<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
FOR THE NINE MONTH PERIOD ENDED: SEPTEMBER 30, 1996
COMMISSION FILE NUMBER: 0-16084
CITIZENS AND NORTHERN CORPORATION
STATE OF INCORPORATION: PENNSYLVANIA
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 23-2451943
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE) : 717-724-3411
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: THOMPSON STREET
RALSTON, PA 17763
MAILING ADDRESS OF EXECUTIVE OFFICE: 90-92 MAIN STREET
WELLSBORO, PA 16901
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (D) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
As of October 1, 1996 5,117,182 COMMON SHARES WERE OUTSTANDING
1
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information
Item 1. - Financial Statements
CONSOLIDATED BALANCE SHEET
Unaudited Audited
(In Thousands) September 30, December 31,
1996 1995
ASSETS
Cash & Due From Banks 16,835 12,945
Interest Bearing Deposits 712 645
Available-for-Sale Securities:
US Treasury Securities 2,465 2,500
Securities of Other US Government Agencies 36,104 12,214
Mortgage Backed Securities 187,868 206,396
Obligations of States and Municipal Subdivisions 52,993 43,582
Other Securities 29,302 34,899
Total Available-for-Sale Securities 308,732 299,591
Held-to-Maturity Securities:
US Treasury Securities 699 599
Mortgage Backed Securities 100 908
Securities of Other US Government Agencies 789
Total Held-to-Maturity Securities 1,588 1,507
Loans:
Loans to Political Subdivisions 6,735 6,597
Other Loans 269,402 257,611
Total Loans 276,137 264,208
Less - Allowance for Possible Loan Losses (4,826) (4,579)
Unearned Income (39) (26)
Loans, Net 271,272 259,603
Bank Premises and Equipment 6,538 6,791
Other Real Estate 698 455
Accrued Interest on Bonds and Loans 4,493 4,058
Other Assets 1,206 392
TOTAL ASSETS 612,074 585,987
LIABILITIES
Deposits:
Demand 46,884 41,167
Interest Checking 40,976 43,180
Money Market 99,031 95,679
Savings 46,619 46,051
Other Time 196,367 203,475
Total Deposits 429,877 429,552
Dividends Payable 852 843
Borrowed Funds 59,000 45,000
Securities Sold Under Agreement to Repurchase 47,650 40,000
Other Liabilities 6,856 3,615
TOTAL LIABILITIES 544,235 519,010
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,117 5,067
Authorized 10,000,000; Issued 5,117,182
and 5,066,516 in 1996 and 1995, respectively
Stock Dividend Distributable 1,013
Paid in Capital 12,538 11,575
Retained Earnings 47,846 43,370
Total 65,501 61,025
Unrealized Gains (Losses) on Available-for-Sale Securities 3,338 6,952
Less: Treasury Stock at Cost
105,100 shares at September 30, 1996 (1,000)
104,060 shares at September 30, 1995 (1,000)
TOTAL SHAREHOLDERS' EQUITY 67,839 66,977
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY 612,074 585,987
Contingent Liabilities Under Unused Letters
of Credit 2,671 2,633
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 1. - Financial Statements (continued)
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year To Date
September 30, 9 Months Ended September 30,
1996 1995 1996 1995
(Current) (Prior Year) (Current) (Prior Year)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans 6,986 6,739 20,516 19,338
Interest on Balances with Depository Institutions 10 15 27 38
Interest on Loans to Political Subdivisions 106 107 318 315
Interest on Federal Funds Sold 1 59 64
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 4,000 3,939 12,059 11,259
Tax Exempt 785 693 2,226 1,992
Dividends 206 165 613 519
Total Interest and Dividend Income 12,094 11,658 35,818 33,525
INTEREST EXPENSE
Interest on Deposits 4,521 4,772 13,290 14,186
Interest on Other Borrowings 1,415 1,492 4,218 4,308
Total Interest Expense 5,936 6,264 17,508 18,494
Interest Margin 6,158 5,394 18,310 15,031
Provision for Possible Loan Losses 175 184 525 552
Interest Margin After Provision for Possible Loan Losses 5,983 5,210 17,785 14,479
OTHER INCOME
Service Charges on Deposit Accounts 289 286 847 842
Service Charges and Fees 70 73 200 204
Trust Department Income 227 178 615 562
Insurance Commissions, Fees and Premiums 134 164 402 477
Other Operating Income 7 8 34 37
Realized Gains on Available-for-Sale and
Held-to-Maturity Securities, Net 183 378 451 1,229
Total Other Income 910 1,087 2,549 3,351
OTHER EXPENSES
Salaries and Wages 1,484 1,368 4,406 4,096
Pensions and Other Employee Benefits 415 382 1,300 1,260
Occupancy Expense, Net 174 168 541 524
Furniture and Equipment Expense 181 176 546 486
Other Operating Expense 1,398 1,294 4,070 4,331
Total Other Expenses 3,652 3,388 10,863 10,697
Income Before Income Tax Provision 3,241 2,909 9,471 7,133
Income Tax Provision 875 840 2,439 1,671
NET INCOME 2,366 2,069 7,032 5,462
PER SHARE DATA:
NET INCOME 0.47 0.41 1.40 1.09
NUMBER SHARES USED IN COMPUTATION 5,012,082 5,012,082 5,012,082 5,012,082
NUMBER SHARES ISSUED 5,117,182 5,066,516 5,117,182 5,066,516
NUMBER SHARES AUTHORIZED 10,000,000 10,000,000 10,000,000 10,000,000
DIVIDEND PER SHARE 0.17 0.16 0.51 0.48
</TABLE>
3
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 1. - Financial Statements (continued)
Nine Months Ended
September 30,
(In Thousands) 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 7,032 5,462
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 525 552
Realized (Gain), Loss on Available-for-Sale and
Held-to-Maturity Securities, Net (451) (1,229)
Provision for Depreciation 572 550
Accretion and Amortization 869 583
Deferred Income Tax (67) (18)
(Increase) in Accrued Interest
Receivable and Other Assets (1,182) (265)
Increase in Accrued Interest Payable and
Other Liabilities 5,112 5,375
Net Cash Provided by Operating Activities 12,410 11,010
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 118 126
Purchase of Held-to-Maturity Securities (199) (198)
Proceeds from Sales of Available-for-Sale Securities 11,573 4,822
Proceeds from Maturities of Available-for-Sale Securities 28,844 25,884
Purchase of Available-for-Sale Securities (55,452) (53,811)
Net Increase in Loans (12,194) (4,336)
Purchase of Premises and Equipment (319) (243)
Sale of Foreclosed Assets 212 241
Purchase of Other Real Estate (455) (428)
Net Cash Used in Investing Activities (27,872) (27,943)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 325 26,079
Increase in Short Term Borrowings 7,650 27,150
Proceeds from (Repayment of) Long Term Borrowings 14,000 (33,500)
Dividends Declared (2,556) (2,382)
Net Cash Provided by Financing Activities 19,419 17,347
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,957 414
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,590 12,407
CASH AND CASH EQUIVALENTS, END OF YEAR 17,547 12,821
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid 13,567 14,030
Income Taxes Paid 2,599 1,606
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 1. Financial Statements (continued)
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to form 10 - Q and Article 10
of regulation S-X. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of financial position and
results of operations.
It is management's opinion, however, that all material adjustments have
been made which are necessary for a fair financial statement presentation. The
results for the interim period are not necessarily indicative of the results to
be expected for the year.
For further information, refer to the consolidated financial statements
and footnotes which are incorporated by reference in the Company's annual Report
on Form 10-K for the year ended December 31, 1995.
This document has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
5
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
EARNINGS OVERVIEW
The Corporation reported net income for the nine months ended September
30, 1996 of $ 7,032,000, or $1.40 per common share. This surpasses income
reported for the same nine months in 1995 of $5,462,000 by $1,562,000 or $.31
per common share. The increase can be attributed to an increase in the net
interest margin of 56 basis points during the nine months ended September 30,
1996, when compared to the same nine month period in 1995.
The reported income exceeded budgeted estimates by approximately 27
percent. The directors and management of the Corporation expect that profits for
the remainder of 1996 should be in the range of those recorded for the first
nine months provided interest rates remain at the current levels.
NET INTEREST MARGIN
Quarters Ended September 30, 1996/1995
The net spread between the rate of return on earning assets and the
cost of interest-bearing liabilities increased from 2.93 percent for the nine
month period ended September 30, 1995 to 3.52 percent for the nine month period
ended September 30, 1996. The net spread for the year ended December 31, 1995
was 2.99 percent. The gross rate of return on earning assets for the nine months
ended September 30, 1996, year ended December 31, 1995 and nine months ended
September 30, 1995 was 8.31 percent, 8.22 percent and 8.23 percent,
respectively. The average cost of interest-bearing liabilities for the nine
month period ended September 30, 1996, year ended December 31, 1995 and nine
months ended September 30, 1995 was 4.79 percent, 5.23 percent and 5.30 percent,
respectively. The 59 basis point increase in the net interest margin between the
comparable nine month periods caused net interest income to increase $2,173,000;
an additional $1,103,000 can be attributed to volume increases.
The average rate of return on Available-for-Sale investments remained
relatively unchanged during the periods being compared. However, the average
balance for the nine months ended September 30, 1996 amounted to $305,462,000,
increasing $21,202,000 between the two periods; this increase generated
$1,047,000 in additional investment income. The average investment in
Available-for-Sale investments for the year ended December 31, 1995 amounted to
$287,069,000 and has increased just over $18,393,000 during the first nine
months of 1996. The average rate of return for 1995 was 6.41 percent.
Average gross loans for the periods ended September 30, 1996, December
31, 1995 and September 30, 1995 totaled $267,190,000, $259,143,000 and
$256,455,000, respectively. The average rate of return on the loan portfolio
posted a slight increase of 19 basis points since year-end 1995 and 18 basis
points since September 30, 1995. The increase in interest income resulting from
increased rates was $487,000. The increase in interest income caused by an
increase in the volume of average outstanding loans amounted to $695,000. Loan
growth has been relatively flat during the past year. Average total loans have
increased $10,735,000, or 4.2 percent since September 30, 1995. The loan
categories that did increase slightly were mortgage and commercial loans. The
biggest single factor inhibiting loan growth is rate competition from other
banks and non bank competitors. The competition will probably keep the average
rate of return on the portfolio at its current level for the balance of 1996.
On the liability side of the balance sheet, average total
interest-bearing deposits increased 4.9 percent or $22,800,000 when comparing
average balances for the periods ended September 30, 1996 and September 30,
1995. Average total interest-bearing deposits increased 4.5 percent or
$21,007,000 between December 31, 1995 and September 30, 1996. All of the
deposit growth has been in interest-bearing deposit categories as demand
deposit liabilities have remained flat.
Average balances carried in interest checking, passbook and statement
savings accounts have declined slightly when comparing the nine month periods.
The average balances in regular and statement savings accounts generally have
been declining, although very slowly and not to an alarming extent, over the
last few years. These accounts still carry substantial balances and are
considered core deposits. Average interest checking account balances have
declined $1,330,000 between September 30, 1995 and September 30, 1996. The
reason for the decrease was a change in the rate schedule applied to these
accounts. The rate paid on balances in these accounts prior to November 1,
1995 was 79 percent of the 91 day Treasury bill auction rate. After November 1,
1995 the rate was lowered to 50 percent of the auction rate; account balances
of less than $2,500 will be paid 25 percent of the 91-day Treasury bill auction
rate. The former rate was 39.5 percent of the auction rate.
6
<PAGE>
Money market account average balances for the periods ended September 30, 1996,
December 31, 1995 and September 30, 1995 amounted to $100,041,000, $91,773,000
and $90,410,000, respectively. The average rates paid on these balances for the
respective periods were 4.52 percent, 4.93 percent and 5.11 percent. The rate
paid on Money Market accounts is 90 percent of the 91-day Treasury bill auction
rate and is one of the highest in our market area. The average balances carried
in certificates of deposit increased significantly between the comparable
periods. The respective average balance for the periods ended September 30,
1996, December 31, 1995 and September 30, 1995 amounted to $117,595,000,
$112,493,000 and $110,244,000. The average rate paid on the certificates dropped
12 basis points between September 30, 1995 and September 30, 1996. Individual
retirement accounts also posted a modest increase in average balances due to the
posting of interest on December 31, 1995. The average balances at September 30,
1996, December 31, 1995 and September 30, 1995 were $80,069,000, $78,534,000 and
$78,503,000, respectively. The ending balance of individual retirement accounts
at year end 1996 will probably decline to about $75,000,000 as competition
increases for these funds, even with the Corporation's own Trust Department.
Average borrowed funds increased $11,830,000 between the periods ended
September 30, 1996 and September 30, 1995 and the average rate paid on those
borrowed funds decreased 59 basis points. Borrowed funds are invested in
mortgage backed securities issued primarily by Fannie Mae. The primary source of
borrowing is the Federal Home Loan Bank of Pittsburgh. Management is expecting
interest rates to remain stable for the balance of 1996 and the net spread to
remain in the 3.55 to 3.60 percent range.
Tables I and II are provided to reflect average balances and rates paid
for the nine month periods ended September 30, 1996, December 31, 1995 and
September 30, 1995, respectively.
7
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
TABLE I - Analysis of the Effect of Volume and Rate Changes in
Interest Income and Interest Expense
<TABLE>
<CAPTION>
Periods Ended September 30, 1996/1995
Change Change
In In Total
(In Thousands) Volume Rate Change
EARNING ASSETS
<S> <C> <C> <C>
Available-for-Sale Securities:
U S Treasury Securities
Securities of Other US Government Agencies and Corporations 949 40 989
Mortgage Backed Securities (267) (33) (300)
Obligations of States and Political Subdivisions 286 (52) 234
Stock 114 (20) 94
Other Securities (35) 140 105
Total Available-for-Sale Securities 1,047 75 1,122
Held-to-Maturity Securities
US Treasury Securities 18 18
Securities of Other US Government Agencies and Corporations
Mortgage Backed Securities (10) (5) (15)
Obligations of States and Political Subdivisions
Stock
Other Securities
Total Held-to-Maturity Securities 8 (5) 3
Interest -bearing Due from Banks (45) 34 (11)
Federal Funds Sold 2 (7) (5)
Loans:
Real Estate Loans 619 348 967
Consumer (105) 198 93
Agricultural (24) (7) (31)
Commercial/Industrial 189 (44) 145
Other 3 3
Political Subdivisions 10 (7) 3
Leases 2 2
Total Loans 694 488 1,182
Total Interest Income 1,706 585 2,291
INTEREST BEARING LIABILITIES
Interest Checking (42) (571) (613)
Money Market 122 (105) 17
Savings (33) 3 (30)
Certificates of Deposit 301 68 369
Individual Retirement Accounts 81 (701) (620)
Other Time Deposits (3) (3) (6)
Federal Funds Purchased (191) (19) (210)
Other Borrowed Funds 367 (260) 107
Total Interest Expense 602 (1,588) (986)
NET INTEREST INCOME 1,104 2,173 3,277
</TABLE>
The change in interest due to both volume and rates has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.
8
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
<TABLE>
<CAPTION>
Table II - Analysis of Average Daily Balances and Rates
Rate of Rate of Rate of
Return/ Return/ Return/
Cost of Cost of Cost of
(In Thousands) Funds Funds Funds
EARNING ASSETS 9/30/96 % 12/31/95 % 9/30/95 %
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities:
US Treasury Securities 2,507 5.12 2,510 5.10 2,510 5.14
Securities of Other US Government Agencies and Corporations 28,580 6.91 10,639 6.49 10,157 6.42
Mortgage Backed Securities 203,037 6.57 208,469 6.55 208,461 6.59
Obligations of States and Political Subdivisions 47,962 6.21 41,756 6.39 41,756 6.38
Stock 16,392 5.00 13,547 5.09 13,327 5.21
Other Securities 6,984 8.21 10,148 5.60 8,049 5.38
Total Available-for-Sale Securities 305,462 6.49 287,069 6.41 284,260 6.44
Held-to-Maturity Securities
U. S. Treasury Securities 698 6.13 324 6.79 299 6.26
Securities of Other U S Government Agencies and Corporations 44 6.08
Mortgage Backed Securities 844 6.97 1,004 7.67 1,032 7.64
Obligations of States and Political Subdivisions
Stock
Other Securities
Total Held-to-Maturity Securities 1,586 6.58 1,328 7.45 1,331 7.33
Interest -bearing Due from Banks 568 6.36 996 5.52 1,089 4.67
Federal Funds Sold 1,444 5.46 1,301 6.07 1,406 6.09
Loans:
Real Estate Loans 205,520 9.34 198,936 9.15 196,579 9.10
Consumer 35,438 17.92 36,230 17.01 36,296 17.15
Agricultural 2,739 10.10 3,051 10.32 3,050 10.43
Commercial/Industrial 16,346 9.64 13,998 10.03 13,686 10.10
Other 268 7.98 238 7.98 223 7.79
Political Subdivisions 6,685 6.36 6,524 6.45 6,458 6.52
Leases 194 8.96 166 4.00 163 9.02
Total Loans 267,190 10.43 259,143 10.24 256,455 10.25
Net Loans & Leases 267,190 10.43 259,143 10.24 256,455 10.25
Total Earning Assets 576,250 8.31 549,837 8.22 544,541 8.23
Cash 13,962 11,834 11,773
Securities Valuation Reserve 5,776 (2,668) (5,280)
Allowance for Possible Loan Losses (4,647) (4,484) (4,442)
Other Assets 5,347 4,737 6,387
Bank Premises & Equipment 6,822 6,774 6,775
Total Assets 603,510 566,030 559,754
INTEREST-BEARING LIABILITIES
Interest Checking 40,664 2.47 42,118 4.02 41,994 4.35
Money Market 100,041 4.55 91,773 4.93 90,410 5.01
Savings 47,225 2.49 48,261 2.48 49,015 2.48
Certificates of Deposit 117,595 5.50 112,493 5.50 110,244 5.42
Individual Retirement Accounts 80,069 5.63 78,534 6.58 78,503 6.80
Other Time Deposits 2,465 2.44 2,465 2.60 2,638 2.58
Federal Funds Purchased 1,220 5.92 4,774 6.37 5,505 6.41
Other Borrowed Funds 99,874 5.57 87,728 6.09 88,044 6.16
Total Interest-bearing Liabilities 489,153 4.79 468,146 5.23 466,353 5.30
Demand Deposits 42,786 39,313 39,399
Other Liabilities 6,467 4,844 3,842
TOTAL LIABILITIES 538,406 512,303 509,594
Stockholders' Equity 61,291 55,961 53,645
Securities Valuation Reserve 3,813 (2,234) (3,485)
Total Liabilities and Stockholders'
Equity 603,510 566,030 559,754
Interest Rate Spread 3.52 2.99 2.93
</TABLE>
9
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Losses is a reserve established by
management, which it believes will be adequate to absorb future loan losses
based on management's assessment of the quality of the total loan portfolio. The
assessment is performed on an ongoing basis and reviewed by the Board of
Directors quarterly.
The assessment evaluates portfolio quality and reviews historical
charge-offs using a six year average. Portfolio quality is determined by
regulatory and independent loan reviews. The Corporation employs an independent
loan review specialist who reviews loans based on criteria set by the Board of
Directors. The review includes, but is not limited to, loan documentation,
financial statements, tax returns and a cash flow analysis of each loan.
The tool most utilized by management to determine portfolio quality is the
"Watch List". The "Watch List" is a collection of loans that are now or have
been classified as substandard by our loan review specialist or management. The
list is distributed to Branch Managers monthly for their review and updated
before going to the Board of Directors. The list also contains all nonperforming
loans that for purposes of SFAS No. 114 are segregated for reserve purposes and
valued at their observable collateral value.
The most recent loan review by the Corporation's independent loan appraiser
was conducted at the close of business May 31, 1996. The review was submitted on
July 26, 1996 and listed $10,145,000 in criticized loans, an increase of
$1,102,000 over the review completed June 16, 1995. Loans classified as
substandard, doubtful and loss were $6,873,000, $276,000 and $82,000,
respectively. Using regulatory standards of 15% of substandard loans, 50% of
doubtful and 100% of loss credits the portfolio would require a minimum reserve
balance of $1,251,000, this would leave an unallocated portion of $3,475,000. An
allocation of the reserve using historical data produces an allocation of
$1,618,000 and an unallocated balance of $3,208,000. Management and the Board
of Directors has therefore determined that the Reserve for Possible Loan Losses
is adequate.
Other factors used to evaluate the reserve level are loan growth, economic
conditions of the market area and peer group comparisons.
Tables IV and V present a five year history of the Allowance for Possible
Loan Losses and projection for the current year. Table V projects estimated
losses using the last five years as a base. Years having abnormally large or low
charge-offs are eliminated to present a realistic estimation. Table III provides
reserve activity for the year-to-date, the most probable at year end and a worst
case scenario which uses an historical average including years which had larger
than normal losses.
TABLE III - Reconciliation of the Reserve for Possible Loan Losses
<TABLE>
<CAPTION>
(In Thousands) Worst Case Probable Actual Actual
Dec 31, 1996 Dec 31, 1996 June 30, 1996 Dec 31, 1995
<S> <C> <C> <C> <C>
Beginning Balance January 1, 4,579,210 4,579,210 4,579,210 4,228,741
Provision Charged to Earnings 701,000 701,000 350,250 736,500
Year-to-Date Recoveries 140,000 140,000 94,441 187,473
Year-to-Date Charge-offs (882,000) (600,000) (320,016) (573,504)
Ending Balance 4,558,210 4,840,210 4,703,885 4,579,210
<CAPTION>
TABLE IV--Loan Loss History
(In Thousands) 1996 Est 1995 1994 1993 1992 1991 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <S>
Net Loans * 290,000 264,182 258,472 238,755 225,475 199,072 210,851
Net Charge-offs 460 387 326 247 518 3,142 726
Allowance for Possible Loan Losses Balance 4,840 4,579 4,229 3,817 3,356 2,548 3,338
Provision for Loan Losses Charged to Earnings 701 737 737 708 1,326 3,151 1,054
Earnings 7,203 7,866 7,494 8,127 7,290 5,643 6,232
Earnings Coverage of Net Charge-offs 15.7x 20.3x 23.0x 32.9x 14.1x 1.8x 8.6x
Allowance Coverage of Net Charge-offs 10.5x 11.8x 13.0x 15.5x 6.5x 0.8x 4.6x
Loans Ninety Days or More Past Due and
Still Accruing 2,500 2,915 2,743 2,899 2,532 3,810 2,486
Net Charge-offs as a Percent of the Provision 63.8% 52.5% 44.2% 34.9% 39.1% 99.7% 68.8%
Year-End Nonperforming Loans 250 279 624 843 1,351 417 538
Allowance as a Percentage of Gross Loans: *
Bank (1) 1.75% 1.73% 1.64% 1.60% 1.49% 1.28% 1.36%
Peer Group (2) 1.54% 1.61% 1.65% 1.82% 1.42% 1.44% 1.38%
* Gross Loans less Unearned Discount
(1) At September 30, 1996
(2) At June 30, 1995
</TABLE>
10
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Table V - Allocation of the Reserve for Possible Loan Losses
<TABLE>
<CAPTION>
(In Thousands)
LOAN CLASSIFICATION 1996 Est 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C>
Commercial, Financial & Agricultural 35,000 31,522 22,649 26,376 22,712 23,541
Real Estate - Construction 1,500 1,284 2,593 2,224 993 982
Real Estate - Mortgage 210,000 192,350 193,095 170,532 162,434 136,716
Credit Card & Related Plans 10,000 9,934 9,896 9,212 9,991 6,694
All Other Loans to Individuals 33,340 28,955 30,094 30,282 29,182 31,762
Lease Financing 160 163 145 154 162 129
Total Loans 290,000 264,208 258,472 238,780 225,474 199,824
FASB 114 Allocation 240 228 N/A N/A N/A N/A
Letter of Credit Commitments 2,750 2,633 4,415 5,046 4,670 N/A
All Other Commitments
Consumer 25,000 24,811 24,202 23,323 22,174 N/A
Mortgage 7,500 7,276 9,566 9,466 9,117 N/A
Commercial 10,500 10,201 9,901 9,790 5,670 N/A
<CAPTION>
LOAN CLASSIFICATION Average
<S> <C> <C> <C> <C>
Commercial, Financial & Agricultural 26,967 0.01955 X 35,000 = 684
Real Estate - Construction 1,596 0.00000 X 1,500 =
Real Estate - Mortgage 177,521 0.00017 X 210,000 = 36
Credit Card & Related Plans 9,288 0.01303 X 10,000 = 130
All Other Loans to Individuals 30,603 0.00551 X 33,340 = 184
Lease Financing 152 0.00000 X 160 = 0
Total Loans 246,126
FASB 114 Allocation 181 1.00000 X 240 = 240
Letter of Credit Commitments 4,191 0.00000 X 2,750 = 0
All Other Commitments
Consumer 23,628 0.00551 X 25,000 = 138
Mortgage 8,856 0.00017 X 7,500 = 1
Commercial 8,891 0.01955 X 10,500 = 205
Reserve Allocation 1,618
Unallocated Portion 3,222
Reserve Balance 4,840
</TABLE>
11
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Periods Ended
Table VI - Major Categories of Noninterest Income September 30,
(In Thousands) $ %
1996 1995 Change Change
Service Charges on Deposit Accounts 847 842 5 0.59
Service Charges and Fees 200 204 (4) (1.96)
Trust Department Income 615 562 53 9.43
Insurance Commissions, Fees and Premiums 402 477 (75) (15.72)
Other Operating Income 34 37 (3) (8.11)
Realized Gains (Losses) on Securities, Net 451 1,229 (778) (63.30)
Total Other Income 2,549 3,351 (802) (23.93)
Only two items of other income reflect significant change: insurance
premiums generated by the Corporation's captive life and accident and health
insurance subsidiary which provides insurance for the consumer loan portfolio
and realized gains from the sale of available-for-sale securities. The decline
in insurance premiums is the general lack of loan demand during the comparable
periods as evidenced by the small increase in average outstanding loan balances.
Realized gains from the sale of available-for-sale securities are the
result of the sale of stock. The Bank and Corporation both have substantial
holdings of Pennsylvania banks and Pennsylvania bank holding companies. The
stocks are evaluated continuously and frequently and when the holdings become
too large or overvalued due to mergers or other reasons, all or portions of the
holdings are sold. Some of the issues sold during the two comparable nine month
periods were mandated by an FDIC ruling that banks may not hold stock that is
traded over-the-counter and not listed on a recognized stock exchange.
12
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table compares the various categories of other expense for the
periods ended June 30, 1996 and June 30, 1995.
Table VII - Major Categories of Noninterest Expense
Periods Ended
September 30,
$ %
1996 1995 Change Change
Salaries and Wages 4,406 4,096 310 7.57
Pensions and Other Employee Benefits 1,300 1,260 40 3.17
Occupancy Expense, Net 541 524 17 3.24
Furniture and Equipment Expense 546 486 60 12.35
Other Operating Expense 4,070 4,331 (261) (6.03)
Total Other Expense 10,863 10,697 166 1.55
Salaries and wages increased 7.11 percent. The increase can be attributed
to an increase in the number of full time equivalent employees and merit raises.
The number of full time equivalent employees at September 30, 1996 was 204,
compared to 199 at September 30, 1995. Merit raises effective January 1, 1996
were in the 5 to 6 percent range.
Furniture and equipment expense increased $60,000 or just over 12 percent.
The change is due to the increase in equipment maintenance costs on the new
check imaging equipment. The new equipment was maintenance free for the first
year of operation. The increase included depreciation expense which also
increased $16,000 over the same nine month period last year.
Other operating expense decreased $261,000 over the same period in 1995.
The largest single factor contributing to the decrease was FDIC insurance. FDIC
premiums dropped from $463,000 for the period ended September 30, 1995 to $2,000
for the period ended September 30, 1996. Several other expense items varied only
slightly, however credit card processing costs increased $207,000 over the same
period last year. It should also be noted that interest and fees associated with
the credit card function included in interest and fees on loans increased
$221,000 during the nine months ended September 30, 1996 when compared to the
same period last year.
13
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
STATEMENT OF CONDITION
Average total assets of the Corporation for the nine month period ended
September 30, 1996 increased $43,756,000 or 7.8 percent when compared to the
average balance for the period ended September 30, 1995. Average total assets
increased $37,480,000 or 6.6 percent when compared to year-end 1995. The
increase in average assets between September 30, 1995 and September 30, 1996 can
be attributed to an increase in average deposits totaling $26,187,000 and an
increase in average borrowed funds totaling $11,830,000. Deposit growth centered
around certificates of deposit and money market accounts. The Corporation has
traditionally used these accounts as its largest and most important source of
funds. To maintain and grow the balances in these accounts the Corporation has
always paid competitive or slightly higher than market rates, however,
competitive pressures from nonbank sources has slowed deposit growth.
Loan demand for 1995 was relatively flat. Total loans for 1995 increased
only $5,713,000 or 2.2 percent. During the nine months ended September 30,
1996 loan growth was slow, increasing only 2.4 percent, with nearly all of the
growth being in the third quarter. Annualized loan growth during the third
quarter would be slightly less than 10 percent.
The Corporation's leveraged borrowing level increased nearly $12,000,000
between September 30, 1995 and September 30, 1996. Given the current interest
rate structure, management and the Corporation's Board of Directors feel that
the current borrowing level of just over $100,000,000 is adequate. The maturity
schedule of the borrowed funds ranges from three to eighteen months. Overnight
borrowing normally averages $8,000,000 to $15,000,000 depending on deposit
levels. The primary source of borrowing is the Federal Home Loan Bank of
Pittsburgh repurchase agreements.
Interest rate fluctuations have caused wide variations in the required
market value adjustment due to the large holdings of Available-for-Sale
securities. The net after tax adjustment at September 30, 1996, December 31,
1995 and September 30, 1995 was $3,338,000, $6,952,000, and $2,706,000,
respectively.
The capital base of the Corporation remains strong. The ratio of capital to
deposits excluding the market value adjustment for Available-for-Sale securities
at September 30, 1996, December 31, 1995 and September 30, 1995 was 15.0
percent, 14.2 percent and 13.7 percent, respectively. The risk based capital
ratio for the same periods, respectively, was 22.37 percent, 18.72 percent and
18.36 percent.
The dividend as a percentage of net income for the nine months ended
September 30, 1996 and September 30, 1995 was 36.3 percent and 43.6 percent,
respectively. The dividend for the year ended December 31, 1995 was 41.2
percent.
The Corporation does not expect that there will be any significant change
in the mix of assets and liabilities for the remainder of 1996. This expectation
is based on the assumption that interest rates will remain stable through the
balance of the year. There are no planned capital expenditures which would have
a detrimental effect on the capital ratios or the results of operations.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation's ability to absorb short term deposit fluctuations or
unusually heavy loan demand, should they occur, are met by using a Flexline of
credit and the Open RepoPlus program available through the Federal Home Loan
Bank of Pittsburgh. The Flexline of credit provides the Corporation with a
credit line of approximately $28,000,000. The Open RepoPlus line is $50,000,000.
The maturities of the repurchase agreements generally range from 30 days to 2
years. The Corporation also has credit lines with correspondent banks totaling
approximately $15,000,000.
At September 30, 1996 total corporate borrowing amounted to $106,650,000,
consisting of repurchase agreements amounting to $47,650,000 and long term
borrowings totaling $59,000,000. This relatively short term borrowing created a
large negative gap which had a detrimental effect on earnings during the three
quarters of 1995, however interest rates have declined and the net interest
margin has shown steady improvement through the last half of 1995 and nine
months ended September 30, 1996.
The Corporation uses a computer model to measure the theoretical effect of
interest rate swings on the market value and the net interest margin using a
rate shock. The model shocks interest 300 basis points upward and downward. The
Asset and Liability Policy set by the Board of Directors imposes limits on the
change in net interest income and market value of portfolio equity at a 200
basis point increase in interest rates. Net interest income may not decline
more than 20 percent and the change in market value of portfolio equity may not
decline more than 25 percent. The Board of Directors feels that the parameters
are reasonable based on the capital strength of the Corporation. The interest
rate sensitivity table presented on page 15 uses static gap methodology to
measure the difference between rate sensitive assets and liabilities at
September 30, 1996. The analysis shows that the Corporation has a negative gap;
i.e. liabilities reprice faster than assets. The Corporation has the ability to
increase or decrease the gap by selling assets and repaying borrowed funds. It
should be noted that the Corporation relies more heavily on its computer model
to monitor interest rate risk than the static gap. The reader should refer to
pages 16 and 17 for a fuller understanding of the effect of interest rate
movements.
14
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Table VIII - Rate Sensitive Assets and Rate Sensitive Liabilities
<TABLE>
<CAPTION>
(In Thousands) 1 YEAR 1 - 5 YEARS 5 - 10 YEARS 10 YEARS TOTAL
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-bearing Deposits 712 712
Available-for-Sale Securities:
US Treasury Securities 2,465 2,465
Securities of Other Government Agencies 8,902 16,999 10,203 36,104
Mortgage Backed Securities 29,022 123,711 35,135 187,868
Municipals 1,684 4,479 4,220 42,610 52,993
Other Bonds 899 2,400 1,000 1,340 5,639
Stocks 23,663 23,663
Total Available-for-Sale Securities 31,605 141,957 57,354 77,816 308,732
Held-to-Maturity Securities:
US Treasury Securities 699 699
Securities of Other Government Agencies 100 100
Mortgage Backed Securities 789 789
Total Held-to-Maturity Securities 0 799 0 789 1,588
Loans and Lease Financing:
Real Estate-Construction 1,284 1,284
Real Estate-Mortgage 87,463 49,440 44,901 26,499 208,303
Consumer 10,943 14,211 1,593 9,007 35,754
Agricultural 1,230 1,199 226 22 2,677
Commercial 12,437 3,329 502 168 16,436
Other 4,687 0 4,687
Political Subdivisions 1,504 2,479 1,465 1,287 6,735
Leases 58 163 1 222
Total Loans 119,606 70,821 48,688 36,983 276,098
Allowance for Possible Loan Losses (4,826) (4,826)
Net Loans and Leases 119,606 70,821 48,688 32,157 271,272
Federal Funds Sold 0
Cash and Due From Banks 16,835 16,835
Other Assets 12,935 12,935
TOTAL ASSETS 151,923 213,577 106,042 140,532 612,074
LIABILITIES AND EQUITY
Interest-bearing Deposits:
Money Market 99,031 99,031
NOW and SNOW 40,976 40,976
Christmas/Fund Clubs 2,432 2,432
CDs 74,945 40,607 88 115,640
Reg/Key Savings 46,619 46,619
GPS 744 744
IRAs 77,551 77,551
Total Interest-bearing Deposits 294,935 40,607 88 47,363 382,993
Demand Deposits 46,884 46,884
Repurchase Agreements 47,650 47,650
Borrowed Funds:
Variable
Fixed 39,000 20,000 59,000
Total Borrowed Funds 39,000 20,000 59,000
Other Liabilities 852 6,856 7,708
Stockholders' Equity 67,839 67,839
TOTAL LIABILITIES AND EQUITY 382,437 60,607 88 168,942 612,074
INTEREST RATE SENSITIVITY GAP (230,514) 152,970 105,954 (28,410)
</TABLE>
15
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Table IX - Rate Shock Analysis and the Resulting Hypothetical Effect on Income
for the Year Ended September 30, 1997
<TABLE>
<CAPTION>
(In Thousands)
CHANGE IN RATE -3.00 -2.00 -1.00 FLAT +1.00 +2.00 +3.00
INCOME STATEMENT
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans 26,394 27,541 28,688 29,753 30,983 32,131 33,278
Investments 18,994 19,395 19,795 20,182 21,000 21,831 22,953
Total Interest Income 45,388 46,936 48,483 49,935 51,983 53,962 56,231
Interest Expense
Deposits 12,464 14,711 17,086 19,381 21,838 24,213 26,589
Borrowings 5,079 5,256 5,433 5,590 5,787 5,964 6,142
Fed Fds Purchased 30 51 82 118 156 197 233
Total Int Expense 17,573 20,018 22,601 25,089 27,781 30,374 32,964
Net Interest Income 27,815 26,918 25,882 24,846 24,202 23,588 23,267
Loan Loss Provision 701 701 701 701 701 701 701
Net Int Inc After Prov 27,114 26,217 25,181 24,145 23,501 22,887 22,566
Other Operating Income 2,280 2,280 2,280 2,280 2,280 2,280 2,280
Other Operating Exp 14,456 14,456 14,456 14,456 14,456 14,456 14,456
Income Before Inc Tax 14,938 14,041 13,005 11,969 11,325 10,711 10,390
Income Tax Provision 3,821 3,508 3,148 2,787 2,559 2,342 2,224
Net Income 11,117 10,533 9,857 9,182 8,766 8,369 8,166
Dividends 3,458 3,458 3,458 3,458 3,458 3,458 3,458
</TABLE>
16
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Table X - Rate Shock Analysis and the Theoretical Effect on Equity Market Values
for the Period Ended September 30, 1996
<TABLE>
<CAPTION>
(In Thousands)
-3.00 -2.00 -1.00 FLAT 1.00 2.00 3.00
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Book Value 600,407 600,407 600,407 600,407 600,407 600,407 600,407
Market Value 647,169 630,361 614,764 602,015 592,885 576,121 561,218
Change 46,762 29,954 14,357 1,608 (7,522) (24,286) (39,189)
LIABILITIES
Book Value 539,872 539,872 539,872 539,872 540,822 540,822 540,822
Market Value 557,940 551,954 546,155 541,153 533,860 527,449 521,068
Change (18,068) (12,082) (6,283) (1,281) 6,962 13,373 19,754
EQUITY
Beginning Balance 60,535 60,535 60,535 60,535 60,535 60,535 60,535
Asset Change 46,762 29,954 14,357 1,608 (7,522) (24,286) (39,189)
Liability Change (18,068) (12,082) (6,283) (1,281) 6,962 13,373 19,754
Market Value 89,229 78,407 68,609 60,862 59,975 49,622 41,100
</TABLE>
Table XI - Current Exposure to Hypothetical Change in Interest Rates for the
Period Ended September 30, 1997
Net Interest Income MV of Portfolio Equity
Change in Rates Projected Projected
Basis Points Change (%) Change (%)
+300 -6.4 -30.6
+200 -5.1 -23.0
+100 -2.6 -13.1
FLAT 0.0 0.0
-100 4.2 12.7
-200 8.3 28.8
-300 12.0 46.6
17
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part II - Other Information
Item 1. Legal Proceedings
Citizens and Northern Corporation is not a litigant in any pending
material lawsuits.
It is the opinion of the counsel of Citizens and Northern Corporation that
minor lawsuits which are pending will not have a significant or materially
detrimental effect on the capital of the Corporation or in any way effect the
results of operations.
Item 4. A submission of matters to a Vote by Security Holders
The Annual Meeting of Shareholders of Citizens & Northern Corporation was
held on Tuesday, April 16, 1996. The Board of Directors fixed the close of
business on March 1, 1996 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and at any
adjournment thereof. On this record date, there were outstanding and entitled to
vote 5,012,082 shares of Common Stock.
The total number of votes cast was 3,763,557. All were voted by proxy for
the following purposes and with the following results.
1. The election of the following as Class III Directors to serve for a
term of three years:
J. Robert Bower Craig G. Litchfield
William K. Francis Lawrence F. Mase
Karl W. Kroeck
The total votes in favor of any one of the above-listed Directors were
not less than 3,699,695.
2. The ratification of the action of the Board of Directors in the
appointment of the firm of Parente, Randolph, Orlando, Carey & Associates as
independent auditors of the Corporation:
Total Votes in Favor 3,737,010
Total Votes Against 6,672
Total Votes Abstained 18,875
Item 5. Other Events
a. Exhibit 2 -- Appointment of New President of Citizens and
Northern Corporation
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits filed as part of this report - None
b. No reports on Form 8-K were filed during the period ended June
30, 1996
18
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
SIGNATURE PAGE
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.
Date November 6, 1996 WILLIAM K FRANCIS
/S/ William K. Francis
Chairman of the Board and Chief Executive Officer
Date November 6, 1996 JAMES W SEIPLER
/S/ James W. Seipler
Treasurer
(Chief Financial Officer)
19
<PAGE>
Exhibit 2
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Item 5. Other Events
Exhibit - 2.
At the Annual Meeting held on Tuesday, April 16, 1996 in Wellsboro W. K.
Francis resigned as President and Craig Litchfield was appointed by the Board
of Directors to fill the position. Mr. Francis, who is 64 years old, joined the
Bank in 1958 and will continue as Chairman of the Board and Chief Executive
Officer for the balance of 1996; after that time he will remain Chairman of the
Board.
Mr. Litchfield, 48 years old, has been employed by the Bank since 1972 and has
held several positions including vice-president and more recently Senior
vice-president.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000810958
<NAME> CITIZENS AND NORTHERN CORP
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 16,835
<SECURITIES> 310,320
<RECEIVABLES> 0
<ALLOWANCES> 4,826
<INVENTORY> 0
<CURRENT-ASSETS> 327,867
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 612,074
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 5,117
<OTHER-SE> 62,722
<TOTAL-LIABILITY-AND-EQUITY> 612,074
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 525
<INTEREST-EXPENSE> 17,508
<INCOME-PRETAX> 9,471
<INCOME-TAX> 2,439
<INCOME-CONTINUING> 7,032
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,032
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
