not a part of, and should not be incorporated into, this annual
report on Form 10-K.
ITEM 2. PROPERTIES
The Quakertown National Bank and QNB Corp.'s main office is located at
10 North Third Street, Quakertown, Pennsylvania. The Quakertown National Bank
conducts business from its main office and six other retail offices located in
Upper Bucks, Southern Lehigh, and Northern Montgomery Counties. The Quakertown
National Bank owns its main office, two retail locations, its operations
facility, and the computer facility. The Quakertown National Bank leases its
remaining retail properties. The leases on the properties generally contain
renewal options. Management considers that its facilities are adequate for its
business.
The following table details The Quakertown National Bank's properties:
Location
Quakertown, Pa. - Main Office Owned
15 North Third Street
Quakertown, Pa. - Towne Bank Center Owned
320 West Broad Street
Quakertown, Pa. - Computer Center Owned
- 121 West Broad Street
Quakertown, Pa. - Country Square Office Leased
240 South West End Boulevard
Dublin, Pa. - Dublin Branch Leased
161 North Main Street
Pennsburg, Pa. - Pennsburg Square Branch Leased
410-420 Pottstown Ave
Coopersburg, Pa. - Coopersburg Branch Owned
51 South Third Street
Perkasie, Pa. - Perkasie Branch Owned
607 Chestnut Street
13
Hilltown Township, Pa. - Souderton Branch Leased
750 Route 113
In management's opinion, these properties are in good condition and are
adequate for QNB Corp.'s purposes.
ITEM 3. LEGAL PROCEEDINGS
Management, after consulting with legal counsel, is not aware of any
litigation that would have a material adverse effect on the consolidated
financial position of QNB Corp. There are no proceedings pending other than
ordinary routine litigation incident to the business of QNB Corp. and its
subsidiary, The Quakertown National Bank. In addition, no material proceedings
are known to be contemplated by governmental authorities against QNB Corp. or
The Quakertown National Bank or any of their properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
QNB Corp. had 715 shareholders of record as of March 18, 2004; however,
QNB Corp. believes, based on the number of annual reports and proxy statements
requested by nominee holders of QNB Corp.'s Common Stock, that the number of
beneficial holders exceeds 980. See Page 55 of the 2003 Annual Report to
Shareholders, "Corporate Information-Stock Information" and page 53 of the 2003
Annual Report to Shareholders, "Notes to Consolidated Financial Statements-Note
20-Regulatory Restrictions," incorporated herein by reference, which pages are
attached at Exhibit 13.
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The information required by Item 6 is incorporated by reference to the
information appearing under the caption "Selected Financial and Other Data" on
page 35 of the 2003 Annual Report to Shareholders, incorporated herein by
reference, which page is attached at Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated by reference to the
information appearing under the caption "Management's Discussion and Analysis"
on pages 8 to 35 of the 2003 Annual Report to Shareholders, incorporated herein
by reference, which pages are attached at Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by Item 7A is incorporated by reference to the
information appearing under the caption "Interest Rate Sensitivity" on pages 32
to 34 of the 2003 Annual Report to Shareholders, which pages are attached at
Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 and the auditor's report are
incorporated by reference to pages 36 to 55 of the 2003 Annual Report to
Shareholders, which pages are attached at Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-K, QNB Corp. carried
out an evaluation, under the supervision and with the participation of its
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, QNB Corp.'s
disclosure controls and procedures are effective in timely alerting them to
material information relating to QNB Corp. (including its consolidated
subsidiaries) required to be included in our periodic SEC filings. There have
been no significant changes in QNB Corp.'s internal controls or, to its
knowledge, in other factors that could significantly affect internal controls
subsequent to the date QNB Corp. carried out its evaluation.
15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference to
information appearing in QNB Corp.'s definitive proxy statement to be used in
connection with the 2004 Annual Meeting of Shareholders under the captions
o "Election of Directors", pages 6-7
o "Governance of the Company", page 8
o "Meetings and Committees of the Board of Directors of QNB and the Bank",
pages 8-10
o "Executive Officers of QNB and/or the Bank", page 19
which pages are incorporated herein by reference.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the
Securities Exchange Act of 1934 requires QNB Corp's officers and directors, and
persons who own more than 10 percent of a registered class of QNB Corp's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Officers, directors and greater than 10
percent shareholders are required by Commission regulation to furnish QNB Corp.
with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it
or written representations from certain reporting persons that no Form 5s were
required for those persons. QNB Corp. believes that during the period January 1,
2003 through December 31, 2003, its officers and directors were in compliance
with all filing requirements applicable to them, except for G. Arden Link, who
filed one form late reporting one transaction.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information appearing in QNB Corp.'s definitive proxy statement to be used in
connection with the 2004 Annual Meeting of Shareholders under the captions
o "Compensation of the Board of Directors", page 10
o "Executive Compensation", page 12-14
o "Compensation Committee Interlocks and Insider Participation", page
17
o "Stock Performance Graph", page 18
which pages are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by Item 12 is incorporated by reference to the
information appearing in QNB Corp.'s definitive proxy statement to be used in
connection with the 2004 Annual Meeting of Shareholders under the captions
o "Security Ownership of Management", pages 3-5
o "Equity Compensation Plan Information", page 15
which pages are incorporated herein by reference.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Certain Relationships and Related Party
Transactions" in QNB Corp.'s definitive proxy statement to be used in connection
with the 2004 Annual Meeting of Shareholders, on pages 19-20, which pages are
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is incorporated by reference to the
information appearing in QNB Corp.'s definitive proxy statement to be used in
connection with the 2004 Annual Meeting of Shareholders under the captions
o "Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors", page 11
o "Audit Fees, Audit Related Fees, Tax Fees, and All Other Fees",
page 12
which pages are incorporated herein by reference.
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements are included by reference in Part
II, Item 8 hereof.
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Shareholders' Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The financial statement schedules required by this Item are omitted
because the information is either inapplicable, not required or is in the
consolidated financial statements as a part of this Report.
3. The following exhibits are incorporated by reference herein or
annexed to this Form 10-K:
3(i)- Articles of Incorporation of Registrant, as amended.
3(ii)- Bylaws of Registrant, as amended.
10.1- Employment Agreement between the Registrant and Thomas J.
Bisko. (Incorporated by reference to Exhibit 10.1 of
Registrant's 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.)
10.2- Salary Continuation Agreement between the Registrant and
Thomas J. Bisko.
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.)
10.4- The Quakertown National Bank Retirement Savings Plan.
(Incorporated by reference to Exhibit 10.4 of Registrants
Form 10-Q filed with the Commission on August 14, 2003.)
10.5- Change of Control Agreement between Registrant and Robert C.
Werner. (Incorporated by reference to Exhibit 10.7
of Registrant's Form 10-Q filed with the Commission on
November 13, 2000.)
10.6- Change of Control Agreement between Registrant and Bret H.
Krevolin. (Incorporated by reference to Exhibit 10.7
of Registrant's Form 10-Q filed with the Commission on
November 13, 2000.)
18
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).
11- Statement re: Computation of Earnings per Share.
(Incorporated by Reference to page 43 of the 2003 Annual
Report to Shareholders, "Notes to Consolidated Financial
Statements- Note 2-Earnings Per Share," which is included
herein at Exhibit 13.)
12- Statement re: Computation of Ratios. (Incorporated by
Reference to page 7 of the 2003 Annual Report to
Shareholders, which is included herein at Exhibit 13.)
13- Excerpts from the 2003 Annual Report to Shareholders.
14- Registrant's Code of Ethics.
21- Subsidiaries of the Registrant.
23- Consent of KPMG LLP.
31.1- Rule 13a-14(a)/15d-14(a) Certification of the CEO.
31.2- Rule 13a-14(a)/15d-14(a) Certification of the CFO.
32.1- ss.1350 Certification of Principal Executive Officer.
32.2- ss.1350 Certification of Principal Financial Officer.
(b) Reports on Form 8-K
Filed October 22, 2003, Press release dated October 22, 2003
reporting third quarter 2003 net income.
(c) The exhibits required to be filed by this Item are listed under
Item 15(a)3 above.
(d) Not applicable.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QNB Corp.
March 30, 2004
BY:/s/ Thomas J. Bisko
-----------------------------
Thomas J. Bisko
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
/s/ Thomas J. Bisko
- ------------------------ President, Chief Executive March 30, 2004
Thomas J. Bisko Officer and Director
/s/ Robert C. Werner
- ------------------------ Vice President March 30, 2004
Robert C. Werner
/s/ Bret H. Krevolin
- ------------------------ Chief Financial Officer March 30, 2004
Bret H. Krevolin and Principal Accounting
Officer
/s/ Norman L. Baringer
- ------------------------ Director March 30, 2004
Norman L. Baringer
/s/ Kenneth F. Brown Jr.
- ------------------------ Director March 30, 2004
Kenneth F. Brown Jr
/s/ Dennis Helf
- ------------------------ Director, Chairman March 30, 2004
Dennis Helf
20
SIGNATURES (Continued)
/s/ G. Arden Link
- ------------------------ Director March 30, 2004
G. Arden Link
/s/ Charles M. Meredith, III
- ----------------------------- Director March 30, 2004
Charles M. Meredith, III
/s/ Gary S. Parzych
- ------------------------ Director March 30, 2004
Gary S. Parzych
/s/ Henry L. Rosenberger
- ------------------------ Director March 30, 2004
Henry L. Rosenberger
/s/ Edgar L. Stauffer
- ------------------------ Director March 30, 2004
Edgar L. Stauffer
21
QNB CORP.
FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2003
EXHIBIT INDEX
Exhibit
3(i)- Articles of Incorporation of Registrant, as amended.
3(ii)- Bylaws of Registrant, as amended.
10.1- Employment Agreement between the Registrant and Thomas J.
Bisko. (Incorporated by reference to Exhibit 10.1 of
Registrant's 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).
10.2- Salary Continuation Agreement between the Registrant and
Thomas J. Bisko.
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.)
10.4- The Quakertown National Bank Retirement Savings Plan.
(Incorporated by reference to Exhibit 10.4 of Registrants
Form 10-Q filed with the Commission on August 14, 2003)
10.5- Change of Control Agreement between Registrant and Robert C.
Werner. (Incorporated by reference to Exhibit 10.7
of Registrant's Form 10-Q filed with the Commission on
November 13, 2000.)
10.6- Change of Control Agreement between Registrant and Bret H.
Krevolin. (Incorporated by reference to Exhibit 10.7
of Registrant's Form 10-Q filed with the Commission on
November 13, 2000.)
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).
11- Statement re: Computation of Earnings per Share.
(Incorporated by Reference to page 43 of the 2003 Annual
Report, "Notes to Consolidated Financial Statements-
Note 2-Earnings Per Share," which is included herein at
Exhibit 13.)
12- Statement re: Computation of Ratios. (Incorporated by
Reference to page 7 of the 2003 Annual Report to
Shareholders, which is included herein at Exhibit 13.)
22
13- Excerpts from the 2003 Annual Report to Shareholders.
14- Registrant's Code of Ethics.
21- Subsidiaries of the Registrant.
23- Consent of KPMG LLP.
31.1- Rule 13a-14(a)/15d-14(a) Certification of the CEO.
31.2- Rule 13a-14(a)/15d-14(a) Certification of the CFO.
32.1- ss.1350 Certification of Principal Executive Officer.
32.2- ss.1350 Certification of Principal Financial Officer.
23