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 September 30, 1999
------------------
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-17706
-------
QNB Corp.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2318082
--------------------------------- -------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
10 North Third Street, Quakertown, PA 18951-9005
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (215) 538-5600
--------------
Not Applicable
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.
Indicate by check 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 November 12, 1999
----------------------------- --------------------------------
Common Stock, par value $1.25 1,436,348
<PAGE>
QNB CORP. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income for Three and
Nine Months Ended September 30, 1999 and 1998.................... 1
Consolidated Balance Sheets at September 30, 1999
and December 31, 1998............................................ 2
Consolidated Statements of Cash Flows for Nine
Months Ended September 30, 1999 and 1998......................... 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......................................................22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................23
(See Regulation S-K Item 305)
ITEM 2. CHANGES IN SECURITIES...............................................23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.....................................23
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITIES HOLDERS..............23
ITEM 5. OTHER INFORMATION...................................................23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................23
<PAGE>
<TABLE>
<CAPTION>
QNB Corp. and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest and fees on loans ................................. $ 3,531 $3,602 $10,698 $11,004
Interest and dividends on investment securities:
Taxable ................................................ 2,143 1,737 5,718 4,994
Tax-exempt ............................................. 298 167 732 467
Interest on Federal funds sold ............................. 38 72 157 256
Interest on interest-bearing balances ...................... 1 4 2 4
- ------------------------------------------------------------------------------------------------------------------------
Total interest income ............................. 6,011 5,582 17,307 16,725
- ------------------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on deposits
Interest-bearing demand accounts ....................... 141 155 339 448
Money market accounts .................................. 198 233 588 707
Savings ................................................ 178 204 523 608
Time ................................................... 1,436 1,513 4,305 4,349
Time over $100,000 ..................................... 341 290 938 854
Interest on short-term borrowings .......................... 109 96 297 257
Interest on Federal Home Loan Bank advances ................ 328 -- 559 --
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense ............................ 2,731 2,491 7,549 7,223
- ------------------------------------------------------------------------------------------------------------------------
Net interest income ............................... 3,280 3,091 9,758 9,502
Provision for loan losses .................................. 60 100 180 300
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,220 2,991 9,578 9,202
- ------------------------------------------------------------------------------------------------------------------------
Non-Interest Income
Fees for services to customers ............................. 318 245 882 701
Mortgage servicing fees .................................... 32 37 95 123
Net (loss) gain on investment securities available-for-sale. (142) 7 21 75
Net gain on sale of loans .................................. 22 60 166 224
Other operating income ..................................... 251 175 708 477
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest income ......................... 481 524 1,872 1,600
- ------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense
Salaries and employee benefits ............................. 1,430 1,344 4,299 4,068
Net occupancy expense ...................................... 162 172 488 488
Furniture and equipment expense ............................ 231 174 656 493
Marketing expense .......................................... 78 87 283 275
Other real estate owned expense ............................ 33 56 100 121
Other expense .............................................. 544 491 1,576 1,499
- ------------------------------------------------------------------------------------------------------------------------
Total non-interest expense ........................ 2,478 2,324 7,402 6,944
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes ............................. 1,223 1,191 4,048 3,858
Provision for income taxes ................................. 281 327 1,008 1,076
- ------------------------------------------------------------------------------------------------------------------------
Net Income ............................................. $ 942 $ 864 $ 3,040 $ 2,782
- ------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic ........................... $ .66 $ .60 $ 2.12 $ 1.94
- ------------------------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted ......................... $ .65 $ .60 $ 2.11 $ 1.93
- ------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Share ............................... $ .21 $ .18 $ .63 $ .54
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Form 10-Q
Page 1
<PAGE>
<TABLE>
<CAPTION>
QNB Corp. and Subsidiary
- --------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
- --------------------------------------------------------------------------------------------------------------
September 30, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks ..................................................... $ 12,232 $ 14,020
Federal funds sold .......................................................... -- 4,869
Investment securities
available-for-sale ...................................................... 106,066 70,088
held-to-maturity (market value $48,999 and $50,473) ..................... 50,132 50,065
Total loans, net of unearned income of $249 and $412 ........................ 173,080 176,443
Allowance for loan losses ............................................... (3,140) (2,951)
- --------------------------------------------------------------------------------------------------------------
Net loans .......................................................... 169,940 173,492
Premises and equipment, net ................................................. 4,464 4,520
Other real estate owned ..................................................... 439 696
Accrued interest receivable ................................................. 2,194 1,900
Other assets ................................................................ 7,006 5,022
- --------------------------------------------------------------------------------------------------------------
Total assets ................................................................ $ 352,473 $ 324,672
- --------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Demand, non-interest-bearing ............................................ $ 35,558 $ 39,083
Interest bearing demand accounts ........................................ 45,741 46,411
Money market accounts ................................................... 29,950 29,918
Savings ................................................................. 36,548 36,770
Time .................................................................... 111,996 109,464
Time over $100,000 ...................................................... 25,533 17,577
- --------------------------------------------------------------------------------------------------------------
Total deposits ..................................................... 285,326 279,223
Short-term borrowings ....................................................... 11,684 14,491
Federal Home Loan Bank advances ............................................. 25,000 --
Accrued interest payable .................................................... 1,448 1,185
Other liabilities ........................................................... 1,348 1,435
- --------------------------------------------------------------------------------------------------------------
Total liabilities ........................................................... 324,806 296,334
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' Equity
Common stock, par value $1.25 per share;
authorized 5,000,000 shares; issued 1,436,348 shares and 1,433,066 shares 1,795 1,791
Surplus ..................................................................... 4,435 4,413
Retained earnings ........................................................... 23,354 21,218
Accumulated other comprehensive (loss) income ............................... (1,917) 916
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity .................................................. 27,667 28,338
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity .................................. $ 352,473 $ 324,672
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Form 10-Q
Page 2
<PAGE>
<TABLE>
<CAPTION>
QNB Corp. and Subsidiary
- ------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Operating Activities
Net income ............................................................................... $ 3,040 $ 2,782
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses .............................................................. 180 300
Depreciation and amortization .......................................................... 464 334
Securities gains ....................................................................... (21) (75)
Net gain on sale of loans .............................................................. (166) (224)
Proceeds from sales of residential mortgages ........................................... 10,562 9,930
Originations of residential mortgages held-for-sale .................................... (7,219) (8,166)
Proceeds from sales of student loans ................................................... 2,090 1,589
Net (gains) losses on sales or writedowns of other real estate owned ................... (107) 9
Deferred income tax provision .......................................................... 23 (89)
Change in income taxes payable ......................................................... -- 83
Net (increase) decrease in interest and dividends receivable ........................... (294) 12
Net amortization of premiums and discounts ............................................. 4 10
Net increase in interest payable ....................................................... 263 125
Increase in other assets ............................................................... (546) (135)
(Decrease) increase in other liabilities ............................................... (87) 61
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities .............................................. 8,186 6,546
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities
Proceeds from maturities and calls of investment securities
available-for-sale ..................................................................... 18,195 19,286
held-to-maturity ....................................................................... 10,775 12,703
Proceeds from sales of investment securities
available-for-sale ..................................................................... 12,834 6,146
Purchase of investment securities
available-for-sale ..................................................................... (71,215) (21,638)
held-to-maturity ....................................................................... (10,909) (21,750)
Net decrease (increase) in Federal funds sold ............................................ 4,869 (402)
Net increase in loans .................................................................... (1,895) (4,560)
Net purchases of premises and equipment .................................................. (409) (501)
Proceeds from the sale of other real estate owned ........................................ 364 973
Purchase of single premium life insurance ................................................ -- (2,557)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities .................................................. (37,391) (12,300)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities
Net decrease in non-interest-bearing deposits ............................................ (3,525) (3,368)
Net increase in interest-bearing deposits ................................................ 9,628 8,195
Net (decrease) increase in short-term borrowings ......................................... (2,807) 616
Proceeds from Federal Home Loan Bank advances ............................................ 25,000 --
Cash dividends paid ...................................................................... (904) (772)
Proceeds from issuance of common stock ................................................... 25 20
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .............................................. 27,417 4,691
- ------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents .................................................. (1,788) (1,063)
Cash and cash equivalents at beginning of year ......................................... 14,020 12,574
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period ............................................. $ 12,232 $ 11,511
- ------------------------------------------------------------------------------------------------------------------------
Supplemental Cash Flow Disclosures
Interest paid ............................................................................ $ 7,286 $ 7,098
Income taxes paid ........................................................................ 970 1,075
Non-Cash Transaction
Change in net unrealized holding gains (losses), net of taxes, on investment securities. (2,833) 71
Transfer of loans to other real estate owned ........................................... -- 49
The accompanying notes are an integral part of the consolidated financial
statements.
Form 10-Q
Page 3
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 AND 1998, AND DECEMBER 31, 1998
(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 September 30, 1999, as well as the
respective statements of income and cash flows for the three and the nine month
periods ended September 30, 1999 and 1998, are unaudited. These financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in QNB's 1998 Annual Report incorporated in the
Form 10-K.
The accompanying consolidated financial statements were prepared in accordance
with instructions to Form 10-Q, and therefore do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. 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>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator for basic and diluted earnings $ 942 $ 864 $ 3,040 $ 2,782
per share-net income
Denominator for basic earnings per share- 1,436,348 1,431,912 1,435,198 1,431,547
weighted average shares outstanding
Effect of dilutive securities-employee 4,072 10,997 6,672 9,866
stock options
Denominator for diluted earnings per 1,440,420 1,442,909 1,441,870 1,441,413
share-adjusted weighted average
shares outstanding
Earnings per share-basic $ .66 $ .60 $ 2.12 $ 1.94
Earnings per share-diluted $ .65 $ .60 $ 2.11 $ 1.93
</TABLE>
Form 10-Q
Page 4
<PAGE>
QNB CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998, AND DECEMBER 31, 1998
(Unaudited)
3. COMPREHENSIVE INCOME
Comprehensive income is defined as the change in equity of a business entity
during a period from transactions and other events and circumstances, excluding
those resulting from investments by and distributions to owners. For QNB, the
sole component of other comprehensive income is the unrealized holding gains and
losses on available-for-sale investment securities.
The following shows the components and activity of comprehensive income during
the periods ended September 30, 1999 and 1998 (net of the income tax effect):
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- -----------------------
1999 1998 1999 1998
------- ----- ------- -------
<S> <C> <C> <C> <C>
Unrealized holding losses arising during
the period on securities held $(1,874) $ 33 $(2,819) $ 121
Reclassification adjustment equal to
beginning unrealized for all sold securities 94 (5) (14) (50)
------- ----- ------- -------
Net change in unrealized during the period (780) 28 (2,833) 71
Unrealized, beginning of period (1,137) 916 916 873
------- ----- ------- -------
Unrealized, end of period $(1,917) $ 944 $(1,917) $ 944
======= ===== ======= =======
Net income 942 864 $ 3,040 $ 2,782
Other comprehensive (loss) income, net of tax:
Unrealized holding losses arising during
the period (780) 28 (2,833) 71
------- ----- ------- -------
Comprehensive Income $ 162 $ 892 $ 207 $ 2,853
======= ===== ======= =======
</TABLE>
Form 10-Q
Page 5
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
QNB Corp. (the "Corporation") is a bank holding company headquartered in
Quakertown, Pennsylvania which provides a full range of commercial and retail
banking services through its banking subsidiary, The Quakertown National Bank
(the "Bank"), a 122 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 1999, and any Current Reports on Form 8-K filed by
the Corporation.
RESULTS OF OPERATIONS-SUMMARY
QNB recorded earnings of $942,000 or $.65 per share on a diluted basis for the
three month period ended September 30, 1999. This represents a 9.0 percent
increase from net income of $864,000 or $.60 per share-diluted reported for the
third quarter of 1998. For the nine month periods ended September 30, 1999 and
1998, net income was $3,040,000 and $2,782,000, respectively, an increase of 9.3
percent. Net income per share diluted was $2.11 and $1.93 for the corresponding
nine-month periods.
An increase in net interest income and a reduction in the provision for loan
losses offset a decline in non-interest income and an increase in non-interest
expense when comparing the two quarters. Net interest income which represents
interest income, dividends, and fees on earning assets, less interest expense
incurred on funding sources, increased 6.1 percent to $3,280,000 for the quarter
ended September 30, 1999 as compared to $3,091,000 for the quarter ended
September 30, 1998. Contributing to the higher net interest income was an
increase in average earning assets of 13.6 percent. Average loans increased 3.0
percent, while average investment securities increased 30.9 percent when
comparing the two quarters. Most of the growth in average earning assets was
funded through wholesale funding. This has the impact of increasing net interest
income, but lowering the net interest margin. The net interest margin declined
from 4.35 percent during the third quarter of 1998 to 4.13 percent for the third
quarter of 1999. Excluding the impact of the wholesale funding transaction, the
net interest margin for the third quarter of 1999 would have been 4.35 percent,
the same as it was for the third quarter of 1998.
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-SUMMARY (Continued)
Non-interest income decreased from $524,000 to $481,000, a decrease of 8.2
percent. During the third quarter of 1999, in response to rising interest rates,
QNB sold some lower yielding securities at a loss of approximately $150,000 and
reinvested the proceeds in higher yielding securities. This transaction benefits
QNB by increasing interest income going forward. Also during the quarter, QNB
sold a foreclosed property at a gain of approximately $60,000. Excluding gains
and losses on the sale of investment securities, loans and other real estate
owned during both periods, non-interest income increased approximately 18.4
percent. Contributing to this increase was higher fee income on deposit
accounts, which increased 29.8 percent or $73,000. Increases in merchant
processing income, check card income, mutual fund commission income and earnings
on the cash surrender value of life insurance also contributed to the positive
variance.
Non-interest expense increased $154,000 or 6.6 percent when comparing the two
periods. Salary and benefits expense increased 6.4 percent or $86,000 to
$1,430,000 for the third quarter of 1999. Most of the $76,000 increase in salary
expense relates to the accrual for incentive-based pay. Increased investment in
technology, which began during 1998, was also a major contributor to the
increase in non-interest expense. Depreciation expense resulting from this
investment increased approximately $41,000 when comparing the two quarters,
while equipment maintenance expense increased $17,000.
Return on average assets was 1.04 percent and 1.09 percent while the return on
average equity was 12.82 percent and 12.86 percent for the three months ended
September 30, 1998 and 1997, respectively. For the nine-month periods ended
September 30, 1998 and 1997, return on average assets was 1.19 percent and 1.20
percent and the return on average equity was 14.22 percent and 14.29 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 September 30, 1999 was $3,280,000
compared to $3,091,000 for the period ended September 30, 1998. On a
tax-equivalent basis net interest income was $3,492,000 and $3,236,000 for the
respective quarters. The following discussion and analysis of yields on earning
assets, rates paid on funding sources and the net interest margin is based on a
tax-equivalent basis. A 13.6 percent increase in average earning assets was
offset by a 22 basis point decrease in the net interest margin. The yield on
earning assets on a fully taxable equivalent basis was 7.35 percent for the
third quarter of 1999 versus 7.69 percent for the third quarter of 1998, while
the rate paid on interest-bearing liabilities was 3.74 percent and 3.94 percent
for the same periods. The net interest margin on a fully taxable equivalent
basis for the three-month period ended September 30, 1999 was 4.13 percent
compared to 4.35 percent for the same period in 1998. Some of the growth in
average earning assets was funded through a wholesale funding transaction
entered into in April 1999, whereby QNB borrowed $25,000,000 from the Federal
Home Loan Bank (FHLB) and reinvested the proceeds in a 30 year mortgage-backed
security and 15 year tax-exempt municipal securities. This transaction has the
impact of increasing net interest income, but lowering the net interest margin.
Excluding the impact of the wholesale funding transaction, the net interest
margin for the third quarter of 1999 would have been 4.35 percent, the same as
it was for the third quarter of 1998.
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)
The lower yield on earning assets and rate paid on interest-bearing liabilities
was a result of a general decline in market interest rates during 1998, as
represented by the U.S. Treasury yield curve. These rates declined dramatically
during 1998 as signs of a global economic crisis created a flight to quality in
the U.S. Treasury market. Adding fuel to this decline was an environment of low
inflation in the U.S. economy. In response to these events the Federal Reserve
Bank lowered the Federal funds rate three times and 75 basis points between the
end of September 1998 and the middle of November 1998, from 5.50 percent to 4.75
percent. The prime rate, the rate which some of QNB's loans are based, also
declined 75 basis points during this time. This general decline in interest
rates ended during the first quarter of 1999, as the U.S. economy continued to
show strength and the fear of inflation reentered the economic picture. In
response, interest rates began to increase rapidly and at the end of June and
again in August, the Federal Reserve Bank raised the Federal funds target rate
25 basis points. The prime rate also increased by .50 percent at this time.
Economic indicators during the third quarter continued to show a strong economy
and the potential for the Federal Reserve to increase rates again in November.
This potential caused market rates to further increase in September and October.
As an example of the higher market rates, the interest rate on a 10-year
Treasury note has increased approximately 123 basis points from the end of 1998,
4.65 percent, to the end of the third quarter of 1999, 5.88 percent. The 10-year
Treasury rate peaked at approximately 6.24 percent towards the end of October
1999. These higher rates should lead to higher yields on both loans and
investment securities and higher rates paid on deposits and borrowed money.
When comparing the third quarter of 1999 to the third quarter of 1998, the yield
on investment securities decreased to 6.47 percent from 6.50 percent while the
yield on loans decreased to 8.20 percent from 8.61 percent. QNB was able to
reduce the impact on the yield of its investment portfolio by purchasing
mortgage-backed securities, whose yields did not decline to the same degree as
Treasury securities and by lengthening the average life of the portfolio with
the purchase of some higher yielding but longer term callable agency securities
and tax-exempt municipal securities. In addition, to enhance the yield of the
investment portfolio and increase interest income in the future, during the
third quarter of 1999, QNB sold approximately $5.5 million of securities
yielding 6.15 percent at a loss of approximately $150,000 and reinvested the
proceeds in securities yielding 7.38 percent. The 41 basis point decline in the
yield on loans was partially a result of the decline in the prime rate and the
continued downward pressure on commercial loan rates resulting from the fierce
competition for loans. The average prime rate for the three months ended
September 30, 1999 and 1998 was 8.10 percent and 8.50 percent, respectively.
Another significant factor in the lower loan yields and another result of the
lower interest rate environment was the continuing trend for customers to select
fixed rather than variable rate loans, both in the residential mortgage and
commercial loan sectors. These fixed rate loans reduce the benefit to QNB of a
rising interest rate environment.
Despite dramatically falling market interest rates during 1998 as indicated by
the Treasury yield curve, the rates paid on deposits and short-term borrowings
did not decline to the same degree as rates on earning assets. This is a
function of the strong competition among financial institutions for funding
sources. The average rate paid on interest bearing demand accounts showed the
largest decline, falling to 1.18 percent for the third quarter of 1999 compared
to 1.47 percent for the third quarter of 1998. QNB was able to reduce the rate
on these accounts as they are deemed to be relatively insensitive to changing
interest rates. The average rate paid on savings accounts, money market accounts
and time deposits decreased 30 basis points, 28 basis points and 40 basis
points, respectively. The rate on deposits is likely to increase over the next
quarter, as the increase in Treasury rates is passed on to the consumer in the
form of higher deposit rates, particularly time deposits. The yield on
short-term borrowings declined to 3.73 percent for the period ended September
30, 1999 from 3.81
Form 10-Q
Page 8
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NET INTEREST INCOME (Continued)
percent for the period ended September 30, 1998. This was primarily the result
of a decline in rates paid on the cash management accounts. Also, impacting the
yield on interest-bearing liabilities was the $25,000,000 advance from the
Federal Home Loan Bank at an average rate of 5.15 percent.
For the nine-month period ended September 30, 1999, net interest income
increased $256,000 to $9,578,000. On a tax-equivalent basis net interest income
increased $385,000 or 3.9 percent. The 9.8 percent growth in average earning
assets was partially offset by a 24 basis point decline in the net interest
margin. Total interest income increased $582,000 from $16,725,000 to $17,307,000
when comparing the nine-month periods ended September 30, 1998 to September 30,
1999. The yield on earning assets decreased from 7.87 percent to 7.46 percent,
with the yield on loans declining from 8.81 percent to 8.26 percent. During the
nine-month period the yield on investment securities decreased from 6.60 percent
to 6.53 percent. Average investment securities increased 21.0 percent to
$139,732,000 while average loans increased 3.7 percent to $175,891,000. Total
interest expense increased $326,000 from $7,223,000 to $7,549,000 for the
nine-month periods. Interest on FHLB advances account for $559,000 of the
increase in total interest expense. The yield on interest-bearing liabilities
decreased from 3.91 percent to 3.69 percent. Average interest-bearing deposits
increased 4.3 percent to $247,791,000, while total average interest-bearing
liabilities, including short-term borrowings and FHLB advances increased 10.8
percent to $273,469,000. The primary difference in the percent change is the
impact of the borrowings from the FHLB, entered into at the end of April 1999.
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 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. The implementation of SFAS No. 118, as
discussed below, also impacts the determination of the allowance for loan
losses.
The provision for loan losses was $60,000 for the quarter ended September 30,
1999 compared to $100,000 for the third quarter of 1998. For the nine-month
periods the provision for loan losses was $180,000 and $300,000, respectively.
QNB was able to reduce the provision for loan losses as a result of continued
improvement in asset quality, low levels of delinquency and net loan recoveries.
QNB had net recoveries of $3,000 and net charge-offs of $3,000 for the third
quarter of 1999 and 1998. For the nine-month periods QNB had net recoveries of
$9,000 and $13,000, respectively.
Non-performing assets (non-accruing loans, loans past due 90 days or more, and
other real estate owned) continued their positive trend downward during 1999 and
amounted to .29 percent of total assets at September 30, 1999. This compares to
.48 percent at September 30, 1998 and .37 percent at December 31, 1998.
Nonaccrual loans were $454,000 and $856,000 at September 30, 1999 and 1998.
Non-accrual loans at
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)
December 31, 1998 were $506,000. Other real estate owned was $439,000 and
$696,000 at September 30, 1999 and December 31, 1998, respectively, and $631,000
at September 30, 1998.
There were no restructured loans as of September 30, 1999, December 31, 1998 or
September 30, 1998 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 $3,140,000 and $2,951,000 at September 30,
1999 and December 31, 1998, respectively. The ratio of the allowance to total
loans was 1.81 percent and 1.67 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.
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 September 30, 1999 and 1998, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled $364,000
and $788,000, respectively, of which $344,000 and $588,000 related to loans with
no valuation allowance. At September 30, 1999 and 1998 there were $20,000 and
$200,000 in impaired loans that had a valuation allowance of approximately
$20,000 and $65,000, 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 decreased $43,000 or 8.2
percent to $481,000 for the quarter ended September 30, 1999 when compared to
September 30, 1998. Excluding gains and losses on the sale of investment
securities, loans and other real estate owned during both periods, non-interest
income increased approximately 18.4 percent. For the nine-month period total
non-interest income increased $272,000 or 17.0 percent to $1,872,000.
Fees for services to customers, the largest component of total non-interest
income, is primarily comprised of service charges on deposit accounts. These
fees increased 29.8 percent, to $318,000 from $245,000, when comparing the two
quarters and 25.8 percent to $882,000 when comparing the nine-month periods. An
increase in overdraft fee income accounts for approximately $68,000 of the
increase for the three-month period and $142,000 for the nine-month period.
During the first quarter of 1999, QNB increased its fee for overdrafts by 12.0
percent. An increase in fees related to the use of out-of-network ATMs
contributed $13,000 to the overall increase for the nine-month periods.
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)
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 ended
September 30, 1999 were $32,000 which represents a $5,000 decline from the same
period in 1998. For the nine month period mortgage servicing fees decreased
$28,000 to $95,000. The decrease in mortgage servicing fees for the quarter and
the nine-month period is primarily a result of an increase in the amortization
of the mortgage servicing asset booked at the time the loan is sold. QNB
recognizes its obligation to service financial assets that are retained in a
transfer of assets in the form of a servicing asset. The servicing asset is
amortized in proportion to and over a period of net servicing income or loss.
Servicing assets are assessed for impairment based on their fair value. During
the third quarter of 1999, QNB amortized approximately $11,000 of the mortgage
servicing asset compared to $6,000 during the third quarter of 1998. For the
respective nine-month periods the amortization was $35,000 and $14,000. The
average balance of mortgages serviced for others was $67,592,000 for the third
quarter of 1999 compared to $67,083,000 for the third quarter of 1998. The
average balance of mortgages serviced was approximately $67,946,000 for the
nine-month period ended September 30, 1999 compared to $67,254,000 for the first
nine months of 1998. The timing of mortgage payments and delinquencies also
impacts the amount of servicing fees recorded.
QNB recorded a loss on the sale of investment securities of $142,000 during the
third quarter of 1999. This compares to a gain of $7,000 for the quarter ended
September 30, 1998. During the third quarter of 1999, in response to rising
interest rates, QNB sold approximately $5,500,000 of lower yielding securities
at a loss of approximately $150,000 and reinvested the proceeds in higher
yielding securities. This transaction benefits QNB by increasing interest income
going forward. QNB owns a small portfolio of marketable equity securities, bank
stocks. During the third quarter of 1999 QNB sold one holding at a gain of
$8,000. The gain recorded during the third quarter of 1998 was the result of the
pre-funding of callable agency securities that had been purchased at a discount.
These gains of approximately $11,000 were partially offset by the loss of $4,000
on the sale of an equity security. For the nine months ended September 30, 1999
and 1998 gains on the sale of investment securities were $21,000 and $75,000,
respectively. Included in these amounts are net gains on the sale of equity
securities of $171,000 and $58,000 for the first nine months of 1999 and 1998.
The gains in 1999 were offset by the $150,000 loss on the sale of debt
securities during the third quarter of 1999.
QNB recorded a gain of $22,000 on the sale of loans during the third quarter of
1999. This compares to a $60,000 gain for the same period in 1998. For the
nine-month periods ended September 30, 1999 and 1998 net gains on the sale of
loans were $166,000 and $224,000, respectively. The sale of student loans
accounts for $6,000 and $2,000 of the gains during the third quarter of 1999 and
1998. QNB sold approximately $414,000 and $119,000 in student loans during the
third quarter of 1999 and 1998. Gains on the sale of student loans accounted for
$39,000 and $38,000 of the total gains during the nine-month periods ended
September 30, 1999 and 1998, respectively. For the nine-month periods ended
September 30, 1999 and 1998, QNB sold approximately $2,051,000 and $1,551,000 in
student loans. The change in pricing for student loans by the U.S. government
has negatively impacted the gains realized when the loans are sold.
The net gain on the sale of residential mortgages loans was $16,000 and $58,000
for the three month periods ended September 30, 1999 and 1998 and $127,000 and
$186,000 for the respective nine 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 gain
during the third quarter of 1998 is a function of both factors. Proceeds from
the sale of residential mortgages were approximately $1,292,000 and $2,731,000
during the third quarters of 1999 and 1998, respectively. Rising interest rates
during the second and third
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)
quarters of 1999 slowed the refinancing activity and reduced the origination of
mortgage loans. The rising rates also had the impact of reducing the net gains
on the sales. Proceeds from the sale of residential mortgages was approximately
$10,562,000 and $9,930,000 during the first nine months of 1999 and 1998. The
increase in interest rates reduced the gains on the loan sold during 1999. As of
September 30, 1999 QNB had approximately $112,000 in mortgage loans classified
as held for sale. These loans are accounted for at lower of cost or market.
Other operating income increased $76,000 to $251,000 when comparing the
three-month periods ended September 30, 1999 and 1998 and $231,000 to $708,000
when comparing the nine-month periods. The results for the three and nine month
periods ended September 30, 1999 include the gain on the sale of other real
estate owned of $60,000 and $107,000, respectively. Also positively impacting
the results when comparing the three and nine month periods was the earnings on
the cash surrender value of single premium life insurance policies purchased in
September 1998. For the three and the nine months ended September 30, 1999 QNB
recognized $38,000 and $113,000 in earnings on these policies. This compares to
$13,000 for the same two periods in 1998. When comparing the two quarters check
card income increased $9,000, merchant processing income increased $5,000 and
mutual fund income increased $10,000. These offset declines of $15,000 in rental
income from other real estate owned, $10,000 in sales of checks to customers and
$4,000 in ATM card income.
These same items impacted the results for the nine-month period. Check card
income increased $32,000, merchant processing income increased $11,000 and
mutual fund income increased $18,000 when comparing the nine month periods. The
increase in check card income and merchant processing income is a result of an
increase in the number of transactions while the increase in mutual fund income
is a result of a change in personnel. Offsetting these positive factors was a
decline in rental income from other real estate owned and ATM card income. The
sale of some revenue generating properties reduced the income from other real
estate owned by $53,000 when comparing the nine-month periods. QNB restructured
its deposit products during the third quarter of 1998. As a result of this
restructure, more customers are eligible for free ATM cards. This has resulted
in a reduction in ATM card income of $15,000 when comparing the nine-month
periods.
NON-INTEREST EXPENSE
Non-interest expense is comprised of costs related to salaries and employee
benefits, net occupancy, furniture and equipment, marketing, other real estate
owned expense and various other operating expenses. Total non-interest expense
of $2,478,000 for the quarter ended September 30, 1999 represents an increase of
$154,000 or 6.6 percent from levels reported in the third quarter of 1998. Total
non-interest expense for the nine months ended September 30, 1999 was
$7,402,000, an increase of $458,000 or 6.6 percent over 1998 levels.
Salaries and benefits, the largest component of non-interest expense, increased
$86,000 or 6.4 percent to $1,430,000 for the quarter ended September 30, 1999
compared to the same quarter in 1998. Salary expense increased $76,000 or 6.9
percent during the period to $1,180,000 while benefits expense increased $10,000
or 4.2 percent to $250,000. For the nine-month period ended September 30, 1999
salaries and benefits expense increased $231,000 or 5.7 percent compared to
1998. Salary expense increased $236,000 or 7.3 percent while benefits expense
decreased $5,000 or .6 percent. Excluding the accrual for bonuses in both years,
salary
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)
expense increased 2.2 percent for the quarter and 3.9 percent for the nine-month
period. An increase in hours worked during the first and second quarters of
1999, as a result of the installation of a new item processing system, mortgage
refinancing activity and Year 2000 testing, contributed to the larger increase
in salary expense for the year than for the quarter. The increase in benefits
expense for the quarter is the result of higher payroll taxes while the decline
when comparing the nine-month periods is primarily the result of a reduction in
QNB's State unemployment tax rate.
Net occupancy expense decreased $10,000 or 5.8 percent to $162,000 for the
three-month period ended September 30, 1999. Slightly lower costs related to
repairs and maintenance, security, insurance and taxes on the buildings account
for the decrease. Net occupancy expense was $488,000 for both nine-month periods
ended September 30, 1999 and 1998. Lower depreciation, insurance and tax expense
offset higher building maintenance costs.
Furniture and equipment expense increased $57,000 or 32.8 percent when comparing
the three-month periods ended September 30, 1999 and 1998, respectively and
$163,000 or 33.1 percent when comparing the nine-month periods. Increased
investment in technology, which began during 1998, was a major contributor to
the increase in furniture and equipment expense during the third quarter and
first nine months of 1999. Depreciation expense resulting from this investment
increased $41,000 when comparing the two quarters and 132,000 when comparing the
nine-month periods. The implementation of a check imaging system was completed
at the end of the first quarter of 1999. Higher equipment maintenance costs of
$17,000 for the quarter and $32,000 for the nine-month period also contributed
to the increase in furniture and equipment expense. Furniture and equipment
expense will continue to increase in 1999 as a result of higher depreciation
expense associated with QNB's continued expansion of its investment in new
technology. This will include the completion of the final phases of the
wide-area network, as well as the impact of the check imaging system. The
expansion of an existing branch during the fourth quarter of 1999 as well as the
opening of a new branch in the fall of 2000 will result in additional net
occupancy and furniture and equipment expense in 1999 and 2000.
Marketing expense decreased $9,000 or 10.3 percent to $78,000 for the quarter
ended September 30, 1999 but increased $8,000 or 2.9 percent when comparing the
nine-month periods. The decline during the quarter relates to a reduction in
advertising expense of $13,000 from 1998. QNB used additional print, radio and
bill board advertising during the third quarter of 1998 to promote specific
products and QNB's image of being an independent community bank in light of the
merger activity that was taking place in the industry. The increase in marketing
expense for the nine-month period relates to higher promotional expense and
contributions as well as additional costs related to the publication of the
annual report.
Other real estate owned expense decreased $23,000 or 41.1 percent to $33,000 for
the three months ended September 30, 1999 and $21,000 or 17.4 percent to
$100,000 for the nine-month period. The reduction in other real estate owned
expense for both the three and nine-month periods, is a function of owning fewer
properties and the related taxes, insurance and maintenance related to the
properties. The majority of the expense during both the third quarter and first
nine months of 1999 relates to the environmental clean up of one property which
sold during the third quarter of 1999. Other real estate expense during the
three-month and nine-month periods ended September 30, 1998 includes the net
loss on the sale or write-down of properties totaling $25,000 and $9,000,
respectively. Management anticipates other real estate expense to continue to
decline in 2000 as the costs associated with these properties are eliminated as
they are sold.
Form 10-Q
Page 13
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
NON-INTEREST EXPENSE (Continued)
Total other expense for the three months ended September 30, 1999 was $544,000
and increase of $53,000 or 10.8 percent over the same period in 1998.
Contributing to the increase were higher costs of office supplies, consultant
expense, charged-off checking accounts and check card expense. The $20,000
increase in consultant expense relates to the hiring of a consultant to assist
in the selection of a new core processing system to be implemented in 2000. The
$15,000 increase in check card expense is primarily a result of the production
and distribution of replacement cards. The $11,000 increase in supplies is
primarily the result of the timing of purchases.
For the nine-month period ended September 30, 1999, other non-interest expense
increased $77,000 or 5.1 percent to $1,576,000. A $58,000 increase in fraud
losses contributed to the increase. Higher check card expense, state tax
expense, telephone expense and consultant expense contributed $28,000, $15,000,
$15,000 and $17,000 to the increase in other operating expense. Partially
offsetting these increases were a reduction in legal expense and the accrual for
director's deferred compensation. The improvement in asset quality has been the
major factor in the reduction in legal expense. The higher director's deferred
compensation in 1998 reflects an adjustment to the interest rate assumption
caused by the decline in market interest rates.
INCOME TAXES
Applicable income taxes and effective tax rates were $281,000 or 23.0 percent
for the three-month period ended September 30, 1999, and $327,000 or 27.5
percent for the same period in 1998. For the nine-month period applicable income
taxes and effective rates were $1,008,000 or 24.9 percent and $1,076,000 or 27.9
percent, respectively. The reduction in the effective tax rate when comparing
1999 to 1998 is a result of an increase in income from tax-exempt municipal
securities and loans and an increase in tax-exempt income from earnings on
single premium life insurance.
QNB utilizes an asset and liability approach for financial accounting and
reporting of income taxes. As of September 30, 1999, QNB's net deferred tax
asset was $1,944,000. Included in the deferred tax asset was $823,000 relating
to the allowance for loan losses and $988,000 resulting from the SFAS No. 115
adjustment for available-for-sale investment securities. As of December 31,
1998, QNB's net deferred tax asset was $506,000. A deferred tax asset of
$762,000 related to the allowance for loan losses was partially offset by a
deferred tax liability of $472,000 resulting from the SFAS No. 115 adjustment.
BALANCE SHEET ANALYSIS
The Balance Sheet Analysis reviews average balance sheet data for the nine
months ended September 30, 1999 and 1998, as well as the period end balances as
of September 30, 1999 and December 31, 1998.
Average earning assets for the nine-month period ended September 30, 1999
increased $28,465,000 or 9.8 percent to $319,791,000 from $291,326,000 for the
nine months ended September 30, 1998. Average investments and average loans
increased $24,289,000 and $6,342,000, respectively while average Federal funds
sold decreased $2,163,000. The large increase in the investment portfolio is a
result of the growth in funding sources, both retail and wholesale, outpacing
the growth in loans. The advance from the Federal Home Loan Bank had the impact
of increasing average investments by approximately $14,322,000 during the
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)
nine-month period. The increase in average loans is a result of competitive
pricing on commercial and home equity loans and participation relationships with
other local community banks. Average consumer loans, primarily home equity loans
increased $3,979,000 and average commercial loans increased $2,372,000. The
increase in home equity loans is a result of aggressive pricing and promotion.
In addition to borrowing from the Federal Home Loan Bank, the growth in average
earning assets was funded by increases in non-interest bearing demand deposits,
time deposits and short-term borrowings, primarily cash management accounts.
Average non-interest bearing demand accounts increased $2,853,000, while average
time deposits increased $9,170,000. Attractive rates on time deposits relative
to rates on other interest-bearing accounts along with the introduction of the
"Flex12" certificate of deposit contributed to the increase in time deposits.
The "Flex12" has a twelve month maturity, allows one no-penalty withdrawal,
enables the holder to add funds to the account and pays a competitive rate.
Average cash management balances increased $1,881,000 when comparing the
nine-month periods. Average interest-bearing transaction accounts, which include
interest-bearing demand deposits, money market accounts and savings accounts,
increased $894,000 between the periods. Average total deposits increased 4.8
percent when comparing the nine-month periods, while average shareholders'
equity increased $2,557,000 or 9.8 percent to $28,578,000.
Total assets at September 30, 1999 were $352,473,000, compared with $324,672,000
at December 31, 1998, an increase of 8.6 percent for the nine months. The
advance from the Federal Home Loan Bank contributed $25,000,000 to the increase.
Without the advance total assets would have increased by approximately .9
percent. Total deposits increased from $279,223,000 at December 31, 1998 to
$285,326,000 at September 30, 1999, an increase of 2.2 percent. The increase in
assets from December 31, 1998 to September 30, 1999 is primarily centered in
investment securities and other assets, which increased $36,045,000 and
$1,984,000, respectively during the period. The increase in other assets is
primarily related to increases in the net deferred tax asset caused by the
increase in the unrealized loss on available-for-sale securities and a deposit
to a third party vendor for the processing of cashier checks. Total loans
decreased $3,363,000 to $173,080,000 at September 30, 1999. The reduction in
loans is primarily a function of the seasonal nature of some of the commercial
lines of credit and the payoff of loans from companies whose business were sold.
Total deposits were $285,326,000 and $279,223,000 at September 30, 1999 and
December 31, 1998. The 2.2 percent increase is primarily centered in time
deposits, which increased $10,488,000 or 8.3 percent during the nine-month
period. Of the increase in time deposits, $7,956,000 of the increase is in time
deposits greater than $100,000. These deposits tend to be higher costing and
short-term in nature. Interest bearing transaction accounts decreased $860,000
or .8 percent and non-interest bearing demand accounts decreased $3,525,000 or
9.0 percent during the nine-month period. The decline in non-interest bearing
demand accounts is a function of the timing of deposits from some large
commercial accounts, primarily abstract companies.
At September 30, 1999 the fair value of investment securities available-for-sale
was $106,066,000 or $2,905,000 below the amortized cost of $108,971,000. This
compares to a fair value of $70,088,000 or $1,387,000 above the amortized cost
of $68,701,000 at December 31, 1998. An unrealized holding loss, net of taxes,
of $1,917,000 was recorded as a decrease to shareholders' equity at September
30, 1999 and an unrealized holding gain of $916,000 was recorded as an increase
to shareholder's equity at December 31, 1998. Rising interest rates during the
second and third quarters of 1999 as well as the lengthening of the average life
of the investment portfolio contributed to the unrealized loss in the portfolio
at September 30, 1999.
Form 10-Q
Page 15
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
BALANCE SHEET ANALYSIS (Continued)
The available-for-sale portfolio had a weighted average maturity of
approximately 8 years, 1 month and 4 years, 10 months at September 30, 1999 and
December 31, 1998, respectively. 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 5 years, 6 months
at September 30, 1999 and 1 year, 2 months at December 31, 1998, based on these
assumptions. The extension of the expected average life of the portfolio is a
result of a number of factors including: the purchase of $20,000,000 of a 30
year mortgage-backed security, with an average life of 9.3 years, and $5,000,000
in 15 year tax exempt municipal bonds with the proceeds from the advances from
the Federal Home Loan Bank; the replacement of bonds that had been called during
the first quarter of 1999 with bonds with longer maturities and the increase in
interest rates which has lengthened the average life on mortgage related
securities and callable agency bonds. The portfolio as of December 31, 1998 had
shortened dramatically as a result of the decline in interest rates during 1998.
The decline in rates caused prepayments on mortgage-backed securities to
increase and the likelihood of callable agency bonds to be called to increase.
The structure of the portfolio at the end of 1998 created reinvestment risk, as
approximately 70 percent of the portfolio was likely to be reinvested at lower
interest rates during 1999 and 2000. The current composition of the portfolio
reduces this risk.
Investment securities held-to-maturity are reported at amortized cost. As of
September 30, 1999 and December 31, 1998, QNB had securities classified as
held-to-maturity with an amortized cost of $50,132,000 and $50,065,000 and a
market value of $48,999,000 and $50,473,000, respectively. The held-to-maturity
portfolio had a weighted average maturity of approximately 5 years, 2 months and
3 years, 10 months at September 30, 1999 and December 31, 1998, respectively.
The increase in the average maturity is a result of the increase in the
percentage of the portfolio in 10 year tax-exempt municipal securities and the
increase in the average life of the mortgage-backed portfolio caused by the
increase in interest rates.
LIQUIDITY
Liquidity represents an institution's ability to generate cash or otherwise
obtain funds at reasonable rates to satisfy commitments to borrowers and demands
of depositors. QNB manages its mix of cash, Federal funds sold, investment
securities and loans in order to match the volatility, seasonality, interest
sensitivity and growth trends of its deposit funds. Liquidity is provided from
asset sources through maturities and repayments of loans and investment
securities, net interest income and fee income. The portfolio of investment
securities available-for-sale and QNB's policy of selling certain residential
mortgage originations and student loans in the secondary market also provide
sources of liquidity.
Cash and due from banks, Federal funds sold, available-for-sale securities and
loans held-for-sale were $119,381,000 and $93,860,000 at September 30, 1999 and
December 31, 1998. These sources were adequate to meet seasonal deposit
withdrawals during the first nine months of 1999 and should be adequate to meet
normal fluctuations in loan demand and or deposit withdrawals. Approximately
$44,482,000 and $44,715,000 of available-for-sale securities at September 30,
1999 and December 31, 1998 were pledged as collateral for repurchase agreements,
public deposits and other deposits as provided by law. Additional sources of
liquidity
Form 10-Q
Page 16
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
LIQUIDITY (Continued)
are provided by the Bank's membership in the Federal Home Loan Bank and a
$5,000,000 unsecured Federal funds line granted by the Bank's correspondent.
These lines were used during the third quarter of 1999 to offset some deposit
withdrawals. Average outstanding Federal funds purchased were $885,000 during
the quarter. There were no Federal funds purchased as of September 30, 1999.
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 decreased $1,788,000 to $12,232,000 at September 30, 1999. This
compares to a $1,063,000 decrease during the first nine months of 1998. After
adjusting net income for non-cash transactions, operating activities provided
$8,195,000 in cash flow in the first nine months of 1999, compared to $6,559,000
in the same period of 1998. An increase in residential mortgage loan activity
and an increase in the proceeds from the sale of student loans accounted for
most of the difference between the periods.
Net cash used by investing activities was $37,400,000 during the first nine
months of 1999. The purchase of investment securities exceeded the maturity,
call and sale of securities by $40,320,000 during the first half of 1999. The
$25,000,000 wholesale funding transaction provided most of the additional cash
for the purchases. An increase in loans of $1,904,000 was also a use of cash
during 1999. A decrease in Federal funds sold and proceeds from the sale of
other real estate owned provided $4,869,000 and $364,000 of cash during the
first nine months of 1999. Net cash used by investing activities was $12,313,000
during the first nine months of 1998. The purchase of investment securities in
excess of proceeds from maturities, calls or sales of $5,253,000 and the net
increase in loans of $4,573,000 were the primary activities that used cash. The
purchase of $2,557,000 of life insurance was also a use of cash. Proceeds from
the sale of other real estate owned provided $973,000 of cash.
Net cash provided by financing activities was $27,417,000 during the first nine
months of 1999 and $4,691,000 during the first nine months of 1998. Federal Home
Loan Bank advances provided $25,000,000 in funding during the second quarter of
1999. Another source of funds in 1999 was time deposits, which increased
$10,488,000 since December 31, 1999. Time deposits over $100,000 accounted for
$7,956,000 of the total increase. These deposits tend to be short-term in nature
and pay a higher rate of interest. During the first nine months of 1999
non-interest bearing demand deposits and short-term borrowings, primarily cash
management accounts, decreased by $3,525,000 and $2,807,000, respectively. The
increase in net cash provided by financing activities during the nine months of
1998 was primarily the result of an increase in interest-bearing deposits,
primarily time deposits, which increased $10,326,000. Money market and
interest-bearing demand accounts decreased over the same period by $2,127,000. A
reduction in non-interest bearing deposits of $3,368,000 was a use of cash
during the period. The reduction in non-interest bearing deposits is a function
of the timing of deposits and withdrawals of several large deposit customers.
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 September 30, 1999 was
$27,667,000 or 7.85 percent of total assets compared to shareholders' equity of
$28,338,000 or 8.73 percent at December 31, 1998. Shareholders' equity at
September 30, 1999 includes a negative adjustment of $1,917,000 related to
unrealized holding losses, net of taxes, on investment securities
available-for-sale, while shareholders' equity at December 31, 1998 includes a
positive adjustment of $916,000. Without these adjustments shareholders' equity
to total assets would have been 8.39 percent and 8.45 percent at September 30,
1999 and
Form 10-Q
Page 17
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
CAPITAL ADEQUACY (Continued)
December 31, 1998. The slight decline in the ratio is a result of the growth in
total assets, primarily achieved through the use of a $25,000,000 wholesale
funding transaction during the second quarter of 1999.
Shareholders' equity averaged $28,578,000 for the first nine months of 1999 and
$26,323,000 during all of 1998, an increase of 8.6 percent. The ratio of average
total equity to average total assets declined to 8.37 percent for 1999, compared
to 8.48 percent for 1998. The decline in the ratio is a result of the growth in
assets exceeding the retention of capital, primarily as a result of the advance
from the FHLB.
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 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 14.98 percent and 14.02 percent, a total
risk-based ratio of 16.24 percent and 15.28 percent and a leverage ratio of 8.15
percent and 8.58 percent at September 30, 1999 and December 31, 1998,
respectively. As discussed previously, the decline in the leverage ratio is
related to the significant growth in total assets resulting primarily from the
wholesale funding transaction.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five capital level designations ranging from "well capitalized" to "critically
undercapitalized." At September 30, 1999 and December 31, 1998 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
Form 10-Q
Page 18
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued)
are scheduled based on their anticipated cash flow. Savings accounts, including
passbook, statement savings, money market, and interest-bearing demand accounts,
do not have a stated maturity or repricing term and can be withdrawn or repriced
at any time. This may impact QNB's margin if more expensive alternative sources
of deposits are required to fund loans or deposit runoff. Management projects
the repricing characteristics of these accounts based on historical performance
and assumptions that it believes reflect their rate sensitivity.
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 September 30, 1999, interest-earning assets scheduled to
mature or likely to be called, repriced or repaid in one year were $81,093,000.
Interest-sensitive liabilities scheduled to mature or reprice within one year
were $128,772,000. The one year cumulative gap, which reflects QNB's interest
sensitivity over a period of time, was a negative $47,679,000 at September 30,
1999 and a negative $1,156,000 at December 31, 1998. The cumulative one-year gap
equals 14.34 percent and .39 percent of total earning assets at these respective
dates. The increase in the negative gap position is primarily the result of a
few factors. Rising interest rates as well as the purchase of some intermediate
term and long term callable agency and mortgage-backed securities has extended
the average life and cash flow of the investment portfolio. The seasonal
reduction in prime rate based commercial lines of credit as of September 30,
1999 and the conversion of some commercial loans from variable to fixed rate
instruments has also contributed to the negative gap position. On the liability
side, the time deposit portfolio lengthened with $86,092,000 in time deposits
either maturing or re-pricing within the next twelve months. This compares to
$97,403,000 as of June 30, 1999. In response to the negative gap position QNB
has been promoting a higher rate 36-month time deposit. This promotion was
started in September and as of the end of the month almost $10,000,000 had been
written. This negative or liability sensitive gap will generally benefit QNB in
a falling interest rate environment, while rising interest rates could
negatively impact QNB. It is the intention of management to reduce the negative
gap position by continuing to promote higher rate, longer-term time deposits and
on the asset side invest in variable rate or shorter-term investment securities.
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 slightly
compared to the prior twelve months. The projected increase in net interest
income is primarily the result of forecasted growth in total earning assets.
These factors will be partially offset by an anticipated 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 exceed the most likely scenario. Conversely, if
interest rates were 100 basis points higher, net interest income for the most
likely scenario would decline. These results are consistent with the results of
the gap analysis described above.
Form 10-Q
Page 19
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTEREST RATE SENSITIVITY (Continued)
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 September 30, 1999, 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.
<TABLE>
<CAPTION>
Change in Interest Rates Net Interest Income Dollar Change Percent Change
- ------------------------ ------------------- ------------- --------------
<S> <C> <C> <C>
+300 Basis Points................. $10,952 $(1,956) (15.15)%
+200 Basis Points................. 11,610 (1,298) (10.06)
+100 Basis Points................. 12,262 (646) (5.00)
FLAT RATE ........................ 12,908 -- --
- -100 Basis Points................. 13,462 554 4.29
- -200 Basis Points................. 13,728 820 6.36
- -300 Basis Points................. 13,670 762 5.90
</TABLE>
IMPACT OF YEAR 2000
During the third quarter of 1999, QNB continued to address all issues
surrounding the Year 2000. The Year 2000 challenge faces all users of automated
systems, including information systems. Many computer systems process data using
only two digits to represent the year of a transaction, rather than storing the
full four-digit year. If renovations are not done to these systems, they 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 systems, including
mainframe systems, personal computers, application processing systems, resource
allocation systems, communications systems, environmental systems, and other
information systems.
In 1997, QNB developed a five-phase plan to address the Year 2000. The five
phases include Awareness, Assessment, Renovation, Validation and Implementation.
The Awareness phase included the establishment of
Form 10-Q
Page 20
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF YEAR 2000 (Continued)
a team of employees, including Executive Management. The focus of this team was
development and sharing of information to insure that our employees, systems
providers, and customers were aware of the Bank's Year 2000 strategies. This
team provides updates to the Bank's Board of Directors on a monthly basis. While
the initial Awareness effort was completed in 1997, the Bank continues to
promote awareness by maintaining close contact with systems providers, key
customers, vendors, and other stakeholders.
The Assessment phase included the identification of all systems on which QNB
relies to provide the services our stakeholders rely upon. These systems were
risk ranked according to their importance to providing uninterrupted services;
they were further ranked to identify those systems that are mission critical for
delivery of products and services. This phase also included the inventory of all
hardware, software, and systems, as well as customer and vendor
interdependencies. The Assessment phase has been completed.
The Renovation phase includes code enhancement, vendor validation, and hardware
and software upgrades as needed. Largely, the systems used by QNB are purchased
from outside vendors. The vendors are responsible for maintenance and upgrades
to the systems as part of systems maintenance agreements; these upgrades include
the modifications necessary to enable uninterrupted usage after December 31,
1999. In a few instances, vendors did not provide the Bank with assurance that
their systems would be Y2K-ready or available for the testing we required in a
timely manner; in those cases, the Bank elected to replace those systems with
others that were already Y2K certified. At the end of the third quarter 1999,
internal systems upgrades were 100 percent completed. Mission Critical systems
upgrades, including utility companies, were also 100 percent complete. Overall
renovations, including external vendor upgrades, were also 100 percent complete.
The Validation phase includes testing of all impacted applications, both
internally developed and third party provided. Testing of systems began in 1998.
A test system was purchased to replicate the mainframe hardware used to
facilitate our mission critical core account processing systems. A test plan
detailing plans to 'validate' all inventoried systems was developed, reviewed by
Senior Management and internal audit, adopted by the Board of Directors, and
reviewed by the Office of the Comptroller of Currency for completeness,
thoroughness, and value in validating the Y2K compliant nature of tested
products.
Validation involves not only extensive in-house testing, but also interpretation
and evaluation of vendor proxy tests and/or vendor certifications. Where
appropriate, validation expands to testing systems that must integrate with
other systems to effectively process. The Y2K team, including Senior Management
in each division of the Bank, reviews the various components of each validation
to measure its reliability and completeness. Only after passing this review is a
product deemed 'compliant' with QNB's definition of Y2K-ready. Mission critical
systems are given the greatest scrutiny in this validation process. The
validation phase was 99 percent complete at the end of the third quarter of
1999. Internal integration of all mission critical applications was 100 percent
complete by the end of the third quarter.
As of the end of the third quarter 1999, there were no systems that are not
expected to be Y2K ready on December 31, 1999. However, contingency plans for
mission critical applications have been developed. During the third quarter,
significant effort was placed on continuing to validate our existing business
resumption plans with specific attention to any possible unexpected situations
that may arise in the millennium change.
Form 10-Q
Page 21
<PAGE>
QNB CORP. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
IMPACT OF YEAR 2000 (Continued)
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, deposit, and investment portfolios due to Year 2000 issues. Based
on currently available information, management does not anticipate that the cost
to address Year 2000 issues will have a significant impact on QNB's financial
condition, results of operations, liquidity or capital resources. The total
anticipated cost for Year 2000 compliance is under $100,000.
Through QNB's Year 2000 team efforts, three areas of Year 2000 exposure have
been identified: 1) customer uncertainty; 2) utility and communications
companies; and 3) indirect debit and ATM gateways. QNB has specifically
addressed these areas through its business resumption contingency plans. In the
final months, our efforts will be directed toward validation and installation of
additional back-up systems as a part of the business resumption contingency plan
that was completed during the second quarter of 1999.
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 22
<PAGE>
QNB CORP. AND SUBSIDIARY
PART II. OTHER INFORMATION
SEPTEMBER 30, 1999
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3.1 Articles of Incorporation of Registrant, as amended.
(Incorporated by reference to Exhibit 3.1 of Registrants
Form 10-Q filed with the Commission on August 13,1998).
Exhibit 3.2 Bylaws of Registrant, as amended. (Incorporated by reference to
Exhibit 3.1 of Registrants Form 10-Q filed with the Commission on
August 13,1998).
Exhibit 10.1 Employment Agreement between the Registrant and Thomas J. Bisko.
(Incorporated by reference to Exhibit 10.1 of Registrants Form
10-K filed with the Commission on March 31,1999).
Exhibit 10.2 Salary Continuation Agreement between the Registrant and Thomas
J. Bisko. (Incorporated by reference to Exhibit 10.2 of
Registrants Form 10-K filed with the Commission on March 31,
1999).
Exhibit 10.4 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).
Form 10-Q
Page 23
<PAGE>
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
(b) Reports on Form 8-K
None
Form 10-Q
Page 24
<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: November 12, 1999 By: /s/ Thomas J. Bisko
-------------------------------
Thomas J. Bisko
President/CEO
Date: November 12, 1999 By: /s/ Robert C. Werner
-------------------------------
Robert C. Werner
Vice President
Date: November 12, 1999 By: /s/ Bret H. Krevolin
-------------------------------
Bret H. Krevolin
Chief Accounting Officer
Form 10-Q
Page 25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,030
<INT-BEARING-DEPOSITS> 202
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 106,066
<INVESTMENTS-CARRYING> 50,132
<INVESTMENTS-MARKET> 48,999
<LOANS> 173,080
<ALLOWANCE> 3,140
<TOTAL-ASSETS> 352,473
<DEPOSITS> 285,326
<SHORT-TERM> 11,684
<LIABILITIES-OTHER> 2,796
<LONG-TERM> 25,000
0
0
<COMMON> 1,795
<OTHER-SE> 25,872
<TOTAL-LIABILITIES-AND-EQUITY> 352,473
<INTEREST-LOAN> 10,698
<INTEREST-INVEST> 6,450
<INTEREST-OTHER> 159
<INTEREST-TOTAL> 17,307
<INTEREST-DEPOSIT> 6,693
<INTEREST-EXPENSE> 7,549
<INTEREST-INCOME-NET> 9,758
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 7,402
<INCOME-PRETAX> 4,048
<INCOME-PRE-EXTRAORDINARY> 3,040
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,040
<EPS-BASIC> 2.12
<EPS-DILUTED> 2.11
<YIELD-ACTUAL> 4.31
<LOANS-NON> 454
<LOANS-PAST> 125
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,421
<ALLOWANCE-OPEN> 2,951
<CHARGE-OFFS> 17
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 3,140
<ALLOWANCE-DOMESTIC> 3,140
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,038
</TABLE>
