SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission file number 0-17706
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QNB Corp.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2318082
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(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
10 North Third Street, Quakertown, PA 18951-9005
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (215)538-5600
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Not Applicable
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Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report.
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at July 10, 1998
- ----------------------------- ----------------------------
Common Stock, par value $1.25 1,431,912
<PAGE>
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income for
Three and Six Months Ended June 30, 1998
and 1997 1
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 2
Consolidated Statements of Cash Flows for Six
Months Ended June 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION 6
ITEM 3. Quantitative and Qualitative Disclosure About
Market Risk 19
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings. 20
(See Regulation S-K Item 305)
ITEM 2. Changes in Securities 20
ITEM 3. Defaults Upon Senior Securities 20
ITEM 4. Submissions of Matters to a Vote of Securities
Holders 20
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
--------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans $3,777 $3,534 $7,402 $6,999
Interest and dividends on investment
securities:
Taxable 1,632 1,535 3,257 2,959
Tax-exempt 160 135 300 265
Interest on Federal funds sold 119 48 184 92
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Total interest income 5,688 5,252 11,143 10,315
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Interest Expense
Interest on deposits
NOW accounts 150 167 293 332
Money market accounts 239 233 474 464
Savings 206 194 404 384
Time 1,444 1,339 2,836 2,634
Time over $100,000 287 237 564 448
Interest on short-term borrowings 86 77 161 147
- --------------------------------------------------------------------------------
Total interest expense 2,412 2,247 4,732 4,409
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Net interest income 3,276 3,005 6,411 5,906
Provision for loan losses 100 100 200 200
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Net interest income after
provision for loan losses 3,176 2,905 6,211 5,706
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Non-Interest Income
Fees for services to customers 256 269 515 538
Mortgage servicing fees 44 48 86 93
Net gain on investment
securities available-for-sale -- 5 68 165
Net gain on sale of loans 110 8 164 42
Other operating income 109 119 299 238
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Total non-interest income 519 449 1,132 1,076
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Non-Interest Expense
Salaries and employee benefits 1,363 1,303 2,724 2,654
Net occupancy expense 160 162 316 325
Furniture and equipment expense 162 158 319 345
Marketing expense 124 82 188 141
Supplies expense 51 42 94 92
Professional fees 29 40 61 89
Insurance expense 24 24 48 51
Other real estate owned expense 35 71 81 106
Other expense 460 372 845 730
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Total non-interest expense 2,408 2,254 4,676 4,533
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Income before income taxes 1,287 1,100 2,667 2,249
Provision for income taxes 346 319 749 647
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Net Income $ 941 $ 781 $1,918 $1,602
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Net Income Per Share - Basic $ .66 $ .55 $ 1.34 $ 1.12
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Net Income Per Share - Diluted $ .65 $ .54 $ 1.33 $ 1.12
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Cash Dividends Per Share $ .18 $ .16 $ .36 $ .32
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 1
<PAGE>
<TABLE>
QNB CORP. AND SUBSIDIARY
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
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June 30, December 31,
1998 1997
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<S> <C> <C>
Assets
Cash and due from banks $ 12,961 $ 12,574
Federal funds sold 8,210 2,022
Investment securities
available-for-sale 76,690 75,920
held-to-maturity (market value
$45,154 and $40,713) 44,829 40,400
Total loans, net of unearned income of
$373 and $448 168,595 167,720
Allowance for loan losses (2,886) (2,670)
- --------------------------------------------------------------------------------
Net loans 165,709 165,050
Premises and equipment, net 4,181 4,066
Other real estate owned 773 1,564
Accrued interest receivable 2,007 2,007
Other assets 2,304 2,169
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Total assets $317,664 $305,772
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Liabilities
Deposits
Demand, non-interest-bearing $ 37,850 $ 38,692
NOW accounts 41,895 42,176
Money market accounts 32,604 32,520
Savings 37,878 36,629
Time 106,779 101,447
Time over $100,000 19,320 15,702
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Total deposits 276,326 267,166
Short-term borrowings 11,510 10,342
Accrued interest payable 1,125 1,057
Other liabilities 1,400 1,375
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Total liabilities 290,361 279,940
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Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued
1,431,912 shares and 1,431,240 shares 1,790 1,789
Surplus 4,393 4,369
Retained earnings 20,204 18,801
Accumulated other comprehensive income 916 873
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Total shareholders' equity 27,303 25,832
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Total liabilities and shareholders' equity $317,664 $305,772
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 2
<PAGE>
QNB CORP. and Subsidiary
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
(in thousands)
(unaudited)
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income $1,918 $1,602
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 200 200
Depreciation and amortization 215 250
Securities gains (68) (165)
Net gain on sale of loans (164) (42)
Proceeds from sales of residential mortgages 7,199 593
Originations of residential mortgages held-for-
sale (5,159) (396)
Net (gains) losses on sales or writedowns of
other real estate owned (16) 9
Deferred income tax provision (63) (20)
Change in income taxes payable 106 (70)
Net increase in interest and dividends receivable -- (128)
Net amortization of premiums and discounts 5 8
Net increase in interest payable 68 30
Increase in other assets (124) (82)
Decrease in other liabilities (16) (70)
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Net cash provided by operating activities 4,101 1,719
- --------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities and calls of investment
securities
available-for-sale 10,924 6,146
held-to-maturity 8,599 1,978
Proceeds from sales of investment securities
available-for-sale 5,114 9,951
Purchase of investment securities
available-for-sale (16,701) (26,958)
held-to-maturity (13,007) (1,245)
Net increase (decrease) in Federal funds sold (6,188) 2,510
Proceeds from sales of student loans 1,467 1,381
Net increase in loans (4,280) (6,016)
Net purchases of premises and equipment (331) (54)
Proceeds from the sale of other real estate owned 856 306
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Net cash used by investing activities (13,547) (12,001)
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Financing Activities
Net decrease (increase) in
non-interest-bearing deposits (842) 6,636
Net increase in interest-bearing deposits 10,002 6,048
Net increase (decrease) in short-term borrowings 1,168 (187)
Cash dividends paid (515) (457)
Proceeds from issuance of common stock 20 52
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Net cash provided by financing activities 9,833 12,092
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Increase in cash and cash equivalents 387 1,810
Cash and cash equivalents at beginning of year 12,574 12,459
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Cash and cash equivalents at end of period $12,961 $14,269
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Supplemental Cash Flow Disclosures
Interest paid $ 4,664 $ 4,379
Income taxes paid 700 730
Non-Cash Transactions
Change in net unrealized holding gains (losses),
net of taxes, on investment securities 43 (29)
Transfer of loans to other real estate owned 49 --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
<PAGE>
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997, AND DECEMBER 31, 1997
(Unaudited)
1. REPORTING AND ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of QNB
Corp. and its wholly owned subsidiary, The Quakertown National Bank, (QNB). All
significant intercompany accounts and transactions are eliminated in the
consolidated statements.
The consolidated balance sheet as of June 30, 1998, as well as the respective
statements of income and cash flows for the three and six month periods ended
June 30, 1998 and 1997, are unaudited. These financial statements should be read
in conjunction with the audited financial statements and notes thereto included
in QNB's 1997 Annual Report incorporated in the Form 10-K.
The financial statements reflect all adjustments, which in the opinion of
management are necessary for a fair presentation of the results of the interim
periods and are of a normal and recurring nature. The results for the periods
presented are not necessarily indicative of the full year. Certain accounts in
last year's financial statements have been reclassified to conform to the
current year's presentation. These reclassifications had no effect on net
income.
2. PER SHARE DATA
The following sets forth the computation of basic and diluted earnings per share
(share and per share data are not in thousands):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted
earnings per share-net income $941 $ 781 $1,918 $1,602
Denominator for basic earnings
per share- Weighted average
shares outstanding 1,431,483 1,427,643 1,431,362 1,427,178
Effect of dilutive securities-
employee Stock options 10,560 5,543 9,262 5,608
Denominator for diluted earnings
per share- adjusted weighted
average shares outstanding 1,442,043 1,433,186 1,441,624 1,432,786
Earnings per share-basic $.66 $.55 $1.34 $1.12
Earnings per share-diluted $.65 $.54 $1.33 $1.12
</TABLE>
Form 10-Q
Page 4
<PAGE>
3. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 requires the inclusion of
comprehensive income, either in a separate statement, or as part of a combined
statement of income and comprehensive income in a full set of general-purpose
financial statements.
Comprehensive income is defined as the change in equity of a business entity
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For QNB, the
sole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.
The following shows the components and activity of comprehensive income during
the period (net of the income tax effect):
Unrealized holding gains arising during the period on
securities held at June 30, 1998 $ 73
Reclassification adjustment equal to beginning unrealized
for all sold securities (30)
-----
Net change in unrealized during the period 43
Unrealized, beginning of period 873
-----
Unrealized, end of period $916
Net income $1,918
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period 43
----
Comprehensive Income $1,962
======
Form 10-Q
Page 5
<PAGE>
QNB CORP. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania which provides a full range of commercial and retail
banking services through its banking subsidiary, The Quakertown National Bank
(the "Bank"), a 121 year old community bank with locations in Upper Bucks,
Northern Montgomery and Southern Lehigh Counties. 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."
In addition to historical information, this management discussion and analysis
contains forward-looking statements. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or circumstances that
arise after the date hereof. Readers should carefully review the risk factors
described in other documents the Corporation files from time to time with the
Securities and Exchange Commission, including the quarterly reports on Form 10-Q
filed by the Corporation in 1998, and any Current Reports on Form 8-K filed by
the Corporation.
RESULTS OF OPERATIONS - OVERVIEW
QNB recorded record earnings of $941,000 or $.65 per share on a diluted basis
for the three month period ending June 30, 1998. This represents a 20.5 percent
increase from net income of $781,000 or $.54 per share-diluted reported for the
same period in 1997. For the six month periods ending June 30, 1998 and 1997,
net income was $1,918,000 and $1,602,000, respectively an increase of 19.7
percent. Net income per share-diluted was $1.33 and $1.12 for the corresponding
six month periods.
The increase in net income for the both the three and six month periods was
primarily a result of higher net interest income. Net interest income represents
interest income, dividends, and fees on earning assets, less expense incurred on
funding sources. Net interest income increased to $3,276,000 for the quarter
ending June 30, 1998 from $3,005,000 for the same quarter in 1997. An 8.8
percent increase in average earning assets and a three basis point increase in
the net interest margin contributed to the increase in net interest income. The
recovery of interest on a non-accrual loan contributed $88,000 to net interest
income during the second quarter of 1998. Excluding this recognition, the net
interest margin would have declined by approximately nine basis points when
comparing the two quarters. Declining interest rates on both loans and
investment securities negatively impacted the net interest margin.
Non-interest income increased $70,000 or 15.6 percent when comparing the two
quarters. Gains on the sale of both residential mortgages and student loans were
$110,000 and $8,000 for the respective quarters ending June 30, 1998 and 1997.
The $72,000 increase in the gains on residential mortgages sales in the second
quarter of 1998 was a result of the refinancing boom resulting from extremely
low mortgage rates. The $30,000 variance in the gain on the sale of student
loans was a function of timing. Most of the gain on student loans for 1997 was
recorded during the first quarter.
Total non-interest expense increased $154,000 or 6.8 percent when comparing the
two quarters. Higher personnel costs and marketing costs contributed to the
increase. A $40,000 pledge to the Main Street Program, a program designed for
the revitalization of downtown Quakertown, contributed to the increase in
marketing expense.
Form 10-Q
Page 6
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS (Continued)
For the six month period ending June 30, 1998, net interest income increased
$505,000 or 8.6 percent to $6,411,000. Significant growth in average earning
assets accounts for most of the improvement in net interest income. Average
earning assets increased 8.4 percent when comparing the two periods. Also
positively impacting net interest income was a slight increase in the net
interest margin from 4.64 percent to 4.66 percent. Excluding the recognition of
interest on a non-accrual loan, the net interest margin would have declined to
4.60 percent for the six months ending June 30, 1998.
Non-interest income increased $56,000 or 5.2 percent and non-interest expense
increased $143,000 or 3.2 percent when comparing the six month periods. Gains on
the sale of residential mortgages and increased fees from checkcard income
contributed to the increase in non-interest income. Slightly higher personnel
expense as well as an increase in marketing costs and the amortization of the
deposit premium related to the acquisition of deposits from First Lehigh Bank
during the fourth quarter of 1997 contributed to the increase in non-interest
expense.
Return on average assets was 1.21 percent and 1.09 percent while the return on
average equity was 14.49 percent and 13.34 percent for the three months ending
June 30, 1998 and 1997, respectively. For the six month periods ending June 30,
1998 and 1997, return on average assets was 1.26 percent and 1.14 percent and
the return on average equity was 15.05 percent and 13.91 percent, respectively.
NET INTEREST INCOME
Net interest income is the primary source of operating income for QNB. Net
interest income is interest income, dividends, and fees on earning assets, less
interest expense incurred for funding sources. Earning assets primarily include
loans, investment securities and Federal funds sold. Sources used to fund these
assets include deposits, borrowed funds and shareholders' equity. Net interest
income is affected by changes in interest rates, the volume and mix of earning
assets and interest-bearing liabilities, and the amount of earning assets funded
by non-interest-bearing deposits and shareholders' equity.
Net interest income for the three months ended June 30, 1998 was $3,276,000
compared to $3,005,000 for the period ending June 30, 1997. An 8.8 percent
increase in average earning assets and a 3 basis point increase in the net
interest margin contributed to the increase in net interest income between the
periods. The yield on earning assets on a fully taxable equivalent basis was
7.95 percent for the second quarter of 1998 versus 7.96 percent for the second
quarter of 1997, while the rate paid on interest-bearing liabilities was 3.89
percent for both periods. The net interest margin on a fully taxable equivalent
basis for the three month period ended June 30, 1998 was 4.66 percent compared
to 4.63 percent for the same period in 1997. Positively impacting the yield on
earning assets and the net interest margin was the recognition of approximately
$88,000 in interest income on a non-accrual loan. The loan had been in
non-accrual status since September of 1995 and was paid off during the second
quarter of 1998. Excluding the recognition of this interest, the yield on
earning assets would have been 7.83 percent, a decline of 13 basis points, while
the net interest margin would have been 4.54 percent, a decline of nine basis
points from the second quarter of 1997.
Declining interest rates during 1998, particularly during the second quarter,
negatively impacted the yield on both investment securities and loans. While the
yield on investment securities for the second quarter of 1998 of 6.60 percent
represents a slight increase from the 6.59 percent yield recorded in the second
quarter of 1997, it represents a 13 basis point decline from the yield recorded
during the first quarter of 1998. The lower rate
Form 10-Q
Page 7
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (Continued)
environment has increased the prepayments on mortgage-backed securities and
callable agency bonds. The reinvestment of these proceeds has been at lower
rates. Helping to mitigate some of the impact of lower rates on the total
portfolio was the sale of approximately $9,000,000 in securities with a weighted
average yield of 5.80 percent at the end of 1997 and the beginning of 1998.
These funds were reinvested in higher yielding securities with slightly longer
maturities. The yield on average loans, excluding the impact of the interest
recognized on the non-accrual loan, was 8.77 percent for the second quarter.
This represents a decline from the yield of 8.92 percent recorded during the
second quarter of 1997 and the 8.89 percent for the first quarter of 1998. The
decline in the yields on loans is a result of falling market interest rates as
well as the reduction of rates for existing commercial loan customers. The
extreme competition for loans is causing the pricing of loans to decline.
Average loans to average earning assets was 58.3 percent and 59.5 percent for
the three month periods ending June 30, 1998 and 1997. This ratio declined
despite a 6.5 percent increase in average loans.
Net interest income for the six month period ending June 30, 1998 was
$6,411,000, an increase of $505,000 over the $5,906,000 recorded in 1997. An 8.4
percent increase in average earning assets and a 2 basis point increase in the
net interest margin contributed to the increase. Total interest income increased
$828,000 from $10,315,000 to $11,143,000 when comparing the six month periods
ending June 30, 1997 to June 30, 1998. The yield on earning assets, excluding
the impact of the interest on the non-accrual loan decreased from 7.97 percent
to 7.90 percent, with the yield on loans declining from 8.91 percent to 8.81
percent. During the six month period the yield on investment securities
increased from 6.59 percent to 6.66 percent. Average investment securities
increased 9.3 percent to $112,354,000 while average loans increased 6.0 percent
to $170,002,000. Total interest expense increased $323,000 from $4,409,000 to
$4,732,000 for the six month periods. The yield on interest-bearing liabilities
increased slightly from 3.88 percent to 3.89 percent, with the yield on
interest-bearing deposits falling one basis point to 3.90 percent and the rate
paid on short-term borrowings increasing 49 basis points to 3.71 percent.
Average interest-bearing deposits increased 7.6 percent to $236,281,000 for the
six month period ending June 30, 1998.
The small increase in the rate paid on interest-bearing liabilities was
primarily the result of higher rates on time deposits and short-term borrowings
offset by lower rates on NOW. The average rate paid on time deposits increased
three basis points while the rate paid on NOW decreased 30 basis points. QNB
lowered the rate paid on its interest-checking NOW accounts because these
accounts are relatively insensitive to changes in interest rates and to
partially offset higher rates paid on other more rate sensitive accounts. The
yield on short-term borrowings, primarily cash management accounts, increased 49
basis points when comparing the six month periods. During the third quarter of
1997 QNB changed the rate structure on its cash management accounts to a tiered
structure that pays a higher rate of interest on higher balances. This was done
to compete with brokerage house and mutual fund money market products.
Management expects the net interest margin to decline throughout the rest of
1998 as a result of lower yields on earning assets, both investment securities
and loans. The low rate environment and the flat yield curve will cause
prepayments on mortgage-backed securities and the call of agency bonds to
increase. This additional cash flow will most likely be reinvested in lower
yielding securities. Yields on loans may continue to decline as existing
commercial loan customers seek to have their rates lowered as well as new loans
being booked at lower rates. If QNB can achieve its primary goals of loan growth
and an increase in the loan-to-average earning asset ratio, the impact on
interest income and the net interest margin of lower rates maybe lessened as QNB
can generally yield more on its loans than it can on its investment securities.
With regard to deposits, management anticipates that rates will remain near
current levels as the competition for funding sources remains strong.
Form 10-Q
Page 8
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to be charged to operations to bring the allowance for loan
losses to a level considered adequate in relation to the risk of probable losses
in the loan portfolio. Actual loan losses, net of recoveries, serve to reduce
the allowance.
Management uses various tools to assess the adequacy of the allowance for loan
losses. One tool is a methodology recommended by the Office of the Comptroller
of the Currency. This methodology considers a number of relevant factors
including: historical loan loss experience, the assigned risk rating of the
credit, current and projected credit worthiness of the borrower, current value
of the underlying collateral, levels of and trends in delinquencies and
non-accrual loans, trends in volume and terms of loans, concentrations of credit
and national and local economic trends and conditions. Other tools include ratio
analysis and peer group analysis. Accounting requirements, as discussed below,
also impact the determination of the allowance for loan losses.
The provision for loan losses was $100,000 for both three month periods and
$200,000 for both six month periods ending June 30, 1998 and 1997. Net
charge-offs in the second quarter of 1998 were $1,000 compared to $117,000 for
the same period in 1997. QNB had a net recovery of $16,000 for the first six
months of 1998. This compares to a net charge-off $125,000 during the same
period of 1997. The partial charge-off of a group of investment property loans
to one borrower account for $94,000 of the charge-offs in the second quarter of
1997. Management anticipates the provision for loan losses in 1998 will remain
near 1997 levels despite the expected continuing improvement in asset quality.
Anticipated loan growth will make any reduction in the provision for loan losses
unlikely.
Non-performing assets (non-accruing loans, loans past due 90 days or more, and
other real estate owned) continued their positive trend downward during the
first half of 1998 and amounted to .55 percent of total assets at June 30, 1998.
This compares to 1.26 percent at June 30, 1997 and .96 percent at December 31,
1997. Non-accrual loans were $937,000 and $2,491,000 at June 30, 1998 and 1997.
Non-accrual loans at December 31, 1997 were $1,209,000. Other real estate owned
was $773,000 at June 30, 1998 compared to $1,080,000 at June 30, 1997 and
$1,564,000 at December 31, 1997. Management anticipates non-performing assets to
decline further as a result of the sale of other real estate owned and through
payments received on non-performing loans.
There were no restructured loans as of June 30, 1998, December 31, 1997 or June
30, 1997 as defined in Statement of Financial Accounting Standards No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructurings," that
have not already been included in loans past due 90 days or more or non-accrual
loans.
The allowance for loan losses was $2,886,000 and $2,670,000 at June 30, 1998 and
December 31, 1997, respectively. The ratio of the allowance to total loans was
1.71 percent and 1.59 percent for the respective periods. 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.
Form 10-Q
Page 9
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
PROVISION FOR LOAN LOSSES (Continued)
A loan is considered impaired, based on current information and events, if it is
probable that QNB will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is generally based on the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral.
At June 30, 1998 and 1997, the recorded investment in loans for which impairment
has been recognized totaled $866,000 and $2,247,000, respectively, of which
$816,000 and $1,454,000 related to loans with no valuation allowance and $50,000
and $793,000 related to loans with a corresponding valuation allowance of
approximately $50,000 and $544,000, respectively. Most of the loans identified
as impaired are collateral-dependent.
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 mortgages and student loans, and other
miscellaneous fee income. Total non-interest income increased $70,000 or 15.6
percent to $519,000 for the quarter ending June 30, 1998 when compared to June
30, 1997. For the six month period total non-interest income increased $56,000
or 5.2 percent to $1,132,000.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees decreased 4.8 percent, to $256,000 from $269,000, when comparing the two
quarters and 4.3 percent to $515,000 when comparing the six month periods.
Charges related to a lower volume of overdrafts account for most of the decline.
QNB reviews all service charges and fee schedules related to its products and
services on an ongoing basis. QNB prices its products and services
competitively.
To date, when QNB sells its residential mortgages in the secondary market, it
retains servicing rights. A normal servicing fee is retained on all mortgage
loans sold and serviced. Mortgage servicing fees for the quarter ending June 30,
1998 were $44,000 which represents a $4,000 decline from the same period in
1997. The decrease in mortgage servicing fees for the quarter is a result of a
5.5 percent decline in the average balance of mortgages sold and serviced to
$67,036,000. For the six month period mortgage servicing fees decreased $7,000
or 7.5 percent to $86,000. The average balance of mortgages serviced was
approximately $67,681,000 for the six month period ending June 30, 1998 compared
to $71,998,000 for the first six months of 1997. The decrease in the volume of
mortgages serviced for others is a result of payments, both recurring and from
refinances, outpacing the origination and sale of new residential mortgages.
Management's decision to retain most 15 and some 20 year mortgages, which would
have been sold in prior years has also reduced the amount of mortgages sold and
serviced. The timing of mortgage payments and delinquencies also impacts the
amount of servicing fees recorded. QNB anticipates mortgage servicing income to
increase slightly during the remainder of 1998 due to the increase in the
origination and sale of residential mortgages resulting from lower interest
rates.
Form 10-Q
Page 10
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued)
There were no gains on sale of investment securities during the second period of
1998. This compares to net gains of $5,000 for the same period in 1997. The gain
on the sale in 1997 was a result of the sale of approximately $6,500,000 of U.S.
Treasury and U.S. agency securities. These securities were primarily sold for
liquidity reasons. Gains on the sale of investment securities were $68,000 for
the first six months of 1998, compared to $165,000 for the first six months of
1997. QNB owns a small portfolio of marketable equity securities, bank stocks.
During the first quarter of 1998 QNB sold a holding with a cost basis of $28,000
at a gain of $62,000. This compares to a similar sale during the first quarter
of 1997 when QNB sold securities with a cost basis of $329,000 for a gain of
$159,000. During the first quarter of 1998 QNB sold approximately $5,000,000 in
lower yielding agency securities at a gain of $6,000. These securities had a
weighted average yield of 5.81 percent and were sold for both liquidity purposes
and to reposition the portfolio. During the first quarter of 1997 QNB sold
approximately $3,467,000 of available-for-sale agency debt securities at a gain
of $1,000. This sale was also done for liquidity purposes. QNB historically
experiences deposit outflows at the beginning of the year.
QNB recorded a gain of $110,000 on the sale of loans during the second quarter
of 1998. This compares to a $8,000 gain for the same period in 1997. For the six
month periods ending June 30, 1998 and 1997 net gains on the sale of loans was
$164,000 and $42,000, respectively. The sale of student loans accounts for
$33,000 and $3,000 of the gains, during the second quarter of 1998 and 1997. QNB
sold approximately $1,256,000 and $251,000 in student loans during the second
quarter of 1998 and 1997. Gains on the sale of student loans accounted for
$36,000 and $32,000 of the total gains during the six month periods ending June
30, 1998 and 1997, respectively. Most of the student loan sale during 1997
occurred during the first quarter. QNB anticipates that the gains recorded on
the sale of student loans will decline dramatically in 1999 as a result of the
reduction in prices paid by the student loan agencies.
The net gain on the sale of residential mortgage loans was $77,000 and 5,000 for
the three month periods ending June 30, 1998 and 1997 and $128,000 and $10,000
for the respective six month periods. 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. The larger gains during 1998 is a
result of both events. Proceeds from the sale of residential mortgages was
approximately $5,148,000 and $268,000 during the second quarter of 1998 and 1997
and $7,199,000 and $593,000 for the six month periods. Declining interest rates
during the first half of 1998 presented an opportunity for many borrowers to
refinance their mortgages at lower rates. This provided an opportunity for QNB
to originate and sell more mortgages. As of June 30, 1998 QNB had approximately
$267,000 in mortgage loans classified as held for sale. These loans are
accounted for at lower of cost or market.
Form 10-Q
Page 11
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST INCOME (Continued)
Other operating income decreased $10,000 to $109,000 when comparing the three
month periods ending June 30, 1998 and 1997, but increased $61,000 when
comparing the six month periods. For the quarter, increases in check card and
ATM interchange income totaling $15,000 were offset by lower rental income on
other real estate owned of $6,000 and the net loss on the writedown and sale of
other real estate owned of $25,000. The increase in other income when comparing
the six month periods includes increases in check card and ATM interchange
income of $20,000 and $8,000, respectively. The net gain on the sale of other
real estate owned accounts for $16,000 of the increase; while the recognition of
fees from official checks contributed $11,000 to the total increase in other
operating income.
NON-INTEREST EXPENSE
Non-interest expense includes salaries and employee benefits, net occupancy
expense, furniture and equipment expense, marketing expense, supplies expense,
professional fees expense, insurance expense, other real estate owned expense,
and various other operating expenses. Total non-interest expense of $2,408,000
for the quarter ending June 30, 1998 represents an increase of $154,000 or 6.8
percent from levels reported in the second quarter of 1997. Total non-interest
expense for the six months ending June 30, 1998 was $4,676,000, an increase of
$143,000 or 3.2 percent over 1997 levels.
Salaries and benefits, the largest component of non-interest expense, increased
$60,000 or 4.6 percent to $1,363,000 for the quarter ending June 30, 1998
compared to the same quarter in 1997. Salaries expense increased $73,000 or 7.2
percent during the period to $1,092,000 while benefits expense decreased $13,000
or 4.6 percent to $271,000. Excluding the accrual for bonuses, core salary
expense increased 5.1 percent when comparing the two quarters. Annual merit
increases in addition to a slight increase in the number of employees account
for the increase during 1998. The decline in benefits expense is a result of
lower medical costs and unemployment compensation costs.
Salaries and benefit expense for the six month period ending June 30, 1998 was
$2,724,000, an increase of $70,000 or 2.6 percent from the same period in 1997.
Salary expense was $78,000 or 3.8 percent higher, while benefit expense was
$8,000 or 1.4 percent lower. The increase in salary expense is primarily a
reflection of annual merit increases. Lower medical costs and unemployment
compensation costs were partially offset by increases in the accrual for
retirement plan expense.
Net occupancy expense decreased $2,000 or 1.2 percent for the three month period
and $9,000 or 2.8 percent for the six month period. Lower utility costs, due to
the relatively mild winter and spring account for the decline in net occupancy
expense. Furniture and equipment expense increased $4,000 or 2.5 percent when
comparing the three month periods ending June 30, 1998 and 1997, but decreased
$26,000 or 7.5 percent when comparing the six month periods. The increase during
the quarter was a result of higher costs for the maintenance of equipment,
particularly computer equipment. The $13,000 increase in equipment maintenance
costs was partially offset by a $9,000 decrease in depreciation expense during
the quarter.
The significant decrease in furniture and equipment expense when comparing the
six month periods is the result of lower depreciation expense of $33,000. 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 has
purchased relatively little furniture and equipment during the past three years.
These smaller amounts of purchases along with lower depreciation expense as an
asset ages, account for the decline in depreciation expense. Depreciation
expense is
Form 10-Q
Page 12
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (Continued)
anticipated to increase during the year as QNB invests in new computer
technology and as older equipment is replaced.
Marketing expense increased $42,000 to $124,000 for the quarter ending June 30,
1998 and $47,000 to $188,000 for the six month period. A $40,000 pledge to the
Main Street Program, a program designed for the revitalization of downtown
Quakertown, contributed to the increase in marketing expense. An increase in
advertising expense in response to local banking mergers also contributed to the
increase.
Professional fees decreased $11,000 or 27.5 percent when comparing the quarters
ending June 30, 1998 and 1997 and $28,000 or 31.5 percent when comparing the six
month periods. Less reliance on legal counsel for loan workout situations
resulting from the improvement in asset quality along with the reimbursement of
some previously expensed legal costs account for the decline.
Other real estate owned expense decreased $36,000 to $35,000 when comparing the
second quarter of 1998 to the same quarter of 1997 and $25,000 to $81,000 when
comparing the six month periods. The lower amount in 1998 is a reflection in the
reduction in the number of properties owned and the costs of taxes, insurance
and maintenance on these properties. Other real estate expense in 1997 includes
the loss on the sale of a property of $9,000. Management anticipates other real
estate expense to continue to decline during the year as the costs associated
with these properties are eliminated as they are sold.
Total other expense for the three months ending June 30, 1998 was $460,000, an
increase of $88,000 or 23.7 percent over the same period in 1997. An increase in
the accrual for a director's deferred compensation plan accounted for $61,000 of
the increase. This increase reflects an adjustment to the interest rate
assumption caused by the decline in market interest rates. The amortization of
the deposit premium relating to the acquisition completed during the fourth
quarter of 1997 accounts for an additional $13,000 of the increase.
For the six month period ending June 30, 1998, other non-interest expense
increased $115,000 or 15.8 percent to $845,000 when compared to the same period
in 1997. The adjustment for the directors' deferred compensation plan
contributed $61,000 while the amortization of the deposit premium accounted for
$26,000 of the increase. Increases in postage expense, directors fees, state
taxes and loan origination costs were partially offset by declines in check card
expense and fraud losses. Other expense in the first quarter of 1997 included
costs related to the startup and distribution of the check card.
INCOME TAXES
Applicable income taxes and effective tax rates were $346,000 or 26.9 percent
for the three month period ending June 30, 1998, and $319,000 or 29.0 percent
for the same period in 1997. For the six month period applicable income taxes
and effective rates were $749,000 or 28.1 percent and $647,000 or 28.8 percent,
respectively. The lower effective tax rate during the second quarter of 1998 is
mainly the result of tax credits received on an investment in a low income
housing project.
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of June 30, 1998 QNB's net deferred tax asset was
$412,000. A deferred tax asset of $739,000 relating to the allowance for loan
losses was partially offset by a deferred tax liability of $472,000 resulting
from the SFAS No.115 adjustment for available-for-sale investment securities. As
of June 30, 1997 QNB's net deferred tax asset was $769,000 of which $663,000
related to the allowance for loan losses.
Form 10-Q
Page 13
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the six months
ended June 30, 1998 and 1997, as well as the period ending balances as of June
30, 1998 and December 31, 1997.
Average earning assets for the six month period ended June 30, 1998 increased
$22,499,000 or 8.4 percent to $289,182,000 from $266,683,000 for the six months
ending June 30, 1997. Average loans and average investments increased $9,565,000
and $9,575,000, respectively while Federal funds sold increased $3,374,000. The
increase in average loans is a result of the business development program
developed over the past couple of years, competitive pricing and participation
relationships with other local community banks. Average commercial, residential
mortgage and consumer loans increased $6,851,000, $1,549,000 and $1,165,000,
respectively. The increase in commercial loans is primarily in the area of
commercial and industrial loans. Although a certain amount of these loans are
considered unsecured, the majority are secured by non-real estate collateral
such as equipment, vehicles, accounts receivable and inventory. The growth in
the residential mortgage portfolio is a result of increased mortgage
originations spurred by the refinancing resulting from lower interest rates.
QNB's decision to retain in portfolio more residential mortgage loans also
positively impacted the balance of the portfolio. The increase in the consumer
loan portfolio is a result of home equity loan promotions and attractive
interest rates.
The growth in average investment securities were primarily in the categories of
U.S Government agency bonds, municipal bonds and mortgage-backed securities.
Agency securities, primarily callable bonds, increased $6,582,000, while
municipal bonds increased $1,629,000 when comparing the six month periods.
The growth in average earning assets was primarily funded by increased
interest-bearing deposits, principally time deposits. Average interest-bearing
deposits increased $16,602,000 or 7.6 percent while non-interest bearing
deposits increased $4,556,000 or 16.1 percent when comparing the two quarters.
Average time deposits increased $10,790,000 while average NOW accounts and
savings accounts increased $2,749,000 and $2,175,000, respectively. The purchase
of approximately $6,800,000 in deposits from First Lehigh Bank contributed to
the increase in total deposits. A significant portion of the increase in time
deposits were accounts with balances over $100,000. These average balances
increased $4,306,000. Attractive rates on these products compared to rates on
money market accounts contributed to the increase. These deposits tend to have
short maturities. Average shareholders' equity increased $2,470,000 to
$25,698,000.
Total assets at June 30, 1998 were $317,662,000, compared with $305,772,000 at
December 31, 1997, an increase of 3.9 percent for the six month period. Total
deposits increased from $267,166,000 at December 31, 1997 to $276,326,000 at
June 30, 1998. This trend is encouraging as QNB historically has experienced
deposit run-off during the first half of the year. The increase in assets from
December 31, 1997 to June 30, 1998 is primarily centered in Federal funds sold
and investment securities which increased $6,188,000 and $5,199,000,
respectively during the period. The higher balance of Federal funds sold at June
30, 1998 is in response to the increase in short-term $100,000 time deposits as
well as the increase in balances held by abstract companies who clear mortgage
settlements through QNB. These deposits tend to be short-term in nature. Total
time deposits increased $8,950,000, with time deposits over $100,000 increasing
$3,618,000. Savings accounts increased $1,249,000 while non-interest bearing
deposits declined by $842,000 from December 31, 1997 to June 30, 1998.
At June 30, 1998 the fair value of investment securities available-for-sale was
$76,690,000 or $1,388,000 above the amortized cost of $75,302,000. This compares
to a fair value of $75,920,000 or $1,323,000 above
Form 10-Q
Page 14
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS
(Continued)
the amortized cost of $74,597,000 at December 31, 1997. An unrealized holding
gain, net of taxes, of $916,000 and $873,000 was recorded as an increase to
shareholders' equity at June 30, 1998 and December 31, 1997. Falling interest
rates as well as continued price appreciation in the stock market contributed to
the increase in the fair value of the investment portfolio.
The available-for-sale portfolio had a weighted average maturity of
approximately 4 years and 11 months at June 30, 1998 and 5 years at December 31,
1997. The weighted average maturity is 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 debt securities and because of prepayments on
mortgage-backed securities. The interest rate sensitivity analysis reflects the
expected maturity distribution of the securities portfolio based upon estimated
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 was 1 years and 8 months at June 30, 1998 and 1 year and 10 months at
December 31, 1997, based on these assumptions. The slight contraction of the
expected average life of the portfolio is a result of the decline in interest
rates thereby increasing the likelihood of some of the callable agency bonds to
be called earlier and an increase in the level of prepayments on mortgage-backed
securities.
Investment securities held-to-maturity are reported at amortized cost. As of
June 30, 1998 and December 31, 1997, QNB had securities classified as
held-to-maturity with an amortized cost of $44,829,000 and $40,400,000 and a
market value of $45,154,000 and $40,713,000, respectively. The held-to-maturity
portfolio had a weighted average maturity of approximately 6 years at June 30,
1998 and 2 years and 10 months at December 31, 1997. The expected weighted
average life of the held-to-maturity portfolio was 3 years and 6 months at June
30, 1998 and 2 years and 10 months at December 31, 1997. The increase in the
average maturity is a result of the purchase of approximately $4,214,000 of ten
year tax-exempt municipal securities and $8,793,000 of mortgage-backed
securities with average lives of five years. The purchase of mortgage-backed
securities replaced the run-off of approximately $7,479,000 in principal
reduction caused by prepayments.
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 sources of liquidity.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $98,427,000 and $91,915,000 at June 30, 1998 and
December 31, 1997. These sources were adequate to meet seasonal deposit
withdrawals and loan demand during the first half of 1998 and should be adequate
to meet normal fluctuations in loan demand and or deposit withdrawals.
Approximately $35,583,000 and $36,510,000 of available-for-sale securities at
June 30, 1998 and December 31, 1997 were pledged as collateral for repurchase
agreements, public deposits and other deposits as provided by law. The Bank is
currently in the process of applying for membership in the Federal Home Loan
Bank. This would provide QNB with an
Form 10-Q
Page 15
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY (Continued)
additional source of liquidity through the ability to borrow both short-term and
longer term funds from the Federal Home Loan Bank. Approval is expected during
the third quarter of 1998.
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 $387,000 to $12,961,000 at June 30, 1998. This
compares to a $1,810,000 increase during the first six months of 1997. After
adjusting net income for non-cash transactions, operating activities provided
$4,101,000 in cash flow in the first six months of 1998, compared to $1,719,000
in the same period of 1997. An increase in residential mortgage loan activity
and higher net income account for most of the difference between the periods.
Net cash used by investing activities was $13,547,000 during the first half of
1998. The $6,188,000 increase in Federal funds sold was the largest factor. The
purchase of investment securities in excess of proceeds from maturities, calls
or sales of $5,071,000 and the net increase in loans of $4,280,000 were also
activities that used cash. Proceeds from the sale of other real estate owned and
student loans provided $2,323,000 of cash. Net cash used by investing activities
was $12,001,000 during the first six months of 1997. This resulted largely from
the purchase of investment securities exceeding sales and maturities by
$10,128,000 and a net increase in loans of $6,016,000. A decrease in Federal
funds sold provided $2,510,000 while proceeds from the sale of student loans
provided $1,381,000.
Net cash provided by financing activities of $9,833,000 during the six months of
1998 was the result of an increase in interest-bearing deposits, primarily time
deposits. An increase in the balances of repurchase agreements, also provided
cash. A reduction in non-interest bearing deposits of $842,000 was a use of cash
during the period. Net cash provided by financing activities of $12,092,000
during the first six months of 1997 was the result of an increase in both
non-interest-bearing deposits and interest-bearing deposits, primarily time
deposits and money market accounts, of $6,636,000 and $6,048,000.
CAPITAL ADEQUACY
A strong capital position is fundamental to support continued growth and
profitability, to serve the needs of depositors, and to yield an attractive
return for shareholders. QNB's shareholders' equity at June 30, 1998 was
$27,303,000 or 8.59 percent of total assets compared to shareholders' equity of
$25,832,000 or 8.45 percent at December 31, 1997.
Shareholders' equity averaged $25,698,000 for the first six months of 1998 and
$23,886,000 during all of 1997, an increase of 7.6 percent. The ratio of average
total equity to average total assets improved to 8.38 percent for 1998, compared
to 8.27 percent for 1997. The increase in the equity to asset ratio is a
function of significantly higher net income, an increase in capital retention
despite increasing the cash dividend in both 1998 and 1997 and modest growth in
average assets.
QNB Corp. and the Quakertown National Bank are subject to various regulatory
capital requirements as issued by Federal regulatory authorities. Regulatory
capital is defined in terms of Tier I capital (shareholders' equity excluding
unrealized gains or losses on available-for-sale securities), Tier II capital
which includes a portion of the allowance for loan losses, and total capital
(Tier I plus II). Risk-based capital ratios are
Form 10-Q
Page 16
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL ADEQUACY (Continued)
expressed as a percentage of risk-weighted assets. Risk-weighted assets are
determined by assigning various weights to all assets and off-balance sheet
arrangements, such as letters of credit and loan commitments, based on
associated risk. Regulators have also adopted minimum Tier I leverage ratio
standards, which measure the ratio of Tier I capital to total assets.
The minimum regulatory capital ratios are 4.00 percent for Tier I, 8.00 percent
for the total risk-based and 4.00 percent for leverage. Under the requirements,
QNB has a Tier I capital ratio of 14.06 percent and 13.49 percent, a total
risk-based ratio of 15.32 percent and 14.74 percent and a leverage ratio of 8.33
percent and 8.23 percent at June 30, 1998 and December 31, 1997, respectively.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At June 30, 1998 and December 31, 1997 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 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 June 30, 1998, interest-earning assets scheduled to mature
or likely to be called, repriced or repaid in one year were $107,149,000.
Interest-sensitive liabilities scheduled to mature or reprice within one year
were $119,236,000. The one year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a negative $12,07,000 at June 30, 1998.
The cumulative one-year gap equals 4.08 percent of total earning assets. This
negative or liability sensitive gap will generally benefit QNB in a falling
interest rate environment, while rising interest rates could negatively impact
QNB.
Form 10-Q
Page 17
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued)
QNB also uses a simulation model to assess the impact of changes in interest
rates on net interest income. The model reflects management's assumptions
related to asset yields and rates paid on liabilities, deposit sensitivity, and
the size, composition and maturity or repricing characteristics of the balance
sheet. The assumptions are based on what management believes at that time to be
the most likely interest rate environment. Management also evaluates the impact
of higher and lower interest rates.
Actual results may differ from simulated results due to various factors
including time, magnitude and frequency of interest rate changes, the
relationship or spread between various rates, loan pricing and deposit
sensitivity, and asset/liability strategies. Based on management's estimate of
balance sheet growth and composition and interest rates for the next year, net
interest income for the next twelve months is expected to increase modestly
compared to the prior twelve months. The projected increase in net interest
income is primarily the result of forecasted growth in total earning assets and
a change in the composition of earning assets, with the loan to earning assets
ratio increasing slightly. These factors will be partially offset by a decrease
in the net interest margin.
If interest rates are 100 basis points lower than management's most likely
interest rate environment, the simulation model projects net interest income for
the next twelve months to slightly exceed the most likely scenario. Conversely,
if interest rates were 100 basis points higher, net interest income for the most
likely scenario would decline slightly. These results are consistent with the
results of the gap analysis described above.
Management believes that the assumptions utilized in evaluating the
vulnerability of QNB's net interest income to changes in interest rates
approximate actual experience; however, the interest rate sensitivity of QNB's
assets and liabilities as well as the estimated effect of changes in interest
rates on net interest income could vary substantially if different assumptions
are used or actual experience differs from the experience on which the
assumptions were based.
In the event QNB should experience a mismatch in its desired gap ranges or an
excessive decline in its net interest income subsequent to an immediate and
sustained change in interest rates, it has a number of options which it could
utilize to remedy such a mismatch. QNB could restructure its investment
portfolio through sale or purchase of securities with more favorable repricing
attributes. It could also emphasize loan products with appropriate maturities or
repricing attributes, or it could attract deposits or obtain borrowings with
desired maturities.
The nature of QNB's current operation is such that it is not subject to foreign
currency exchange or commodity price risk. Additionally, neither the Corporation
nor the Bank owns trading assets. At June 30, 1998, QNB did not have any hedging
transactions in place such as interest rate swaps, caps or floors.
The table below summarizes estimated changes in net interest income over a
twelve month period, under alternative interest rate scenarios.
- --------------------------------------------------------------------------------
Change in Interest Rates Net Interest Income Dollar Change Percent Change
- --------------------------------------------------------------------------------
+300 Basis Points $11,412 $(1,318) (10.35)%
+200 Basis Points 11,824 (906) (7.12)
+100 Basis Points 12,316 (414) (3.25)
FLAT RATE 12,730 - -
-100 Basis Points 13,135 405 3.18
-200 Basis Points 13,309 579 4.55
-300 Basis Points 13,233 503 3.95
Form 10-Q
Page 18
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF YEAR 2000
QNB is currently in the process of addressing the challenge that faces all users
of automated systems, including information systems. Many computer systems
process transactions based on two digits representing the year of transaction,
rather than a full four digits. These computer systems may not operate properly
when the last two digits become "00", as will occur on January 1, 2000. The
problem could affect a wide variety of automated information systems, such as
mainframe applications, personal computers, communication systems, environmental
systems and other information systems.
At the beginning of 1997, QNB developed a five phase plan to address the year
2000 issue. These phases are Awareness, Assessment, Renovation, Validation and
Implementation. The Awareness phase included the establishment of a team of
employees, including executive management, and the development of strategies to
make employees and customers aware of the situation. The Assessment phase
included the identification of areas of operations critical for the delivery of
products and services. This phase also included the inventory of all hardware
and software applications and the identification of customer and vendor
interdependencies. The majority of the programs and applications used by QNB are
purchased from outside vendors. The vendors providing the software are
responsible for maintenance of the systems and modifications to enable
uninterrupted usage after December 31, 1999. These two phases have been
completed.
The Renovation phase includes code enhancement, vendor certification and
hardware and software upgrades as needed. The vendor of QNB's core operating
system has informed management that changes are complete and proxy testing was
satisfactorily completed by six user banks. QNB has installed the updated
software on a mainframe test system and will begin on site testing early in the
third quarter.
The Validation phase includes testing of all of the impacted applications, both
internally developed and third party provided. Testing of the systems has begun
and will continue throughout 1998. Contingency plans, if any are needed, will be
developed during 1998 to address any shortcomings that are identified. The
Implementation phase includes incorporating all changes, achieving certification
of year 2000 compliance and implementing contingency plans, if necessary. QNB's
plan also includes reviewing any potential risks associated with the loan and
investment portfolios due to the year 2000 issue. QNB's goal is to have the plan
complete and be fully compliant by December 31, 1998.
Based on the currently available information, management does not anticipate
that the cost to address year 2000 issues will have an impact on QNB's financial
condition, results of operations, liquidity or capital resources. A significant
portion of the anticipated costs are not expected to be incremental, but rather
will represent the redeployment of existing information technology resources.
OTHER ITEMS
Management is not aware of any current specific recommendations by regulatory
authorities or proposed legislation, which if they were implemented, would have
a material adverse effect upon the liquidity, capital resources, or results of
operations, although the general cost of compliance with numerous and multiple
federal and state laws and regulations does have, and in the future may have, a
negative impact on QNB's results of operations.
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk.
The information required herein is set forth in Item 2, above.
Form 10-Q
Page 19
<PAGE>
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
JUNE 30, 1998
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The 1998 Annual Meeting (the "Meeting") of the shareholders of
QNB Corp. (the "Registrant") was held on May 5, 1998. Notice
of the Meeting was mailed to shareholders of record on or
about April 3, 1998, together with proxy solicitation
materials prepared in accordance with Section 14(a) of the
Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder.
The Meeting was held for the following purposes:
(1) To elect three (3) Directors; and
(2) To approve and adopt the 1998 Stock Incentive Plan.
There was no solicitation in opposition to the nominees of the
Board of Directors for election to the Board of Directors and
all such nominees were elected. The number of votes cast for
or withheld, as well as the number of abstentions and broker
non-votes for each of the nominees for election to the Board
of Directors were as follows:
Nominee For Withhold
------- --- -------
Gary S. Parzych 1,182,441 2,662
Norman L. Baringer 1,183,377 1,726
Charles M. Meredith, III 1,182,996 2,107
<PAGE>
The continuing directors of the Registrant are:
Kenneth F. Brown, Jr.
Henry L. Rosenberger
Edgar L. Stauffer
Dennis Helf
Donald T. Knauss
Thomas J. Bisko
There was no solicitation in opposition to Proposal No. 2 to approve and
adopt the Registrant's 1998 Stock Incentive Plan, and the Plan was
approved. The number of votes cast for or against as well as the number of
abstentions and broker nonvotes, for the proposal were as follows:
For Against Abstentions
------- ------- -------------
1,143,798 32,975 8,330
Item 5. Other information. None.
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits.
The following Exhibits are included in this Report:
Exhibit 3.1 Articles of Incorporation of Registrant, as amended.
Exhibit 3.2 Bylaws of Registrant, as amended.
Exhibit 10.1 Employment Agreement between the Registrant and Thomas
J. Bisko. (Incorporated by reference to Exhibit 10(a)
of Registrant's Current Report on Form 8-K filed with
the Commission on April 30, 1989).
Exhibit 10.2 Salary Continuation Agreement between the Registrant
and Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(b) of Registrant's Current Report on Form 8-K
filed with the Commission on April 30, 1989).
<PAGE>
Exhibit 10.3 Deferred Compensation Agreement between the Registrant
and Philip D. Miller. (Incorporated by reference to
Exhibit 10(c) of Registrant's Current Report on Form 8-K
filed with the Commission on April 30, 1989).
Exhibit 10.4 QNB Corp. Stock Incentive Plan. (Incorporated by reference
to Exhibit 4A to Registration Statement No. 333-16627 on
Form S-8, filed with the Commission on November 22, 1996.)
Exhibit 10.5 QNB Corp. Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 4B to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission on
November 22, 1996.)
Exhibit 10.6 The Quakertown National Bank Profit Sharing and Section
401(k) Salary Deferral Plan. (Incorporated by reference
to Exhibit 4C to Registration Statement No. 333-16627
on Form S-8, filed with the Commission on November 22,
1996.)
Exhibit 11 Statement Re: Computation of Earnings Per Share.
(Included in Part I, Item I, hereof.)
Exhibit 27 Financial Data Schedule.
Exhibit 99 Financial Data Schedule for June 30, 1997, revised
to reflect changes in Earnings Per Share.
(b) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
QNB Corp.
Date: August 13, 1998 By: /s/ Robert C. Werner
--------------------------
Robert C. Werner
Vice President
Date: August 13, 1998 By: /s/ Bret H. Krevolin
---------------------------
Bret H. Krevolin
Chief Accounting Officer
Form 10-Q
Page 20
<PAGE>
EXHIBIT INDEX
Sequential Page
Number in Manually
Exhibit Number Signed Original
- -------------- ------------------
Exhibit 3.1 Articles of Incorporation of Registrant,
as amended.
Exhibit 3.2 Bylaws of Registrant, as amended.
Exhibit 10.1 Employment Agreement between the Registrant and
Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(a) of Registrant's Current Report
on Form 8-K filed with the Commission on April
30, 1989).
Exhibit 10.2 Salary Continuation Agreement between the Registrant
and Thomas J. Bisko. (Incorporated by reference to
Exhibit 10(b) of Registrant's Current Report on Form
8-K filed with the Commission on April 30, 1989).
Exhibit 10.3 Deferred Compensation Agreement between the Registrant
and Philip D. Miller. (Incorporated by reference to
Exhibit 10(c) of Registrant's Current Report on Form
8-K filed with the Commission on April 30, 1989).
Exhibit 10.4 QNB Corp. Stock Incentive Plan. (Incorporated by
reference to Exhibit 4A to Registration Statement No.
333-16627 on Form S-8, filed with the Commission
on November 22, 1996.)
Exhibit 10.5 QNB Corp. Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 4B to Registration Statement No.
333-16627 on Form S-8, filed with the Commission on
November 22, 1996.)
Exhibit 10.6 The Quakertown National Bank Profit Sharing and
Section 401(k) Salary Deferral Plan. (Incorporated
by reference to Exhibit 4C to Registration Statement
No. 333-16627 on Form S-8, filed with the Commission
on November 22, 1996.)
Exhibit 11 Statement Re: Computation of Earnings Per Share.
(Included in Part I, Item I, hereof.)
Exhibit 27 Financial Data Schedule.
<PAGE>
Exhibit 99 Financial Data Schedule for June 30, 1997,
revised to reflect changes in Earnings Per Share.
Form 10-Q
Page 21
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
QNB CORP.
In compliance with the requirements of Section 204 of the Business
Corporation Law, Act of May 5, 1933 (P.L. 364), as amended (15 P.S. (0)1204) the
undersigned, desiring to be incorporated as a business corporation, hereby
certify that:
ARTICLE I
Name
The name of the Corporation is QNB Corp.
ARTICLE II
Location
The location and post office of the initial registered office of the
Corporation in the Commonwealth of Pennsylvania is Third and West Broad Streets,
Quakertown, Pennsylvania 18951.
ARTICLE III
Purpose
The corporation is incorporated under the Business Corporation Law of the
Commonwealth of Pennsylvania for the purposes of conducting any lawful act
concerning any or all lawful business for which a corporation may be
incorporated under the provisions of the Business Corporation Law.
<PAGE>
ARTICLE IV
Term
The term for which the Corporation is to exist is Perpetual.
ARTICLE V
Shares
The aggregate number of shares which the corporation shall have authority
to issue is 5,000,000 shares of Common Stock par value of $5.00 per share.
Shares of authorized capital stock may be issued from time to time as and
when the Board of Directors shall determine and for such consideration as may be
fixed from time to time by the Board of Directors, except that no stock may be
issued for less than the par value thereof in the case of stock with par value.
ARTICLE VI
No Preemptive Rights - No Cumulative Voting.
A. No holder of shares of any class of stock of the Corporation shall have
any preemptive or preferential right to subscribe for, purchase or otherwise
acquire or receive any shares of any class of stock hereafter issued by the
Corporation, whether now or hereafter authorized, or any shares of any class of
stock of the Corporation now or hereafter acquired and held by the Corporation
as treasury stock and subsequently reissued and sold or otherwise disposed of,
or any bonds, certificates of indebtedness, notes or any other securities
convertible into or exchangeable for, or any warrants or rights to purchase or
otherwise acquire, any shares of any class of stock of the Corporation, whether
now or hereafter authorized.
- 2 -
<PAGE>
B. At each election of directors every shareholder entitled to vote at such
election shall have the right to vote the number of shares owned by him for as
many persons as there are directors to be elected and for whose election he has
a right to vote. Cumulative Voting shall not be allowed.
ARTICLE VII
Board of Directors
A. The number of directors of the Corporation shall be nine (9) and may be
changed from time to time but only by receiving the affirmative vote of (i) the
holders of at least seventy-five percent (75%) of all the outstanding shares of
the Corporation entitled to vote on such change, or (ii) seventy-five percent
(75%) of the directors then in office. Each director of this Corporation during
the full term of his directorship must own a minimum of 200 shares of the
authorized common stock of the Corporation.
B. Except for the initial Board of Directors named in Article XI of these
Articles of Incorporation, the Board of Directors shall be and is divided into
three classes, Class I, Class II and Class III, which shall be as nearly equal
in number as possible. Each director shall serve a term ending on the date of
the third annual meeting following the annual meeting at which such director was
elected; provided, however, that each initial director in Class I shall hold
office until the annual meeting of stockholders in 1987; and each initial
director in Class III shall hold office until the annual meeting of stockholders
in 1988.
At each annual meeting held after 1985, the directors chosen to succeed
those whose terms are expiring shall be identified as being of the same class as
the directors whom they
- 3 -
<PAGE>
succeed and shall be elected for a term expiring at the third succeeding annual
meeting of stockholders or thereafter in each case when their respective
successors are elected and qualified.
C. In the event of any increase or decrease in the authorized number of
directors, (i) each director then serving as such shall nevertheless continue as
a director of the class of which he or she is a member until the expiration of
his or her current term, or his or her prior death, retirement, resignation, or
removal, and (ii) the newly created or eliminated directorship(s) resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of directors so as to maintain such classes as nearly equal as
possible.
D. Nominations for election to the Board of Directors may be made by the
Board of Directors or by any shareholder of any outstanding class of capital
stock of the Corporation entitled to vote for election of directors. Nominations
other than those made by or on behalf of the existing management of the
Corporation, shall be made in writing and shall be delivered or mailed to the
President of the Corporation, not less than 14 days nor more than 50 days prior
to any meeting of shareholders called for the election of Directors, provided
however, that if less than 21 days' notice of the meeting is given to
shareholders, such nomination shall be mailed or delivered to the President of
the Corporation not later than the close of business on the seventh day
following the day on which the notice of meeting was mailed. Such notification
shall contain the following information to the extent known to the notifying
shareholder: (a) the name and address of each proposed nominee; (b) the
principal occupation of each proposed nominee; (c) the total number of shares of
capital stock of the Corporation that will be voted for each proposed nominee;
(d) the name and residence address of the notifying shareholder; and (e) the
number of shares of capital stock of the Corporation owned by the notifying
shareholder. Nominations not
- 4 -
<PAGE>
made in accordance herewith may, in his discretion, be disregarded by the
chairman of the meeting, and upon his instructions, the vote tellers may
disregard all votes cast for each such nominee.
ARTICLE VIII
Business Combinations
A. The affirmative vote of the holders of not less than seventy-five
percent (75%) of the outstanding shares of stock of the Corporation then
entitled to vote shall be required for the approval or authorization of any
"Business Combination" (as hereinafter defined). Such seventy-five percent (75%)
voting requirement shall not be applicable if:
(1) the Board of Directors of the Corporation has by a majority vote
of the members of the Board then in office (a) given prior approval to the
acquisition by the "Related Person" (as hereinafter defined) involved in
the Business Combination of 20% or more of the outstanding shares of Common
Stock of the Corporation, the acquisition of which resulted in such person,
corporation or other entity becoming a Related Person or (b) approved the
Business Combination prior to the time that the person, corporation or
other entity involved in the Business Combination shall have become a
Related Person; or
(2) the Business Combination involves solely the Corporation and a
Subsidiary, none of whose stock is beneficially owned by a Related Person
(other than Beneficial Ownership arising solely because of the control of
the Corporation), provided that if the Corporation is not the surviving
company, each stockholder of the Corporation receives the same type of
consideration in such transaction in proportion to his stockholdings, the
provisions of Article V, and Articles VII through X of the Corporation's
Articles of Incorporation are continued in effect
- 5 -
<PAGE>
or adopted by such surviving company as part of its articles of
incorporation or certificate of incorporation, as the case may be, and such
articles or certificate have no provisions inconsistent with such
provisions, and the provisions of the Corporation's By-Laws are continued
in effect or adopted by said surviving company.
B. The Board of Directors of the Corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
the Corporation, (b) merge or consolidate the Corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation may consider, in connection with
the exercise of its judgment in determining what is the best interest of the
Corporation and its stockholders, including without limitation, (i) the social
and economic effects on the employees, customers, and other constituents of the
Corporation and its subsidiaries and on the communities in which the Corporation
and its subsidiaries operate or are located; (ii) the desirability of the
Corporation continuing as an independent entity; and (iii) such other factors as
the Board of Directors shall deem relevant.
C. For purposes of this Article VIII the following defined terms shall have
the following meanings:
(1) The term "Business Combination" shall mean (a) any merger or
consolidation of the Corporation or a Subsidiary with or into a Related
Person, (b) any sale, lease, exchange, transfer or other disposition,
including without limitation, a mortgage or any other security device of
all or any substantial part of the assets of the Corporation (including
without limitation any securities of a Subsidiary) or of a Subsidiary, to a
Related Person, (c) any merger or consolidation of a Related Person with or
into this Corporation or a Subsidiary, (d) any sale,
- 6 -
<PAGE>
lease, exchange, transfer or other disposition of all or any substantial
part of the assets of a Related Person to this Corporation or a Subsidiary,
(e) the issuance of any securities of this Corporation or a Subsidiary to a
Related Person, (f) the acquisition by the Corporation or a Subsidiary of
any securities of a Related Person, (g) any reclassification of Voting
Stock of the Corporation, or any recapitalization involving Voting Stock of
the Corporation, consummated within five years after a Related Person
become a Related Person, (h) any loan or other extension of credit by the
Corporation or a Subsidiary to the Related Person or any guarantees by the
Corporation or a Subsidiary of any loan or other extension of credit by any
person to a Related Person, and (i) any agreement, contract or other
arrangement provided for any of the transactions described in this
definition of Business combination.
(2) The term "Related Person" shall mean and include any individual,
corporation, partnership or other person or entity which, together with its
"affiliates" and "associates", (as those terms are hereinafter defined) is
the beneficial owner, directly or indirectly, of 20% or more in the
aggregate of the outstanding shares of the Corporation's stock entitled to
vote at the election of directors of the Corporation.
(3) For purposes of this Article VIII any corporation, person or other
entity shall be deemed to be the beneficial owner of any shares of stock of
the Corporation, (i) which it owns directly, whether or not of record, or
(ii) which it has the right to acquire pursuant to any agreement or
understanding or upon exercise of conversion rights, warrants or options or
otherwise, whether or not presently exercisable, or (iii) which are
beneficially owned, directly or indirectly (including shares deemed to be
owned through application of clause (ii) above), by an "affiliate" or
"associate" as those terms are defined herein, or (iv) which are
beneficially owned,
- 7 -
<PAGE>
directly or indirectly by any other corporation, person or entity
(including any shares which such other corporation, person or entity has
the right to acquire pursuant to any agreement or understanding or upon
exercise of conversion rights, warrants or options or otherwise, whether or
not presently exercisable) with which it or its "affiliate" or "associate"
has any agreement or arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of stock of this Corporation.
(4) For the purposes of this Article VIII, the term "affiliate" shall
mean any person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, such corporation, person or other entity. The term "control"
(including the terms "controlling", "controlled by" and "under common
control with") means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a
corporation, person or other entity, whether through the owner-ship of
voting securities, by contract, or otherwise.
(5) For purposes of this Article VIII, the term "associate" shall mean
(i) any corporation or organization (other than the Corporation or a
majority-owned subsidiary of this Corporation) of which such corporation,
person or entity is an officer or partner or is, directly or indirectly,
the beneficial owner of ten percent (10%) or more of any class of equity
securities, (ii) any trust or other estate in which such corporation,
person or other entity has a substantial beneficial interest or as to which
such corporation, person or other entity serves as a trustee or in a
similar fiduciary capacity, and (iii) any relative or spouse of such
person, or any relative of such spouse, who has the same house as such
person or who is a director or officer of this corporation or any of its
subsidiaries.
- 8 -
<PAGE>
(6) The Board of Directors shall have the power and duty to determine
for the purposes of this Article VIII on the basis of information known to
the Board of Directors of this Corporation, whether
(i) such other corporation, person or other entity beneficially
owns more than 20% in number of shares of the outstanding shares of
the Corporation entitled to vote in elections of directors, and
(ii) a corporation, person or other entity is an "affiliate" or
"associate" (as defined above) of another.
Any such determination shall be conclusive and binding for all
purposes of this Article VIII.
(7) The term "Substantial Part" shall mean more than ten percent (10%)
of the total assets of the person or entity in question, as of the end of
its most recent fiscal year ending prior to the time the determination is
being made.
(8) The term "Subsidiary" shall mean any corporation or other entity
more than 50% of the stock of which is Beneficially owned by the
Corporation.
ARTICLE IX
Section 910 of the Business Corporation Law
The provisions of Section 910 of the Business Corporation Law, Act of May
5, 1933 (P.L. 364), as amended, is hereby incorporated herein by reference and
it hereby forms an integral part of these Articles of Incorporation.
- 9 -
<PAGE>
ARTICLE X
Amendments of Articles of Incorporation
These Articles of Incorporation may be amended, subject to the provisions
of the laws of the Commonwealth of Pennsylvania, at any regular or special
meeting of the shareholders for which adequate notice has been given, by the
affirmative vote of the holders of the majority of the outstanding shares of
stock of the Corporation then entitled to vote, provided however that Article V,
Articles VII through IX and this Article X of the Articles of Incorporation may
be amended only by the affirmative vote of the holders of seventy-five percent
(75%) of the out-standing shares of stock of the Corporation then entitled to
vote at a special meeting called for that purpose.
- 10 -
<PAGE>
ARTICLE XI
Incorporators - First Directors
The name and post office address of the incorporators and the number and
class of shares subscribed by each incorporator is:
Number and
Name Address Class of Shares
----- -------- ---------------
Ray M. Taylor Tenth Street & Park Avenue 200 shares of
Quakertown, PA 18951 Common Stock
Donald T. Knauss 330 Edgemont Avenue 200 shares of
Quakertown, PA 18951 Common Stock
James C. Ebbert 303 Edgemont Avenue 200 shares of
Quakertown, PA 18951 Common Stock
Philip D. Miller 59 Muhlenberg Circle 200 shares of
Quakertown, PA 18951 Common Stock
Charles M. Meredith, III 203 Juniper Street 200 shares of
Quakertown, PA 18951 Common Stock
J. Clair Hershey Springtown, PA 18081 200 shares of
Common Stock
Charles G. Hersh 260 Locust Street 200 shares of
Coopersburg, PA 18036 Common Stock
Edgar L. Stauffer Bowers Mill Road, MR1 200 shares of
Pennsburg, PA 18073 Common Stock
Henry L. Rosenberger 1047 Hatfield Valley Rd. 200 shares of
Hatfield, PA 19440 Common Stock
The foregoing Incorporators shall be the first directors of the Corporation
who shall serve until the first annual meeting of the shareholders, at which
time their successor shall be duly elected in accordance with the provisions of
Article VII of these Articles of Incorporation.
- 11 -
<PAGE>
ARTICLE XII
Director Liability
A. Director's Personal Liability. A director of the corporation shall not
be personally liable for monetary damages for any action taken, or any failure
to take any action, provided however, that this provision shall not eliminate or
limit the liability of a director to the extent that such elimination or
limitation of liability is expressly prohibited by the Pennsylvania Directors'
Liability Act as in effect at the time of the alleged action or failure to take
action by such director.
B. Preservation of Right. Any repeal or modification of this Article by the
shareholders of the corporation shall not adversely affect any right or
protection existing at the time of such repeal or modification to which any
director or former director may be entitled under this Article. The rights
conferred by this Article shall continue as to any person who has ceased to be
director of the corporation and shall inure to the benefit of the heir,
executors and administrators of such person.
ARTICLE XIII
Indemnification
A. Mandatory Indemnification of Directors and Officers. The corporation
shall indemnify, to the fullest extent now or hereafter permitted by law, each
director or officer (including each former director or officer) of the
corporation who was or is made a party to or a witness in or is threatened to be
made a party to or a witness in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was an authorized representative of the
corporation, against all expenses (including attorneys' fees and disbursements),
judgments, fines (including excise taxes and
- 12 -
<PAGE>
penalties) and amounts paid in settlement actually and reasonably incurred by
him in connection with such action, suit or proceeding.
B. Mandatory Advancement of Expenses to Directors and Officers. The
corporation shall pay expenses (including attorneys' fees and disbursements)
incurred by a director or officer of the corporation referred to in Section
XIII(A) hereof in defending or appearing as a witness in any civil or criminal
action, suit or proceeding described in Section XIII(A) hereof in advance of the
final disposition of such action, suit or proceeding. The expenses incurred by
such director or officer shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding only upon receipt of an
undertaking by or on behalf of such director or officer to repay all amounts
advanced if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation.
C. Permissive Indemnification and Advancement of Expenses. The corporation
may, as determined by the Board of Directors from time to time, indemnify to the
fullest extent now or hereafter permitted by law, any person who was or is a
party to or a witness in or is threatened to be made a party to or a witness in,
or is otherwise involved in, any threatened, pending or completed action, suit
or proceedings, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was an authorized representative of the
corporation, both as to action in his official capacity and as to action in
another capacity while holding such office or position, against all expenses
(including attorneys' fees and disbursements), judgments, fines (including
excise taxes and penalties), and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceedings.
The corporation may, as determined by the Board of Directors from time to time,
pay expenses incurred by any such
- 13 -
<PAGE>
person by reason of his participation in an action, suit or proceeding referred
to in this Section in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such person to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation.
D. Scope of Indemnification. Indemnification under this Article is provided
pursuant to Section 8365 of the Pennsylvania Directors' Liability Act (or any
successor provision or statute), and this Article is intended to provide
indemnification in accordance with its terms whether the corporation would have
the power to so indemnify under any other provisions of law except such Act and
whether or not the indemnified liability arises or arose from any threatened,
pending or completed action by or in the right of the corporation;
indemnification under this Article shall not be made by the corporation in any
case where the alleged act or failure to act giving rise to the claim for
indemnification is expressly prohibited by the Pennsylvania Directors' Liability
Act or any successor statute as in effect at the time of such alleged action or
failure to take action.
E. Insurance; Funding to Meet Indemnification Obligations. The corporation
shall have the power to purchase and maintain insurance on behalf of any
authorized representative of the corporation against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to indemnify
him against such liability. The Board of Directors, without further approval of
the shareholders, shall have the power to borrow money on behalf of the
corporation, including the power to pledge the assets of the corporation, from
time to time to discharge the corporation's obligations with respect to
indemnification and the advancement and reimbursement of expenses,
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and the purchase and maintenance of insurance on behalf of each director and
officer against any liability asserted against or incurred by such director or
officer in any capacity.
F. Miscellaneous. Each director and officer of the corporation shall be
deemed to act in such capacity in reliance upon such rights of indemnification
and advancement of expenses as are provided in this Article. The rights of
indemnification and advancement of expenses provided by this Article shall not
be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any agreement,
vote of shareholders or disinterested directors, statute or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office or position, and shall continue as to a
person who has ceased to be an authorized representative of the corporation and
shall inure to the benefit of the heirs, executors and administrators of such
person. Any repeal or modification of this Article by the shareholders or the
Board of Directors of the corporation shall not adversely affect any right or
protection existing at the time of such repeal or modification to which any
person may be entitled under this Article.
G. Definition of Corporation. For purposes of this Article, references to
"the corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of the constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its authorized representatives
so that any person who is or was an authorized representative of such
constituent corporation shall stand in the same position under this Article with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
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<PAGE>
H. Definition of Authorized Representative. For the purposes of this
Article, the term "authorized representative" shall mean a director, officer,
employee or agent of the corporation, or any subsidiary of the corporation, or a
trustee, custodian, administrator, committeeman or fiduciary of any employee
benefit plan established and maintained by the corporation or by any subsidiary
of the corporation, or a person serving another corporation, partnership, joint
venture, trust or other enterprise in any of the foregoing capacities at the
request of the corporation.
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BY-LAWS OF
QNB CORP.
AMENDED AND RESTATED
AS OF APRIL 21, 1987
ARTICLE I - OFFICES
Section 1-1. Registered Office. The registered office of the Corporation
shall be located within the Commonwealth of Pennsylvania, at such place as the
Board of Directors shall, from time to time, determine.
Section 1-2. Other Offices. The Corporation may also have offices at such
other places within or without the Common-wealth of Pennsylvania, as the Board
of Directors may, from time to time, determine.
ARTICLE II - SHAREHOLDERS
Section 2-1. Place of Shareholders' Meetings. Meetings of shareholders
shall be held at such places within or without the Commonwealth of Pennsylvania
as may be fixed by the Board of Directors, from time to time. If no such place
is fixed by the Board of Directors, meetings of the shareholders shall be held
at the registered office of the Corporation.
Section 2-2. Annual Meeting. A meeting of the share-holders of the
Corporation shall be held in each calendar year, commencing with the year 1984,
on such date and at such time as the Board of Directors may determine, or if the
Board of Directors fails on or before February 15, to set a date and time, a
meeting of shareholders shall be held on the third Tuesday of March at 10:00
a.m., if not a legal holiday, and if such day is a legal holiday, then such
meeting shall be held on the next business day.
<PAGE>
At such annual meeting, there shall be held an election of Directors.
Unless the Board of Directors shall deem it advisable, financial reports of
the Corporation's business need not be sent to the shareholders and need not be
presented at the annual meeting except as otherwise may be required by
applicable law. If any report is deemed advisable by the Board of Directors,
such report may contain such information as the Board of Directors shall
determine and need not be certified by a Certified Public Accountant unless the
Board of Directors shall so direct.
Section 2-3. Special Meetings. Special meetings of the shareholders may be
called at any time:
(a) By the President of the Corporation; or
(b) By a majority of the Board of Directors; or
(c) By shareholders entitled to cast at least one-fifth of the votes
which all shareholders are entitled to cast at the meeting.
Upon the written request of any person or persons entitled to call a
special meeting, which request shall set forth the purpose for which the meeting
is desired, it shall be the duty of the Secretary to fix the date of such
meeting to be held at such time, not less than five nor more than sixty days
after the receipt of such request, as the Secretary may determine, and to give
due notice thereof. If the Secretary shall neglect or refuse to fix the date of
such meeting and to give notice thereof within five days after receipt of such
request, the person or persons calling the meeting may do so.
Section 2-4. Notices of Shareholders' Meetings. Written notice stating the
date, place and hour and, if required by law or these By-laws, the purpose, of
any meeting of the
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shareholders, shall be given to each shareholder of record entitled to vote at
the meeting at least ten days prior to the day named for the meeting, unless
otherwise required by law. Such notices may be given at the discretion of, or in
the name of, the Board of Directors, President, Vice President, Secretary or
Assistant Secretary. When a meeting is adjourned, it shall not be necessary to
give any notice of the adjourned meeting or of the business to be transacted at
an adjourned meeting, other than by announcement at the meeting at which such
adjournment is taken.
Section 2-5. Quorum of and Action by Shareholders. Unless otherwise
provided in the Articles of Incorporation, the presence, in person or by proxy,
of shareholders entitled to cast at least a majority of the votes which all
shareholders are entitled to cast on the particular matter shall constitute a
quorum for the purposes of considering such matter, and, unless otherwise
specifically provided by law, the acts, at a duly organized meeting of the
shareholders present in person or by proxy, entitled to cast at least a majority
of the votes which all shareholders present are entitled to cast, shall be the
acts of the shareholders. The shareholders present at a duly organized meeting
can continue to do business until adjournment, notwithstanding the withdrawal of
enough shareholders to leave less than a quorum. If a meeting cannot be
organized because a quorum has not attended, those present may, except as
otherwise provided by law, adjourn the meeting to such time and place as they
may determine, but in the case of any meeting called for the election of
Directors, those shareholders who attend the second of such adjourned meetings,
although less than a quorum as fixed in this Section, or in the Articles of
Incorporation, shall nevertheless constitute a quorum for the purpose of
electing Directors.
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<PAGE>
Section 2-6. Voting. At least five days but not more than thirty days
before any meeting of shareholders, the officer or agent having charge of the
transfer books of the Corporation shall make a complete list of the shareholders
entitled to vote at such meeting, arranged in alphabetical order with the
address of and the number of shares held by each, which list shall be kept on
file at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any shareholder during the whole time of
the meeting.
At all shareholders' meetings, shareholders entitled to vote may attend and
vote either in person or by proxy. All proxies shall be in writing, executed by
the shareholder or by his duly authorized attorney in fact, and shall be filed
with the Secretary of the Corporation. A proxy, unless coupled with an interest,
shall be revocable at will, notwithstanding any other agreement or any provision
in the proxy to the contrary, but the revocation of a proxy shall not be
effective until the notice thereof has been given to the Secretary of the
Corporation. No unrevoked proxy shall be valid after eleven months from the date
of execution, unless a longer time is expressly provided therein; but in no
event shall a proxy, unless coupled with an interest, be voted on after three
years from the date of its execution.
Except as otherwise specifically provided by law, all matters coming before
the meeting shall be determined by a vote of shares. Such vote shall be taken by
written ballot, and the Judge or Judges of Election or, if none, the Secretary
of the Meeting, shall tabulate and certify the results of such vote.
<PAGE>
Section 2-7. Action by Unanimous Consent of Share-holders. Any action which
may be taken at a meeting of the shareholders or a class of shareholders may be
taken without a meeting if a consent or consents in writing, setting forth the
action so taken, shall be signed by all of the shareholders who would be
entitled to vote at a meeting for such purpose and shall be filed with the
Secretary of the Corporation. Insertion in the minute book of the Corporation
shall be deemed filing with the Secretary regardless of whether the Secretary or
some other authorized person has actual possession of the minute book. Written
consents by all of the shareholders executed pursuant to this Section 2-7 may be
executed in any number of counterparts and shall be deemed effective as of the
date set forth therein.
ARTICLE III - BOARD OF DIRECTORS
Section 3-1. Number and Qualification. The number of Directors of the
Corporation shall be nine (9) and this number may be changed only by receiving
the affirmative vote of (i) shareholders entitled to cast at least seventy-five
percent (75%) of the votes which all shareholders are entitled to vote on such
change, or (ii) seventy-five percent (75%) of the Directors in office at the
time of voting. Each Director of the Corporation during the full term of his
directorship must own a minimum of 200 shares of the authorized common stock of
the Corporation.
Section 3-2. Classes of Directors. Except for the initial Board of
Directors named in Article XI of the Corporation's Articles of Incorporation,
the Board of Directors shall be and is divided into three classes, Class I,
Class II and Class III, which shall be as nearly equal in number as possible.
Each Director shall serve for a term ending on the date of third annual meeting
following the annual meeting at which such Director was elected; provided,
however, that each
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initial Director in Class I shall hold office until the annual meeting of
stockholders in 1986; each initial director in Class II shall hold office until
the annual meeting of stockholder in 1987; and each initial Director in Class
III shall hold office until the annual meeting of stockholders in 1988.
At each annual meeting held after 1985, the Directors chosen to succeed
those whose terms are expiring shall be identified as being of the same class as
the Directors whom they succeed and shall be elected for a term expiring at the
third succeeding annual meeting of stockholders or thereafter in each case when
their respective successors are elected and qualified.
If, at any meeting of shareholders, due to a vacancy or vacancies, or
otherwise, Directors of more than one class are to be elected, each class of
Directors to be elected at the meeting shall be elected in a separate election.
Section 3-3. Place of Meeting. Meetings of the Board of Directors may be
held at such place within the Commonwealth of Pennsylvania or elsewhere as a
majority of the Directors may from time to time appoint or as may be designated
in the notice calling the meeting.
Section 3-4. Regular Meetings. A regular meeting of the Board of Directors
shall be held annually, immediately following the annual meeting of shareholders
at the place where such meeting of the shareholders is held or at such other
place, date and hour as a majority of the newly elected Directors may designate.
At such meeting the Board of Directors shall elect officers of the Corporation.
In addition to such regular meeting, the Board of Directors shall have the power
to fix by resolution the place, date and hour of other regular meetings of the
Board.
Section 3-5. Participation in Meetings by Conference Telephone. Any
Director may participate in any meeting of the Board of Directors or of any
committee (provided he is otherwise entitled to participate), be counted for the
purpose of determining quorum thereof and
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<PAGE>
exercise all rights and privileges to which he might be entitled were he
personally in attendance, including the right to vote, by means of conference
telephone or other similar communications equipment by means of which all
persons on the meeting can hear each other.
Section 3-7. Notices of Meeting of Board of Directors.
(a) Regular Meetings. No notice shall be required to be given of any
regular meeting, unless the same is held at other than the time or place
for holding such meetings as fixed in accordance with Section 3-4 of these
By-Laws, in which event one days' notice shall be given of the time and
place of such meeting.
(b) Special Meetings. Written notice stating the date, place and hour
of any special meeting of the Board of Directors shall be given at least
one day prior to the date named for the meeting.
Section 3-8. Quorum. A majority of the Directors in office shall be
necessary to constitute a quorum for the trans-action of business, and unless
otherwise provided in the Articles of Incorporation or in these By-Laws, the
acts of a majority of the Directors present at a meeting at which a quorum is
present shall be considered as the acts of the Board of Directors. If there is
not a quorum present at a duly convened meeting of the Board of Directors, the
majority of these present may adjourn the meeting from time to time and place to
place.
Section 3-9. Informal Action by the Board of Directors. Any action which
may be taken at a meeting of the Directors, or of the members of any committee
of the Board of Directors, may be taken without a meeting if a consent or
consents in writing, setting forth the action so taken, shall be signed by all
of the Directors, or members of the committee, as the case may be, and shall be
filed with the Secretary of the Corporation. Insertion in the minute book of
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the Corporation shall be deemed fining with the Secretary regardless of whether
the Secretary or some other authorized person has actual possession of the
minute book. Written consents by all of the Directors or the members of any
committee of the Board of Directors executed pursuant to this Section 3-9 may be
executed in any number of counterparts and shall be deemed effective as of the
date set forth therein.
Section 3-10. Powers.
(a) General Powers. The Board of Directors shall have all the power
and authority granted by law to the Board, including all powers necessary
or appropriate to the management of the business and affairs of the
Corporation.
(b) Specific Powers. Without limiting the general powers conferred by
the last preceding clause and the powers conferred by the Articles and
these By-laws of the Corporation, it is hereby expressly declared that the
Board of Directors shall have the following powers:
(1) To confer upon any officer or officers of the Corporation the
power to choose, remove or suspend assistant officers, agents or
servants.
(2) To appoint any person, firm or corporation to accept and hold
in trust for the Corporation any property belonging to the Corporation
or in which it is interested, and to authorize any such person, firm
or corporation to execute any documents and perform any duties that
may be requisite in relation to any such trust.
(3) To appoint a person or persons to vote shares of another
corporation held and owned by the Corporation.
(4) By resolution adopted by a majority of the whole Board of
Directors, to designate one or more committees, each committee to
consist of two or more of the
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<PAGE>
Directors of the Corporation. To the extent provided in any such
resolution, and to the extent permitted by law, a committee so
designated shall have and may exercise the authority of the Board of
Directors in the management of the business and affairs of the
Corporation. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. If
specifically granted this power by the Board in its resolution
establishing the committee, in the absence or disqualification of any
member and all designated alternates of such committee or committees
or if the whole Board of Directors has failed to designate alternate
members, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another Director to act at the meeting
in the place of any such absent or disqualified member.
(5) To fix the place, time and purpose of meetings of
shareholders.
(6) To fix the compensation of Directors and officers for their
services.
Section 3-11. Vacancies. Vacancies in the Board of Directors, including
vacancies resulting from an increase in the number of Directors, may be filled
by a majority of the remaining members of the Board of Directors though less
than a quorum, and each person so elected shall be a Director until his
successor is duly elected by the shareholders, who may make such election at the
next annual meeting of the shareholders or at any special meeting duly called
for that purpose and held prior thereto, or until his earlier resignation or
removal.
In the event of any increase or decrease in the authorized number of
directors, (i) each Director then serving as such shall nevertheless continue as
a Director of the class of which he is a member until the expiration of his
current term, or his prior death, retirement, resignation,
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or removal, and (ii) the newly created or eliminated directorship resulting from
such increase or decrease shall be apportioned by the Board of Directors among
the three classes of Directors so as to maintain such classes as nearly equal as
possible.
ARTICLE IV - OFFICERS
Section 4-1. Election and Office. The Corporation shall have a President, a
Secretary and a Treasurer who shall be elected by the Board of Directors. The
Board of Directors may elect as additional officers a Chairman of the Board of
Di-rectors, one or more Vice-Presidents, and one or more other officers or
assistant officers. Any number of offices may be held by the same person.
Section 4-2. Term. The officers and assistant officers shall each serve at
the pleasure of the Board of Directors and until the annual meeting of the Board
of Directors following the next annual meeting of shareholders unless removed
from office by the Board of Directors during their respective tenures.
Section 4-3. Powers and Duties of the President. Unless otherwise
determined by the Board of Directors, the President shall have the usual duties
of an executive officer with general supervision over and direction of the
affairs of the Corporation. In the exercise of these duties and subject to the
limitations of the laws of the Commonwealth of Pennsylvania, these By-laws, and
the actions of the Board of Directors, he may appoint, suspend, and discharge
employees, agents and assistant officers, fix the compensation of all officers
and assistant officers, shall preside at all meetings of the shareholders at
which he shall be present, and, unless there is a Chairman of the Board of
Directors, shall preside at all meetings of the Board of Directors. He
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<PAGE>
shall also do and perform such other duties as from time to time may be assigned
to him by the Board of Directors.
Unless otherwise determined by the Board of Directors, the President shall
have full power and authority on behalf of the Corporation to attend and to act
and to vote at any meeting of the shareholders of any corporation in which the
Corporation may hold stock, and, at any such meeting, shall possess and may
exercise any and all the rights and powers incident to the ownership of such
stock and which, as the owner thereof, the Corporation might have possessed and
exercised.
Section 4-4. Powers and Duties of the Secretary. Unless otherwise
determined by the Board of Directors, the Secretary shall be responsible for the
keeping of the minutes of all meetings of the Board of Directors, shareholders
and all committees, in books provided for that purpose, and for the giving and
serving of all notices for the Corporation. He shall have charge of the
corporate seal, the certificate books, transfer books and stock ledgers, and
such other books and papers as the Board of Directors may direct. He shall
perform all other duties ordinarily incident to the office of Secretary and
shall have such other powers and perform such other duties as may be assigned to
him by the Board of Directors.
Section 4-5. Powers and Duties of the Treasurer. Unless otherwise
determined by the Board of Directors, the Treasurer shall have charge of all the
funds and securities of the Corporation which may come into his hands. When
necessary or proper, unless otherwise determined by the Board of Directors, he
shall endorse for collection on behalf of the Corporation checks, notes, and
other obligations, and shall deposit the same to the credit of the Corporation
in such banks or depositories as the Board of Directors may designate and shall
sign all receipts and
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<PAGE>
vouchers for payments made to the Corporation. He shall sign all checks made by
the Corporation, except when the Board of Directors shall otherwise direct. He
shall be responsible for the regular entry in books of the Corporation to be
kept for such purpose, full and accurate account of all funds and securities
received and paid by him on account of the Corporation. Whenever required by the
Board of Directors, he shall render a statement of the financial condition of
the Corporation. He shall have such other powers and shall perform such other
duties as may be assigned to him from time to time by the Board of Directors. He
shall give such bond, if any, for the faithful performance of his duties as
shall be required by the Board of Directors and any such bond shall remain in
the custody of the President.
Section 4-6. Powers and Duties of the Chairman of the Board of Directors.
Unless otherwise determined by the Board of Directors, the Chairman of the Board
of Directors, if any, shall preside at all meetings of Directors. He shall have
such other powers and perform such further duties as may be assigned to him by
the Board of Directors.
Section 4-7. Powers and Duties of Vice-Presidents and Assistant Officers.
Unless otherwise determined by the Board of Directors, each Vice-President and
each assistant officer shall have the powers and perform the duties of his
respective superior officer. Vice-Presidents and assistant officers shall have
such rank as may be designated by the Board of Directors. Vice-Presidents may be
designated as having responsibility for a specific area of the Corporation's
affairs, in which event such Vice-President shall be superior to the other
Vice-Presidents in relation to matters within his area. The President shall be
the superior officer of the Vice-Presidents. The Treasurer and Secretary shall
be the superior officers of the Assistant Treasurers and Assistant Secretaries,
respectively.
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<PAGE>
Section 4-8. Delegation of Office. The Board of Directors may delegate the
powers or duties of any office of the Corporation to any other person from time
to time.
Section 4-9. Vacancies. The Board of Directors shall have the power to fill
any vacancies in any office occurring from whatever reason.
ARTICLE V - CAPITAL STOCK
Section 5-1. Share Certificates. Every share certificate shall be signed by
the Chairman of the Board or the President or Vice-President and by the
Treasurer, Assistant Treasurer, Secretary or Assistant Secretary and sealed with
the corporate seal, which may be a facsimile, engraved or printed, but where
such certificate is signed by a transfer agent or a register, the signature of
any corporate officer upon such certificate may be a facsimile, engraved or
printed.
Section 5-2. Transfer of Shares. Transfer of shares shall be made on the
books of the Corporation only upon surrender of the share certificate, duly
endorsed or with duly executed stock powers attached and otherwise in proper
form for transfer, which certificate shall be cancelled at the time of the
transfer.
Section 5-3. Determination of Shareholders of Record and Closing Transfer
Books. The Board of Directors may fix a time, nor more than fifty days prior to
the date of any meeting of shareholders, or the date fixed for the payment of
any dividend or distribution, or the date for the allotment of rights, or the
date when any change or conversion or exchange of shares will be made or go into
effect, as a record date for the determination of the shareholders entitled to
notice of or to vote at any such meeting, or entitled to receive payment of any
such dividend or distribution, or to receive any such allotment of rights, or to
exercise the rights in respect to any such change, conversion or exchange of
shares or otherwise. In such case, only such shareholders
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as shall be shareholders of record on the date so fixed shall be entitled to
notice of or to vote at such meeting, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any shares on the books of the Corporation
after any record date fixed as aforesaid. The Board of Directors may close the
books of the Corporation against transfers of shares during the whole or any
part of such period, and in such case written or printed notice thereof shall be
mailed at least ten day before the closing thereof to each shareholder of record
at the address appearing on the records of the Corporation or supplied by him to
the Corporation for the purpose of notice. While the stock transfer books of the
Corporation are closed, no transfer of shares shall be made thereon. Unless a
record date is fixed by the Board of Directors for the determination of
shareholders entitled to receive notice of, or vote at, a shareholders' meeting,
transferees of shares which are transferred on the books of the Corporation
within ten days preceding the date of such meet shall not be entitled to notice
of or to vote at such meeting. The Corporation may treat the registered owner of
each share of stock as the person exclusively entitled to vote, to receive
notifications and otherwise to exercise all the rights and powers of the owner
thereof.
Section 5-4. Lost Share Certificates. Unless waived in whole or in part by
the Board of Directors, any person requesting the issuance of a new certificate
in lieu of an alleged lost, destroyed, mislaid or wrongfully taken certificate,
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shall (1) give to the Corporation his bond or indemnity with an acceptable
surety; and (2) satisfy such other reasonable requirements as may be imposed by
the Corporation. Thereupon a new share certificate shall be issued to the
registered owner or his assigns in lieu of the alleged lost, destroyed, mislaid
or wrongfully taken certificate, provided that the request therefor and issuance
thereof have been made before the Corporation has notice that such shares have
been acquired by a bona fide purchaser.
ARTICLE VI - NOTICES; COMPUTING TIME PERIODS
Section 6-1. Contents of Notice. Whenever any notice of a meeting is
required to be given pursuant to these By-laws or the Articles of Incorporation
or otherwise, the notice shall specify the place, day and hour of the meeting
and, in the case of a special meeting of shareholders or where otherwise
required by law, the general nature of the business to be transacted at such
meeting.
Section 6-2. Method of Notice. All notices shall be given to each person
entitled thereto, either personally or by sending a copy thereof through the
mail or by telegraph, charges prepaid, to his address appearing on the books of
the Corporation, or supplied by him to the Corporation for the purpose of notice
in the case of a notice to shareholders. If notice is sent by mail or telegraph,
it shall be deemed to have been given to the person entitled thereto when
deposited in the United States Mail or with the telegraph office for
transmission; if notice is published in a newspaper, it shall be deemed to have
been given to all the persons addressed therein on the day that such notice is
published.
Section 6-3. Computing Time Periods. In computing the number of days for
purposes of these By-laws, all days shall be counted, including Saturdays,
Sundays or holidays; provided, however, that if the final day of any time period
falls on a Saturday, Sunday or holiday, then the final day shall be deemed to be
the next day which is not a Saturday, Sunday or holiday. In computing the number
of days for the purpose of giving notice of any meeting, the date upon which the
notice is given shall be counted but the day set for the meeting shall not be
counted.
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<PAGE>
Notice given twenty-four hours before the time set for a meeting shall be deemed
one day's notice.
ARTICLE VII INDEMNIFICATION
Section 7-1. Mandatory Indemnification of Directors and Officers. The
Corporation shall indemnify, to the fullest extent now or hereafter permitted by
law, each director or officer (including each former director or officer) of the
Corporation who was or is made a party to or a witness in or is threatened to be
made a party to or a witness in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was an authorized representative of the
Corporation, against all expenses (including attorneys' fees and disbursements),
judgments, fines (including excise taxes and penalties) and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding.
Section 7-2. Mandatory Advancement of Expenses to Directors and Officers.
The Corporation shall pay expenses (including attorneys' fees and disbursements)
incurred by a director or officer of the Corporation referred to in Section 7-1
hereof in defending or appearing as a witness in any civil or criminal action,
suit or proceeding described in Section 7-1 hereof in advance of the final
disposition of such action, suit or proceeding. The expenses incurred by such
director or officer shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding only upon receipt of an
undertaking by or on behalf of such director or officer to repay all amounts
advanced if it shall ultimately be determinated that he is not entitled to be
indemnified by the Corporation.
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Section 7-3. Permissive Indemnification and Advancement of Expenses. The
Corporation may, as determined by the Board of Directors from time to time,
indemnify to the fullest extent now or hereafter permitted by law, any person
who was or is a party to or a witness in or is threatened to be made a party to
or a witness in, or is otherwise involved in, any threatened, pending or
completed action, suit or proceedings, whether civil, criminal, administrative
or investigative, by reason of the fact that he is or was an authorized
representative of the Corporation, both as to action in his official capacity
and as to action in another capacity while holding such office or position,
against all expenses (including attorneys' fees and disbursements), judgments,
fines (including excise taxes and penalties), and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceedings. The Corporation may, as determined by the Board of Directors from
time to time, pay expenses incurred by any such person by reason of his
participation in an action, suit or proceeding referred to in this Section in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such person to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation.
Section 7-4. Scope of Indemnification. Indemnification under this Article
is provided pursuant to Section 8365 of the Pennsylvania Directors' Liability
Act (or any successor provision or statute), and this Article is intended to
provide indemnification in accordance with its terms whether the Corporation
would have the power to so indemnify under any other provisions of law except
such Act and whether or not the indemnified liability arises or arose from any
threatened, pending or completed action by or in the right of the Corporation;
indemnification under this Article shall not be made by the Corporation in any
case where the alleged act or failure to act
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giving rise to the claim for indemnification is expressly prohibited by the
Pennsylvania Directors' Liability Act or any successor statute as in effect at
the time of such alleged action or failure to take action.
Section 7-5. Insurance; Funding to Meet Indemnification Obligations. The
Corporation shall have the power to purchase and maintain insurance on behalf of
any authorized representative of the Corporation against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability. The Board of Directors, without further approval of
the shareholders, shall have the power to borrow money on behalf of the
Corporation, including the power to pledge the assets of the Corporation, from
time to time to discharge the Corporation's obligations with respect to
indemnification and the advancement and reimbursement of expenses, and the
purchase and maintenance of insurance on behalf of each director and officer
against any liability asserted against or incurred by such director or officer
in any capacity.
Section 7-6. Miscellaneous. Each director and officer of the Corporation
shall be deemed to act in such capacity in reliance upon such rights of
indemnification and advancement of expenses as are provided in this Article. The
rights of indemnification and advancement of expenses provided by this Article
shall not be deemed exclusive of any other rights to which any person seeking
indemnification or advancement of expenses may be entitled under any agreement,
vote of shareholders or disinterested directors, statute or otherwise, both as
to action in such person's official capacity and as to action in another
capacity while holding such office or position, and shall continue as to a
person who has ceased to be an authorized representative of the Corporation and
shall inure to the benefit of the heirs, executors and administrators of such
- 18 -
<PAGE>
person. Any repeal or modification of this Article by the shareholders or the
Board of Directors of the Corporation shall not adversely affect any right or
protection existing at the time of such repeal or modification to which any
person may be entitled under this Article.
Section 7-7. Definition of Corporation. For purposes of this Article,
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of the
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
authorized representatives so that any person who is or was an authorized
representative of such constituent corporation shall stand in the same position
under this Article with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
Section 7-8. Definition of Authorized Representative. For the purposes of
this Article, the term "authorized representative" shall mean a director,
officer, employee or agent of the Corporation or of any subsidiary of the
Corporation, or a trustee, custodian, administrator, committeeman or fiduciary
of any employee benefit plan established and maintained by the Corporation or by
any subsidiary of the Corporation, or a person serving another corporation,
partnership, joint venture, trust or other enterprise in any of the foregoing
capacities at the request of the Corporation.
ARTICLE VIII - FISCAL YEAR
Section 8-1. The Board of Directors shall have the power by resolution to
fix the fiscal year of the Corporation. If the Board of Directors shall fail to
do so, the President shall fix the fiscal year.
- 19 -
<PAGE>
ARTICLE IX - AMENDMENTS
Section 9-1. The shareholders entitled to vote thereon shall have the power
to alter, amend, or repeal these By-laws, by the vote of shareholders entitled
to cast at least a majority of the votes which all shareholders are entitled to
cast thereon, at any regular or special meeting, duly convened after notice to
the shareholders of such purpose, provided however that Sections 3-1 and 3-2 of
Article III and this Section 9-1 of these By-laws may be amended or repealed
only by a vote of shareholders entitled to cast at least two-thirds of the votes
which all shareholders are entitled to cast at a special meeting called for that
purpose. The Board of Directors, by a majority vote of those voting, shall have
the power to alter, amend, and repeal these By-laws, at any regular or special
meeting duly convened after notice of such purpose, subject always to the power
of the shareholders to further alter, amend or repeal these By-laws.
ARTICLE X - INTERPRETATION OF BY-LAWS
Section 10-1. All words, terms and provisions of these By-laws shall be
interpreted and defined by and in accordance with the Pennsylvania Business
Corporation Law, as amended, and as amended from time to time hereafter.
ARTICLE XI - DIRECTOR LIABILITY
Section 11-1. Director's Personal Liability. A director of the Corporation
shall not be personally liable for monetary damages for any action taken, or any
failure to take any action, provided however, that this provision shall not
eliminate or limit the liability of a director to the extent that such
elimination or limitation of liability is expressly prohibited by the
Pennsylvania Directors' Liability Act as in effect at the time of the alleged
action or failure to take action by such director.
- 20 -
<PAGE>
Section 11-2. Preservation of Right. Any repeal or modification of this
Article by the shareholders of the Corporation shall not adversely affect any
right or protection existing at the time of such repeal or modification to which
any director or former director may be entitled under this Article. The rights
conferred by this Article shall continue as to any person who has ceased to be
director of the corporation and shall inure to the benefit of the heir,
executors and administrators of such persons.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,698
<INT-BEARING-DEPOSITS> 263
<FED-FUNDS-SOLD> 8,210
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,690
<INVESTMENTS-CARRYING> 44,829
<INVESTMENTS-MARKET> 45,154
<LOANS> 168,595
<ALLOWANCE> 2,886
<TOTAL-ASSETS> 317,664
<DEPOSITS> 276,326
<SHORT-TERM> 11,510
<LIABILITIES-OTHER> 2,525
<LONG-TERM> 0
0
0
<COMMON> 1,790
<OTHER-SE> 24,597
<TOTAL-LIABILITIES-AND-EQUITY> 317,662
<INTEREST-LOAN> 7,402
<INTEREST-INVEST> 3,557
<INTEREST-OTHER> 184
<INTEREST-TOTAL> 11,143
<INTEREST-DEPOSIT> 4,571
<INTEREST-EXPENSE> 4,732
<INTEREST-INCOME-NET> 6,411
<LOAN-LOSSES> 200
<SECURITIES-GAINS> 68
<EXPENSE-OTHER> 4,676
<INCOME-PRETAX> 2,667
<INCOME-PRE-EXTRAORDINARY> 1,918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,918
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 4.66
<LOANS-NON> 937
<LOANS-PAST> 49
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,813
<ALLOWANCE-OPEN> 2,670
<CHARGE-OFFS> 13
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 2,886
<ALLOWANCE-DOMESTIC> 2,886
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,094
</TABLE>
QNB CORP.
FINANCIAL DATA SCHEDULE
ARTICLE 9 OF REGULATION S-X
ARTICLE 9
MULTIPLIER 1,000
PERIOD-TYPE 6-MOS
FISCAL-YEAR-END DEC-31-1997
PERIOD-END JUN-30-1997
CASH 14,269
INT-BEARING-DEPOSITS 0
FED-FUNDS-SOLD 3,970
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 63,738
INVESTMENTS-CARRYING 41,981
INVESTMENTS-MARKET 42,068
LOANS 163,633
ALLOWANCE 2,660
TOTAL-ASSETS 294,072
DEPOSITS 259,428
SHORT-TERM 8,488
LIABILITIES-OTHER 2,213
LONG-TERM 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 1,785
OTHER-SE 22,158
TOTAL-LIABILITIES-AND-EQUITY 294,072
INTEREST-LOAN 6,999
INTEREST-INVEST 3,224
INTEREST-OTHER 92
INTEREST-TOTAL 10,315
INTEREST-DEPOSIT 4,262
INTEREST-EXPENSE 4,409
INTEREST-INCOME-NET 5,906
LOAN-LOSSES 200
SECURITIES-GAINS 165
EXPENSE-OTHER 4,533
INCOME-PRETAX 2,249
INCOME-PRE-EXTRAORDINARY 1,602
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 1,602
EPS-PRIMARY 1.12
EPS-DILUTED 1.12
YIELD-ACTUAL 4.64
LOANS-NON 2,491
LOANS-PAST 148
LOANS-TROUBLED 0
LOANS-PROBLEM 4,315
ALLOWANCE-OPEN 2,585
CHARGE-OFFS 137
RECOVERIES 12
ALLOWANCE-CLOSE 2,660
ALLOWANCE-DOMESTIC 2,660
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 1,399
