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 March, 31, 2004
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OR
|_| 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.
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2318082
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
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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Not Applicable
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Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check |X| 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 May 14, 2004
Common Stock, par value $.625 3,095,379
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED MARCH 31, 2004
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited) PAGE
Consolidated Statements of Income for Three
Months Ended March 31, 2004 and 2003...............................................1
Consolidated Balance Sheets at March 31, 2004
and December 31, 2003..............................................................2
Consolidated Statements of Cash Flows for Three
Months Ended March 31, 2004 and 2003...............................................3
Notes to Consolidated Financial Statements..................................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.....................................................9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK...........................................................................26
ITEM 4. CONTROLS AND PROCEDURES.............................................................................26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................................................27
ITEM 2. CHANGES IN SECURITIES...............................................................................27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................................................27
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS..............................................27
ITEM 5. OTHER INFORMATION...................................................................................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................................................27
SIGNATURES
CERTIFICATIONS
QNB Corp & Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
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Three Months Ended March 31, 2004 2003
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Interest Income
Interest and fees on loans........................................................................... $ 3,440 $ 3,622
Interest and dividends on investment securities:
Taxable.......................................................................................... 2,217 2,191
Tax-exempt....................................................................................... 549 542
Interest on Federal funds sold....................................................................... 21 36
Interest on interest-bearing balances................................................................ 1 1
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Total interest income....................................................................... 6,228 6,392
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Interest Expense
Interest on deposits
Interest-bearing demand accounts................................................................. 150 115
Money market accounts............................................................................ 61 87
Savings.......................................................................................... 52 108
Time ............................................................................................ 996 1,165
Time over $100,000............................................................................... 212 289
Interest on short-term borrowings.................................................................... 22 29
Interest on Federal Home Loan Bank advances.......................................................... 718 712
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Total interest expense...................................................................... 2,211 2,505
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Net interest income......................................................................... 4,017 3,887
Provision for loan losses............................................................................ - -
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Net interest income after provision for loan losses......................................... 4,017 3,887
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Non-Interest Income
Fees for services to customers....................................................................... 446 414
ATM and debit card income............................................................................ 128 131
Income on cash surrender value of insurance.......................................................... 68 77
Mortgage servicing (loss) income..................................................................... (6) (59)
Net gain on investment securities available-for-sale................................................. 479 155
Net gain on sale of loans............................................................................ 100 361
Other operating income............................................................................... 155 159
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Total non-interest income................................................................... 1,370 1,238
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Non-Interest Expense
Salaries and employee benefits....................................................................... 1,833 1,809
Net occupancy expense................................................................................ 238 215
Furniture and equipment expense...................................................................... 243 270
Marketing expense.................................................................................... 107 100
Third party services................................................................................. 155 190
Telephone, postage and supplies expense.............................................................. 116 137
State taxes.......................................................................................... 112 83
Other expense........................................................................................ 365 334
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Total non-interest expense.................................................................. 3,169 3,138
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Income before income taxes ..................................................................... 2,218 1,987
Provision for income taxes........................................................................... 496 456
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Net Income....................................................................................... $ 1,722 $ 1,531
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Net Income Per Share - Basic..................................................................... $ .56 $ .50
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Net Income Per Share - Diluted................................................................... $ .54 $ .49
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Cash Dividends Per Share......................................................................... $ .185 $ .165
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The accompanying notes are an integral part of the unaudited consolidated
financial statements.
QNB Corp & Subsidiary
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
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March 31, December 31,
2004 2003
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Assets
Cash and due from banks................................................................................. $ 18,705 $ 21,534
Federal funds sold...................................................................................... 10,859 4,532
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Total cash and cash equivalents................................................................ 29,564 26,066
Investment securities
Available-for-sale (cost $246,271and $260,894)..................................................... 251,800 264,441
Held-to-maturity (market value $9,979 and $12,334)................................................. 9,664 12,012
Loans held-for-sale..................................................................................... 213 1,439
Total loans, net of unearned income of $76 and $153 ................................................. 234,911 232,127
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Allowance for loan losses............................................................................... (2,919) (2,929)
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Net loans...................................................................................... 231,992 229,198
Cash surrender value of insurance....................................................................... 7,656 7,585
Premises and equipment, net............................................................................. 5,088 5,090
Accrued interest receivable ............................................................................ 2,282 2,823
Other assets............................................................................................ 2,381 2,177
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Total assets............................................................................................ $ 540,640 $ 550,831
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Liabilities
Deposits
Demand, non-interest-bearing....................................................................... $ 51,880 $ 50,468
Interest-bearing demand accounts................................................................... 93,864 107,648
Money market accounts.............................................................................. 34,280 38,373
Savings............................................................................................ 54,747 52,008
Time............................................................................................... 153,424 151,304
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Time over $100,000................................................................................. 38,039 38,838
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Total deposits................................................................................. 426,234 438,639
Short-term borrowings................................................................................... 9,714 10,416
Federal Home Loan Bank advances......................................................................... 55,000 55,000
Accrued interest payable................................................................................ 1,189 1,285
Other liabilities....................................................................................... 2,605 2,051
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Total liabilities....................................................................................... 494,742 507,391
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Commitments and contingencies
Shareholders' Equity
Common stock, par value $.625 per share;
authorized 10,000,000 shares; 3,202,065 shares issued;
3,095,379 shares outstanding....................................................................... 2,001 2,001
Surplus ............................................................................................... 8,933 8,933
Retained earnings....................................................................................... 32,808 31,659
Accumulated other comprehensive gain, net............................................................... 3,650 2,341
Treasury stock, at cost; 106,686 shares ................................................................ (1,494) (1,494)
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Total shareholders' equity.............................................................................. 45,898 43,440
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Total liabilities and shareholders' equity.............................................................. $ 540,640 $ 550,831
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The accompanying notes are an integral part of the unaudited consolidated
financial statements.
QNB Corp & Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended March 31, 2004 2003
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Operating Activities
Net income......................................................................................... $ 1,722 $ 1,531
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization.................................................................... 189 207
Securities gains ............................................................................... (479) (155)
Net gain on sale of loans........................................................................ (100) (361)
Proceeds from sales of residential mortgages..................................................... 3,923 9,908
Originations of residential mortgages held-for-sale.............................................. (2,678) (8,064)
Proceeds from sales of student loans............................................................. - 262
Originations of student loans.................................................................... - (160)
Income on cash surrender value of insurance...................................................... (68) (77)
Life insurance proceeds/premiums, net............................................................ (3) (4)
Deferred income tax provision.................................................................... 107 23
Change in income taxes payable................................................................... 377 421
Net decrease in interest receivable.............................................................. 541 274
Net amortization of premiums and discounts....................................................... 303 432
Net (decrease) increase in interest payable...................................................... (96) 21
Increase in other assets ........................................................................ (434) (435)
(Decrease) increase in other liabilities......................................................... (415) 105
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Net cash provided by operating activities........................................................ 2,889 3,928
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Investing Activities
Proceeds from maturities and calls of investment securities
available-for-sale............................................................................... 25,154 25,342
held-to-maturity................................................................................. 2,349 6,791
Proceeds from sales of investment securities
available-for-sale............................................................................... 17,954 18,643
Purchase of investment securities
available-for-sale............................................................................... (28,239) (48,944)
Net increase in loans.............................................................................. (2,742) (14,618)
Net purchases of premises and equipment............................................................ (187) (153)
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Net cash provided (used) by investing activities................................................. 14,289 (12,939)
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Financing Activities
Net increase in non-interest-bearing deposits...................................................... 1,412 5,925
Net (decrease) increase in interest-bearing non-maturity deposits.................................. (15,138) 7,735
Net increase in time deposits...................................................................... 1,321 7,757
Net decrease in short-term borrowings.............................................................. (702) (7,850)
Cash dividends paid................................................................................ (573) (510)
Proceeds from issuance of common stock............................................................. - 56
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Net cash (used) provided by financing activites.................................................. (13,680) 13,113
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Increase in cash and cash equivalents............................................................ 3,498 4,102
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Cash and cash equivalents at beginning of year................................................... 26,066 27,477
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Cash and cash equivalents at end of period....................................................... $ 29,564 $31,579
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Supplemental Cash Flow Disclosures
Interest paid...................................................................................... $ 2,307 $ 2,484
Income taxes paid.................................................................................. 150 -
Non-Cash Transactions
Change in net unrealized holding gains, net of taxes, on investment securities................... 1,309 (39)
The accompanying notes are an integral part of the unaudited consolidated
financial statements.
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 AND 2003, AND DECEMBER 31, 2003
(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 March 31, 2004, as well as the respective
statements of income and cash flows for the three-month period ended March 31,
2004 and 2003, are unaudited. These financial statements should be read in
conjunction with the audited financial statements and notes thereto included in
QNB's 2003 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 SPLIT
On August 19, 2003 the Board of Directors authorized a two-for-one split of the
Company's common stock, affected by a distribution on October 14, 2003 of one
share for each one share held of record at the close of business on September
30, 2003. All earnings per share and common stock information is presented as if
the stock split occurred prior to the earliest year included in these financial
statements.
STOCK BASED COMPENSATION
At March 31, 2004, QNB has a stock-based employee compensation plan that is
accounted for 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 the plan 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.
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004 AND 2003, AND DECEMBER 31, 2003
(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
Ended March 31,
2004 2003
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Net income, as reported $1,722 $1,531
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 18 26
Pro forma net income $1,704 $1,505
Earnings per share
Basic - as reported $.56
$.50
Basic - pro forma $.55 $.49
Diluted - as reported $.54 $.49
Diluted - pro forma $.54 $.48
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
Ended March 31,
2004 2003
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Numerator for basic and diluted earnings $1,722 $1,531
per share-net income
Denominator for basic earnings per share- 3,095,379 3,086,862
weighted average shares outstanding
Effect of dilutive securities-employee 84,549 37,050
stock options
Denominator for diluted earnings per 3,179,928 3,123,912
share- adjusted weighted average
shares outstanding
Earnings per share-basic $.56 $.50
Earnings per share-diluted $.54 $.49
There were no stock options that were anti-dilutive for either three-month
period ended March 31, 2004 or 2003.
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003, AND DECEMBER 31, 2003
(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 March 31, 2004 and 2003 (net of the income tax effect):
For the Three Months
Ended March 31,
2004 2003
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Unrealized holding gains arising during the
period on securities held $1,625 $63
Reclassification adjustment for sold securities
(316) (102)
Net change in unrealized gains during the period
1,309 (39)
Unrealized holding gains, beginning of period
2,341 3,603
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Unrealized holding gains, end of period $3,650 $3,564
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Net income $1,722 $1,531
Other comprehensive income, net of tax:
Unrealized holding gains (losses) arising during
the period 1,309 (39)
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Comprehensive Income $3,031 $1,492
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QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003, AND DECEMBER 31, 2003
(Unaudited)
4. LOANS
The following table presents Loans by category as of March 31, 2004 and December
31, 2003:
March 31, December 31,
2004 2003
Commercial and industrial $52,051 $47,196
Agricultural 12 14
Construction 7,728 9,056
Real estate-commercial 85,966 86,707
Real estate-residential 83,877 83,703
Consumer 5,353 5,604
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Total loans 234,987 232,280
Less unearned income 76 153
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Total loans net of unearned income $234,911 $232,127
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5. INTANGIBLE ASSETS
The following table presents Intangible Asset information as of March 31, 2004:
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Amortized Intangible Assets Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
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Purchased deposit premium $511 $328 $183
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Mortgage servicing asset 740 187 553
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Total $1,251 $515 $736
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The following table presents Intangible Asset information as of December 31,
2003:
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Amortized Intangible Assets Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
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Purchased deposit premium $511 $315 $196
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Mortgage servicing asset 741 159 582
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Total $1,252 $474 $778
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Aggregate Amortization Expense
For the Three Months ended March 31, 2004 $71
Estimated Amortization Expense
For the Year Ended 12/31/04 $209
For the Year Ended 12/31/05 168
For the Year Ended 12/31/06 143
For the Year Ended 12/31/07 113
For the Year Ended 12/31/08 54
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004 AND 2003, AND DECEMBER 31, 2003
(Unaudited)
6. RECENT ACCOUNTING PRONOUNCEMENTS
Stock-Based Compensation
On March 31, 2004, the FASB issued a proposed Statement, Share-Based Payment an
Amendment of FASB Statements No. 123 and APB No. 95, that addresses the
accounting for share-based payment transactions in which an enterprise receives
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
Under the FASB's proposal, all forms of share-based payments to employees,
including employee stock options, would be treated the same as other forms of
compensation by recognizing the related cost in the income statement. The
expense of the award would generally be measured at fair value at the grant
date. Current accounting guidance requires that the expense relating to
so-called fixed plan employee stock options only be disclosed in the footnotes
to the financial statements. The proposed Statement would eliminate the ability
to account for share-based compensation transactions using APB Opinion No. 25,
Accounting for Stock Issued to Employees. QNB is currently evaluating this
proposed statement and its effects on its results of operations.
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-
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
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.
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 first quarter of 2004 of $1,722,000 or $.54 per
share on a diluted basis. This represents a 12.5 percent increase in net income
when compared to the $1,531,000 or $.49 a diluted share reported for the first
quarter of 2003.
Two important measures of profitability in the banking industry are an
institution's return on average assets and return on average shareholders'
equity. Return on average assets and return on average shareholders' equity were
1.28 percent and 16.64 percent, respectively, for the first quarter of 2004
compared with 1.24 percent and 16.38 percent for the first quarter of 2003.
Contributing to the results for the first quarter of 2004 compared with the
first quarter of 2003 were the following:
o $130,000 increase in net interest income resulting from a 7.7 percent
increase in average earning assets offsetting a 19 basis point
reduction in the net interest margin to 3.48 percent for the first
quarter of 2004 from 3.67 percent for the first quarter of 2003.
o Recognized $44,000 in interest during the first quarter of 2004 on
the pay-off of two loans that had not been accruing interest. This
recognition had an impact on the
net interest margin of approximately 3 basis points
o Net interest margin increases in first quarter of 2004 compared to
3.38 percent recorded during the fourth quarter of 2003.
o 8.5 percent increase in average deposits centered in growth of
interest- bearing demand accounts and savings accounts. Increase in
interest-bearing demand accounts primarily a result of municipal and
school district deposits.
o 5.4 percent increase in average loans, primarily commercial.
RESULTS OF OPERATION (Continued)
o 11.5 percent increase in average investment securities.
o Continued low interest rate environment. However, interest rates off
the lows seen during 2003 reducing the amount of mortgage refinance
activity.
o Gain on the sale of loans $100,000 in 2004 compared to $361,000 in
2003.
o Gain on investment securities $479,000 in 2004 compared to $155,000
in 2003.
These items as well as others will be explained more thoroughly in the next
sections.
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 increased 3.3 percent to $4,017,000 for the quarter ended
March 31, 2004 as compared to $3,887,000 for the quarter ended March 31, 2003.
On a tax-equivalent basis, which allows for the comparison of tax-exempt loans
and investments to taxable loans and investments, net interest income increased
by 3.0 percent from $4,246,000 for the three months ended March 31, 2003 to
$4,375,000 for the same period ended March 31, 2004. Included in net interest
income in the first quarter of 2004 was $44,000 in interest recognized on the
pay-off of two loans that had not been accruing interest. As has been the trend
for the past three years, the ability to increase net interest income is a
result of the tremendous growth in deposits and the investment of these deposits
into profitable loans and investment securities. The increase in average
deposits when comparing the first quarter of 2004 to the first quarter of 2003
primarily reflects the deposit growth achieved during 2003. This growth was once
again aided by economic uncertainty, the conflict in Iraq and the threat of
terrorism. Investors continued to look to the safety of bank deposits and the
U.S. Government bond market. Also contributing to the growth in deposits during
2003, with an impact on first quarter of 2004 averages, was significant
increases in deposits of local municipalities and school districts. The majority
of the growth in these deposits is seasonal with a significant amount already
withdrawn during the first quarter of 2004. It is anticipated that more of these
deposits will likely be withdrawn during the second quarter of 2004 and then
re-deposited at the end of the third quarter. These deposits were primarily
invested in securities whose cash flow will closely match the anticipated
run-off of the deposits.
Average deposits increased $33,535,000 or 8.5 percent when comparing the first
quarters of 2004 and 2003. These deposits were used to fund the $11,881,000 or
5.4 percent increase in average loans and the $27,024,000 or 11.5 percent
increase in average investment securities.
The historically low interest rate environment of the past three years continued
during the first quarter of 2004. This long period of low interest 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 time deposits
either repriced at lower rates or were originated at lower interest rates. The
yield on earning assets on a tax-equivalent basis was 5.25 percent for the first
quarter of 2004 versus 5.84 percent for the first quarter of 2003, while the
rate paid on interest-bearing liabilities was 2.00 percent and 2.45 percent for
the same periods. The net interest margin, on a tax-equivalent basis, declined
19 basis points to 3.48 percent for the three-month period ended March 31,
NET INTEREST INCOME (Continued)
2004 compared with 3.67 percent for the same period in 2003. Excluding the
impact of the recognition of non-accrual income, the net interest margin for the
first quarter of 2004 was 3.45 percent. The net interest margin for the three
months ended March 31, 2004 represents an increase from the 3.38 percent
reported for the fourth quarter of 2003.
The yield on loans decreased 71 basis points to 6.01 percent when comparing the
first quarter of 2003 to the first quarter of 2004.The average prime rate when
comparing the first quarter of 2003 to the first quarter of 2004 decreased 25
basis points, from 4.25 percent to 4.00 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 2004 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 during 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
interest rates increase.
When comparing the first quarter of 2004 to the first quarter of 2003, the yield
on investment securities decreased 53 basis points to 4.72 percent from 5.25
percent. The decline in the yield from investment securities is a result of
heavy cash flow from callable agency and municipal securities, mortgage-backed
securities and collateralized mortgage obligations (CMOs) resulting from the low
interest rate environment. These funds as well as new funds from deposit growth
were reinvested in lower-yielding securities. QNB has attempted to manage the
prepayment 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. During the fourth quarter of 2003 and the first quarter of
2004, QNB entered into several transactions in an effort to reposition the
portfolio in anticipation of rising rates during 2004. These transactions were
performed in an effort to reduce extension risk on mortgage backed securities
and CMO's should interest rates rise and also to increase the overall yield on
the portfolio. The yield on the investment portfolio of 4.72 percent for the
first quarter of 2004 represents an increase from the 4.56 percent yield
achieved during the fourth quarter of 2003.
While total interest income on a tax-equivalent basis decreased $165,000 when
comparing the first quarter of 2004 to the first quarter of 2003, total interest
expense decreased $294,000. The rate paid on interest bearing deposits decreased
from 2.05 percent to 1.56 for the quarters ended March 31, 2003 and 2004. 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 $246,000 when
comparing the two quarters. The average rate paid on time deposits declined from
3.08 percent to 2.56 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 costs in either a rising or falling rate environment.
However, given the extended period of low interest rates, most time deposits
have already repriced lower and therefore the costs of time deposits will likely
not decline much further. Average time deposits decreased $1,833,000 to
$189,708,000 when comparing the first quarter of 2004 to the same period in
2003. A $3,007,000 increase in average time deposits with balances less than
$100,000 partially offset a $4,840,000 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 $26,000 and $56,000 decrease in interest expense for these products. The
average rate paid on money market accounts declined 30
NET INTEREST INCOME (Continued)
basis points when comparing the first quarter of 2004 cost of .68 percent to the
first quarter of 2003 cost of .98 percent. Contributing to the decline in the
cost of 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 53 basis points to .39 percent when comparing the first quarter of 2004
to the first quarter of 2003. When comparing the first quarter of 2004 to the
first quarter of 2003 average money market accounts increased $224,000 while
average savings accounts increased $6,017,000. The continued growth in savings
deposits can be attributed to consumers looking for the relative safety of bank
deposits despite the low interest rate environment. The challenge will be to
retain these deposits as interest rates increase and confidence in the equity
markets improves.
Interest expense on interest bearing demand accounts increased from $115,000 to
$150,000, while the cost of these accounts decreased from .63 percent to .60
percent, when comparing the three-month periods ended March 31, 2003 and 2004.
The average balance on these accounts increased from $74,421,000 to $100,239,000
when comparing the same two periods. As discussed previously, the majority of
the growth in interest bearing demand deposits can be attributed to the
successful development of relationships with several municipal organizations.
Management does not expect the cost of non-maturity interest-bearing deposits,
which reprice immediately when their rates are changed, to decline significantly
as they have reached levels where only minimal reduction in rates is possible.
The more likely scenario is that rates on non-maturity deposits will begin to
rise during 2004, as interest rates begin to increase as the economy improves.
Interest expense on short-term borrowing decreased from $29,000 for the first
quarter of 2003 to $22,000 for the first quarter of 2003. Average short-term
borrowings increased slightly from $9,532,000 to $10,681,000 when comparing the
two periods, while the rate paid on short-term borrowings decreased from 1.23
percent for the first quarter of 2003 to .83 percent for the first quarter of
2004. Most of these borrowings are indexed with the Federal funds rate.
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
inherent losses in the existing 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
PROVISION FOR LOAN LOSSES (Continued)
with another analysis that also incorporates exceptions to QNB's loan policy and
QNB's portfolio exposure to borrowers with large dollar concentration. Other
tools include ratio analysis and peer group analysis.
QNB's management determined no provision for loan losses was necessary for
either three-month period ended March 31, 2004 or 2003 as charged off loans,
non-performing assets and delinquent loans remained at low levels relative to
the allowance for loan losses. QNB had net charge-offs of $10,000 and $5,000
during the first quarter of 2004 and 2003, respectively.
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 .12
percent of total assets at both March 31, 2004 and 2003. This compares to .15
percent at December 31, 2003. Non-accrual loans were $562,000 and $579,000 at
March 31, 2004 and 2003. Non-accrual loans at December 31, 2003 were $818,000.
QNB did not have any other real estate owned as of March 31, 2004, December 31,
2003 or March 31, 2003. Repossessed assets were $5,000 at March 31, 2003. There
were no repossessed assets as of December 31, 2003 or March 31, 2004.
There were no restructured loans as of March 31, 2004, December 31, 2003 or
March 31, 2003 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 $2,919,000 and $2,929,000 at March 31, 2004
and December 31, 2003, respectively. The ratio of the allowance to total loans
was 1.24 percent and 1.26 percent at the respective period end dates. 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.
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 March 31, 2004 and 2003, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled $560,000
and $552,000, 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 other miscellaneous fee
income. QNB reviews all service charges and fee schedules related to its
products and services on an annual basis. Except for an increase to the
overdraft fee effective March 1, 2004, QNB has not materially changed these fee
schedules during 2003 or the first quarter of 2004.
Total non-interest income increased $132,000 or 10.7 percent to $1,370,000 for
the quarter ended March 31, 2004 when compared to March 31, 2003. Excluding
gains on the sale of investment securities and loans during both periods,
non-interest income increased approximately $69,000 or 9.6 percent.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees increased 7.7 percent, to $446,000 from $414,000, when comparing the two
quarters. The increase in the overdraft fee in March 2004, as well as an
increase in the volume of overdrafts contributed to the $34,000 or 9.9 percent
increase in overdraft income when comparing the three month periods ended March
31, 2004 and 2003.
Income on cash surrender value of insurance represents the earnings on life
insurance policies in which the Bank is the beneficiary. The earnings on these
policies were $68,000 and $77,000 for the three months ended March 31, 2004 and
2003, respectively. The insurance carriers reset the rates on these policies
annually. The decline in income when comparing the two periods is a result of a
lower earnings rate resulting from the lower interest rate environment.
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 three months ended March 31, 2004 and 2003 were
losses of $6,000 and $59,000, respectively. Included in these amounts are
$23,000 and $75,000 related to a valuation allowance for impairment. 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 $17,000 for the first quarter of 2004 compared
to $16,000 for the first quarter of 2003.
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 March 31, 2004
and 2003 was $36,000 and $31,000, respectively. The average balance of mortgages
serviced for others was $85,047,000 for the first quarter of 2004 compared to
$74,876,000 for the first quarter of 2003, an increase of 13.6 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 $479,000 for the first
quarter of 2004. This compares to net gains of $155,000 for the same period in
2003. Of the gains recorded during the first quarter of 2004, $210,000 related
to the sale of fixed income securities at the Bank, while $269,000 was a result
of sales from the equity
NON-INTEREST INCOME (Continued)
portfolio at the Corporation. During the first quarter QNB sold approximately
$17,000,000 in securities in three transactions. The first transaction, was for
liquidity purposes, and involved the sale of approximately $6,800,000 of the
lowest coupon, slowest paying mortgage-backed securities whose average life
would extend in a rising interest rate environment. The primary purpose of this
transaction was to fund a short-term timing difference between the withdrawal of
some municipal deposits and the anticipated call of the securities purchased to
match these withdrawals. This transaction resulted in a gain of $25,000. The
second transaction involved the sale of the three lowest yielding corporate
bonds at a gain of $84,000. Since spreads on corporate bonds had tightened,
management determined that there was better value in switching to the agency
sector, thereby taking a gain, and reducing credit risk without sacrificing
yield or extending duration significantly. The final transaction resulted in the
sale of approximately $7,600,000 in low yielding callable agency bonds with high
coupons that would likely be called in a short-time period. This transaction
resulted in a gain of approximately $101,000.
Net gains on the sale of investment securities were $155,000 for the first
quarter of 2003. QNB recognized a gain of $266,000 on the sale of debt
securities and a net loss of $111,000 in the marketable equity securities
portfolio. QNB sold $18,161,000 of mortgage-backed securities and CMO's that
were prepaying at very fast speeds. The proceeds were used to purchase lower
coupon 15-year mortgage backed securities. The purpose of this transaction was
to reduce the amount of cash flow currently being received. Included in the loss
on equity securities 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.
QNB recorded a gain of $100,000 on the sale of loans during the first quarter of
2004. This compares to a $361,000 gain for the same period in 2003. The sale of
residential mortgages accounts for the entire gain in 2004 and $356,000 of the
gain in 2003. The sale of student loans accounts for $5,000 of the gain in 2003.
QNB sold approximately $257,000 in student loans during the first quarter of
2003. Effective June 30, 2002 QNB terminated its agreement with the Student Loan
Marketing Association (SLMA). QNB no longer originates 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. QNB originated $2,678,000 and $8,064,000 in mortgages held for sale
during the first quarter of 2004 and 2003. Proceeds from the sale of residential
mortgages were approximately $3,923,000 and $9,908,000 during the first quarter
of 2004 and 2003. As of March 31, 2004 and 2003 QNB had approximately $213,000
and $2,227,000 in mortgage loans classified as held for sale. These loans are
accounted for at lower of cost or market. The reduction in residential mortgage
loan activity is a function of the up-tick in interest rates since their lows in
2003 and the resulting slowdown in mortgage refinancing activity.
Other operating income decreased $4,000 to $155,000 during the first quarter of
2003. Included in other operating income during the first quarter of 2003 was a
$46,000 derivative gain on residential mortgage loans held for sale that have
been committed but not settled. An $8,000 increase in merchant processing
income, a $9,000 increase in retail brokerage income, a $10,000 increase in
commission on the sale of checks to customers and a $9,000 refund of prior years
sales tax payments helped offset the $46,000 derivative gain from 2003.
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
$3,169,000 for the quarter ended March 31, 2004 represents an increase of
$31,000 or 1.0 percent from levels reported in the first quarter of 2003.
Salaries and benefits, the largest component of non-interest expense, increased
$24,000 or 1.3 percent to $1,833,000 for the quarter ended March 31, 2004
compared to the same quarter in 2003. Salary expense increased $32,000 or 2.2
percent during the period to $1,473,000 while benefits expense decreased $8,000
or 2.2 percent to $360,000. Included in salary expense for the three month
periods ended March 31, 2004 and 2003 is an accrual of $100,000 and $145,000,
respectively related to the incentive compensation plan. Merit increases and an
increase in the number of employees contributed to the increase in salary
expense. The number of full time-equivalent employees increased by two when
comparing the first quarters of 2004 and 2003. QNB monitors, through the use of
various surveys, the competitive salary information in its markets and makes
adjustments where appropriate.
Net occupancy expense increased $23,000 to $238,000 while furniture and
equipment expense decreased $27,000 to $243,000 when comparing the three-month
periods ended March 31, 2004 and 2003, respectively. Higher utility costs and
building maintenance costs contributed to the increase in net occupancy expense.
An $18,000 decrease in depreciation and amortization expense and a $4,000
decrease in equipment maintenance costs contributed to the decline in furniture
and equipment expense.
Marketing expense increased $7,000 to $107,000 for the quarter ended March 31,
2004. The increase in marketing expense is primarily a result of an increase in
public relations expense including costs associated with a customer newsletter
and an increase in contributions and sponsorships.
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 $155,000 in the first quarter of 2004 compared
to $190,000 for the first quarter of 2003. The use of an executive search firm
to fill an open Trust officer position was the primary contributor to the higher
third party service expense in 2003. Also contributing to the higher costs in
2003 were consulting and training costs related to the installation of an
upgrade to the item processing system. Partially offsetting these items were
higher internal and external auditing costs and costs associated with the
outsourcing of the statement printing and mailing function which began in the
second quarter of 2003.
Telephone, postage and supplies expense was $116,000 for the three months ended
March 31, 2004 compared to $137,000 for the same period ended March 31, 2003.
The outsourcing of the statement mail function mentioned above, contributed to
the $23,000 decrease in postage expense.
The major components of other expense are regulatory costs, insurance costs,
membership fees, courier expense, ATM and debit card expense, loan origination
costs and directors fees. Other expense for the first quarter of 2004 was
$365,000, an increase of $31,000 or 9.3 percent. Costs associated with
originating loans, primarily fixed rate home equity and home equity lines of
credit, were the primary contributor to the increase in other expense. These
costs, associated with a promotion in which the bank was absorbing appraisal,
title and credit reporting costs, increased $19,000 when comparing the two
periods. Also contributing to the variance was a $9,000 increase in ATM and
debit card expenses.
INCOME TAXES
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of March 31, 2003 QNB's net deferred tax liability
was $1,067,000. The primary components of deferred taxes are a deferred tax
asset of $747,000 relating to the allowance for loan losses and a deferred tax
liability of $1,880,000 resulting from the SFAS No.115 adjustment for
available-for-sale investment securities. As of March 31, 2003 QNB's net
deferred tax liability was $942,000. A deferred tax asset of $724,000 related to
the allowance for loan losses was offset by a deferred tax liability of
$1,836,000 resulting from the SFAS No. 115 adjustment for available-for-sale
investment securities.
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 $138,000 was established as of March 31,
2003 to offset a portion of the tax benefits associated with certain impaired
securities that management believed may not be realizable. This valuation
allowance was reversed during 2003 as a result of the ability to realize tax
benefits associated with certain impaired securities, due to the increase in
unrealized gains of certain equity securities. 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. The net deferred tax
liability is included in other liabilities on the consolidated balance sheet.
Applicable income taxes and effective tax rates were $496,000 or 22.4 percent
for the three-month period ended March 31, 2003, and $456,000 or 22.9 percent
for the same period in 2003. Applicable income taxes for the three-month period
ended March 31, 2003 include $43,000 relating to income tax expense associated
with additional valuation allowance required as described above. The effective
tax rate without the valuation allowance would have been 20.8 percent. The
higher rate of 22.4 percent in 2004 compared to the 20.8 percent in 2003 is a
result of a decline in the proportion of tax-free loan and investment income and
income from bank owned life insurance relative to pre-tax income.
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the three
months ended March 31, 2004 and 2003, as well as the period ended balances as of
March 31, 2004 and December 31, 2003.
Average earning assets for the three-month period ended March 31, 2004 increased
$35,923,000 or 7.7 percent to $504,964,000 from $469,041,000 for the quarter
ended March 31, 2003. Average investments increased $27,024,000 while average
loans increased $11,881,000. Average Federal funds sold decreased $3,662,000
when comparing these same periods.
The 5.4 percent increase in average loans is a result of the use of a formal
business development and calling program encompassing lending personnel, branch
personnel and executive management. This program was strengthened in 2003 by the
appointment of a business development officer. The focus of this program is to
both develop new lending and deposit relationships as well as strengthen
existing relationships. The initial business development process was enhanced in
2002 with the development of a bank-wide sales initiative that concentrated on
sales training, particularly with regard to identifying lending opportunities.
This program was further expanded in 2003 to include an incentive compensation
program that rewards employees not only for loan growth, but also for asset
quality and profitability. Despite the weak economy and extremely competitive
environment, QNB was successful in increasing total loans, while maintaining
excellent asset quality.
BALANCE SHEET ANALYSIS (Continued)
Average commercial loans and average home equity loans increased $15,786,000 and
$5,859,000, when comparing the first quarter of 2004 to the first quarter of
2003 while average residential mortgage loans and average consumer type loans
decreased $8,462,000 and $1,302,000 during this same period. The increase in
average commercial loans reflects the success of the business development
program mentioned above. The 13.1 percent increase in home equity loans reflects
their popularity with consumers; especially those refinancing existing
residential mortgage loans, because they have lower origination costs than
residential mortgage loans. It also reflects the introduction of a more
competitive variable rate home equity line of credit priced at prime minus .50
percent introduced in late 2003. The decrease in residential mortgage loans is a
result of the decision by management to sell most residential mortgage loan
production in the secondary market because of the interest rate risk associated
with the low interest rates.
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 $3,309,000 or 7.2 percent, while average
interest-bearing deposit accounts increased $30,226,000 or 8.7 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 $25,818,000 or 34.7
percent. The majority of this growth can be attributed to the development of
relationships with several school districts and municipalities. Most of these
deposits are seasonal and were withdrawn during the first quarter of 2004 or
will be withdrawn during the second quarter of 2004. It is anticipated that
these funds will flow back in during the third quarter of 2004. Average savings
accounts increased $6,017,000 or 12.7 percent. The continued growth in savings
deposits can be attributed to consumers looking for the relative safety of bank
deposits despite the low interest rate environment. The challenge will be to
retain these deposits as interest rates increase and confidence in the equity
markets improves.
Average time deposits decreased $1,833,000 to $189,708,000 when comparing the
first quarter of 2004 to the same period in 2003. A $3,007,000 increase in
average time deposits with balances less than $100,000 partially offset a
$4,840,000 decrease in average time deposits with balances of $100,000 or more.
Total assets at March 31, 2004 were $540,640,000, compared with $550,831,000 at
December 31, 2003, a decline of 1.9 percent for the quarter. The decline in
total assets reflects the run-off of the municipal deposits as was expected.
Total deposits decreased $12,405,000 from $438,639,000 at December 31, 2003 to
$426,234,000 at March 31, 2004. Most of these deposits were in either
interest-bearing demand accounts or money market accounts which decreased
$13,784,000 and $4,093,000, respectively between December 31, 2003 and March 31,
2004. The decrease in assets from December 31, 2003 to March 31, 2004 was
primarily centered in investment securities, which decreased $14,989,000. As
mentioned previously, investment securities were purchased to closely match the
anticipated withdrawal of the municipal deposits.
Total loans and Federal funds sold increased $2,784,000 and $6,327,000 between
December 31, 2003 and March 31, 2004. The increase in Federal funds sold is
primarily a result of timing differences between the sale of investment
securities that occurred in the first quarter of 2004 and the purchase of other
investment securities with the proceeds from the sale. Management retained the
proceeds in anticipation of rising rates. Investment securities were purchased
in April 2004.
BALANCE SHEET ANALYSIS (Continued)
Non-interest bearing demand accounts, saving accounts and time deposits
increased $1,412,000, $2,739,000 and $1,321,000, respectively when comparing
balances at March 31, 2004 and December 31, 2003.
At March 31, 2004 the fair value of investment securities available-for-sale was
$251,800,000 or $5,529,000 above the amortized cost of $246,271,000. This
compares to a fair value of $264,441,000 or $3,547,000 above the amortized cost
of $260,894,000 at December 31, 2003. An unrealized holding gain, net of taxes,
of $3,650,000 and $2,341,000 was recorded as an increase to shareholders' equity
at March 31, 2004 and December 31, 2003, respectively. As a result of the three
transactions mentioned earlier as well as the reinvestment of proceeds from
callable agency securities and mortgage-backed securities the composition of the
portfolio has changed since December 31, 2003. Agency securities and
mortgage-backed securities have decreased from 16.1 percent and 24.7 percent of
the fixed income portfolio at December 31, 2003 to 8.0 percent and 23.2 percent
of the portfolio at March 31, 2004, while CMO's have increased from 26.4 percent
to 35.0 percent of the portfolio during this same time period. The reduction in
the agency portfolio reflects the call of the bonds associated with the
municipal deposits. The reduction in the mortgage-backed portfolio and the
increase in the CMO portfolio reflect the desire to continue to position the
portfolio for rising interest rates.
The available-for-sale portfolio had a weighted average maturity of
approximately 4 years and 4 months at March 31, 2004 and 4 years, 1 month at
December 31, 2003. The weighted average tax-equivalent yield was 4.69 percent
and 4.61 percent at March 31, 2004 and December 31, 2003. 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. However, the estimated average life could be longer if rates were to
increase and principal payments on mortgage-backed securities and CMOs would
slow. 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 3 years, 10 months at
March 31, 2004 and 3 years, 7 months at December 31, 2003, based on these
assumptions.
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. Investment securities
held-to-maturity are reported at amortized cost. As of March 31, 2004 and
December 31, 2003, QNB had securities classified as held-to-maturity with an
amortized cost of $9,664,000 and $12,012,000 and a market value of $9,979,000
and $12,334,000, respectively. The held-to-maturity portfolio had a weighted
average maturity of approximately 3 years, 4 months at March 31, 2004 and 2
years, 11 months at December 31, 2003. The weighted average tax-equivalent yield
was 6.56 percent at March 31, 2004 and 6.59 percent at December 31, 2003.
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
LIQUIDITY (Continued)
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 $10,000,000 unsecured Federal funds line granted by
the Bank's correspondent. This line was increased from $5,000,000 during the
first quarter of 2004.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $281,577,000 and $291,946,000 at March 31, 2004 and
December 31, 2003. These sources were adequate to meet seasonal deposit
withdrawals and loan growth during the first quarter of 2004 and should be
adequate to meet normal fluctuations in loan demand and or deposit withdrawals.
QNB borrowed against it Federal funds line seven times during the first quarter
of 2004 but had no overnight borrowings from the FHLB or the Federal Reserve
Bank discount window during this same period. The need to borrow resulted
primarily from timing differences between the withdrawal of funds by the
municipalities and the receipt of the proceeds from the securities matched
against these deposits.
Approximately $73,048,000 and $84,425,000 of available-for-sale securities at
March 31, 2004 and December 31, 2003 were pledged as collateral for repurchase
agreements and deposits of public funds. 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 $3,498,000 to $29,564,000 at March 31, 2004. This
compares to a $4,102,000 increase during the first three months of 2003. After
adjusting net income for non-cash transactions, operating activities provided
$2,889,000 in cash flow in the first three months of 2004, compared to
$3,928,000 in the same period of 2003. Net income and the net activities
associated with the origination and sale of residential mortgages account for
most of the net cash provided by operating activities during the first quarter
of 2004. Higher net income, an increase in mortgage activity, an increase in
amortization of premiums on investment securities and an increase in taxes
payable accounted for the increase in net cash provided by operating activities
during the first quarter of 2003.
Net cash provided by investing activities was $14,289,000 during the first
quarter of 2004. Proceeds from the call, maturity and sales of investment
securities exceeded the purchase of investment securities by $17,218,000 during
the first three months of 2004. A significant portion of the activity was used
to fund the deposit run-off of the municipal deposits, as expected. Net cash
used by investing activities was $12,939,000 during the first quarter of 2003.
The growth in loans during the quarter was the primary use of cash. Loans,
excluding mortgage and student loan activity increased $14,618,000 during the
first quarter of 2003. Investment securities activity was a net provider of cash
of $1,832,000 during the first quarter of 2003.
The withdrawal of municipal funds during the first quarter of 2004 resulted in
net cash used by financing activities of $13,680,000. Interest-bearing
non-maturity deposits decreased $15,138,000 during the first three months of
2004. It is anticipated that this money will be re-deposited during the third
quarter. Net cash provided by financing activities was $13,113,000 during the
first quarter of 2003. The increase in deposits of $21,417,000 offset the
decline in short-term borrowings of $7,850,000. The decrease in short-term
borrowings is primarily the reduction of balances held by one repurchase
agreement customer.
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 March 31, 2004 was
$45,898,000 or 8.49 percent of total assets compared to shareholders' equity of
$43,440,000 or 7.89 percent at December 31, 2003. Shareholders' equity at March
31, 2004 includes a positive adjustment of $3,650,000 related to unrealized
holding gains, net of taxes, on investment securities available-for-sale, while
shareholders' equity at December 31, 2003 includes a positive adjustment of
$2,341,000. Without these adjustments shareholders' equity to total assets would
have been 7.81 percent and 7.46 percent at March 31,2004 and December 31, 2003.
The increase in the ratio reflects both the growth in retained earnings and the
decline in total assets between December 31, 2003 and March 31, 2004.
Shareholders' equity averaged $41,617,000 for the first three months of 2004 and
$39,286,000 during all of 2003, an increase of 5.9 percent. The ratio of average
total equity to average total assets increased to 7.71 percent for 2004,
compared to 7.46 percent for 2003. 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), Tier II capital
that 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 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 12.85 percent and 12.49 percent, a total
risk-based ratio of 13.75 percent and 13.39 percent and a leverage ratio of 7.76
percent and 7.38 percent at March 31, 2004 and December 31, 2003, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At March 31, 2004 and December 31, 2003 QNB met the "well
capitalized" criteria which requires minimum Tier I and total risk-based capital
ratios of 6.00 percent and 10.00 percent, respectively and a Tier I leverage
ratio of 5.00 percent.
INTEREST RATE SENSITIVITY
Since the assets and liabilities of QNB have diverse repricing characteristics
that influence net interest income, management analyzes interest sensitivity
through the use of gap analysis and simulation models. Interest rate sensitivity
management seeks to minimize the effect of interest rate changes on net interest
margins and interest rate spreads and to provide growth in net interest income
through periods of changing interest rates. The Asset/Liability Management
Committee (ALCO) is responsible for managing interest rate risk and for
evaluating the impact of changing interest rate conditions on net interest
income.
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 (Continued)
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 March 31, 2004, interest-earning assets scheduled to mature
or likely to be called, repriced or repaid in one year were $202,573,000.
Interest-sensitive liabilities scheduled to mature or reprice within one year
were $158,142,000. The one-year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a positive $44,431,000 at March 31, 2004.
The cumulative one-year gap equals 8.70 percent of total rate sensitive assets.
These results are similar to QNB's one-year gap position at December 31, 2004.
This positive or asset sensitive gap will generally benefit QNB in a rising
interest rate environment, while falling interest rates could negatively impact
QNB.
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.
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. This is a result of a further decline in the net
interest margin. The net interest margin is anticipated to decline as earning
assets, particularly loans continue to reprice lower during the next twelve
months, while the cost of funds remains relatively unchanged. These results were
based on interest rate assumptions as of March 31, 2004, prior to the
significant increase in treasury market interest rates.
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 significantly lower than the most likely scenario. The reduction in net
interest income is a result of floors built into the deposit assumptions because
management believes it would be difficult to reduce rates paid on deposits much
further. However, rates on earning assets would reprice lower. The direction of
these results is consistent with the results anticipated by the gap analysis.
While management performs a downward rate shock of 100, 200 and 300
INTEREST RATE SENSITIVITY (Continued)
basis points, it believes, given the level of interest rates at March 31, 2004,
that it is unlikely that interest rates would decline by 200 or 300 basis
points.
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 March 31, 2004, 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........................................... $15,835 $927 6.22%
+200 Basis Points........................................... 15,839 931 6.24
+100 Basis Points........................................... 15,495 587 3.94
FLAT RATE................................................... 14,908 - -
- -100 Basis Points............................................ 13,031 (1,877) (12.59)
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.
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
MARCH 31, 2004
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
None.
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-K filed with the Commission on March 30, 2004).
Exhibit 3(ii) Bylaws of Registrant, as amended. (Incorporated by
reference to Exhibit 3(ii) of Registrants Form 10-K filed
with the Commission on March 30, 2004).
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).
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
MARCH 31, 2004
Item 6. Exhibits and Reports on Form 8-K (Continued)
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.
(Incorporated by reference to Exhibit 10.4 of Registrants
Form 10-Q filed with the Commission on August 14, 2003).
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.)
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 January 30, 2004, Press release dated January 30,
2004 reporting fourth quarter 2003 net income.
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: May 17, 2004 By:
--------------------------
/s/ Thomas J. Bisko
-----------------------
Thomas J. Bisko
President/CEO
Date: May 17, 2004 By:
--------------------------
/s/ Robert C. Werner
-----------------------
Robert C. Werner
Vice President
Date: May 17, 2004 By:
--------------------------
/s/ Bret H. Krevolin
-----------------------
Bret H. Krevolin
Chief Financial Officer
CERTIFICATION
I, Thomas J. Bisko, President and CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of QNB Corp.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
(b) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
(c) Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.
Date: May 17, 2004 By: /s/ Thomas J. Bisko
----------- -------------------
Thomas J. Bisko
President and CEO
CERTIFICATION
I, Bret H. Krevolin, Chief Financial Officer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of QNB Corp.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material
information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in
which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that
has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal control over financial
reporting.
Date: May 17, 2004 By: /s/ Bret H. Krevolin
------------- -----------------------
Bret H. Krevolin
Chief Financial Officer