UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-17706
QNB CORP.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2318082
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215)538-5600
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.25 par value
(Title of class)
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
[Cover page 1 of 2 pages]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
As of March 21, 1996, 1,423,998 shares of Common Stock of the registrant
were outstanding and the aggregate market value of the Common Stock of the
registrant, held by nonaffiliates was approximately $38,982,292.(1)
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Stockholders for 1995 - Part I, Item 3
Part II, Items 6, 7 and 8
Proxy Statement dated April 8, 1996 - Part III, Items 10, 11, 12 and 13
- -------------------
(1) Such figure excludes the shares of Common Stock held by the Company's
executive officers and directors. The information provided shall in no way
be construed as an admission that any person whose holdings are excluded
from the figure is not an affiliate or that any person whose holdings are
included is an affiliate and any such admission is hereby disclaimed.
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FORM 10-K INDEX
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PART I PAGE
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Item 1 Business...........................................................................................4
Item 2 Properties.........................................................................................8
Item 3 Legal Proceedings..................................................................................9
Item 4 Submission of Matters to a Vote of Security Holders................................................9
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters...............................9
Item 6 Selected Financial Data...........................................................................10
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................................................10
Item 8 Financial Statements and Supplementary Data.......................................................10
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................10
PART III
Item 10 Directors and Executive Officers of the Registrant................................................10
Item 11 Executive Compensation............................................................................10
Item 12 Security Ownership of Certain Beneficial Owners and Management....................................11
Item 13 Certain Relationships and Related Transactions....................................................11
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................11
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PART I
ITEM 1. BUSINESS
QNB CORP.
QNB Corp. (the "Corporation") was incorporated under the laws of the
Commonwealth of Pennsylvania on June 4, 1984. The Corporation is registered with
the Federal Reserve Board as a bank holding company under the Bank Holding
Company Act of 1956, as amended, and conducts its business through its
wholly-owned subsidiary, The Quakertown National Bank (the "Bank"). The
principal business of the Corporation, through the Bank, is commercial banking
and consists of, among other things, attracting deposits from the general public
and using these funds in making commercial loans, residential mortgage loans,
consumer loans, and purchasing investment securities.
QNB Corp. was organized for the purpose of becoming the holding
company of The Quakertown National Bank. Pursuant to a Plan of Reorganization
approved by the Bank's stockholders, the holding company was approved as a bank
holding company by the Federal Reserve Board of Governors on September 11, 1984.
In accordance with the terms of the Plan of Reorganization, each share of the
Bank's common stock previously outstanding was automatically converted into one
share of the Corporation's common stock and the Bank became a wholly owned
subsidiary of the Corporation. The Corporation's primary asset is its investment
in the Bank. The Corporation's assets also include a portfolio consisting of
stock in various financial institutions. The stock portfolio accounts for less
than .12% of the Corporation's total consolidated assets.
THE QUAKERTOWN NATIONAL BANK
The Quakertown National Bank is a national banking association
organized in 1877. The Bank is chartered under the National Banking Act to
engage in the various activities of a commercial bank and is subject to federal
and state laws applicable to commercial banks.
The Bank is a full-service commercial bank that provides most major
financial services. The Bank's principal office is located in Bucks County,
Pennsylvania. The Bank also operates five other full-service branches, an
operations facility and an administrative office. See Item 2. Properties. The
Bank had a total of 113 full-time employees and 43 part-time employees, at
December 31, 1995. There are no employees of the Corporation who are not
employees of the Bank.
As of December 31, 1995 the Corporation, on a consolidated basis,
had total assets of $276,049,000, total deposits of $242,887,000, and total
shareholders' equity of $20,886,000.
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MARKET AREA
The Bank's primary market area is Quakertown and its surrounding
communities and includes parts of Upper Bucks County, Southern Lehigh County,
and Northern Montgomery County.
LENDING ACTIVITIES
General. The Bank offers a variety of loan products to its
customers; including residential real estate mortgages, commercial,
construction, home equity, business, consumer, and student loans. The Bank's
loan portfolio totaled $155,957,000 and $153,993,000 at December 31, 1995 and
1994, respectively. The portfolio represented approximately 56.5% and 57.4% of
the Bank's total assets at December 31, 1995 and 1994, respectively.
Residential Mortgage Loans. The Bank offers primarily 1 and 3 year
adjustable rate mortgages, 7 year balloon mortgages, and 15, 20 and 30 year
fixed rate loans. Since 1984 the Bank has generally sold, without recourse, its
mortgage loans in the secondary mortgage market. During 1995, the Bank sold
primarily only 30 year fixed rate mortgage loans in the secondary market.
The Bank originates mortgage loans up to a 95% maximum loan-to-value
ratio provided the amount above 80% is covered by private mortgage insurance.
Premiums for private mortgage insurance are paid by the borrower.
All mortgages sold in the secondary market conform to the
loan-to-value ratios and underwriting standards dictated by the secondary
market. A majority of the mortgages are sold to the Federal Home Loan Mortgage
Corporation (Freddie Mac), with servicing retained by the Bank.
The Bank also offers home equity loans and lines of credit which are
included in real estate residential loans. Real estate residential loans in the
aggregate amount of $61,339,000 and $57,486,000 represented 39.2% and 37.3% of
gross loans at December 31, 1995 and 1994, respectively. An aggressive fixed
rate home equity loan promotion during 1995, and the change in strategy in
selling loans in the secondary market account for the increase.
Commercial Loans. The Bank offers commercial loans, including lines
of credit or commitment, term loans, commercial mortgages, letters of credit,
and tax-free loans.
The Bank's commercial and industrial loan portfolio totaled
$27,002,000 and $24,599,000 at December 31, 1995 and 1994, respectively.
Commercial and industrial loans represented approximately 17.3% and 15.9% the
Bank's total gross loans at December 31, 1995 and 1994 respectively.
Commercial real estate loans in the aggregate amount of $51,368,000
and $54,015,000 represented 32.9% and 35.0% of the Bank's gross loan portfolio
at December 31, 1995 and 1994, respectively, while construction loans, including
commercial and residential, totaled $6,641,000 and $5,253,000 for the same
periods. Commercial real estate loans include all loans collateralized at least
in part by commercial real estate, but may not be for the expressed purpose of
conducting commercial real estate transactions.
5
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Construction, commercial and industrial, and commercial real estate
lending generally entails significant additional risk as compared with
residential mortgage lending. These loans typically involve larger loan balances
to single borrowers or groups of related borrowers.
Consumer Loans. The Bank's consumer loan portfolio totaled
$7,538,000 and $10,208,000 at December 31, 1995 and 1994, respectively. Consumer
loans represented 4.8% and 6.6% of the Bank's total gross loans at December 31,
1995 and 1994, respectively. Consumer loans include automobile loans, student
loans and other consumer type credit not secured by real estate. The decline in
consumer loans is the result of the sale of approximately $2,558,000 of student
loans to SallieMae in 1995.
INVESTMENT ACTIVITIES
At December 31, 1995 and 1994, the Corporation's investment
portfolio, on a consolidated basis, in the aggregate amount of $97,895,000 and
$85,474,000 consisted primarily of U.S. Government and Federal agency
obligations, mortgage-backed securities, and state and municipal securities.
Subject to applicable limits the Bank is also permitted to invest in corporate
bonds and the Corporation is permitted to invest in equity securities. On
December 31, 1993 the Bank adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities". To
comply with this statement the investment portfolio was segregated into two
classifications, investment securities available-for-sale and investment
securities held-to-maturity. Investment securities available-for-sale are
recorded at market value with the unrealized holding gain or loss, net of taxes,
included in shareholders' equity, while investment securities held-to-maturity
are recorded at amortized cost. At December 31, 1995 and 1994, the balance of
the available-for-sale portfolio was $55,380,000 and $49,838,000 and the balance
of the held-to-maturity portfolio was $42,515,000 and $35,636,000, respectively.
The Bank views its investment portfolio as a secondary source of
liquidity and stable earnings. Decisions regarding the selection of investments
for the Bank's portfolio are made by the Chief Operating Officer and the Chief
Financial Officer, or either of them, together with one other member of the
asset/liability committee. Decisions on maturity and type of investment are
dictated by the Bank's investment policy as approved annually by the Board of
Directors. To enhance the liquidity and interest rate sensitivity of the
portfolio, the Bank's strategy has been to invest seventy-five percent in short
and medium term U.S. Government and Federal Agency obligations and callable
bonds and twenty-five percent in longer term mortgage-backed securities and
state and municipal securities. The available-for-sale and held-to-maturity
investment portfolios had weighted average maturities of 3 years and 5 months
and 3 years and 8 months respectively, at December 31, 1995.
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SOURCES OF FUNDS
Deposits. The Bank offers a variety of deposit products including
checking accounts, passbook and statement savings, money market accounts, Super
N.O.W. accounts, certificates of deposit, and jumbo certificates of deposit.
Deposits of the Bank are insured up to $100,000 by the Federal Deposit Insurance
Corporation (the "FDIC").
COMPETITION
The Bank competes actively with other commercial banks in its market
area. Competition exists for new deposits, in the scope and type of services
offered, in interest rates on interest-bearing deposits and loans, and in other
aspects of banking. In addition, the Bank, like other commercial banks,
encounters competition from other non-bank financial institutions including
savings banks, savings and loans, insurance companies, credit unions, finance
companies, mutual funds and certain governmental agencies. Furthermore, large
regional and national banks located in Philadelphia and Allentown are active in
servicing companies based in the Bank's market area.
SUPERVISION AND REGULATION
Holding Company Regulation
As a registered holding company under the Bank Holding Company Act,
(the "BHCA"), the Corporation is regulated by the Federal Reserve Board (the
"FRB"). The Corporation is also subject to the provisions of section 115 of the
Pennsylvania Banking Code of 1965.
As a bank holding company, the Corporation is required to file with
the FRB an annual report and such additional information regarding the holding
company and its subsidiary bank as required pursuant to the BHCA. The FRB may
also make examinations of the holding company and its subsidiary. The FRB
possesses cease-and-desist powers over bank holding companies and their non-bank
subsidiaries where their actions would constitute an unsafe or unsound practice
or violation of law.
In addition to the restrictions imposed by the BHCA relating to a
bank holding company's ability to acquire control of additional banks, the BHCA
generally prohibits a bank holding company from (i) acquiring a direct or
indirect interest in, or control of 5% or more of the outstanding voting shares
of any company, and (ii) engaging directly or indirectly in activities other
than that of banking, managing or controlling banks or furnishing services to
subsidiaries. However, a bank holding company may engage in, and may own shares
of companies engaged in, certain activities deemed by the FRB to be closely
related to banking or managing or controlling banks.
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Bank Regulation
The Bank operates as a national bank subject to regulation and
examination by the Office of the Comptroller of the Currency (the "OCC").
The OCC regulates all areas of a national bank's commercial banking
operations including loans, mergers, establishment of branches and other aspects
of operations. The OCC also regulates the level of dividends which can be
declared by the Corporation. See the Corporation's 1995 Annual Report to
Shareholders ("Annual Report"), "Management Discussion and Analysis,"
incorporated by reference herein.
The Bank is also regulated by the Federal Reserve System and the
FDIC. The major function of the FDIC with respect to insured member banks is to
pay depositors to the extent provided by law in the event an insured bank is
closed without adequately providing for payment of the claims of depositors.
FDIC insured banks are subject to certain FDIC requirements designed
to maintain the safety and soundness of individual banks and the banking system.
In addition, the FDIC along with the Comptroller of the Currency and the FRB
have adopted regulations which define and set the minimum requirements for
capital adequacy based on risk. See the Corporation's Annual Report, "Capital
Adequacy," incorporated by reference herein. The FRB, the FDIC and Federal and
State law extensively regulate other various aspects of the banking business,
including, but not limited to, permissible types and amounts of loans,
investments and other activities, branching, interest rates on loans and the
safety and soundness of banking practices.
Federal Reserve Board Requirements
Regulation D of the FRB imposes reserve requirements on all
depository institutions, including the Bank, that maintain transaction accounts
or non-personal time and savings accounts. These reserves may be in the form of
cash or non-interest bearing deposits with the Philadelphia Federal Reserve
Bank. Under current Regulation D, the Bank must establish reserves equal to 3.0%
of the first $47.7 million of net transaction accounts and 10.0% of the
remainder. The reserve requirement on non-personal savings and time deposits
with an original maturity of less than 18 months is 3.0%. Cash and due from
banks are used as a deduction against the reserve. At December 31, 1995, the
Bank met applicable FRB reserve requirements.
ITEM 2. PROPERTIES
The Bank and Corporation's main office is located at 10 North Third
Street, Quakertown, Pennsylvania. The Bank conducts business from its main
office and five other retail offices located in Upper Bucks, Southern Lehigh,
and Northern Montgomery Counties. The Bank owns its main office, two retail
locations, its operations facility, and the computer facility. The
8
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Bank leases its remaining retail properties. The leases on the properties
generally contain renewal options. Management considers that its facilities are
adequate for its business.
The following table details the Bank's properties:
Location
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1) Quakertown, Pa. - Main Office - owned
2) Quakertown, Pa. - Towne Bank Center - owned
3) Quakertown, Pa. - Computer Center - owned
4) Quakertown, Pa. - Country Square Branch - net lease requiring rental
payments of $25,000 per year.
5) Dublin, Pa. - Dublin Branch - net lease requiring rental payments of $19,600 per year.
6) Pennsburg, Pa. - Pennsburg Square Branch - net lease requiring
rental payments of $40,000 per year.
7) Coopersburg, Pa. - Coopersburg Branch - owned
8) Perkasie, Pa. - Perkasie Branch - owned
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The information required by Item 3 is incorporated by reference to Note
13 Commitments and Contingencies, to the Consolidated Financial Statements,
appearing on page 36 of the Annual Report which is attached as Exhibit 13.1.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There were 586 shareholders of record as of March 21, 1996; however,
the Corporation believes, based on the number of annual reports and proxy
statements requested by nominee holders of the Corporation's Common Stock, that
the number of beneficial holders exceeds 675. The other information required by
Item 5 is incorporated by reference to the information appearing under the
caption "Stock Information" on page 40 of the Annual Report.
9
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ITEM 6. SELECTED FINANCIAL AND OTHER DATA
The information required by Item 6 is incorporated by reference to the
information appearing under the caption "Selected Financial and Other Data" on
page 26 of the Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by Item 7 is incorporated by reference to the
information appearing under the caption "Management's Discussion and Analysis"
on pages 8 to 25 of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 and the auditor's report are
incorporated by reference to the Corporation's consolidated financial
statements, on pages 27 to 40 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the sections captioned
"Election of Directors" and "Executive Officers of the Registrant" in the
definitive proxy statement of the Registrant, filed with the Securities and
Exchange Commission on or about March 29, 1996 (The "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
information appearing under the caption "Executive Compensation" in the Proxy
Statement.
10
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
information appearing under the caption "Securities Ownership of Management" in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
information appearing under the caption "Related Transactions" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The consolidated financial statements to be included in Part II, Item 8
are incorporated by reference to the 1995 Annual Report of the
Corporation to Shareholders, a copy of which accompanies this report as
Exhibit 13.1.
2. Financial Statement Schedules
All schedules applicable to the Registrant are shown in the respective
financial statements or in the notes thereto included in the 1995
Annual Report.
3. The following exhibits are incorporated by reference herein or
annexed to this 10-K:
3.1- Registrants Articles of Incorporation, as amended, are
incorporated by reference to Exhibit 3 of Registrant's Current
Report on Form 8-K filed with the Commission on April 30, 1989
"Form 8-K".
3.2- Registrants By-Laws, as amended, are incorporated by reference
to Exhibit 3 of Form 8-K.
4.1- Registrant's specimen certificate of Common Stock is
incorporated by reference to Exhibit 4 of Form 8-K.
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10.1- Employment Agreement between the Registrant and Thomas J.
Bisko is incorporated by reference to Exhibit 10(a) of Form
8-K.
10.2- Salary Continuation Agreement between the Registrant and
Thomas J. Bisko is incorporated by reference to Exhibit 10(b)
of Form 8-K.
10.3- Deferred Compensation Agreement between the Registrant and
Philip D. Miller is incorporated by reference to Exhibit 10(c)
of Form 8-K.
10.4- The Registrant's Stock Incentive Plan is incorporated by
reference to Exhibit 28 of Form 8-K.
13.1- 1995 Annual Report to Shareholders.
21.1- Subsidiaries of the Registrant.
23.1- Consent of Coopers & Lybrand L.L.P., filed herewith.
(b) Reports on Form 8-K
None
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes thereto.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QNB Corp.
March 26, 1996
BY: /s/ Thomas J. Bisko
-------------------------------
Thomas J. Bisko
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report is signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
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/s/ Philip D. Miller Chairman of the Board and March 26, 1996
- ----------------------------- Director
Philip D. Miller
/s/ Thomas J. Bisko President, Chief Executive March 26, 1996
- ----------------------------- Officer and Director
Thomas J. Bisko
/s/ Robert C. Werner Vice President March 26, 1996
- -----------------------------
Robert C. Werner
/s/ Bret H. Krevolin Chief Accounting Officer March 26, 1996
- -----------------------------
Bret H. Krevolin
/s/ Norman L. Baringer Director March 26, 1996
- -----------------------------
Norman L. Baringer
/s/ Kenneth G. Brown Jr. Director March 26, 1996
- -----------------------------
Kenneth G. Brown Jr.
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SIGNATURES (Continued)
/s/ Gary S. Parzych Director March 26, 1996
- -----------------------------
Gary S. Parzych
/s/ Donald T. Knauss Director March 26, 1996
- -----------------------------
Donald T. Knauss
/s/ Charles M. Meredith, III Director March 26, 1996
- -----------------------------
Charles M. Meredith, III
/s/ Henry L. Rosenberger Director March 26, 1996
- -----------------------------
Henry L. Rosenberger
/s/ Edgar L. Stauffer Director March 26, 1996
- -----------------------------
Edgar L. Stauffer
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MANAGEMENT'S DISCUSSION AND ANALYSIS 8
CONSOLIDATED BALANCE SHEETS 27
CONSOLIDATED STATEMENTS OF INCOME 28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 29
CONSOLIDATED STATEMENTS OF CASH FLOWS 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31
INDEPENDENT AUDITOR'S REPORT 40
CORPORATE INFORMATION 40
DIRECTORS, OFFICERS & OFFICE LOCATIONS 41
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CONSOLIDATED FINANCIAL REVIEW
The intention of this section is to provide the reader with a better
understanding of the consolidated results of operations and financial condition
of QNB Corp. and its wholly owned subsidiary, The Quakertown National Bank, for
the years 1995, 1994 and 1993. The results of operations and financial condition
discussed herein are presented on a consolidated basis and the consolidated
entity is referred to herein as "QNB." This section should be read in
conjunction with the financial statements and notes beginning on page 27.
Tabular information is presented in thousands of dollars, except per share data.
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania, which provides a full range of commercial and retail
banking services through its banking subsidiary, The Quakertown National Bank
(the "Bank"), a 118 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties.
RESULTS OF OPERATIONS
For the financial services industry, which primarily includes commercial banks,
thrift institutions, insurance companies, brokerage firms and mutual fund
companies, 1995 was an exciting year--a year of change. Megamergers of some of
the largest banks in the country, record inflows of cash into mutual funds,
record highs in the stock markets, and deposit insurance premium reductions and
refunds for most commercial banks were a few of the major events that impacted
the financial services industry.
To sustain its competitive position, QNB implemented strategies throughout 1995
to strengthen the balance sheet and position itself for future growth and
increased profitability. These strategies included a corporate re-engineering, a
further strengthening of the allowance for possible loan losses, and a
realignment of a segment of the investment portfolio to enhance future yields.
Net income for 1995 reflects the results of these actions in the form of lower
earnings. Net income for 1995 was $1,687,000 or $1.19 per share. This represents
a decrease of 15.8 percent from net income reported in 1994.
Net income in 1994 was $2,004,000 or $1.41 per share, an increase of 13.5
percent from net income, before a change in accounting principle, reported in
1993. The strong improvement in operating income in 1994 was a result of solid
growth in the net interest margin and significant reductions in nonperforming
assets. Net income in 1994 was also positively impacted by reduced operating
expenses, partially accomplished through a corporate restructuring program. Net
income in 1993, after a change in accounting principle, was $1,818,000 or $1.28
per share. Effective January 1, 1993, QNB adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." As a result of this
accounting change, QNB recorded a cumulative benefit of $52,000 in 1993. The
effect of this change added $.03 to earnings per share in 1993.
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
.63 percent and 8.46 percent, respectively, in 1995 compared with .77 percent
and 10.56 percent in 1994 and .73 percent and 10.06 percent in 1993.
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 noninterest-bearing deposits and shareholders' equity.
For purposes of this discussion, interest income, and the average yield earned
on loans and investment securities, is adjusted to a tax-equivalent basis as
detailed in the Average Balances, Rates, and Interest Income and Expense Summary
that appears on page 25. This provides a basis for comparison of tax-exempt
loans and investments with taxable loans and investments by giving effect to
interest earned on tax-exempt loans and investments by an amount equivalent to
the Federal income taxes which would have been paid if the interest earned on
those assets were taxable at the statutory tax rate of 34 percent.
The net interest rate spread is the difference between average rates received on
earning assets and the average rates paid on interest-bearing liabilities, while
the net interest rate margin includes interest-free sources of funds.
On a fully tax-equivalent basis, net interest income for 1995 decreased $35,000
or .3 percent to $11,772,000. This slight decline in net interest income is a
result of a narrowing net interest rate spread and net interest rate margin
which decreased to 4.16 percent and 4.64 percent in 1995 from 4.52 percent and
4.89 percent in 1994. The decline in the net interest rate spread and the net
interest rate margin offset a 5.0 percent increase in average earning assets.
Total interest income increased $1,843,000 in 1995 to $20,109,000. Higher
volumes of earning assets accounted for $739,000 of the increase in interest
income, while higher interest rates on earning assets accounted for $1,104,000
of the increase. The yield on earning assets increased 37 basis points to 7.93
percent with the average rates on Federal funds sold, investment securities and
loans increasing 175 basis points, 24 basis points and 51 basis points,
respectively during 1995. The increase in the yield on earning assets was due to
the increase in interest rates during 1994 and the beginning of 1995. For
example, the prime rate, the index on which many loans are priced, increased
from 6.00 percent on January 1, 1994, to 9.00 percent by February 1995. This
rate subsequently declined to 8.75 percent in July 1995 and to 8.50 percent in
December 1995. The average prime rate increased from 7.13 percent in 1994 to
8.83 percent in 1995. QNB's interest rate sensitivity position prevented full
benefit from these increases, as it holds many loans and securities that either
have fixed rates or had repriced, for a fixed period of time, when interest
rates were lower.
Nonaccrual loans of $4,488,000 in 1995 and $3,905,000 in 1994 resulted in the
non-recognition of $320,000 and $254,000 in interest for the respective periods.
Nonaccrual loans are included in the impact of rate changes.
Earning assets averaged $253,503,000 and $241,478,000 in 1995 and 1994. While
loan demand did increase during the fourth quarter of 1995, it remained on
average relatively flat for most of 1995. This resulted in funding sources being
directed into investment securities during the year. Average investment
securities increased $12,015,000 or 14.3 percent. Since investment securities
generally have lower yields than loans, the increase in average investment
securities relative to average loans has negatively impacted the yield on
earning assets and the net interest margin. It is the goal of management during
1996 to reposition QNB's balance sheet by increasing average loans and
decreasing average investment securities, which should positively impact the net
interest margin.
Total interest expense increased $1,878,000 in 1995 to $8,337,000. A 4.0 percent
increase in average interest-bearing liabilities resulted in an increase in
interest expense of $543,000, while higher interest rates contributed $1,335,000
to the increase in total interest expense. The rates paid on interest-bearing
liabilities increased 73 basis points to 3.77 percent for 1995. Average interest
rates on NOW accounts, money market accounts, savings accounts and time deposits
increased 33 basis points, 12 basis points, 2 basis points and 115 basis points,
respectively. Interest rates paid on interest-bearing deposits lagged the rates
received on earning assets when rates increased during 1994 and the first part
of 1995. As interest rates declined since their peak in the first quarter of
1995, interest rates on earning assets also reacted more rapidly to the decline
than interest rates on interest-bearing liabilities. The increase in the cost of
interest-bearing liabilities is also a result of a change in the mix of deposits
as customers moved their balances from lower paying savings and money market
accounts to higher paying time deposits. As a result, average time deposits
increased $20,356,000 while average money market and savings accounts decreased
$15,868,000 and $2,900,000, respectively.
RATE-VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
1995 vs. 1994 1994 vs. 1993
- --------------------------------------------------------------------------------------------------------------------------------
Change due to Total Change due to Total
Volume Rate Change Volume Rate Change
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-bearing balances............................... $ (1) __ $ (1) $ 1 $ (1) __
Federal funds sold...................................... (2) $ 98 96 (4) 72 $ 68
Investment securities:
Taxable ............................................. 659 281 940 436 (262) 174
Tax-exempt .......................................... 73 (46) 27 94 (57) 37
Loans................................................... 10 771 781 56 (77) (21)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income.............................. 739 1,104 1,843 583 (325) 258
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
NOW accounts............................................ 77 123 200 73 (293) (220)
Money market accounts................................... (421) 47 (374) (177) (173) (350)
Savings................................................. (65) 8 (57) 78 (241) (163)
Time ................................................... 566 908 1,474 112 34 146
Time over $100,000...................................... 306 225 531 122 74 196
Short-term borrowings................................... 80 24 104 7 (6) 1
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense............................. 543 1,335 1,878 215 (605) (390)
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income..................................... $196 $ (231) $ (35) $ 368 $ 280 $ 648
================================================================================================================================
</TABLE>
Variances which were not specifically attributed to volume or rate were
allocated proportionately between volume and rate. The marginal Federal
corporate tax rate of 34 percent was used. Nonperforming assets are treated as a
change due to rate.
NET INTEREST INCOME (CONTINUED)
Management expects the net interest margin to continue to decline during 1996 as
a result of anticipated lower interest rates, particularly the Federal funds
rate, the prime rate and Treasury yields, which will negatively impact the yield
on earning assets. Funding costs will not decline to the same magnitude because
the competition for deposits will keep the rates paid on interest-bearing
liabilities close to current levels. The repositioning of the balance sheet, as
discussed above, should help reduce the impact of lower interest rates on the
net interest margin. At the end of January 1996 the Federal Reserve Bank
decreased the Federal funds rate by 25 basis points to 5.25 percent. The prime
rate also declined by 25 basis points to 8.25 percent.
Net interest income for 1994 increased $648,000 or 5.8 percent from 1993 to
$11,807,000. The increase resulted from an improvement in the net interest rate
spread and net interest rate margin from 4.42 percent and 4.79 percent in 1993
to 4.52 percent and 4.89 percent in 1994, respectively, coupled with 3.7 percent
growth in average earning assets. Lower levels of nonperforming assets,
including nonaccrual loans and other real estate owned, also aided in the
improvement of net interest income.
Total interest income increased $258,000 in 1994 to $18,266,000. Higher volumes
of earning assets accounted for $583,000 of the increase in interest income,
while lower interest rates on earning assets partially offset the positive
impact by $325,000. The yield on earning assets decreased 17 basis points with
the average rate on average investment securities and average loans decreasing
37 basis points and 5 basis points, respectively, during 1994. This was somewhat
offset by a 126 basis point increase in the average rate earned on Federal funds
sold. QNB experienced a decline in the average yield on investments and loans
despite the frequent upward pressure placed on short-term interest rates,
particularly the Federal funds rate and discount rate, by the Federal Reserve
Bank. During 1994 the prime rate increased from 6.00 percent to 8.50 percent.
The average prime rate increased from 6.00 percent in 1993 to 7.13 percent in
1994.
[GRAPHIC]
In the printed version there is a column graph depicting the following data
points.
INTEREST INCOME/INTEREST EXPENSE
(in thousands, tax equivalent basis)
Interest Income Interest Expense
1995 $20,109 $ 8,337
1994 $18,266 $ 6,459
1993 $18,008 $ 6,849
1992 $19,461 $ 8,787
1991 $21,099 $11,518
NET INTEREST MARGIN COMPARISON
- -----------------------------------------------------------------------------
1995 1994 1993
- -----------------------------------------------------------------------------
Rate on earning assets.............. 7.93% 7.56% 7.73%
Rate paid on
interest-bearing liabilities..... 3.77 3.04 3.31
- -----------------------------------------------------------------------------
Net interest rate spread............ 4.16 4.52 4.42
Effect of
noninterest-bearing liabilities.. .48 .37 .37
- -----------------------------------------------------------------------------
Net interest rate margin............ 4.64% 4.89% 4.79%
=============================================================================
Earning assets averaged $241,478,000 and $232,883,000 in 1994 and 1993. Loan
demand remained relatively flat for all of 1994, resulting in funding sources
being directed into investment securities during the year. Average investment
securities increased $8,045,000 or 10.6 percent, while average loans increased
$650,000 or .4 percent.
Total interest expense decreased $390,000 in 1994 to $6,459,000. A 2.7 percent
increase in average interest-bearing liabilities resulted in an increase in
interest expense of $215,000. This was offset by a $605,000 decrease in interest
expense as a result of lower interest rates on these liabilities, particularly
interest paid on NOW accounts, money market accounts and savings accounts.
However, interest rates on time deposits trended upward during 1994,
particularly in the fourth quarter. Average interest rates on NOW accounts,
money market accounts and savings accounts decreased 88 basis points, 31 basis
points and 63 basis points, respectively, while average interest rates on time
deposits increased 13 basis points. As a result of rates increasing on time
deposits while rates on other interest-bearing liabilities decreased, average
time deposits increased $6,000,000 while all other interest-bearing liabilities
decreased $676,000.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses represents management's determination of
the amount necessary to be charged to operations to bring the allowance for
possible loan losses to a level considered adequate in relation to the risk of
possible losses in the loan portfolio. Actual loan losses, net of recoveries,
serve to reduce the allowance. The provision was $1,010,000 in 1995 compared to
$600,000 and $470,000 in 1994 and 1993, respectively. The primary reason for the
higher provision for loan losses in 1995 was the increase in the amount of
charge-offs of loans collateralized by real estate, both residential and
commercial. Since approximately 78 percent of the loan portfolio is
collateralized by real estate, charge-offs of real estate collateralized loans
have a significant impact on the allowance for loan loss model, which is heavily
weighted for historical charge-offs. Management's decision to strengthen the
balance sheet by increasing the coverage of the allowance for possible
<TABLE>
<CAPTION>
Change from Prior Year
NON-INTEREST INCOME COMPARISON 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fees for services to customers............ $ 904 $ 840 $ 832 $ 64 7.6 % $ 8 1.0 %
Mortgage servicing fees................... 229 241 250 (12) (5.0) (9) (3.6)
Net (loss) gain on investment securities.. (79) 215 566 (294) (136.7) (351) (62.0)
Net gain on sale of loans................. 108 __ 635 108 100.0 (635) (100.0)
Other operating income.................... 231 302 201 (71) (23.5) 101 50.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total................................ $1,393 $1,598 $2,484 $(205) (12.8)% $(886) (35.7)%
====================================================================================================================================
</TABLE>
loan losses to nonperforming loans and total loans also contributed to the
higher provision for possible loan losses. The increase in the provision in 1994
was the result of the sudden deterioration of several related unsecured
commercial loans.
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, mortgage servicing fees, gains on the sale of investment securities,
gains on the sale of residential mortgage loans and student loans, and other
miscellaneous fee income. Total non-interest income was $1,393,000 in 1995,
compared to $1,598,000 in 1994 and $2,484,000 in 1993.
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 $64,000 or 7.6 percent in 1995. Charges related to a greater
volume of overdrafts, as well as an increase in the overdraft fee in November of
1995, account for approximately $32,000 of the increase. In 1995, the
implementation of a transaction fee for customers that use an out-of-network ATM
increased service charge income by $22,000. A reduction in waived service
charges of approximately $16,000 also added to the increase in total service
charge income. Partially offsetting these positive factors were lower monthly
fees and transaction fees on business deposit accounts, which decreased $24,000.
Higher interest rates created higher earnings credits for businesses to use to
help offset their monthly fees and transaction costs.
Fees for services to customers increased $8,000 or 1.0 percent from 1993 to
1994. Charges related to a greater volume of overdrafts and increased check
printing fees offset the decline in monthly and transaction fees on deposit
accounts, particularly business accounts. QNB reviews all service charges and
fee schedules related to its products and services on an annual basis. QNB
prices its products and services competitively.
While QNB sells a majority of its residential mortgages in the secondary market,
it retains servicing rights. A normal servicing fee is retained on all loans
sold and serviced. Mortgage servicing fees decreased $12,000 or 5.0 percent in
1995 to $229,000. This followed a decrease of $9,000 or 3.6 percent in 1994 to
$241,000. The level of mortgages serviced decreased $5,699,000 to $79,908,000 at
December 31, 1995. This 6.7 percent decrease in mortgages serviced from year-end
1994 to year-end 1995 followed a 2.3 percent decline between 1993 and 1994. The
average balance of mortgages serviced for others decreased 5.2 percent in 1995
to $83,152,000. The decrease in the volume of mortgages serviced for others
during 1995 is a result of fewer residential mortgage originations and
management's decision to retain 15 and 20 year mortgages, which would have been
sold in prior years.
In May 1995, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights," which is effective for QNB beginning January 1, 1996. SFAS
No. 122 requires the recognition of separate assets relating to the rights to
service mortgage loans based on their fair value if it is practicable to
estimate the value. Additionally, the fair value of servicing assets will be
required to be measured at each reporting date to determine any potential
impairment. The Statement applies prospectively to transactions entered into in
1996; therefore, there will be no cumulative effect upon adoption of this
Statement. This Statement is not expected to have a significant effect on the
financial position or results of operations of QNB.
Net losses on investment securities were $79,000 in 1995, while net gains on
investment securities were $215,000 and $566,000 in 1994 and 1993, respectively.
To assist in increasing future profitability, QNB sold approximately $7,885,000
of lower yielding investment securities at a loss of $79,000 in the fourth
quarter of 1995 and reinvested the proceeds in higher yielding investment
securities which will provide for higher interest income in future years.
Net gains on the sale of approximately $16,426,000 in debt securities
available-for-sale were $47,000 in 1994, while net gains on the sale of
approximately $15,779,000 in debt securities held-for-sale were $490,000 in
1993. Although the dollar volumes of debt securities sold are comparable, the
rapidly rising interest rate environment encountered during 1994 eroded the
gains that had accumulated in the portfolio. The sales transactions executed in
1994 were primarily in response to liquidity needs, while the transactions in
1993 were executed to moderately restructure the portfolio, improve cash flow
and to maximize the use of the yield curve as well as for liquidity reasons.
<TABLE>
<CAPTION>
Change from Prior Year
----------------------
NON-INTEREST EXPENSE COMPARISON 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 Amount Percent Amount Percent
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits......... $5,343 $5,307 $ 5,247 $ 36 .7 % $ 60 1.1 %
Net occupancy expense.................. 675 693 599 (18) (2.6) 94 15.7
Furniture and equipment expense........ 721 764 728 (43) (5.6) 36 4.9
Insurance expense...................... 404 688 676 (284) (41.3) 12 1.8
Other real estate owned expense........ 356 186 1,068 170 91.4 (882) (82.6)
Other expense.......................... 2,040 2,081 2,227 (41) (2.0) (146) (6.6)
- ---------------------------------------------------------------------------------------------------------------------------------
Total............................. $9,539 $9,719 $10,545 $(180) (1.9)% $(826) (7.8)%
=================================================================================================================================
</TABLE>
NON-INTEREST INCOME (CONTINUED)
There were no sales of investment securities held-to-maturity during any of the
three years. QNB owns a small portfolio of marketable equity securities. There
were no sales of these securities in 1995. During 1994 and 1993, $129,000 and
$78,000 of these securities were sold at gains of $168,000 and $76,000,
respectively. At December 31, 1995, these securities had an amortized cost of
$139,000 and a market value of $309,000.
The net gain on the sale of loans was $108,000 in 1995. There were no gains on
the sale of loans in 1994 and $635,000 in gains in 1993. Included within the
1995 amount are gains on the sale of student loans of $68,000. QNB sold
approximately $2,558,000 of student loans to SallieMae in June of 1995. Since
then, QNB changed the manner in how it originates and sells student loans to
SallieMae. This change provides a lower cost method of originating student loans
while also providing an opportunity for gains on the sale of the originated
loans. The amount of the gain depends upon the size and volume of loans
originated. There were no gains on the sale of student loans in 1994 or 1993.
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. Net gains on the sale of residential mortgages were $40,000 in
1995, zero in 1994 and $635,000 in 1993. Volatile interest rate swings have had
a major impact on the volume of mortgages originated and the gains recorded on
the sale of these mortgages. A historically low interest rate environment during
1993 resulted in a large volume of mortgage refinancing activity and the
opportunity for significant gains on the sale of these loans. Rapidly rising
interest rates during 1994 negatively impacted the volume of mortgages
originated and sold and the profits earned on these sales. A downturn in rates
at the end of the first quarter of 1995 and during the rest of the year provided
a better opportunity for originating and selling mortgages at a gain. QNB sold
approximately $2,598,000, $10,934,000 and $35,280,000 of residential mortgages
in the secondary market in 1995, 1994 and 1993, respectively. Management decided
in 1995 to sell primarily only 30 year fixed rate mortgage originations. If
interest rates continue to decline, QNB anticipates an increase in the volume of
mortgages originated and sold and higher profits on these sales in 1996.
Other operating income was $231,000, $302,000 and $201,000 in 1995, 1994 and
1993, respectively. Net gains on the sale of other real estate owned accounted
for $82,000 of the amount reported in 1994. There were no net gains in 1995 or
1993. An increase in merchant charge card income, ATM card income and mutual
fund commissions offset a decline in consumer loan insurance commissions in
1995. The increase in merchant charge card income is a result of an increase in
the volume of transactions processed, while higher ATM card income is the result
of an increase in the number of cards outstanding as well as an increase in the
annual fee charged. During the third quarter of 1995, QNB began offering retail
investment products through a third party vendor. QNB received commissions of
approximately $3,000 for these transactions in 1995. QNB anticipates an increase
in other operating income in 1996 as a result of higher ATM card income, safe
deposit box income and investment product commissions.
NON-INTEREST EXPENSE
Non-interest expense is comprised of costs related to salaries and employee
benefits, net occupancy, furniture and equipment, insurance, other real estate
owned and various other operating expenses. The reduction of non-interest
expense that began in 1994 continued in 1995 as total non-interest expense
declined 1.9 percent to $9,539,000. This followed a 7.8 percent decline between
1994 and 1993.
Salaries and benefits expense is the largest component of non-interest expense.
Salaries and benefits expense has increased slightly over the last three years,
recording a .7 percent increase in 1995 to $5,343,000. This followed a 1.1
percent increase in 1994. Salary expense increased $11,000 or .3 percent in 1995
to $4,261,000 and $39,000 or .9 percent in 1994 to $4,250,000.
During both 1995 and 1994 corporate re-engineering plans were implemented to
reduce the number of employees. As a result the number of full-time equivalent
employees was reduced from 153 at December 31, 1993 to 134 at December 31, 1995.
The cost of the reorganizations was approximately $244,000 in 1995 and $113,000
in 1994. If the cost of the severance packages was excluded, salary expense
would have declined by approximately $120,000 or 2.9 percent in 1995 and $76,000
or 1.8 percent in 1994.
Employee benefits increased $25,000 in 1995 to $1,082,000. The 2.4 percent
increase is primarily the result of higher medical, life and disability
insurance costs and higher state unemployment taxes. Lower retirement plan
expense in 1995, a result of the reduction in the number of employees and the
corresponding reduction in eligible compensation, partially offset these
increases.
Employee benefits increased $23,000 in 1994 to $1,057,000. Approximately $11,000
of the increase is related to QNB's defined contribution plans. QNB's
contribution to the money purchase pension plan decreased $13,000. This was
primarily the result of the reorganization that was implemented during 1994 and
the corresponding reduction in eligible compensation. Offsetting this was a
$24,000 increase in the expense related to the 401(k) profit sharing plan. This
plan was amended April 1, 1993 to provide a matching company contribution
limited to 3.0 percent of compensation, in addition to a discretionary profit
sharing contribution. The increase is a result of having an extra quarter's
expense in 1994. Higher expense for employer payroll taxes and life, disability
and vision insurance premiums also contributed to the increase, while lower
medical insurance costs offset some of these increases.
QNB anticipates that salaries and benefits expense will decrease in 1996 as the
cost savings of both reorganization plans are realized. Also positively
impacting these expenses are lower projected medical insurance premiums.
In October 1995, Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation" was issued. SFAS No. 123, which
is effective January 1, 1996, provides an alternative method of accounting for
stock-based compensation arrangements. This method is based on the fair value of
the stock-based compensation determined by an option pricing model utilizing
various assumptions regarding the underlying attributes of the options and QNB's
stock, rather than the existing method of accounting for stock-based
compensation which is provided in Accounting Principles Board Opinion No. 25
(APB No. 25), "Accounting for Stock Issued to Employees." The FASB encourages
entities to adopt the fair value based method, but does not require the adoption
of this method. For those entities that continue to apply APB No. 25, pro forma
disclosure of the effects, if adopted, of SFAS No. 123 on net income and
earnings per share would be required in the 1996 financial statements. QNB will
continue to apply APB No. 25; and therefore, there will be no impact on its
financial position and results of operations.
Net occupancy expense decreased $18,000 or 2.6 percent in 1995 to $675,000. A
$41,000 decrease in building repairs and maintenance expense offset increases in
utilities expense, security expense and real estate taxes totaling $19,000. Net
occupancy expense will likely increase in 1996 as a result of costs associated
with maintaining the buildings during the severe winter of 1996, and general
increases in utility and real estate taxes.
Net occupancy expense increased $94,000 or 15.7 percent in 1994 to $693,000.
Expenses related to repairs and maintenance of QNB's facilities increased
$46,000 while branch rent and utilities increased $11,000 and $28,000,
respectively. The addition of a new branch, renovations of existing locations
and maintenance associated with a severe winter contributed to the increases in
1994. Depreciation expense on QNB's facilities also increased $8,000 in 1994.
The purchase of a new branch and the renovation and expansion of space at QNB's
operations center account for the majority of this increase.
Furniture and equipment expense was $721,000, $764,000 and $728,000 for the
years ended 1995, 1994 and 1993, respectively. Depreciation expense on furniture
and equipment decreased $36,000 to $446,000 in 1995. QNB uses an accelerated
method of depreciation on its furniture and equipment. This provides for higher
expense in the earlier years of an asset's life. QNB purchased approximately
$143,000 of furniture and equipment in 1995 compared to $628,000 in 1994 and
$552,000 in 1993. The decline in the amount of furniture and equipment
purchased, along with lower depreciation expense as an asset ages, account for
the decrease. Also positively impacting total furniture and equipment expense
was lower expense of $13,000 related to equipment maintenance. Furniture and
equipment expense should decline again in 1996 as a result of lower depreciation
costs.
The increase in furniture and equipment expense in 1994 was primarily the result
of an increase in depreciation expense of $88,000. This was partially offset by
lower costs for equipment maintenance and equipment rentals of $25,000 and
$22,000, respectively. The increase in depreciation expense in 1994 is primarily
related to the purchase of a new mainframe computer and the purchase of
furniture and equipment for a new branch and the expanded operations center.
Insurance expense, primarily premiums paid to the Federal Deposit Insurance
Corporation (F.D.I.C.), was $404,000, $688,000 and $676,000 for the years ended
1995, 1994 and 1993, respectively. F.D.I.C. premiums account for $306,000,
$588,000 and $576,000 of total insurance expense for the three years. In August
1995, the F.D.I.C. announced that the Bank Insurance Fund (BIF) had met its
legally set coverage ratios as of May 1995, and as a result F.D.I.C. premiums
for "well capitalized" institutions decreased by 83 percent starting with the
third quarter of 1995 assessment. In addition, since the BIF met its required
ratios in May, the F.D.I.C. refunded approximately $37,000 of the premium QNB
paid during the second quarter of 1995.
[GRAPHIC]
In the printed document there appears a column graph depicting the
following data points:
Non-Interest Expense
(in thousands)
1995 $ 9,539
1994 $ 9,719
1993 $10,545
1992 $ 9,184
1991 $ 8,224
NON-INTEREST EXPENSE (CONTINUED)
The F.D.I.C. has been granted unlimited assessment authority to increase or
decrease premiums under the Federal Deposit Insurance Corporation Act of 1991.
Effective in 1993, F.D.I.C. insurance premiums were based on assigned risk
classifications. For 1996, the current F.D.I.C. assessment is expected to be
$2,000, which represents a significant reduction from previous years. This
amount could increase if Congress attaches language to a debt ceiling extension
bill to recapitalize the Savings Association Insurance Fund (SAIF) and
eventually merge this fund with the BIF. Congress may also make all insured
institutions assume responsibility for the Financing Corp. (FICO) obligations.
Other real estate owned expense increased $170,000 in 1995 to $356,000. Other
real estate owned expense for 1994 was $186,000 a dramatic reduction of $882,000
from the amount reported in 1993. Net losses on writedowns and sales of
properties account for $149,000 of the increase in 1995. In 1994, QNB recorded
$82,000 of net gains on other real estate owned. These gains are reflected in
other non-interest income. Expenses related to the maintenance of other real
estate owned, which consists of insurance, utilities and real estate taxes,
increased approximately $21,000 when comparing 1995 to 1994. Prior years' real
estate taxes on one property account for most of the increase. Other real estate
owned expense in 1993 includes $527,000 in writedowns and losses on properties
owned and sold. Higher expenses relating to the management of a greater number
of properties also contributed to the significant expense in 1993.
The primary components of other expense are marketing, supplies, professional
fees, postage, telecommunications, Comptroller of the Currency expense and state
taxes. Other expense was $2,040,000 in 1995, $2,081,000 in 1994 and $2,227,000
in 1993. The continuing improvement in other non-interest expense is a result of
a bankwide effort to monitor expenses. The improvement in 1995 is a result of a
reduction in costs associated with third party vendors and consultants, ATM
network fees, and marketing costs, primarily advertising. Partially offsetting
these positive factors were increases in legal expense, sales department
expense, state tax expense and costs for check printing. The increase in sales
department expense was related to costs associated with the training of customer
service representatives and tellers. QNB will continue to invest in training for
its employees so that they can further improve on the quality of service that
QNB provides to its loyal customer base. The increase in check printing costs is
a result of a deposit account promotion. At the end of 1994 and during 1995 QNB
offered a free NOW account to customers; as part of the promotion customers
received their first supply of checks free.
The primary reasons for the 6.6 percent decrease in other expense in 1994 were
the reductions in costs related to professional service fees and meetings and
conferences. The decline in nonperforming assets contributed to the reduction in
legal expense by $156,000 in 1994. As part of the attempt to reduce costs in
1994, QNB was able to reduce expenses related to meetings and overnight
conferences by approximately $48,000. Offsetting some of these savings were
higher sales and marketing expense which increased $46,000 in 1994. Increased
advertising necessitated by the opening of a new branch and the introduction of
a new theme, "Your Future is Our Future," contributed to this increase.
INCOME TAXES
Effective January 1, 1993, QNB adopted Statement of Financial Accounting
Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes." SFAS No. 109
requires a change from the deferred method of accounting for income taxes of
Accounting Principles Board Opinion No. 11 (APB No. 11) to the asset and
liability method of accounting for income taxes. Under the asset and liability
method of SFAS No. 109, 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. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under SFAS
No. 109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enacted date. The
effect of adopting SFAS No. 109 was a cumulative benefit of $52,000 in 1993. As
permitted by the Statement, prior financial statements have not been restated to
reflect the change in accounting method.
Applicable income taxes and effective tax rates were $536,000 or 24.1 percent
for 1995 compared to $681,000 or 25.4 percent for 1994, and $517,000 or 22.6
percent for 1993. The decrease in the effective tax rate between 1994 and 1995
is primarily the result of an increase in the percentage of QNB's income which
is derived from non-taxable loans and investments. The lower effective tax rate
in 1993 relative to 1994 is primarily the impact of the alternative minimum tax
credit of $55,000 realized in 1993.
FINANCIAL CONDITION
The completion of several large bank mergers as well as the announcement of
several others during 1994 and 1995 changed the landscape in which QNB operates.
QNB's primary competition in the banking segment of the financial services
industry is comprised of a large regional bank, several large community banks
and a thrift institution. The contraction of the banking industry and the
increased demand for loans by financial institutions has led to increased price
competition for both deposits and loans. Record highs in the stock markets as
well as record inflows of cash into mutual funds have also had a direct impact
in the competition for deposits.
As a result, QNB experienced only modest growth in both 1995 and 1994. Total
assets at year-end 1995 were $276,049,000, compared with $268,260,000 at
December 31, 1994, an increase of 2.9 percent. This followed growth of 4.4
percent in 1994. Average total assets increased 4.0 percent or $10,489,000 in
1995 to $269,833,000. Average total assets increased 3.6 percent or $9,056,000
in 1994 to $259,344,000. Total loans at December 31, 1995 were $155,957,000, an
increase of 1.3 percent from December 31, 1994. This followed a .8 percent
increase from December 31, 1993. Average total loans increased .1 percent in
1995 and .4 percent in 1994. Funding sources, which include deposits and
short-term borrowings, increased 1.8 percent from year-end 1994 to year-end 1995
and 5.1 percent from year-end 1993 to year-end 1994. Average funding sources
increased 4.0 percent in 1995 and 3.5 percent in 1994. The following discussion
will further detail QNB's financial condition during 1995 and 1994.
INVESTMENT SECURITIES AND OTHER
SHORT-TERM INVESTMENTS
Investment policies, approved annually by QNB's Board of Directors, include
strict standards regarding permissible investment categories, credit quality,
maturity intervals and investment concentrations. At both December 31, 1995 and
1994, approximately 90 percent of QNB's investment securities were either U.S.
Government debt securities or U.S. Government agency issued mortgage-backed
securities.
QNB did not hold any securities which, in the aggregate from any issuer
(excluding the U.S. Government and its agencies), were in excess of 10 percent
of shareholders' equity. In addition, Federal funds sold, which would be
affected by the economic status of the banking industry, are short-term in
nature and sold to banks with a minimum "A" rating at the date of the sale.
Average investment securities increased $12,015,000 or 14.3 percent to
$96,042,000 in 1995 compared with a $8,045,000 or 10.6 percent increase in 1994.
Average Federal funds sold decreased .8 percent in 1995 to $5,598,000 and 2.1
percent in 1994 to $5,643,000. The trend of higher interest rates which began in
1994 came to an end as interest rates peaked during the beginning of 1995.
Economic indicators pointed to a slowing of the United States economy in 1995.
These statistics in conjunction with low inflation and the desire for Congress
to enact a balanced budget created an environment for lower interest rates.
While the bond market reacted with lower interest rates in all maturity sectors,
the yield curve became flatter as the spread between short-term rates and
long-term rates narrowed. For example, for the period between October 1989 and
August 1995, the average spread between the one year Treasury and the ten year
Treasury was 177 basis points with a low of 2 basis points in October 1989, and
a high of 329 basis points in October of 1992. Toward the end of 1995 this
spread was approximately 52 basis points and the yield on the 30 year Treasury
had fallen below 6.00 percent. In this interest rate environment QNB invested
primarily in callable U.S. Government agency securities, mortgage-backed
securities and tax-exempt state and municipal securities. Callable securities
are investments that, for example, have maturities of five years but can be
called by the issuer after one year. These bonds provide a higher yield than
traditional agency bonds.
While interest rates rose during 1994, the yield curve became flatter as
short-term interest rates increased to a greater degree than medium and
long-term rates. This created an environment which favored investing in
short-term securities, adjustable rate securities, short-term mortgage-backed
securities with a high level of cash flow and "step-up" bonds. "Step-up" bonds
are callable U.S. Government agency securities with predetermined increasing
coupons.
Management anticipates reductions in the size of the securities portfolio during
1996. This will be accomplished through scheduled maturities and anticipated
repayments. These funds will be used to fuel anticipated loan growth.
At December 31, 1995 and 1994, investment securities totaling $37,551,000 and
$38,470,000 were pledged as collateral for repurchase agreements, public
deposits and other deposits as provided by law.
On December 31, 1993, QNB adopted Statement of Financial Accounting Standards
No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity
Securities." The Statement requires that these securities be classified into
three categories. Securities that QNB has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and reported at
amortized cost. Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings. Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized gains
and losses, net of tax, excluded from earnings and reported as a separate
component of shareholders' equity. Management determines the appropriate
classification of securities at the time of purchase. At the time of adoption,
QNB reclassified securities as deemed appropriate by management. QNB held no
trading securities as of December 31, 1995 and 1994.
INVESTMENT PORTFOLIO HISTORY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Securities Available-for-Sale
U.S. Treasuries........................................................................... $12,732 $ 13,301 $13,201
U.S. Government agencies.................................................................. 40,415 34,152 36,543
Mortgage-backed securities................................................................ 1,859 1,932 3,867
Other securities.......................................................................... 374 453 755
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities available-for-sale......................................... $55,380 $ 49,838 $54,366
- ------------------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries........................................................................... $ 2,006 $ 2,017 __
State and municipal securities............................................................ 9,531 7,253 $ 7,369
Mortgage-backed securities................................................................ 30,900 26,288 20,447
Other securities.......................................................................... 78 78 78
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities held-to-maturity........................................... $42,515 $ 35,636 $27,894
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities............................................................ $97,895 $ 85,474 $82,260
====================================================================================================================================
</TABLE>
INVESTMENT PORTFOLIO WEIGHTED AVERAGE YIELDS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Under 1-5 5-10 Over 10
December 31, 1995 1 Year Years Years Years Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Securities Available-For-Sale
U.S. Treasuries:
Fair value........................................... $6,566 $ 6,166 __ __ $12,732
Weighted average yield............................... 6.04% 6.25% 6.14%
U.S. Government agencies:
Fair value........................................... $1,512 $30,354 $ 8,549 __ $40,415
Weighted average yield............................... 6.94% 6.07% 6.64% 6.22%
Mortgage-backed securities:
Fair value........................................... __ $ 888 $ 971 __ $ 1,859
Weighted average yield............................... 6.94% 5.60% 6.23%
Other securities:
Fair value........................................... $ 321 $ 53 __ __ $ 374
Weighted average yield............................... 8.58% 7.50% 8.31%
- ------------------------------------------------------------------------------------------------------------------------
Total fair value........................................ $8,399 $37,461 $ 9,520 __ $55,380
Weighted average yield ................................. 6.25% 6.12% 6.53% 6.21%
- ------------------------------------------------------------------------------------------------------------------------
Investment Securities Held-to-Maturity
U.S. Treasuries:
Amortized cost....................................... $2,006 __ __ __ $ 2,006
Weighted average yield............................... 7.28% 7.28%
State and municipal securities:
Amortized cost....................................... $ 270 $ 155 $ 9,106 __ $ 9,531
Weighted average yield............................... 6.28% 7.71% 7.39% 7.36%
Mortgage-backed securities:
Amortized cost....................................... $3,701 $23,737 $ 3,462 __ $30,900
Weighted average yield............................... 7.41% 6.43% 6.50% 6.55%
Other securities:
Amortized cost....................................... $ 78 __ __ __ $ 78
Weighted average yield............................... 6.00% 6.00%
- ------------------------------------------------------------------------------------------------------------------------
Total amortized cost.................................... $6,055 $23,892 $12,568 __ $42,515
Weighted average yield ................................. 7.30% 6.44% 7.14% 6.77%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities are assigned to categories based on stated contractual maturity
except for mortgage-backed securities which are based on anticipated payment
periods. See interest rate sensitivity section for practical payment and
repricing characteristics. Tax-exempt securities were adjusted to a
tax-equivalent basis and are based on the marginal Federal corporate tax rate of
34 percent.
INVESTMENTS AVAILABLE-FOR-SALE
Investment securities available-for-sale include securities that management
intends to use as part of its asset/liability management strategy. They may be
sold in response to changes in market interest rates and related changes in the
security's prepayment risk or in response to the need for liquidity. The
available-for-sale portfolio is primarily comprised of U.S. Treasuries and U.S.
Government agencies due to their high degree of liquidity. Also chosen were
certain mortgage-backed securities to ensure QNB's ability to react to changes
in prepayment activity. At December 31, 1995, the fair value of investment
securities available-for-sale was $55,380,000 or $336,000 above the amortized
cost of $55,044,000. This compares to a fair value of $49,838,000 or $2,808,000
below the amortized cost of $52,646,000 at December 31, 1994. Falling interest
rates during 1995 increased the value of the portfolio, while rising interest
rates during 1994 negatively impacted the value of the portfolio. An unrealized
holding gain, net of taxes, of $222,000 was recorded as an increase to
shareholders' equity at December 31, 1995, and an unrealized holding loss, net
of taxes, of $1,853,000 was recorded as a decrease to shareholders' equity at
December 31, 1994. The available-for-sale portfolio had a weighted average
maturity of approximately 3 years and 5 months and 2 years and 11 months and a
weighted average tax-equivalent yield of 6.21 percent and 5.93 percent at
December 31, 1995 and 1994, respectively.
The weighted average maturities are based on the stated contractual maturity of
all securities except for mortgage-backed securities which are based on
estimated average life. The maturity of the portfolio may be shorter because of
call features in many of the debt securities and because of prepayments on
mortgage-backed securities. The interest rate sensitivity analysis on page 24
reflects the expected maturity distribution of the securities portfolio based
upon estimated likely call dates and anticipated cash flows assuming
management's most likely interest rate environment. The expected weighted
average life of the available-for-sale portfolio is 1 year and 4 months.
INVESTMENTS HELD-TO-MATURITY
Investment securities held-to-maturity are recorded at amortized cost. Included
in this portfolio are state and municipal securities and most mortgage-backed
securities. They are designated as held-to-maturity as they represent a large
component of QNB's core earnings and are not purchased specifically for
liquidity. The mortgage-backed securities with the highest degree of yield and
average life stability are included in this classification. In December 1994, a
U.S. Treasury security was purchased and classified in this portfolio due to its
short maturity. At December 31, 1995 and 1994, the amortized cost of investment
securities held-to-maturity was $42,515,000 and $35,636,000 and the fair value
was $42,861,000 and $33,781,000, respectively. The held-to-maturity portfolio
had a weighted average maturity of approximately 3 years and 8 months and 3
years and 10 months and a weighted average tax-equivalent yield of 6.77 percent
and 6.83 percent at December 31, 1995 and 1994, respectively.
LOANS
QNB's primary function and responsibility is to accept deposits and to make
loans to meet the credit needs of the communities it serves. Loans are the most
significant component of earning assets. Inherent within the lending function is
the evaluation and acceptance of credit risk and interest rate risk along with
the opportunity cost of alternative deployment of funds. QNB manages credit risk
associated with its lending activities through portfolio diversification,
underwriting policies and procedures, and loan monitoring practices.
QNB's commercial lending activity is focused on small businesses within the
local community. Commercial and industrial loans represent commercial purpose
loans that are either secured by collateral other than real estate or unsecured.
Real estate commercial loans include commercial purpose loans collateralized at
least in part by commercial real estate. These loans may not be for the
expressed purpose of conducting commercial real estate transactions. Real estate
residential loans include loans secured by one-to-four family units. These loans
include home equity loans, loans to individuals for residential mortgages and
commercial purpose loans. Prior to 1995, substantially all originations of
residential mortgage loans were sold in the secondary market. Beginning in 1995,
QNB decided it would sell primarily only 30 year mortgages in the secondary
market.
The loan portfolio composition remained substantially unchanged from year-end
1994 except for a moderate increase in the proportion of commercial and
industrial loans and real estate residential loans, and a moderate decrease in
consumer loans. Loans, net of unearned income, increased $1,964,000 to
$155,957,000 at December 31, 1995. Commercial and industrial loans, construction
loans and real estate residential loans increased $2,403,000, $1,388,000 and
$3,853,000, respectively. Real estate commercial loans and consumer loans
decreased $2,647,000 and $2,670,000, respectively. The increase in residential
real estate loans is primarily a result of both the change in strategy in
selling loans in the secondary market and an aggressive fixed rate home equity
loan promotion offered during 1995. Included in real estate residential loans at
December 31, 1995 and 1994 are $661,000 and $174,000 of residential mortgage
loans held-for-sale. The decline in consumer loans is the result of the sale of
approximately $2,558,000 of student loans to SallieMae. QNB continues to pursue
new commercial banking relationships and to develop new residential mortgage
products and consumer loan products to meet the needs of the community.
Average loans for 1995 increased modestly over 1994 levels to $151,839,000 from
$151,726,000. The proportion of average loans to average earning assets
decreased to 59.9 percent in 1995 compared with 62.8 percent a year ago. Growth
in the loan portfolio was also impacted by the level of nonperforming assets.
LOANS (CONTINUED)
Management's primary focus during recent years has been asset quality and the
reduction of nonperforming assets. QNB has made great strides in reducing the
level of nonperforming assets. While one of QNB's goals is to continue to reduce
the amount of nonperforming assets, it will now focus on developing new lending
relationships as well as strengthening existing relationships. Management
expects the ratio of average loans to average earning assets to increase in 1996
as a result of loan growth achieved through a formal business development
program.
NONPERFORMING ASSETS
Nonperforming assets are defined as accruing loans past due 90 days or more,
nonaccruing loans, restructured loans and other real estate owned. QNB continues
to make significant progress in reducing its level of nonperforming assets.
Total nonperforming assets were $5,535,000 at December 31, 1995, their lowest
level since 1990. This represents a reduction of 16.1 percent from the December
31, 1994 balance of $6,599,000 and a 53.5 percent reduction from their highest
level recorded in April 1993. Nonperforming assets at December 31, 1995
represent 2.01 percent of total assets, an improvement from 2.46 percent of
total assets at December 31, 1994.
Generally, the accrual of interest income on loans is discontinued when, in
management's judgement, reasonable doubt exists as to the full, timely
collection of interest or principal. When a loan is placed on nonaccrual status,
all interest previously accrued but not collected is reversed against current
period interest income. Interest payments received on nonaccrual loans are
either applied against principal or reported as income, according to
management's judgement as to the collectibility of principal. The accrual of
interest income on commercial loans is generally discontinued when a loan is
past due 90 days or more. In most instances, consumer loans are charged-off when
payments are 120 days past due.
Included in the loan portfolio are loans on nonaccrual status of $4,488,000 and
$3,905,000 at December 31, 1995 and 1994. If interest had been accrued
throughout the period, interest income
[GRAPHIC]
In the printed version there appears a column graph with the following
data points:
Nonperforming Assets
(in thousands)
1995 $ 5,535
1994 $ 6,599
1993 $ 8,221
1992 $10,328
1991 $ 9,585
for the years ended December 31, 1995 and 1994, would have increased
approximately $320,000 and $245,000, respectively. The amount of interest income
on these loans included in net income in 1995 and 1994 was $220,000 and
$182,000.
There were no restructured loans as of December 31, 1995 or 1994, 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 nonaccrual loans.
Other real estate owned totaled $775,000 at December 31, 1995 and $1,973,000 at
December 31, 1994. This real estate is recorded at the fair value of the
property less estimated costs to sell. The decrease was the result of the sale
of a property, with a book value of $1,215,000 at December 31, 1994, during the
second quarter of 1995.
Loans not included in past due, nonaccrual or restructured categories, but where
known information about possible credit problems causes management to be
uncertain as to the ability of the borrowers to comply with the present loan
repayment terms totaled $2,592,000 and $3,513,000 at December 31, 1995 and 1994.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The determination of an appropriate level of the allowance for possible 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
possible 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
nonaccrual loans, trends in volume and terms of loans, concentrations of credit,
and national and local economic trends and conditions. Other tools include ratio
analysis and peer group analysis.
QNB utilizes a risk weighting system that assigns a risk code to every
commercial loan. This risk weighting system is supplemented with a program that
encourages account officers to identify potentially deteriorating loan
situations. The officer analysis program is used to complement the on-going
analysis of the loan portfolio performed by the loan review officer. In
addition, QNB has a committee that meets quarterly to review the adequacy of the
allowance for possible loan losses based on the current and projected status of
all relevant factors pertaining to the loan portfolio.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for possible loan losses. They may require
additions to the allowance based upon their judgements about information
available to them at the time of examination.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial.................................. $ 27,002 $ 24,599 $ 20,405 $ 18,245 $ 24,127
Agricultural............................................... 2,451 2,823 1,268 1,726 2,245
Construction............................................... 6,641 5,253 6,019 4,199 3,171
Real estate-commercial*.................................... 51,368 54,015 56,510 83,069 82,143
Real estate-residential*................................... 61,339 57,486 59,154 38,531 35,767
Consumer................................................... 7,538 10,208 9,830 10,050 9,744
- -------------------------------------------------------------------------------------------------------------------------
Total loans............................................. 156,339 154,384 153,186 155,820 157,197
Less unearned income....................................... 382 391 422 470 415
- -------------------------------------------------------------------------------------------------------------------------
Total loans, net of unearned income .................... $155,957 $153,993 $152,764 $155,350 $156,782
=========================================================================================================================
</TABLE>
* Reclassification of approximately $17,861,000 from real estate-commercial
to real estate-residential occurred in 1993.
LOAN MATURITIES AND INTEREST SENSITIVITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Under 1-5 Over
December 31, 1995 1 Year Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial and industrial...................................... $ 8,613 $12,337 $ 6,052 $ 27,002
Agricultural................................................... 750 17 1,684 2,451
Construction................................................... 3,693 2,948 __ 6,641
Real estate-commercial......................................... 4,707 7,985 38,676 51,368
Real estate-residential........................................ 10,159 16,236 34,944 61,339
Consumer....................................................... 2,540 4,662 336 7,538
- -------------------------------------------------------------------------------------------------------------------
Total....................................................... $30,462 $44,185 $81,692 $156,339
===================================================================================================================
</TABLE>
Demand loans, loans having no stated schedule of repayment and no stated
maturity, are included in under one year.
The following shows the amount of loans due after one year that have fixed,
variable or adjustable interest rates at December 31, 1995:
Loans with fixed predetermined interest rates $ 54,209
Loans with variable or adjustable interest rates $ 71,668
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more not on nonaccrual status
Commercial and industrial....................................... $ 66 $ 5 __ $ 6 $ 47
Construction.................................................... __ 299 __ __ __
Real estate-commercial.......................................... 107 100 $ 191 643 100
Real estate-residential......................................... 96 313 253 230 622
Consumer........................................................ 3 4 78 67 61
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and accruing............. 272 721 522 946 830
Loans accounted for on a nonaccrual basis
Commercial and industrial....................................... 120 123 312 849 308
Construction.................................................... 686 846 1,132 165 __
Real estate-commercial.......................................... 2,588 1,157 2,097 4,474 5,964
Real estate-residential......................................... 1,084 1,755 1,543 __ __
Consumer........................................................ 10 24 11 23 __
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans........................................ 4,488 3,905 5,095 5,511 6,272
Other real estate owned............................................ 775 1,973 2,604 3,871 2,483
- ------------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets.................................... $5,535 $6,599 $ 8,221 $ 10,328 $9,585
====================================================================================================================================
Total as a percent of total assets................................. 2.01% 2.46% 3.20% 4.04% 4.14%
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSS ALLOCATION
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Commercial and industrial............ $ 792 17.3% $ 749 15.9% $ 936 13.3% $ 696 11.7% $ 543 15.4%
Agricultural......................... 13 1.6 12 1.8 11 .9 12 1.1 15 1.4
Construction......................... 43 4.2 56 3.4 53 3.9 198 2.7 186 2.0
Real estate-commercial............... 363 32.9 535 35.0 436 36.9 1,344 53.3 1,476 52.3
Real estate-residential.............. 547 39.2 289 37.3 273 38.6 230 24.7 215 22.7
Consumer............................. 44 4.8 36 6.6 97 6.4 247 6.5 300 6.2
Unallocated.......................... 582 347 415 201 91
- -----------------------------------------------------------------------------------------------------------------------------------
Total.............................. $2,384 100.0% $2,024 100.0% $2,221 100.0% $2,928 100.0% $2,826 100.0%
====================================================================================================================================
</TABLE>
Gross loans represent loans before unamortized net loan fees. Percentage gross
loans lists the percentage of each loan type to total loans.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Allowance for possible loan losses:
Balance, January 1............................................ $ 2,024 $ 2,221 $ 2,928 $ 2,826 $ 1,870
Charge-offs
Commercial and industrial.................................. 4 567 1,038 278 261
Agricultural............................................... __ __ __ __ 1
Real estate-commercial..................................... 320 222 115 102 47
Real estate-residential.................................... 325 62 82 48 __
Consumer................................................... 54 38 66 88 161
- ------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs.......................................... 703 889 1,301 516 470
Recoveries
Commercial and industrial.................................. 12 55 106 6 42
Real estate-commercial..................................... 10 11 __ __ __
Real estate-residential.................................... 4 3 3 3 __
Consumer................................................... 27 23 15 16 10
- ------------------------------------------------------------------------------------------------------------------------------------
Total recoveries........................................... 53 92 124 25 52
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs............................................... (650) (797) (1,177) (491) (418)
Provision for possible loan losses............................ 1,010 600 470 593 1,374
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31.......................................... $ 2,384 $ 2,024 $ 2,221 $ 2,928 $ 2,826
====================================================================================================================================
Total loans:
Average.................................................... $151,839 $151,726 $151,076 $156,982 $159,296
Year-end................................................... 155,957 153,993 152,764 155,350 156,782
Ratios:
Net charge-offs to:
Average loans.............................................. .43% .53% .78% .31% .26%
Loans at year-end.......................................... .42 .52 .77 .32 .27
Allowance for possible loan losses......................... 27.27 39.38 52.99 16.77 14.79
Provision for possible loan losses......................... 64.36 132.83 250.43 82.80 30.42
Allowance for possible loan losses to:
Average loans.............................................. 1.57% 1.33% 1.47% 1.87% 1.77%
Loans at year-end.......................................... 1.53 1.31 1.45 1.88 1.80
</TABLE>
ALLOWANCE FOR POSSIBLE LOAN LOSSES (CONT.)
QNB adopted Statement of Financial Accounting Standards No. 114 (SFAS No. 114),
"Accounting by Creditors for Impairment of a Loan" as amended by Statement of
Financial Accounting Standards No. 118 (SFAS No. 118), "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures" during the first
quarter of 1995. Under the new standard, 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 effective interest rate, except that all collateral-dependent loans are
measured for impairment based on the fair value of the collateral. The adoption
of SFAS Nos. 114 and 118 resulted in no additional provision for loan losses.
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $4,345,000, of
which $3,733,000 related to loans with no valuation allowance and $612,000
related to loans with a corresponding valuation allowance of approximately
$179,000. Most of the loans identified as impaired are collateral-dependent.
Net charge-offs were $650,000 in 1995 compared with $797,000 in 1994 and
$1,177,000 in 1993. This level of charge-offs represents .43 percent of average
loans in 1995, compared with .53 percent and .78 percent in 1994 and 1993,
respectively. The improvement in the net charge-off levels reflects QNB's loan
recovery efforts and the continued improvement in overall asset quality. The
amount of net charge-offs is expected to continue to decline in 1996.
The allowance for possible loan losses was $2,384,000 at December 31, 1995,
which represents 1.53 percent of total loans, compared to $2,024,000 and 1.31
percent of total loans at December 31, 1994. While the allowance is allocated to
specific loans or loan categories, the total allowance is considered available
for losses in the entire loan portfolio. 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.
DEPOSITS
QNB primarily attracts deposits from within its market area by offering various
deposit products, including demand deposits, NOW accounts, money market
accounts, savings accounts and certificates of deposit.
Total deposits increased .8 percent to $242,887,000 at December 31, 1995, from
$240,896,000 at year-end 1994. An analysis of the change in average deposits
provides a more meaningful measure of deposit change. Average total deposits
increased 2.9 percent in 1995 and 3.5 percent in 1994. Average
noninterest-bearing deposits increased 4.3 percent to $26,416,000 in 1995. This
followed an 11.2 percent increase in 1994. Noninterest-bearing deposits are an
important source of funds for QNB because they are low cost. Average NOW
accounts increased 12.5 percent in 1995 to $37,335,000 and 8.6 percent in 1994
to $33,197,000. The increase in NOW accounts is primarily the result of
obtaining the deposit relationship of a local school district in 1995 and the
impact of free NOW account promotions in both 1994 and 1995. Average time
deposits increased 25.5 percent in 1995 and 8.1 percent in 1994, while average
money market accounts decreased 28.2 percent and 9.7 percent for the same time
periods. The change in the mix of deposits is a result of changing interest
rates. QNB offers a money market product that requires a minimum investment of
$25,000 and pays interest similar to a short-term time deposit, while providing
AVERAGE DEPOSITS BY MAJOR CLASSIFICATION
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits................... $26,416 __ $ 25,334 __ $ 22,784 __
NOW accounts................................... 37,335 2.20% 33,197 1.87% 30,558 2.75%
Money market accounts.......................... 40,392 2.77 56,260 2.65 62,275 2.96
Savings........................................ 35,044 2.27 37,944 2.25 35,244 2.88
Time .......................................... 84,340 5.19 70,582 4.12 67,750 4.07
Time deposits of $100,000 or more.............. 15,986 6.04 9,388 4.63 6,220 3.84
- ----------------------------------------------------------------------------------------------------------------------------------
Total..................................... $239,513 3.37% $232,705 2.71% $224,831 2.98%
==================================================================================================================================
</TABLE>
MATURITY OF TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Three months or less........................... $ 2,815 $ 6,609 $1,750
Over three months through six months........... 4,508 3,115 994
Over six months through twelve months.......... 2,062 824 304
Over twelve months............................. 5,067 6,398 1,369
- -----------------------------------------------------------------------------------------------------------------------
Total..................................... $14,452 $16,946 $4,417
=======================================================================================================================
</TABLE>
DEPOSITS (CONTINUED)
complete liquidity. When interest rates were declining many depositors were
utilizing this investment vehicle as an alternative to time deposits. As
interest rates on time deposits increased and outperformed rates on this product
in 1995 and 1994, customers transferred their deposits from money market
accounts to time deposits.
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 tries to manage the coordination of its mix of cash, Federal
funds sold, investment securities and loans in order to match the volatility,
seasonality, interest sensitivity and growth trends of its deposit funds.
Liquidity is provided from asset sources through maturities and repayments of
loans and investment securities, net interest income and fee income. The
portfolio of investments available-for-sale and QNB's policy of selling certain
residential mortgage originations and student loans in the secondary market also
provide a source of liquidity.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale totaled $71,898,000 at December 31, 1995 and $72,844,000 on
average for 1995. This is expected to be adequate to meet normal fluctuations in
loan demand and deposit withdrawals. The Bank will be considering membership to
the Federal Home Loan Bank during 1996. This would provide QNB with an
additional source of liquidity.
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 $1,523,000 to $12,950,000 at year-end 1995, compared
to $11,427,000 at year-end 1994. After adjusting net income for non-cash
transactions, operating activities provided $3,190,000 in cash flow in 1995,
compared to $2,964,000 in 1994.
Net cash used by investing activities of $5,657,000 in 1995 resulted largely
from the growth in the investment portfolio and the slight increase in loans
outstanding. Net usage from purchases, sales, maturities and calls of investment
securities was $9,471,000. Investing activities which provided cash during 1995
were the sale of student loans, residential mortgage loans and other real estate
owned which provided cash of $2,626,000, $2,638,000 and $1,320,000,
respectively. A $5,493,000 decrease in Federal funds sold also provided cash in
1995. Net cash used by investing activities of $11,713,000 in 1994 resulted
largely from the expansion of the investment portfolio and the $3,014,000
increase in Federal funds sold.
Growth in noninterest-bearing deposits and short-term borrowings of $3,692,000
and $2,562,000 was primarily responsible for the cash provided from financing
activities of $3,990,000 in 1995. A decline in interest-bearing deposits,
primarily money market accounts and savings accounts, and the payment of
dividends were financing activities which used cash in 1995. An increase in NOW
accounts and time deposits minimized the impact of the decline in money market
and savings accounts. Growth in deposits, both noninterest-bearing and
interest-bearing, and short-term borrowings were primarily responsible for the
increase in net cash provided by financing activities of $11,540,000 in 1994.
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 December 31, 1995 was
$20,866,000 or 7.56 percent of total assets, compared to shareholders' equity of
$17,784,000 or 6.63 percent at year-end December 31, 1994. At December 31, 1995,
shareholders' equity included a positive adjustment of $222,000 related to the
unrealized holding gains, net of taxes, on investment securities
available-for-sale, while shareholders' equity at December 31, 1994 included a
negative adjustment of $1,853,000. Without these adjustments shareholders'
equity to total assets would have been 7.48 percent and 7.32 percent at December
31, 1995 and 1994.
CAPITAL ANALYSIS
- -----------------------------------------------------------------------------
December 31, 1995 1994
- -----------------------------------------------------------------------------
Tier I
Shareholders' equity....................... $ 20,866 $ 17,784
Net unrealized securities (gains) losses... (222) 1,853
- -----------------------------------------------------------------------------
Total Tier I risk-based capital............ 20,644 19,637
Tier II
Allowable portion of the allowance
for possible loan losses................. 2,125 2,024
- -----------------------------------------------------------------------------
Total risk-based capital................... $ 22,769 $ 21,661
=============================================================================
Risk-weighted assets....................... $169,701 $169,336
=============================================================================
Capital Ratios
- -----------------------------------------------------------------------------
December 31, 1995 1994
- -----------------------------------------------------------------------------
Tier I capital/risk-weighted assets 12.16% 11.60%
Total risk-based capital/risk-weighted assets 13.42 12.79
Tier I capital/total assets (leverage ratio) 7.48 7.32
[GRAPHIC]
In the printed document a column graph appears depicting the following
data points:
Capital Ratios
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Tier I Capital 12.16% 11.60% 10.98% 10.13% 9.21%
Tier I Minimum 4.00% 4.00% 4.00% 4.00% 4.00%
Total Capital 13.42% 12.79% 12.23% 11.38% 10.47%
Total Minimum 8.00% 8.00% 8.00% 8.00% 8.00%
Shareholders' equity averaged $19,933,000 during 1995, an increase of 5.0
percent compared to 1994. The ratio of average total equity to average total
assets improved slightly to 7.39 percent for 1995, compared to 7.32 percent for
1994. Book value per share rose to $14.66 at year-end 1995 from $12.53 the prior
year. The market price was $29.00 bid and $31.00 ask at December 31, 1995,
compared with $20.50 bid and $22.25 ask at the prior year-end.
QNB is 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 which includes a portion of the allowance for loan
losses, and total capital (Tier I plus Tier 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 total risk-based capital and 3.00 percent for leverage. Under the
requirements, QNB has a Tier I capital ratio of 12.16 percent and 11.60 percent,
a total risk-based ratio of 13.42 percent and 12.79 percent and a leverage ratio
of 7.48 percent and 7.32 percent at December 31, 1995 and 1994, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At December 31, 1995 and 1994 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
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at either their contractual maturity, estimated likely call date, or
earliest repricing opportunity. Mortgage-backed securities and amortizing loans
are scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market, and NOW 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. 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 December 31, 1995, interest earning assets scheduled to
mature, or likely to be called, repriced or repaid in one year were
$116,175,000. Interest sensitive liabilities scheduled to mature or reprice
within one year were $105,786,000. The one year cumulative gap, which reflects
QNB's interest sensitivity over a period of time, was a positive $10,389,000 at
December 31, 1995. The cumulative one-year gap equals 4.05 percent of total
earning assets. This positive or asset sensitive gap will generally benefit QNB
in a rising interest rate environment, while falling interest rates will
negatively impact QNB.
INTEREST RATE SENSITIVITY (CONTINUED)
During 1995, QNB began using 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 management's estimate of
balance sheet growth and composition and interest rates for the next year, net
interest income in 1996 is expected to increase by approximately 4.2 percent
compared with 1995 net interest income. The projected increase in net interest
income is primarily the result of forecasted growth in total assets and a change
in the composition of earning assets, with the loan to earning assets ratio
increasing. These factors will be partially offset by a slight decrease in the
net interest margin. One of the assumptions in the model was a 25 basis point
decrease in the Federal funds rate and the prime rate. These occurred at the end
of January 1996.
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 exceed the most likely scenario by 1.5 percent.
Conversely, if interest rates are 100 basis points lower, net interest income
for the most likely scenario would decline by 1.9 percent.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
- ---------------------------------------------------------------------------------------------------------------------------------
Within 3 to 6 6 months 1 to 3 3 to 5 After
December 31, 1995 3 months months to 1 year years years 5 years Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Federal funds sold....................... $ 2,907 __ __ __ __ __ $ 2,907
Investment securities.................... 8,992 $10,031 $ 16,854 $ 39,167 $ 10,095 $ 12,756 97,895
Loans.................................... 54,509 6,685 16,197 44,109 12,699 21,758 155,957
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive assets.............. 66,408 16,716 33,051 83,276 22,794 34,514 $256,759
Total cumulative assets.................. $66,408 $83,124 $116,175 $ 199,451 $222,245 $256,759
=================================================================================================================================
Liabilities
Savings deposits......................... $13,365 $ 8,989 $ 17,581 $ 59,269 $ 10,967 __ $110,171
Time deposits less than $100,000......... 19,021 10,760 16,586 35,237 4,758 $ 20 86,382
Time deposits over $100,000.............. 2,815 4,508 2,062 3,102 1,837 128 14,452
Short-term borrowings.................... 10,099 __ __ __ __ __ 10,099
- ---------------------------------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities......... 45,300 24,257 36,229 97,608 17,562 148 $221,104
Total cumulative liabilities............. $45,300 $69,557 $105,786 $ 203,394 $220,956 $221,104
=================================================================================================================================
Gap during period........................ $21,108 $(7,541) $ (3,178) $ (14,332) $ 5,232 $ 34,366 $ 35,655
=================================================================================================================================
Cumulative gap........................... $21,108 $13,567 $ 10,389 $ (3,943) $ 1,289 $ 35,655
=================================================================================================================================
Cumulative gap/earning assets............ 8.22% 5.28% 4.05% (1.54)% .50% 13.89%
=================================================================================================================================
Cumulative gap ratio..................... 1.47 1.20 1.10 .98 1.01 1.16
=================================================================================================================================
</TABLE>
AVERAGE BALANCES, RATES, AND INTEREST INCOME AND EXPENSE SUMMARY
(TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Interest Balance Rate Interest Balance Rate Interest
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-bearing balances............ $ 24 3.10% $ 1 $ 82 2.65% $ 2 $ 59 2.80% $ 2
Federal funds sold................... 5,598 5.91 331 5,643 4.16 235 5,766 2.90 167
Investment securities
Taxable........................... 87,916 6.25 5,495 76,810 5.93 4,555 69,827 6.27 4,381
Tax-exempt........................ 8,126 7.46 606 7,217 8.02 579 6,155 8.81 542
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities.... 96,042 6.35 6,101 84,027 6.11 5,134 75,982 6.48 4,923
Loans, net of unearned income........ 151,839 9.01 13,676 151,726 8.50 12,895 151,076 8.55 12,916
- ------------------------------------------------------------------------------------------------------------------------------------
Total earning assets............ 253,503 7.93 20,109 241,478 7.56 18,266 232,883 7.73 18,008
Cash and due from banks.............. 8,497 8,148 8,131
Allowance for possible loan losses... (2,232) (2,119) (2,706)
Other assets......................... 10,065 11,837 11,980
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets.................... $269,833 7.45% $ 259,344 7.04% $250,288 7.19%
====================================================================================================================================
Liabilities and
Shareholders' Equity
Interest-bearing deposits
NOW accounts......................... $ 37,335 2.20% 820 $ 33,197 1.87% 620 $ 30,558 2.75% 840
Money market deposit accounts........ 40,392 2.77 1,119 56,260 2.65 1,493 62,275 2.96 1,843
Savings accounts..................... 35,044 2.27 795 37,944 2.25 852 35,244 2.88 1,015
Time deposits........................ 84,340 5.19 4,380 70,582 4.12 2,906 67,750 4.07 2,760
Time deposits of $100,000 or more.... 15,986 6.04 966 9,388 4.63 435 6,220 3.84 239
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits. 213,097 3.79 8,080 207,371 3.04 6,306 202,047 3.31 6,697
Short-term borrowings................ 7,955 3.23 257 5,225 2.93 153 4,987 3.05 152
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities................. 221,052 3.77 8,337 212,596 3.04 6,459 207,034 3.31 6,849
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits......... 26,416 25,334 22,784
Other liabilities.................... 2,432 2,434 2,405
Shareholders' equity................. 19,933 18,980 18,065
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity.......... $269,833 3.09% $ 259,344 2.49% $250,288 2.74%
====================================================================================================================================
Net interest rate spread............. 4.16% 4.52% 4.42%
====================================================================================================================================
Margin/net interest income........... 4.64% $11,772 4.89% $11,807 4.79% $11,159
====================================================================================================================================
</TABLE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income and Expense
Interest income.................................... $ 19,716 $ 17,865 $17,663 $ 19,127 $ 20,690
Interest expense................................... 8,337 6,459 6,849 8,787 11,518
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income................................ 11,379 11,406 10,814 10,340 9,172
Provision for possible loan losses................. 1,010 600 470 593 1,374
Non-interest income................................ 1,393 1,598 2,484 2,364 1,681
Non-interest expense............................... 9,539 9,719 10,545 9,184 8,224
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle ....... 2,223 2,685 2,283 2,927 1,255
Provision for income taxes......................... 536 681 517 566 230
- --------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change
in accounting principle.......................... 1,687 2,004 1,766 2,361 1,025
- --------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change
in tax accounting method......................... __ __ 52 __ __
- --------------------------------------------------------------------------------------------------------------------------------
Net income......................................... $ 1,687 $ 2,004 $ 1,818 $ 2,361 $ 1,025
================================================================================================================================
Per Share Data
Net income before cumulative effect of
change in accounting principle................... $ 1.19 $ 1.41 $ 1.25 $ 1.67 $ .73
Cumulative effect of change
in tax accounting method......................... __ __ .03 __ __
Net income......................................... 1.19 1.41 1.28 1.67 .73
Book value......................................... 14.66 12.53 13.31 12.14 10.94
Cash dividends..................................... .50 .50 .50 .50 .50
Average common shares outstanding.................. 1,421,378 1,417,395 1,415,828 1,414,160 1,413,208
Balance Sheet at Year-end
Loans, net......................................... $ 153,573 $ 151,969 $150,543 $ 152,422 $ 153,956
Investment securities available-for-sale........... 55,380 49,838 54,366 __ __
Investment securities held-to-maturity............. 42,515 35,636 27,894 76,375 49,930
Other earning assets............................... 2,915 8,439 5,395 926 8,983
Total assets....................................... 276,049 268,260 257,062 255,380 231,613
Deposits........................................... 242,887 240,896 231,125 231,185 208,510
Other interest-bearing liabilities................. 10,099 7,537 5,179 4,354 4,128
Shareholders' equity............................... 20,866 17,784 18,859 17,176 15,461
Selected Financial Ratios
Net interest margin................................ 4.64% 4.89% 4.79% 4.68% 4.52%
Net income as a percentage of:
Average total assets............................ .63 .77 .73 .97 .45
Average shareholders' equity.................... 8.46 10.56 10.06 14.05 6.61
Average shareholders' equity
to average total assets ........................ 7.39 7.32 7.22 6.88 6.83
Dividend payout ratio.............................. 42.13 35.36 38.95 29.94 68.88
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS QNB CORP. AND SUBSIDIARY
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks........................................................................... $ 12,950 $ 11,427
Federal funds sold................................................................................ 2,907 8,400
Investment securities
available-for-sale............................................................................. 55,380 49,838
held-to-maturity (market value $42,861 and $33,781)............................................ 42,515 35,636
Total loans, net of unearned income of $382 and $391.............................................. 155,957 153,993
Allowance for possible loan losses............................................................. (2,384) (2,024)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans .................................................................................... 153,573 151,969
Premises and equipment, net....................................................................... 4,536 4,906
Other real estate owned........................................................................... 775 1,973
Accrued interest receivable ...................................................................... 1,943 1,682
Other assets...................................................................................... 1,470 2,429
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets...................................................................................... $ 276,049 $ 268,260
====================================================================================================================================
Liabilities
Deposits
Demand, noninterest-bearing.................................................................... $ 31,882 $ 28,190
NOW accounts................................................................................... 39,477 34,283
Money market accounts.......................................................................... 36,853 44,059
Savings........................................................................................ 33,841 36,354
Time........................................................................................... 86,382 81,064
Time over $100,000............................................................................. 14,452 16,946
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits................................................................................. 242,887 240,896
Short-term borrowings............................................................................. 10,099 7,537
Accrued interest payable.......................................................................... 1,040 1,082
Other liabilities................................................................................. 1,157 961
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities................................................................................ 255,183 250,476
- ------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued 1,423,838 shares and 1,419,700 shares...................... 1,780 1,774
Surplus........................................................................................... 4,283 4,258
Retained earnings................................................................................. 14,581 13,605
Unrealized holding gains (losses), net of taxes,
on investment securities available-for-sale.................................................... 222 (1,853)
- ------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity........................................................................ 20,866 17,784
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity........................................................ $ 276,049 $ 268,260
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME QNB CORP. AND SUBSIDIARY
(in thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans................................................................ $ 13,492 $ 12,691 $12,757
Interest and dividends on investment securities available-for-sale........................ 3,537 3,134 __
Interest and dividends on investment securities held-for-sale............................. __ __ 1,104
Interest and dividends on investment securities held-to-maturity:
Taxable.............................................................................. 1,956 1,423 3,277
Tax-exempt........................................................................... 400 382 358
Interest on Federal funds sold............................................................ 331 235 167
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income............................................................ 19,716 17,865 17,663
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits
NOW accounts......................................................................... 820 620 840
Money market accounts................................................................ 1,119 1,493 1,843
Savings.............................................................................. 795 852 1,015
Time................................................................................. 4,380 2,906 2,760
Time over $100,000................................................................... 966 435 239
Interest on short-term borrowings......................................................... 257 153 152
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense........................................................... 8,337 6,459 6,849
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income.............................................................. 11,379 11,406 10,814
Provision for possible loan losses........................................................ 1,010 600 470
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses.................... 10,369 10,806 10,344
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Fees for services to customers........................................................... 904 840 832
Mortgage servicing fees.................................................................. 229 241 250
Net (loss) gain on investment securities................................................. (79) 215 566
Net gain on sale of loans................................................................ 108 __ 635
Other operating income................................................................... 231 302 201
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-interest income....................................................... 1,393 1,598 2,484
- ---------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits........................................................... 5,343 5,307 5,247
Net occupancy expense.................................................................... 675 693 599
Furniture and equipment expense.......................................................... 721 764 728
Insurance expense........................................................................ 404 688 676
Other real estate owned expense.......................................................... 356 186 1,068
Other expense............................................................................ 2,040 2,081 2,227
- ---------------------------------------------------------------------------------------------------------------------------------
Total non-interest expense...................................................... 9,539 9,719 10,545
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect
of change in accounting principle ................................................ 2,223 2,685 2,283
Provision for income taxes.......................................................... 536 681 517
- ---------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in accounting principle................... 1,687 2,004 1,766
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in tax accounting method................................ __ __ 52
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income.......................................................................... $ 1,687 $ 2,004 $ 1,818
=================================================================================================================================
Net income per share before cumulative effect of change in accounting principle..... $ 1.19 $1.41 $1.25
- ---------------------------------------------------------------------------------------------------------------------------------
Cumulative effect of change in tax accounting method................................ __ __ .03
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Per Share................................................................ $ 1.19 $1.41 $1.28
=================================================================================================================================
Average Common Shares Outstanding................................................... 1,421,378 1,417,395 1,415,828
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY QNB CORP. AND SUBSIDIARY
- ------------------------------------------------------------------------------------------------------------------------------------
Unrealized
Number Common Retained Treasury Holding
(in thousands, except share data) of Shares Stock Surplus Earnings Stock Gain (Loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992....................... 1,414,616 $ 1,768 $ 4,208 $ 11,200 __ __ $17,176
Net income....................................... __ __ __ 1,818 __ __ 1,818
Cash dividends paid
($.50 per share).............................. __ __ __ (708) __ __ (708)
Stock issue - 401(k) plan........................ 1,712 2 29 __ __ __ 31
Stock options exercised.......................... 784 1 __ __ __ __ 1
Unrealized holding gains,
net of taxes, on investment
securities available-for-sale.................. __ __ __ __ __ $ 541 541
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993....................... 1,417,112 1,771 4,237 12,310 __ 541 18,859
- ------------------------------------------------------------------------------------------------------------------------------------
Net income....................................... __ __ __ 2,004 __ __ 2,004
Cash dividends paid
($.50 per share).............................. __ __ __ (709) __ __ (709)
Treasury stock acquired.......................... (800) __ __ __ $ (15) __ (15)
Stock issue - 401(k) plan........................ 568 __ 5 __ 6 __ 11
Stock options exercised.......................... 2,820 3 16 __ 9 __ 28
Change in net unrealized holding
gains (losses), net of taxes,
on investment securities available-for-sale.. __ __ __ __ __ (2,394) (2,394)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994....................... 1,419,700 1,774 4,258 13,605 __ (1,853) 17,784
- ------------------------------------------------------------------------------------------------------------------------------------
Net income....................................... __ __ __ 1,687 __ __ 1,687
Cash dividends paid
($.50 per share).............................. __ __ __ (711) __ __ (711)
Stock issue - 401(k) plan........................ 462 1 10 __ __ __ 11
Stock options exercised.......................... 3,676 5 15 __ __ __ 20
Change in net unrealized holding
gains (losses), net of taxes,
on investment securities available-for-sale.. __ __ __ __ __ 2,075 2,075
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995....................... 1,423,838 $ 1,780 $ 4,283 $ 14,581 __ $ 222 $20,866
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS QNB CORP. AND SUBSIDIARY
(in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income.................................................................................... $ 1,687 $ 2,004 $ 1,818
Adjustments to reconcile net income to net cash provided by operating activities
Provision for possible loan losses.......................................................... 1,010 600 470
Depreciation and amortization............................................................... 602 636 540
Securities losses (gains)................................................................... 79 (215) (566)
Net gain on sale of loans................................................................... (108) __ (635)
Gain on disposal of premises and equipment.................................................. (10) __ __
Writedowns, net of losses (gains) on sales of other real estate owned....................... 149 (82) 527
Deferred income tax provision............................................................... 21 169 18
Change in income taxes payable.............................................................. 146 (132) 174
Net (increase) decrease in interest and dividends receivable................................ (261) (114) 208
Net amortization of premiums and discounts.................................................. 115 258 393
Net (decrease) increase in interest payable................................................. (42) 180 (607)
Other, net ................................................................................. (198) (340) (217)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities................................................... 3,190 2,964 2,123
- ------------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities and calls of investment securities
available-for-sale.......................................................................... 13,026 13,208 __
held-for-sale............................................................................... __ __ 12,970
held-to-maturity............................................................................ 2,928 5,055 2,436
Proceeds from sales of investment securities
available-for-sale.......................................................................... 8,888 16,758 __
held-for-sale............................................................................... __ __ 16,423
Purchase of investment securities
available-for-sale.......................................................................... (24,501) (29,027) __
held-for-sale............................................................................... __ __ (29,303)
held-to-maturity............................................................................ (9,812) (12,880) (7,418)
Net decrease (increase) in Federal funds sold................................................. 5,493 (3,014) (4,486)
Proceeds from sales of student loans.......................................................... 2,626 __ __
Proceeds from sales of residential mortgages.................................................. 2,638 10,934 35,915
Originations of residential mortgages held-for-sale........................................... (3,859) __ __
Net increase in loans......................................................................... (4,182) (13,683) (35,155)
Net purchases of premises and equipment....................................................... (222) (804) (1,065)
Proceeds from the sale of other real estate owned............................................. 1,320 1,740 2,130
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities....................................................... (5,657) (11,713) (7,553)
- ------------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net increase in noninterest-bearing deposits.................................................. 3,692 1,119 807
Net (decrease) increase in interest-bearing deposits.......................................... (1,701) 8,652 (867)
Net increase in short-term borrowings......................................................... 2,562 2,358 825
Cash dividends paid........................................................................... (711) (709) (708)
Proceeds from issuance of common stock........................................................ 31 39 32
Acquisition of treasury stock................................................................. __ (15) __
Other, net.................................................................................... 117 96 (224)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities............................................ 3,990 11,540 (135)
- ------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents............................................ 1,523 2,791 (5,565)
Cash and cash equivalents at beginning of year.............................................. 11,427 8,636 14,201
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year.................................................... $ 12,950 $ 11,427 $ 8,636
====================================================================================================================================
Supplemental Cash Flow Disclosures
Interest paid................................................................................. $ 8,379 $ 6,279 $ 7,456
Income taxes paid............................................................................. 370 655 300
Non-Cash Transactions
Transfer of loans to other real estate owned................................................ 271 723 1,284
Transfer of investment securities to investment securities
held-for-sale and available-for-sale ..................................................... __ __ 53,176
Change in net unrealized holding gains (losses), net of taxes, on investment securities..... 2,075 (2,394) 541
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
- --------------------------------------------------------------------------------
QNB Corp. through its subsidiary bank, The Quakertown National Bank, provides a
full range of banking services to individual and corporate customers through its
branch banking system located in Upper Bucks, Northern Montgomery and Southern
Lehigh Counties in Pennsylvania. The Quakertown National Bank is subject to
competition from other financial institutions and other financial services
companies with respect to these services and customers. QNB Corp. is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by such regulatory authorities.
Basis of Financial Statement Presentation
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of QNB Corp. and its
wholly owned subsidiary, The Quakertown National Bank (QNB). Such statements
have been prepared in accordance with generally accepted accounting principles
and general practice within the banking industry. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements. Tabular information other than per share data is presented in
thousands of dollars.
Investment Securities
- --------------------------------------------------------------------------------
Effective December 31, 1993, QNB adopted Statement of Financial Accounting
Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt
and Equity Securities." The Statement requires that debt and equity securities
be classified into three categories. Management determines the appropriate
classification of securities at the time of purchase. Securities that QNB has
the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity securities or trading
securities are classified as available-for-sale securities and reported at fair
value, with unrealized gains and losses, net of tax, excluded from earnings and
reported as a separate component of shareholders' equity.
Available-for-sale securities include securities that management intends to use
as part of its asset/liability management strategy and that may be sold in
response to changes in market interest rates and related changes in the
securities prepayment risk or to meet liquidity needs.
Gains and losses on sales of investment securities are computed on the specific
identification method and included in non-interest income.
Loans
- --------------------------------------------------------------------------------
Loans are stated at the principal amount outstanding, net of unearned income and
net deferred loan fees and costs. Interest income is accrued on the principal
amount outstanding. Generally, the accrual of interest income on loans is
discontinued if certain factors indicate reasonable doubt as to the timely
collectibility of such interest. Past due loans on which the accrual of interest
income has been discontinued are designated as nonaccrual. At the time a loan is
placed on nonaccrual status, previously accrued and uncollected interest is
reversed against interest income in the current period. Interest payments
received on nonaccrual loans are either applied against principal or reported as
income, according to management's judgement as to the collectibility of
principal. Loans are returned to accrual status when factors indicating doubtful
collectibility on a timely basis no longer exist. The accrual of interest income
on commercial purpose loans is generally discontinued when a loan is past due 90
days or more. In most instances, consumer loans are charged off after they
become 120 days past due.
During the first quarter of 1995, QNB adopted Statements of Financial Accounting
Standards No. 114 and No. 118 (SFAS No. 114 and No. 118), "Accounting by
Creditors for Impairment of a Loan." Under the requirements of these Statements,
recognition of an impairment in the performance of a loan is required when it is
probable that all amounts, including both principal and interest, will not be
collected in accordance with the loan agreement. Impaired loans are measured
based on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Impairment criteria are applied to the loan portfolio
exclusive of smaller homogeneous loans such as residential mortgage and consumer
loans which are evaluated collectively for impairment. The adoption of SFAS Nos.
114 and 118 resulted in no additional provision for loan losses.
Residential mortgages held-for-sale are carried at the lower of aggregate cost
or market value. Gains and losses on residential mortgages held-for-sale are
included in non-interest income.
Loan origination fees and related direct costs are deferred and amortized to
income over the term of the respective loan and loan commitment period as a
yield adjustment.
Allowance for Possible Loan Losses
- --------------------------------------------------------------------------------
The provision for possible loan losses charged to operating expense reflects the
amount deemed appropriate by management to produce an adequate reserve to meet
the present and foreseeable risk characteristics of the existing loan portfolio.
Management's judgement is based on the evaluation of individual loans, past
experience, the assessment of current economic conditions, and other relevant
factors. Loan losses are charged directly against the allowance and recoveries
on previously charged-off loans are added to the allowance.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Significant estimates are made by management in determining the allowance for
possible loan losses. 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
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows, and other relevant factors. Since the allowance for
possible 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 possible loan losses could differ in the near
term.
Premises and Equipment
- --------------------------------------------------------------------------------
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are calculated principally on an
accelerated or straight-line basis over the estimated useful lives of the assets
as follows: buildings--10 to 40 years, and equipment--3 to 10 years, or, in the
case of leasehold improvements, over the term of the lease. Expenditures for
maintenance and repairs are charged to operations as incurred. Gains or losses
upon disposition are reflected in earnings as realized.
Other Real Estate Owned
- --------------------------------------------------------------------------------
Other real estate owned is comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. Other real estate
owned is recorded at the lower of the carrying value of the loan or the fair
value of the property. Loan losses arising from the acquisition of such
properties are charged against the allowance for possible loan losses. After
acquisition, such properties are carried at the lower of cost or the fair value
minus estimated costs to sell. Holding expenses related to the operation and
maintenance of properties are expensed as incurred. Gains and losses upon
disposition are reflected in earnings as realized.
Income Taxes
- --------------------------------------------------------------------------------
QNB Corp. and its subsidiary file a consolidated Federal income tax return and
the amount of income tax expense or benefit is computed and allocated on a
separate return basis. Effective January 1, 1993, QNB adopted Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." SFAS No. 109 requires an asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the difference between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
which includes the enacted date.
Net Income Per Share
- --------------------------------------------------------------------------------
Net income per share is calculated on the basis of the weighted average number
of shares outstanding, after giving retroactive effect to the four-for-one stock
split paid on July 15, 1994. Shares issued upon the exercise of stock options
are excluded from the computation since the effect on net income per share would
be insignificant. Fully diluted per common share data is not presented because
there are no material differences between those amounts and the primary per
share data as presented.
Statement of Cash Flows
- --------------------------------------------------------------------------------
Cash and cash equivalents for purposes of this statement consist of cash and due
from banks.
Interest Rate Risk
- --------------------------------------------------------------------------------
The earnings of QNB depend primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments, and the interest paid on its interest-bearing
liabilities, such as deposits and short-term borrowings. Accordingly, the
operations of QNB are subject to risks and uncertainties surrounding its
exposure to changes in the interest rate environment. QNB assesses the impact of
changes in interest rates through the use of a simulation model.
Use of Estimates
- --------------------------------------------------------------------------------
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts 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.
NOTE 2 -STOCK SPLIT
On June 7, 1994, QNB declared a four-for-one stock split, which was distributed
July 15, 1994, to shareholders of record as of July 1, 1994. The number of
shares and per share amounts have been restated to reflect this event.
NOTE 3 - CASH AND DUE FROM BANKS
Included in cash and due from banks are reserves in the form of deposits with
the Federal Reserve Bank of $536,000 and $225,000 to satisfy federal regulatory
requirements as of December 31, 1995 and 1994.
NOTE 4 - INVESTMENT SECURITIES
Available-For-Sale
On December 31, 1993, QNB adopted Financial Accounting Standards No. 115 (SFAS
No. 115) "Accounting for Certain Investments in Debt and Equity Securities." As
discussed in Note 1, SFAS No. 115 requires investment securities
available-for-sale to be reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity. The amortized cost and estimated fair values of investment
securities available-for-sale at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
Gross Gross Gross Gross
Aggregate unrealized unrealized Aggregate unrealized unrealized
fair holding holding Amortized fair holding holding Amortized
value gains losses cost value gains losses cost
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 12,732 $ 139 $ 2 $ 12,595 $13,301 __ $ 398 $13,699
U.S. Government agencies............ 40,415 195 156 40,376 34,152 $ 1 2,282 36,433
Mortgage-backed securities.......... 1,859 12 25 1,872 1,932 __ 178 2,110
Other securities.................... 374 173 __ 201 453 52 3 404
- -----------------------------------------------------------------------------------------------------------------------------------
Total investment securities
available-for-sale............... $ 55,380 $ 519 $ 183 $ 55,044 $49,838 $ 53 $2,861 $52,646
===================================================================================================================================
</TABLE>
The amortized cost and estimated fair value of debt securities
available-for-sale by contractual maturity at December 31, 1995 are shown in the
following table. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. Mortgage-backed securities are shown
separately due to the amortization and prepayment of principal occurring
throughout the life of these instruments.
- --------------------------------------------------------------------------------
Aggregate
fair Amortized
December 31, 1995 value cost
- --------------------------------------------------------------------------------
Due in one year or less.............................. $ 8,078 $ 8,024
Due after one year through five years................ 36,573 36,489
Due after five years through ten years............... 8,549 8,508
Due after ten years.................................. __ __
Mortgage-backed securities........................... 1,859 1,872
- --------------------------------------------------------------------------------
Total investment securities available-for-sale ...... $55,059 $54,893
================================================================================
Proceeds from sales of investment securities available-for-sale are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds....................................... $8,888 $16,758 __
Gross gains.................................... 1 238 __
Gross losses................................... 88 23 __
</TABLE>
Held-To-Maturity
Investment securities classified as held-to-maturity are reported at amortized
cost. The amortized cost and estimated fair values of investment securities
held-to-maturity at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
Gross Gross Gross Gross
unrealized unrealized Aggregate unrealized unrealized Aggregate
Amortized holding holding fair Amortized holding holding fair
cost gains losses value cost gains losses value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 2,006 $ 23 __ $ 2,029 $ 2,017 __ $ 9 $ 2,008
State and municipal securities...... 9,531 201 $ 1 9,731 7,253 $5 315 6,943
Mortgage-backed securities.......... 30,900 254 131 31,023 26,288 __ 1,536 24,752
Other securities.................... 78 __ __ 78 78 __ __ 78
- ------------------------------------------------------------------------------------------------------------------------------------
Total investment securities
held-to-maturity................. $ 42,515 $ 478 $ 132 $ 42,861 $35,636 $5 $1,860 $33,781
====================================================================================================================================
</TABLE>
<PAGE>
NOTE 4 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated fair values of debt securities held-to-maturity
by contractual maturity at December 31, 1995 are shown in the following table.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are shown separately due to the
amortization and prepayment of principal occurring throughout the life of these
instruments.
- -------------------------------------------------------------------------------
Aggregate
Amortized fair
December 31, 1995 cost value
- -------------------------------------------------------------------------------
Due in one year or less................... $ 2,276 $ 2,300
Due after one year through five years.... 155 160
Due after five years through ten years... 9,106 9,300
Due after ten years....................... __ __
Mortgage-backed securities................ 30,900 31,023
- -------------------------------------------------------------------------------
Total investment securities held-to-maturity $42,437 $42,783
===============================================================================
There were no sales of investment securities classified as held-to-maturity
during 1995, 1994 or 1993.
NOTE 5 - LOANS
- ------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------
Commercial and industrial.............. $ 27,002 $ 24,599
Agricultural........................... 2,451 2,823
Construction........................... 6,641 5,253
Real estate-commercial................. 51,368 54,015
Real estate-residential................ 61,339 57,486
Consumer............................... 7,538 10,208
- ------------------------------------------------------------------------------
Total loans............................ 156,339 154,384
Less unearned income................... 382 391
- ------------------------------------------------------------------------------
Total loans, net of unearned income ... $155,957 $153,993
================================================================================
Real estate commercial loans include all loans collateralized at least in part
by commercial real estate. These loans may not be for the expressed purpose of
conducting commercial real estate transactions.
Included in real estate residential loans at December 31, 1995 and 1994, are
$661,000 and $174,000 of residential mortgage loans held-for-sale.
At December 31, 1995, the recorded investment in loans for which impairment has
been recognized in accordance with SFAS Nos. 114 and 118 totaled $4,345,000, of
which $3,733,000 related to loans with no valuation allowance and $612,000
related to loans with a corresponding valuation allowance of approximately
$179,000. Most of the loans identified as impaired are collateral-dependent. For
the year ended December 31, 1995, the average recorded investment in impaired
loans was approximately $3,676,000. QNB recognized $220,000 of interest income
on these loans in 1995.
Included within the loan portfolio are loans on nonaccrual status of $4,488,000
and $3,905,000 at December 31, 1995 and 1994, respectively. If interest had been
accrued throughout the period, interest income for the years ended December 31,
1995, 1994 and 1993, would have increased approximately $320,000, $254,000 and
$369,000, respectively. The amount of interest income on these loans that was
included in net income in 1995, 1994 and 1993 was $220,000, $182,000 and
$171,000, respectively.
QNB generally lends in its trade area which is comprised of Quakertown and
surrounding communities. To a large extent QNB makes loans collateralized at
least in part by real estate. Its lending activities could be affected by
changes in the general economy, the regional economy, or real estate values.
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
(SFAS No. 122), "Accounting for Mortgage Servicing Rights," which is effective
for QNB beginning January 1, 1996. SFAS No. 122 requires the recognition of
separate assets relating to the rights to service mortgage loans based on their
fair value if it is practicable to estimate the value. Additionally, the fair
value of servicing assets will be required to be measured at each reporting date
to determine any potential impairment. The Statement applies prospectively to
transactions entered into in 1996; therefore, there will be no cumulative effect
upon adoption of this Statement. This Statement is not expected to have a
significant effect on the financial position or results of operations of QNB.
NOTE 6 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
Activity in the allowance for possible loan losses is shown below:
- --------------------------------------------------------------------------------
December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Balance at beginning of year........$ 2,024 $2,221 $ 2,928
- --------------------------------------------------------------------------------
Charge-offs......................... (703) (889) (1,301)
Recoveries.......................... 53 92 124
- --------------------------------------------------------------------------------
Net charge-offs..................... (650) (797) (1,177)
Provision for possible loan losses.. 1,010 600 470
- --------------------------------------------------------------------------------
Balance at end of year..............$ 2,384 $2,024 $ 2,221
================================================================================
NOTE 7 - PREMISES AND EQUIPMENT
Premises and equipment, stated at cost less accumulated depreciation and
amortization, are summarized below:
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
Land and buildings.......................... $ 4,817 $ 4,819
Furniture and equipment..................... 4,362 4,634
Leasehold improvements...................... 469 412
- --------------------------------------------------------------------------------
Book value.................................. 9,648 9,865
Accumulated depreciation and amortization... (5,112) (4,959)
- --------------------------------------------------------------------------------
Net book value.............................. $ 4,536 $ 4,906
================================================================================
Depreciation and amortization expense on premises and equipment amounted to
$602,000, $636,000 and $540,000, for the years ended December 31, 1995, 1994 and
1993, respectively.
Rental expense on operating leases amounted to approximately $133,000, $147,000
and $157,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Most leases have options for renewal. Required minimum annual rentals due on
noncancelable leases expiring after one year approximate $271,000 in the
aggregate at December 31, 1995. Future minimum annual rental payments due on
noncancelable leases for each of the years 1996 through 2000 are approximately
$116,000, $79,000, $39,000, $29,000 and $4,000, respectively.
NOTE 8 - SHORT-TERM BORROWINGS
Short-term borrowings at December 31, 1995 and 1994, consisted of Treasury tax
and loan notes, approximating $203,000 and $600,000 respectively, and securities
sold under agreement to repurchase, approximating $9,896,000 and $6,937,000,
respectively. The repurchase agreements were collateralized by U.S. Treasury and
U.S. Government agency securities with an amortized cost of $11,162,000 and
$6,394,000 and a fair value of $11,171,000 and $6,073,000 at December 31, 1995
and 1994, respectively. The agreements had a weighted average interest rate of
3.01 percent and 2.96 percent at December 31, 1995 and 1994, and matured within
30 days.
NOTE 9 - INCOME TAXES
As discussed in Note 1, QNB adopted SFAS No. 109 effective January 1, 1993. The
effect of adopting the new Statement was a cumulative benefit of $52,000 in
1993. The components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Federal income taxes
currently payable................. $515 $512 $499
Deferred income taxes............... 21 169 18
- --------------------------------------------------------------------------------
Net provision....................... $536 $681 $517
================================================================================
At December 31, 1995, 1994 and 1993, the tax effects of temporary differences
that represent the significant portion of deferred tax assets and liabilities
are as follows:
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Deferred tax assets
Allowance for possible loan losses...... $569 $446 $513
Other real estate owned reserves........ 22 126 176
Deferred compensation................... 149 154 155
Deferred loan fees...................... 20 44 82
Net unrealized holding losses on
investment securities
available-for-sale.................... __ 954 __
Other................................... 6 __ 3
- --------------------------------------------------------------------------------
Total deferred tax assets............. 766 1,724 929
Deferred tax liabilities
Net unrealized holding gains on
investment securities
available-for-sale.................... 114 __ 279
Other................................... 45 28 30
- --------------------------------------------------------------------------------
Total deferred tax liabilities........ 159 28 309
- --------------------------------------------------------------------------------
Net deferred tax asset before
allowance............................ 607 1,696 620
SFAS No. 109 valuation allowance........ __ __ __
- --------------------------------------------------------------------------------
Net deferred tax asset
after allowance....................... $607 $1,696 $620
================================================================================
The net deferred tax asset is included in other assets on the consolidated
balance sheet.
A reconciliation between the statutory and effective tax rate for net income was
as follows:
- -------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- -------------------------------------------------------------------------------
Provision at statutory rate......... $ 756 $ 913 $ 776
Tax-exempt interest income.......... (260) (264) (227)
Alternative minimum tax (credit).... __ __ (55)
Other............................... 40 32 23
- -------------------------------------------------------------------------------
Total provision..................... $ 536 $ 681 $ 517
===============================================================================
NOTE 10 - SHAREHOLDERS' EQUITY
Dividends payable by QNB Corp. and its bank subsidiary are subject to various
limitations imposed by statutes, regulations and policies adopted by bank
regulatory agencies. Under current regulations regarding dividend availability,
the bank subsidiary may declare dividends in 1996 to the holding company
totaling $2,421,000, plus additional amounts equal to the net profit earned by
the bank subsidiary for the period from January 1, 1996, through the date of
declaration, less dividends previously declared in 1996.
NOTE 11 - EMPLOYEE BENEFIT PLANS
QNB maintains a money purchase defined contribution plan which covers all
employees who meet the age and service requirements. QNB makes contributions to
the money purchase plan equivalent to 5 percent of total compensation (as
defined by the plan). QNB contributed and expensed $174,393, $178,225 and
$191,400 to this plan in 1995, 1994 and 1993, respectively. QNB also has a
401(k) profit sharing plan pursuant to the provisions of 401(k) of the Internal
Revenue Code. The plan covers substantially all employees who meet the age and
service requirements. The 401(k) plan provides for elective employee
contributions up to 9 percent of compensation and a matching company
contribution limited to 3 percent. QNB makes contributions to the profit sharing
plan as directed by its Board of Directors. For 1995, 1994 and 1993 QNB
contributed and expensed $100,195, $102,686 and $78,566, respectively, to the
401(k) profit sharing plan. The plan was amended in 1993 to increase the
elective employee contribution from a maximum of 5 percent to a maximum of 9
percent and to add the company matching contribution.
NOTE 12 - STOCK OPTION PLAN
QNB sponsors a Stock Option Plan (the "Plan") administered by a committee which
consists of three or more members of QNB's Board of Directors. The Plan provides
to key employees the granting of either (i) Non-Qualified Stock Options (NQSOs)
or (ii) Incentive Stock Options (ISOs). The exercise price of an option is the
fair market value of QNB's common stock at the date of grant. The plan
authorizes the issuance of 82,000 shares. ISOs expire 5 years from the date of
grant. Changes in total options outstanding during 1995, 1994 and 1993, were as
follows:
- --------------------------------------------------------------------------------
Number Exercise Price
of Options per Option
- --------------------------------------------------------------------------------
Outstanding at December 31, 1992 26,400 $15.83 to $17.63
ISOs Exercised (4,200) 15.83
- --------------------------------------------------------------------------------
Outstanding at December 31, 1993 22,200 16.38 to 17.63
ISOs Exercised (8,400) 16.38 to 19.50
ISOs Granted 9,400 19.50
- --------------------------------------------------------------------------------
Outstanding at December 31, 1994 23,200 16.50 to 19.50
ISOs Exercised (9,440) 16.50 to 21.00
ISOs Granted 9,200 21.00
- --------------------------------------------------------------------------------
Exercisable at December 31, 1995 22,960 $16.88 to $21.00
================================================================================
In October 1995, Statement of Financial Accounting Standards No. 123 (SFAS No.
123), "Accounting for Stock-Based Compensation," was issued. SFAS No. 123, which
is effective January 1, 1996, provides an alternative method of accounting for
stock-based compensation arrangements. This method is based on fair value of the
stock-based compensation determined by an option pricing model utilizing various
assumptions regarding the underlying attributes of the options and QNB's stock,
rather than the existing method of accounting for stock-based compensation which
is provided in Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees." The Financial Accounting Standards
Board encourages entities to adopt the fair value based method, but does not
require the adoption of this method. For those entities that continue to apply
APB No. 25, pro forma disclosure of the effects, if adopted, of SFAS No. 123 on
net income and earnings per share would be required in the 1996 financial
statements. QNB will continue to apply APB No. 25; and therefore, there will be
no impact on the financial position and results of operations.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the normal course of business there are various legal proceedings,
commitments, and contingent liabilities which are not reflected in the financial
statements. Management does not anticipate any material losses as a result of
these transactions and activities. They include, among other things, commitments
to extend credit and standby letters of credit. Outstanding standby letters of
credit amounted to $2,941,000 and $1,912,000 and commitments to extend credit
totaled $28,683,000 and $29,756,000 at December 31, 1995 and 1994, respectively.
The maximum exposure to credit loss, which represents the possibility of
sustaining a loss due to the failure of the other parties to a financial
instrument to perform according to the terms of the contract, is represented by
the contractual amount of these instruments. QNB uses the same lending standards
and policies in making credit commitments as it does for on-balance sheet
instruments. The activity is controlled through credit approvals, control
limits, and monitoring procedures.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. QNB evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the customer.
Collateral varies but may include real estate, accounts receivable, marketable
securities, pledged deposits, inventory or equipment.
Standby letters of credit are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit are essentially the same as those
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral varies but
may include real estate, accounts receivable, marketable securities, pledged
deposits, inventory or equipment.
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
all entities to disclose the estimated fair value of its financial instrument
assets and liabilities. For QNB, as for most financial institutions,
approximately 98 percent of its assets and liabilities are considered financial
instruments as defined in SFAS No. 107. Many of these financial instruments,
however, lack an available trading market as characterized by a willing buyer
and willing seller engaging in an exchange transaction. Therefore, significant
estimations and present value calculations were made by QNB for the purpose of
this disclosure.
Estimated fair values have been determined by QNB using the best available data
and an estimation methodology suitable for each category of financial
instruments. For those loans and deposits with floating interest rates it is
presumed that estimated fair values generally approximate the recorded book
balances. The estimation methodologies used, the estimated fair values, and
recorded book balances at December 31, 1995 and 1994 were as follows:
The carrying amounts of cash and due from banks and Federal funds sold
approximate fair value because of the short maturity of these instruments.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and due from banks....................................... $ 12,950 $12,950 $ 11,427 $11,427
Federal funds sold............................................ 2,907 2,907 8,400 8,400
</TABLE>
Investment securities actively traded in a secondary market have been
valued using quoted available market prices. Investments available-for-sale are
carried at fair value.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment securities available-for-sale...................... $ 55,380 $55,380 $ 49,838 $49,838
Investment securities held-to-maturity........................ 42,861 42,515 33,781 35,636
</TABLE>
Deposits and short-term borrowings with stated maturities have been valued
using the present value discounted cash flow with a discount rate approximating
the current market for similar liabilities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits with stated maturities............................... $ 101,360 $100,834 $ 94,508 $98,010
Short-term borrowings......................................... 10,089 10,099 7,537 7,537
</TABLE>
Deposits with no stated maturities have an estimated fair value equal to
the amount payable on demand which is the recorded book balance.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits with no stated maturities............................ $ 142,053 $142,053 $ 142,886 $142,886
</TABLE>
The net loan portfolio has been valued using the present value of the
estimated discounted cash flows. The discount rate used in these calculations is
the Treasury yield curve adjusted for non-interest operating costs, credit loss
and assumed prepayment risk.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Estimated Recorded Estimated Recorded
Fair Value Book Balance Fair Value Book Balance
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loans..................................................... $ 158,355 $153,573 $ 142,246 $151,969
</TABLE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Changes in assumptions or estimation methodologies may have a material effect on
these estimated fair values.
There is no material difference between the notional amount and the estimated
fair value of off-balance sheet items which total $31,624,000 and $31,668,000 at
December 31, 1995 and 1994. These are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
Management is concerned that reasonable comparability between institutions may
not be likely due to the wide range of permitted valuation techniques and
numerous estimates which must be made given the absence of active secondary
markets for many of the financial instruments. This lack of uniform valuation
methodologies also introduces a greater degree of subjectivity to these
estimated fair values. Therefore, these values may not be realized. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of QNB.
NOTE 15 - RELATED PARTY TRANSACTIONS
The following table presents the amounts due from directors, principal officers,
and their related interests. All of these transactions were made in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons. Also, they did not involve a more than normal risk of
collectibility or present any other unfavorable features.
- --------------------------------------------------------------------------------
Balance, December 31, 1994.......................... $ 5,070
New loans........................................... 11,782
Repayments and other changes........................ (12,226)
- --------------------------------------------------------------------------------
Balance, December 31, 1995.......................... $ 4,626
================================================================================
QNB allowed its directors to defer a portion of their compensation. The amount
of deferred compensation accrued as of December 31, 1995 and 1994, was $439,000
and $454,000, respectively.
NOTE 16 - PARENT COMPANY
FINANCIAL INFORMATION
Condensed financial statements of QNB Corp. only:
Balance Sheets
- --------------------------------------------------------------------------------
December 31, 1995 1994
- --------------------------------------------------------------------------------
Assets
Cash and due from banks $ 8 $ 39
Investment securities available-for-sale.. 309 191
Investment in subsidiary ................. 20,597 17,572
Other assets.............................. 10 __
- --------------------------------------------------------------------------------
Total assets.............................. $20,924 $ 17,802
================================================================================
Liabilities
Other liabilities......................... $ 58 $ 18
Shareholders' equity
Common stock ............................. 1,780 1,774
Surplus................................... 4,283 4,258
Retained earnings......................... 14,581 13,605
Unrealized holding gains (losses),
net of taxes, on investment
securities available-for-sale......... 222 (1,853)
- --------------------------------------------------------------------------------
Total liabilities and shareholders' equity $20,924 $17,802
================================================================================
Statements of Income
- --------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- --------------------------------------------------------------------------------
Dividends from subsidiary................. $ 673 $ 496 $ 481
Interest and dividend income.............. 10 15 17
Securities gains.......................... __ 168 76
- --------------------------------------------------------------------------------
Total income........................... 683 679 574
Expenses............................... 34 14 5
- --------------------------------------------------------------------------------
Income before applicable
income taxes and equity in
undistributed income of subsidiary..... 649 665 569
Income taxes (benefit).................... (10) 54 26
- --------------------------------------------------------------------------------
Income before equity in
undistributed income of subsidiary .... 659 611 543
Equity in undistributed
income of subsidiary..................... 1,028 1,393 1,275
- --------------------------------------------------------------------------------
Net income............................. $1,687 $2,004 $1,818
================================================================================
<TABLE>
<CAPTION>
Statements of Cash Flows
- ---------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income........................................................ $ 1,687 $ 2,004 $ 1,818
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income from subsidiary.................. (1,028) (1,393) (1,275)
Securities gains................................................ __ (168) (76)
(Increase) decrease in other assets............................. (10) __ 12
(Decrease) increase in other liabilities........................ __ (26) 26
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities..................... 649 417 505
- ---------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from sale of investment securities....................... __ 297 154
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities..................... __ 297 154
- ---------------------------------------------------------------------------------------------------------------
Financing Activities
Cash dividends paid............................................... (711) (709) (708)
Stock issue - 401(k) plan and stock options exercised............. 31 40 32
Acquisition of treasury stock..................................... __ (15) __
- ---------------------------------------------------------------------------------------------------------------
Net cash used by financing activities......................... (680) (684) (676)
- ---------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents.............. (31) 30 (17)
Cash and cash equivalents at beginning of year................ 39 9 26
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year...................... $ 8 $ 39 $ 9
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NOTE 17 - CONSOLIDATED QUARTERLY FINANCIAL DATA (unaudited):
- ------------------------------------------------------------------------------------------------------------------------------------
Quarters Ending 1995 Quarters Ending 1994
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income........................... $4,707 $4,899 $5,061 $5,049 $4,203 $4,430 $4,546 $4,686
Interest expense.......................... 1,933 2,057 2,175 2,172 1,469 1,527 1,627 1,836
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income....................... 2,774 2,842 2,886 2,877 2,734 2,903 2,919 2,850
Provision for possible loan losses........ 250 560 100 100 100 100 300 100
Non-interest income....................... 324 414 341 314 384 433 348 433
Non-interest expense...................... 2,465 2,717 2,196 2,161 2,542 2,395 2,427 2,355
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ........ 383 (21) 931 930 476 841 540 828
Provision (benefit) for income taxes ..... 81 (16) 214 257 109 236 108 228
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (loss)......................... $ 302 $ (5) $ 717 $ 673 $ 367 $ 605 $ 432 $ 600
===================================================================================================================================
Net Income Per Share...................... $ .21 __ $ .50 $ .48 $ .26 $ .43 $ .30 $ .42
===================================================================================================================================
</TABLE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of QNB Corp:
We have audited the accompanying consolidated balance sheets of QNB Corp. and
subsidiary as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of QNB
Corp. and subsidiary as of December 31, 1995 and 1994, and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, QNB Corp.
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" and No. 109, "Accounting for
Income Taxes" in 1993.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 25, 1996
CORPORATE INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders of QNB Corp. will be held at the offices of
The Quakertown National Bank, 320 West Broad Street, Quakertown, PA on May 7,
1996, at 11:00 a.m.
MARKET MAKERS
As of December 31, 1995, the following firms made a market in QNB Corp. common
stock:
Legg Mason Wood Walker, Inc.
Allentown, PA 18105
Ryan, Beck & Company
West Orange, NJ 07052
Wheat First Butcher Singer
Quakertown, PA 18951
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 456-0596
FORM 10-K
A copy of QNB Corp.'s Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available, without charge to shareholders, by
writing Tara E. Zuck, QNB Corp., P.O. Box 9005, Quakertown, PA 18951-9005.
AUDITORS
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
STOCK INFORMATION
QNB Corp. common stock is traded in the over-the-counter market. Quotations for
QNB Corp. common stock appear in the pink sheets published by the National
Quotations Bureau, Inc.
The following table sets forth representative high and low bid and ask stock
prices for QNB Corp. common stock on a quarterly basis during 1995 and 1994:
- --------------------------------------------------------------------------------
Cash
High Low Dividend
Bid Ask Bid Ask Per Share
- --------------------------------------------------------------------------------
1995
First Quarter $ 22 1/2 $ 23 1/2 $ 20 1/2 $ 22 1/4 $ .125
Second Quarter 25 26 22 3/4 23 3/4 .125
Third Quarter 27 1/2 29 1/2 26 1/2 27 3/4 .125
Fourth Quarter 29 31 27 1/4 28 .125
1994
First Quarter $ 19 1/8 $ 19 7/8 $ 19 $ 19 1/2 $ .125
Second Quarter 19 5/8 20 1/4 19 1/8 19 7/8 .125
Third Quarter 20 1/4 22 1/4 19 5/8 20 1/4 .125
Fourth Quarter 20 1/2 22 1/4 20 1/4 21 1/2 .125
- --------------------------------------------------------------------------------
Exhibit 21.1
Subsidiaries of the Registrant
The Quakertown National Bank, incorporated in Pennsylvania.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
QNB Corp. on Form S-8 (File No. 33-79802) of our report dated January 25, 1996,
on our audits of the consolidated financial statements of QNB Corp. as of
December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994,
1993 which report is incorporated by reference in this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
March 21, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,950
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,907
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55,380
<INVESTMENTS-CARRYING> 42,515
<INVESTMENTS-MARKET> 42,861
<LOANS> 155,957
<ALLOWANCE> 2,384
<TOTAL-ASSETS> 276,049
<DEPOSITS> 242,887
<SHORT-TERM> 10,099
<LIABILITIES-OTHER> 2,197
<LONG-TERM> 0
0
0
<COMMON> 1,780
<OTHER-SE> 19,086
<TOTAL-LIABILITIES-AND-EQUITY> 276,049
<INTEREST-LOAN> 13,492
<INTEREST-INVEST> 5,893
<INTEREST-OTHER> 331
<INTEREST-TOTAL> 19,716
<INTEREST-DEPOSIT> 8,080
<INTEREST-EXPENSE> 8,337
<INTEREST-INCOME-NET> 11,379
<LOAN-LOSSES> 1,010
<SECURITIES-GAINS> (79)
<EXPENSE-OTHER> 9,539
<INCOME-PRETAX> 2,223
<INCOME-PRE-EXTRAORDINARY> 1,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,687
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 4.64
<LOANS-NON> 4,488
<LOANS-PAST> 272
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,592
<ALLOWANCE-OPEN> 2,024
<CHARGE-OFFS> 703
<RECOVERIES> 53
<ALLOWANCE-CLOSE> 2,384
<ALLOWANCE-DOMESTIC> 2,384
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 582
</TABLE>
