<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-16084
DECEMBER 31, 1995 -------
- -----------------
CITIZENS & NORTHERN CORPORATION
-------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2451943
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(State of Incorporation) (Employer Identification Number)
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: THOMPSON STREET
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RALSTON, PA 17763
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MAILING ADDRESS OF EXECUTIVE OFFICE: 90-92 MAIN STREET
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WELLSBORO, PA 16901
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REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE): 717-265-6171
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
-----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $1.00 A SHARE
-------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _________
---------
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
The number of shares outstanding of the issuer's class of common stock as of
March 1, 1996:
$1.00 Par Value 5,012,081 Shares
---------
The aggregate market value of the registrant's common stock held by non-
affiliates at
March 1, 1996 : $102,747,660
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Shareholders for the Year Ended December 31,
1995 (Annual Report) are incorporated by reference into Parts I and II
Portions of the Proxy Statement for the Annual Shareholders Meeting to be held
April 16, 1996
(Proxy Statement) are incorporated by reference into Part III
LOCATION IN FORM 10-K INCORPORATED INFORMATION
- --------------------- ------------------------
PART II
- -------
Item 5. Market for Registrant's Common Page 39 of the Annual Report
Stock and Related Stockholder Matters
Item 6. Selected Financial Data Pages 39 and 40 of the
Annual Report
Item 7. Management's Discussion and Analysis Page 24 through 38 of the
of the Financial Condition and Results Annual Report
of Operations
Item 8. Financial Statements and Page 5 through 22 and page
Supplementary Data 39 of the Annual Report
PART III
- --------
Item 10. Directors and Executive Officers Page 2 through 6 of the of
of the Registrant Proxy Statement
Item 11. Executive Compensation Page 6 through 9 of the
Proxy Statement
Item 12. Security Ownership of Certain Page 2 through 6 of the
Beneficial Owners and Management Proxy Statement
Item 13. Certain Relationships and Related Page 21 of the Annual Report
Transactions Page 11 of the Proxy
Statement
Number of pages, not including Cover Page, is 10
1
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PART I
------
ITEM 1. BUSINESS
- -----------------
The information appearing in the Annual Report under the caption
"Description of Business" on page 43 is herein incorporated by reference.
REGULATION AND SUPERVISION
THE CORPORATION
The Corporation is a one-bank holding company formed under the provisions
of Section 3 of the Federal Reserve Act. The Corporation is under the direct
supervision of the Federal Reserve Board and must comply with the reporting
requirements of the Federal Bank Holding Company Act.
A one-bank or multi-bank holding company is prohibited under Section 3
(a)(3) of the Act from acquiring either directly or indirectly 5% or more of
the voting shares of any bank or bank holding company without prior Board
approval. Additionally, Section 3 (a)(3) prevents, without prior Board
approval, an existing bank holding company from increasing its ownership in an
existing subsidiary bank unless a majority (greater than 50 percent) of the
shares are already owned (Section 3 (a)(B) ). A bank holding company which
owns more than 50 percent of a bank's shares may buy and sell those shares
freely without Board approval, provided the ownership never drops to 50 percent
or less. If the holding company owns 50 percent or less of a bank's shares,
prior Board approval is required before such additional acquisition of shares
takes place until ownership exceeds 50 percent.
Under current Pennsylvania law, which became effective March 4, 1990,
bank holding companies located in any state may acquire banks and bank holding
companies located in Pennsylvania provided that the laws of such state grant
reciprocal rights to Pennsylvania bank holding companies and that 75% of the
domestic deposits are located in a state granting reciprocity.
THE BANK
The Bank is a state chartered nonmember bank, supervised by and under the
reporting requirements of the Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation.
ITEM 2. PROPERTIES
- -------------------
The Bank fully owns fifteen (15) banking offices as listed below. All
offices have been modernized to meet the demands for the Bank's services and to
give a pleasant and comfortable atmosphere in which to conduct the Bank's
business.
1. Executive Offices - 90-92 Main Street, Wellsboro, PA 16901
2. Corporate Headquarters - Thompson Street, Ralston, PA 17763
3. 428 South Main Street, Athens, PA 18810
4. 111 Main Street, Dushore, PA 18614
5. Main Street, East Smithfield, PA 18817
6. Main Street, Elkland, PA 16920
7. Route 49, Knoxville, PA 16928
8. Main Street, Laporte, PA 18626
9. Route 15, Liberty, PA 16930
10. Route 220, Monroeton, PA 18832
11. RD 2, Sayre, PA 18840
12. Route 15, Tioga, PA 16946
2
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13. 428 Main Street, Towanda, PA 18848
14. Elmira and East Main Street, Troy, PA 16947
15. Route 6, Wysox, PA 18854
All offices offer a full range of banking services, except the Monroeton
office, which does not offer safe deposit boxes.
There are no encumbrances against any of the properties owned by the
Bank.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
- ---------------------------------------------------------------------
MATTERS
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The information appearing in the Annual Report under the caption
"Quarterly Share Data" on page 39 and the "Summary of Quarterly Financial Data"
on page 41 is herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The "Five Year Summary of Operations" on page 40 of the Annual Report is
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The information appearing in the Annual Report under the caption
"Management's Discussion and Analysis of the Financial Condition and Results of
Operations" on pages 24 through 38, is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The Consolidated Financial Statements (and footnotes thereto) and the
Summary of Quarterly Financial Data presented in the Annual Report is herein
incorporated by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
- -------------------------------------------------------------
Not applicable.
3
<PAGE>
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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(a) Identification of Directors. The information appearing under the
caption "Election of Directors" on pages 2 through 4 of the Corporation's Proxy
Statement dated March 18, 1996, is herein incorporated by reference.
(b) Identification of Executive Officers. The information appearing
under the caption "Corporation's and Bank's Executive Officers" on pages 4
through 6 of the Corporation's Proxy Statement dated March 18, 1996, is herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information appearing under the caption "Executive Compensation" on page
8 of the Corporation's Proxy Statement dated March 18, 1996, is herein
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information appearing under the caption "Election of Directors" on pages
2 through 4 and under the caption "Corporation's and Bank's Executive Officers"
on pages 4 through 6 of the Corporation's Proxy Statement is herein
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
- --------------------------------------------------------
Information appearing in footnote 12 to the Consolidated Financial
Statements included on page 21 in the Annual Report is herein incorporated by
reference.
Information appearing under the caption "Certain Transactions" on page
11 of the Corporation's Proxy Statement is herein incorporated by reference.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
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(a) (1). The following consolidated financial statements and reports
are set forth in Item 8.
<TABLE>
PAGE
<S> <C>
Report of Independent Certified Public Accountants 23
Financial Statements:
Consolidated Balance Sheet - December 31, 1995 and 1994 4
Consolidated Statement of Income - Years Ended
December 31, 1995, 1994 and 1993 5
Consolidated Statement of Changes in Stockholders' Equity -
Years Ended December 31, 1995, 1994 and 1993 6
Consolidated Statement of Cash Flows - Years Ended
December 31, 1995, 1994 and 1993 7
Notes to Consolidated Financial Statements 8 - 22
</TABLE>
4
<PAGE>
(2). Financial statement schedules are either omitted because
inapplicable or included in the financial statements or related notes.
Individual financial statements of Bucktail Life Insurance Company, a
consolidated subsidiary have been omitted, as neither the assets nor the income
from continuing operations before taxes exceed ten percent of the consolidated
totals.
(3). Exhibits (numbered as in Item 601 of Regulation S-K)
2. Plan of Acquisition, Reorganization,
Arrangement, Liquidation or Succession Not applicable
3. (i) Articles of Incorporation *
3. (ii) Bylaws of the Registrant *
4. Articles of Incorporation
of the Registrant as Currently in effect *
9. Voting Trust Agreement Not applicable
10. Material Contracts Not applicable
11. Statement re Computation
of Per Share Earnings Not applicable
12. Statements re Computation of Ratios Not applicable
13. Annual Report to Shareholders
16. Letter re Change in Certifying
Accountant Not applicable
18. Letter re Change in Accounting
Principles Not applicable
21. List of Subsidiaries 9
22. Published Report Regarding Matters
Submitted to Vote of Security Holders Not applicable
23. Consents of Experts and Counsel Not applicable
24. Power of Attorney Not applicable
27. Financial Data Schedules None
28. Information from Reports Furnished
to State Insurance Regulatory Authorities Not applicable
99. Additional Exhibits Not applicable
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1995.
*omitted in the interest of brevity
5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
March 20, 1996 By: WILLIAM K. FRANCIS /s/.
- ------------------------- -----------------------------
Date William K. Francis
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 20, 1996 By: JAMES W. SEIPLER /s/.
- ------------------------- -----------------------------
Date James W. Seipler
Treasurer
6
<PAGE>
BOARD OF DIRECTORS
J. ROBERT BOWER /s/ . LAWRENCE F. MASE /s/ .
------------------------------- --------------------------------
J. Robert Bower Lawrence F. Mase
R. ROBERT DECAMP /s/ . ROBERT J. MURPHY /s/ .
------------------------------- --------------------------------
R. Robert DeCamp Robert J. Murphy
R. JAMES DUNHAM /s/ . EDWARD H. OWLETT, III /s/ .
------------------------------- --------------------------------
R. James Dunham Edward H. Owlett, III
ADELBERT E. ELDRIDGE /s/ . F. DAVID PENNYPACKER /s/ .
------------------------------- --------------------------------
Adelbert E. Eldridge F. David Pennypacker
WILLIAM K. FRANCIS /s/ . LEONARD SIMPSON /s/ .
------------------------------- --------------------------------
William K. Francis Leonard Simpson
LAURENCE R. KINGSLEY /s/ . HOWARD W. SKINNER /s / .
------------------------------- --------------------------------
Laurence R. Kingsley Howard W. Skinner
EDWARD L. LEARN /s/ . DONALD E. TREAT /s/ .
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Edward L. Learn Donald E. Treat
JOHN H. MACAFEE /s/ .
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John H. Macafee
7
<PAGE>
EXHIBIT INDEX
3. (i) Articles of Incorporation of the Registrant as currently in
effect are herein incorporated by reference to Exhibit D to
Registrant's Form S-4, Registration Statement dated
March 27, 1987.
3. (ii) Bylaws of the Registrant as currently in effect are herein
incorporated by reference to Exhibit E to Registrant's Form
S-4, Registration Statement dated March 27, 1987
4. Articles of Incorporation of the Registrant as currently in
effect are herein incorporated by reference to Exhibit D to
Registrant's Form S-4, Registration Statement dated
March 27, 1987.
10. Page 29 of Registrant's Form S-4, Registration Statement dated
March 27, 1987, is herein incorporated by reference.
13. Annual Report to Shareholders
21. List of Subsidiaries
8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Citizens & Northern Corporation
We have audited the accompanying consolidated balance sheets of Citizens &
Northern Corporation and subsidiaries ("Corporation") as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted accounting
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens & Northern
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Corporation changed its
method of accounting for securities and income taxes in 1993.
Williamsport, Pennsylvania
January 22, 1996
9
<PAGE>
TO OUR STOCKHOLDERS:
It is the belief of Citizens & Northern Corp. that a well-run, independent
community bank can produce a fair rate of return to its shareholders and meet
the financial needs of its banking community.
The results produced in 1995 were very satisfactory for C&N, thus meeting our
expressed goals.
Net after-tax income for 1995 totaled $7,866,000 or $1.57 per share, compared to
1994's net income of $7,494,000, or $1.50 per share. The net-earnings-to-
average-assets ratio was 1.39%, once again higher than our peer group banks.
Dividends to our shareholders for 1995 increased 5.7% to 65 cents per share plus
a 1% stock dividend, compared to the dividend in 1994 of 61.5 cents per share
plus a 1% stock dividend.
Total assets grew $39.5 million, or 7.2%, to a new high of $586 million at year
end 1995.
Deposits increased $30.3 million, or 7.6%, to $429.6 million in 1995. Net loans
rose $5.4 million, or 2.1%, to $259.6 million over last year.
Shareholders' equity less unrealized gains on available-for-sale securities
increased $4.6 million, or 8.4%, to $60 million. Shareholders' equity including
unrealized gains on available-for-sale securities gained $20.2 million, or
43.1%, to $67 million. C&N maintains a strong capital position, well above the
regulators' requirements and above our banking peer group.
Only one major structural improvement was made to our fifteen banking offices in
1995 and that was to our Towanda office. All-new teller counters were added and
offices were renovated to be used by the loan officers, as well as the Towanda
trust officer.
We are continuing to improve and increase our computer operations, which are
vital to enhancing customer service.
We were saddened by the untimely death on September 8 of Paul (Nick) Ritter,
who headed our Trust Department for over 26 years. He will be missed both as a
friend and a fellow worker.
The Trust Department, now headed by Thomas L. Briggs, is continuing to grow at a
very good pace. The total market value of trust assets increased in 1995 to
$181.1 million, or 24%, over the 1994 year-end total of $146.2 million. The fee
income generated by the department increased 25% in 1995 to $726,000 for 1995.
Of the numerous services offered by the Trust Department, two important services
used by our customers are employee benefit services and investment management
services. These two services will continue to increase fees for the department
in the years to come.
We were also saddened by the passing of our good friends, Paul B. Harden and
Dick Hall. Paul passed away on January 1, 1996. Paul retired in 1988 after
serving for over 16 years as our senior vice president and also as a director
for over 22 years. Dick passed away in May 1995. He was an assistant vice
president and had been employed at C&N for 45 years, retiring in 1993
Another sad note was the passing of Arlene Weatherbee. A C&N employee and
officer for 30 years, Arlene retiored in 1988.
The success of Citizens & Northern can be attributed directly to our directors
and staff, all of whom are dedicated and work diligently to make the bank a
successful financial institution. During 1995, the staff continued to further
their education, thus enabling them to better serve our customers. a total of
115 employees attended banking courses or educational seminars, 10 attended
advanced banking schools and 4 graduated from these advanced schools.
C&N's aim as an independent community financial institution is to provide the
finest of financial services that enhance the success and health of individuals,
industries, businesses and communities in which we reside and work.
Citizens & Northern's outstanding staff, its strong capital, its stable
earnings, its technological resources and its strong market position in our area
provide an excellent base for our continued success.
We look forward to 1996, which should once again prove to be a very satisfactory
year for your bank.
1
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CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
(In Thousands Except Share Data) December 31, December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash and Due From Banks
Noninterest-bearing $ 12,945 $ 11,572
Interest-bearing 645 835
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Total Cash and Cash Equivalents 13,590 12,407
Available-for-Sale Securities 299,591 260,624
Held-to-Maturity Securities 1,507 1,196
(Estimated fair value of $1,537 and $1,138 in 1995 and 1994, respectively)
Loans, Net 259,603 254,243
Bank Premises and Equipment, Net 6,791 6,920
Foreclosed Assets Held for Sale 455 644
Accrued Interest Receivable 4,058 3,861
Other Assets 392 6,583
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TOTAL ASSETS $ 585,987 $ 546,478
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LIABILITIES
Deposits:
Noninterest-bearing $ 41,167 $ 42,855
Interest-bearing 388,385 356,408
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Total Deposits 429,552 399,263
Dividends Payable 843 786
Borrowed Funds 85,000 98,500
Accrued Interest and Other Liabilities 3,615 1,133
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TOTAL LIABILITIES 519,010 499,682
STOCKHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,067 5,016
Authorized 10,000,000; Issued 5,066,516
and 5,016,352 in 1995 and 1994, respectively
Stock Dividend Distributable 1,013 1,016
Paid in Capital 11,575 10,610
Retained Earnings 43,370 39,743
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Total 61,025 56,385
Net Unrealized Gain (Loss) on Available-for-Sale Securities 6,952 (8,589)
Less: Treasury Stock at Cost
104,060 shares at December 31, 1995 (1,000)
103,030 shares at December 31, 1994 (1,000)
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TOTAL STOCKHOLDERS' EQUITY 66,977 46,796
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TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 585,987 $ 546,478
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Share Data)
YEARS ENDED DECEMBER 31,
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 26,11 $ 3,329 $ 22,732
Interest on Balances with Depository 5 63 32
Interest on Loans to Political Subdivisions 42 315 195
Interest on Federal Funds Sold 7 13 77
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 15,15 15,268 12,871
Tax Exempt 2,66 2,655 2,616
Dividends 69 666 599
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 45,18 42,309 39,122
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Depsits 18,831 15,523 14,810
Interest on Other Borrowings 5,66 5,282 3,586
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 24,47 20,805 18,396
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Interest Margin 20,74 21,504 20,726
Provision for Possible Loan Losses 737 737 708
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Interest Margin After Provision for Possible Loan Losses 19,967 20,767 20,018
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 1,117 1,071 1,081
Service Charges and Fees 273 286 255
Trust Department Income 726 582 546
Insurance Commissions, Fees and Premiums 620 602 598
Other Operating Income 60 341 226
Realized Gains (Losses) on Securities, Net 1,675 (219) 646
Total Other Income 4,471 2,663 3,352
OTHER EXPENSES
Salaries and Wages 5,385 5,004 4,764
Pensions and Other Employee Benefits 1,618 1,620 1,662
Occupancy Expense, Net 698 692 622
Furniture and Equipment Expense 675 556 508
Other Operating Expense 5,703 5,725 5,363
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 14,079 13,597 12,919
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision and Cumulative Effect of Accounting Change 10,359 9,833 10,451
Income Tax Provision 2,493 2,339 2,557
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change 7,866 7,494 7,894
Cumulative Effect of Change in Accounting for Income Taxes (233)
NET INCOME $ 7,866 $ 7,494 $ 8,127
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 1.57 $ 1.50 $ 1.57
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 1.57 $ 1.50 $ 1.62
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Common Stock Net
Stock Dividend Paid In Retained Unrealized Treasury
Shares Amount Distributable Capital Earnings Gain (Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1992
4,967 $ 4,967 $ 572 $ 9,267 $ 31,704 $ $ (1,000) $45,510
Net Income 8,127 8,127
Stock Dividend Issued 24 24 (572) 548
Cash Dividends Declared, $.54 Share (2,724) (2,724)
Stock Dividend Declared, 1% 820 (820)
Net Unrealized Gain on
Available-for-Sale Securities 5,592 5,592
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1993 4,991 4,991 820 9,815 36,287 5,592 (1,000) 56,505
Net Income 7,494 7,494
Stock Dividend Issued 25 25 (820) 795
Cash Dividends Declared, $.60 Share (3,022) (3,022)
Stock Dividend Declared, 1% 1,016 (1,016)
Net Unrealized Loss on
Available-for-Sale Securities (14,181) (14,181)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 5,016 5,016 1,016 10,610 39,743 (8,589) (1,000) 46,796
Net Income 7,866 7,866
Stock Dividend Issued 51 51 (1,016) 965
Cash Dividends Declared, $.64 Share (3,226) (3,226)
Stock Dividend Declared, 1% 1,013 (1,013)
Net Unrealized Gain on
Available-for-Sale Securities 15,541 15,541
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 5,067 $ 5,067 $ 1,013 $ 11,575 $ 43,370 $ 6,952 $ (1,000) $66,977
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 7,866 7,494 8,127
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 737 737 708
Realized (Gain) Loss on Securities, Net (1,675) 219 (646)
Donation of Land 31
Gain on Sale of Premises and Equipment (8)
Loss on the Sale of Foreclosed Assets 50 16
Gain on Sale of Other Assets (265)
Provision for Depreciation 735 627 552
Accretion and Amortization 817 62 1,010
Deferred Income Tax (100) 263 (392)
Changes in Operating Assets and Liabilities:
Decrease (Increase) in Accrued Interes
Receivable and Other Assets 1,569 (343) 2,110
(Decrease) Increase in Accrued Interest Payable and
Other Liabilities (944) 378 (1,298)
- ------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,086 9,180 10,171
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Sales of Held-to-Maturity Securities 51,632
Proceeds from the Maturities of Held-to-Maturity Securities 188 196 72,605
Purchase of Held-to-Maturity Securities (498) (320) (120,356)
Proceeds from Sales of Available-for-Sale Securities 8,284 60,391 75,819
Proceeds from Maturities of Available-for-Sale Securities 37,256 48,972 27,065
Purchase of Available-for-Sale Securities (60,101) (90,732) (182,941)
Proceeds from Sale of Premises and Equipment 29 8
Proceeds from Sale of Other Assets 266
Net Increase in Loans (6,525) (20,752) (14,152)
Purchase of Premises and Equipment (637) (2,113) (575)
Sale of Foreclosed Assets 567 373 379
- ------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (21,466) (3,690) (90,516)
- ------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 30,289 7,624 24,443
Increase (Decrease) in Short Term Borrowings (5,000) (5,807) 57,307
Proceeds from Long Term Borrowings 10,000
Repayment of Long Term Borrowings (8,500) (15,000)
Dividends Declared (3,226) (3,022) (2,724)
- ------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 13,563 (6,205) 79,026
- ------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,183 (715) (1,319)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,407 13,122 14,441
- ------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,590 $ 12,407 $ 13,122
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $ 25,621 $ 20,316 $ 18,197
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Income Taxes Paid $ 2,487 $ 2,405 $ 2,851
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of Citizens and Northern Corporation ("Corporation"), and its
subsidiaries, Citizens and Northern Bank ("Bank") and Bucktail Life Insurance
Company. All material intercompany balances and transactions have been
eliminated in consolidation.
NATURE OF OPERATIONS - The Corporation is primarily engaged in providing a full
range of banking and mortgage services to individual and corporate customers in
Northcentral Pennsylvania. It also provides other services, such as Trust
activities. The Corporation is subject to competition from other financial
institutions. It is also subject to regulation by certain federal and state
agencies and undergoes periodic examination by those regulatory authorities.
USE OF ESTIMATES - The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses
and the valuation of foreclosed assets held for sale, management relies on
appraisals of its internal certified appraiser.
Management believes that the allowance for losses on loans and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revisions of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's allowance for
losses on loans and valuation of foreclosed assets held for sale. Such agencies
may require the Corporation to recognize additional losses based on their
judgments of information available to them at the time of their examination.
INVESTMENT SECURITIES - As of December 31, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 115 ("SFAS No. 115"),
"Accounting for Certain Investments in Debt and Equity Securities". In
accordance with SFAS No. 115, such investments are accounted for as follows:
HELD-TO-MATURITY SECURITIES - includes debt securities that the
Corporation has the positive intent and ability to hold to maturity. These
securities are reported at cost adjusted for amortization of premiums and
accretion of discounts, computed using a method approximating the level-yield
basis.
AVAILABLE-FOR-SALE SECURITIES - includes debt and equity securities not
classified as held-to-maturity securities. Such securities are reported at fair
value, with unrealized gains and losses excluded from earnings and reported, net
of deferred income taxes, as a separate component of stockholders' equity. The
Corporation reclassified securities with a book value of $141,229,000 from held-
to-maturity to available-for-sale as of December 31, 1993.
Realized gains and losses on the sale of available-for-sale and held-to-maturity
securities are computed on the basis of specific identification of the adjusted
cost of each security.
The fair values of the majority of the Corporation's investments are estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued. The carrying values of restricted equity securities
approximate fair values.
6
<PAGE>
LOANS AND LEASE FINANCE RECEIVABLES ("LOANS") - Loans are stated at unpaid
principal balances, less the allowance for loan losses and net deferred loan
fees and unearned discounts.
Unearned discounts on installment loans are recognized as income over the term
of the loans using a method that approximates the interest method.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual status when, in the opinion of management,
collection of interest is doubtful. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income is generally not recognized
on specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation. Repair and maintenance expenditures which extend
the useful life of an asset are capitalized and other repair expenditures are
expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and
accumulated depreciation are removed from the account and any gain or loss is
credited or charged to income. Depreciation expense is computed using the
straight-line method.
FORECLOSED ASSETS HELD FOR SALE - Foreclosed assets held for sale consist of
real estate acquired by foreclosure and are carried at the lower of fair value
minus estimated cost to sell or cost. The book value of foreclosed assets held
for sale at December 31, 1995 and December 31, 1994 was $455,000 and $644,000,
respectively. Foreclosed assets held for sale amounting to $428,000 and $711,000
and $318,000 were acquired from the foreclosure of real estate loans during
1995, 1994 and 1993, respectively.
EMPLOYEE BENEFIT PLANS - The Corporation has a noncontributory defined benefit
pension plan covering substantially all of its employees. It is the
Corporation's policy to fund pension costs on a current basis to the extent
deductible under existing tax regulations. Such contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
In addition the Corporation has a profit-sharing plan which provides tax
deferred salary savings under section 401 (k) of the Internal Revenue Code.
The Corporation has also established a nonqualified "Supplemental Executive
Retirement Plan" for selected key executives.
In 1995, the Corporation adopted a Stock Incentive Plan for selected employees.
Awards may be made under the Plan in the form of qualified options ("Incentive
Stock Options", as defined by the Internal Revenue Code), nonqualified options,
stock appreciation rights or grants of restrictive stock. The number of shares
that may be issued under the Plan shall not exceed 60,000.
POSTRETIREMENT BENEFITS - Net periodic postretirement benefits costs are based
on provisions of Statement of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
7
<PAGE>
INCOME TAXES - Provisions for deferred income taxes are made as a result of
temporary differences in financial and income tax methods of accounting. These
differences relate principally to provisions for possible loan losses,
amortization of loan origination fees and costs, depreciation of bank premises
and equipment and accretion of discounts on investment securities.
In 1993, the Corporation implemented Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". SFAS No. 109 requires an asset
and liability approach for accounting and reporting for income taxes. The
cumulative effect of the adoption of SFAS No. 109 as of January 1, 1993 resulted
in an increase in net income for 1993 of $233,000 or $0.05 per share.
PER SHARE DATA - Earnings and cash dividends per share are based on the weighted
average number of shares outstanding, adjusted in each reporting period to give
the retroactive effect of stock dividends declared in the fourth quarter of each
year, payable in the first quarter of the next year. Weighted average shares
used for computation of earnings and dividends per share also include the
issuance of a 2 for 1 stock split recorded in the form of a stock dividend on
October 14, 1994.
The weighted average number of shares used in the earnings and dividends per
share computations was 5,012,081 for 1995, 1994 and 1993. The assumed exercise
of stock options (see Note 9) does not result in material dilution.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Corporation has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
payable.
CASH FLOWS - The Corporation utilizes the net reporting of cash receipts and
cash payments for certain deposit and lending activities. The Corporation
considers all cash and amounts due from depository institutions, interest-
bearing deposits in other banks, and federal funds sold to be cash equivalents
for purposes of the statement of cash flows.
TRUST ASSETS AND INCOME - Assets held by the Corporation in a fiduciary or
agency capacity for its customers are not included in the financial statements
since such items are not assets of the Corporation. Trust income is recorded on
a cash basis, which is not materially different from the accrual basis.
RECLASSIFICATIONS - Certain 1993 financial information has been reclassified
where necessary to conform to the 1994 and 1995 financial statement
presentation.
2. CASH AND DUE FROM BANKS
Banks are required to maintain reserves consisting of vault cash and deposit
balances with the Federal Reserve Bank in their district. The reserves are based
on deposit levels during the year and account activity and other services
provided by the Federal Reserve Bank. Average daily currency, coin, and cash
balances with the Federal Reserve Bank needed to cover reserves against deposits
for 1995 ranged from $4,199,000 to $4,963,000. For 1994, these balances ranged
from $4,062,000 to $5,360,000. Average daily cash balances with the Federal
Reserve Bank required to cover services provided to the Bank amounted to
$425,000 throughout 1995 and ranged from $425,000 to $525,000 for 1994. Total
balances restricted at December 31, 1995 and December 31, 1994 were $5,405,000
and $5,414,000, respectively.
Deposits with one financial institution are insured up to $100,000. The
Corporation maintains cash and cash equivalents with certain financial
institutions in excess of the insured amount.
8
<PAGE>
3. SECURITIES
Amortized cost and the estimated fair value of securities at December 31, 1995
and 1994 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U S Treasury $ 2,508 $ $ (8) $ 2,500
Obligations of Other U S Government Agencies 12,063 156 (5) 12,214
Obligations of States and Political Subdivisions 41,635 1,995 (48) 43,582
Corporate Debt Securities 13,922 272 14,194
Mortgage-backed Securities 204,259 3,381 (1,244) 206,396
- ----------------------------------------------------------------------------------------------------------------------------------
Total Debt Securities 274,387 5,804 (1,305) 278,886
Marketable Equity Securities 14,670 6,140 (105) 20,705
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 289,057 $ 11,944 $ (1,410) $ 299,591
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U S Treasury $ 598 $ 12 $ $ 610
Mortgage-backed Securities 909 18 927
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,507 $ 30 $ $ 1,537
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U S Treasury $ 2,511 $ $ (212) $ 2,299
Obligations of Other U S Government Agencies 13,099 4 (345) 12,758
Obligations of States and Political Subdivisions 40,722 538 (1,621) 39,639
Corporate Debt Securities 4,482 127 (61) 4,548
Mortgage-backed Securities 198,953 32 (15,876) 183,109
- ----------------------------------------------------------------------------------------------------------------------------------
Total Debt Securities 259,767 701 (18,115) 242,353
Marketable Equity Securities 13,871 4,555 (155) 18,271
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 273,638 $ 5,256 $ (18,270) $ 260,624
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U S Treasury $ 101 $ $ (4) $ 97
Mortgage-backed Securities 1,095 4 (58) 1,041
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,196 $ 4 (62) 1,138
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of investment debt securities at
December 31, 1995 follow. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with
9
<PAGE>
or without call or prepayment penalties. Maturities of mortgage-backed
securities have been estimated based on the contractual maturity.
<TABLE>
<CAPTION>
(In Thousands) December 31, 1995
Amortized Fair Fair
Cost Value
<S> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Due in one year or less $2,000 $2,045
Due after one year through five years 32,445 32,528
Due after five through ten years 38,663 40,100
Due after ten years 201,279 204,213
- -------------------------------------------------------------------------------
Total $274,387 $278,886
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Due after one year through five years $598 $610
Due after five through ten years 106 113
Due after ten years 803 814
- -------------------------------------------------------------------------------
Total $1,507 $1,537
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1995:
<TABLE>
<CAPTION>
Within
One One - Five Five - Ten After Ten
Year Yield Years Yield Years Yield Years Yield Total Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U S Treasury $ $ 2,508 5.16 $ $ $ 2,508 5.16
Obligations of Other U S
Government Agencies 7,063 5.84 5,000 8.00 12,063 6.74
Obligations of States and
Political Subdivisions 1,000 7.00 3,625 7.46 6,150 6.74 30,860 6.06 41,635 6.30
Corporate Debt 1,000 8.70 1,000 7.75 15 7.15 11,907 5.57 13,922 5.95
Mortgage-backed Securities 25,311 5.95 25,435 6.65 153,513 6.61 204,259 6.53
- ----------------------------------------------------------------------------------------------------------------------------------
Total $2,000 7.85 $32,444 6.11 $38,663 6.52 $201,280 6.50 $274,387 6.47
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U S Treasury $ $ 598 6.29 $ $ $ 598 6.29
Mortgage-backed Securities 106 9.09 797 7.37 909 7.57
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ $ 598 6.29 $ 106 9.09 $ 797 7.37 $ 1,507 7.06
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation owned one investment that exceeded 10 percent of stockholders'
equity as of December 31, 1995. The investment was a DLJ Mortgage Acceptance
Corp. CMO, with a fair value of $9,716,000.
Investment securities carried at approximately $34,602,000 and $26,710,000 at
December 31, 1995 and 1994, respectively, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law.
In 1995, gross realized gains from the sale of available-for-sale securities
were $1,675,000. In 1994, gross realized gains from the sale of available-for-
sale securities were $780,000, while gross realized losses amounted to
$999,000.
In 1993, proceeds from the sale of debt securities amounted to $126,641,000.
Gross gains realized for 1993 from the sale of debt securities were $872,000
and the respective gross losses realized for 1993 were $457,000. Net realized
gains on the sale of equity securities were $231,000 in 1993.
10
<PAGE>
4. NET LOANS AND LEASE FINANCE RECEIVABLES
Major categories of loans and leases included in the loan portfolio are
summarized as follows:
<TABLE>
<CAPTION>
(In Thousands) December 31, December 31,
% of % of
1995 Total 1994 Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 1,284 0.49 $ 2,593 1.00
Real Estate - Mortgage 200,066 75.72 193,095 74.70
Consumer 36,351 13.75 37,531 14.52
Agricultural 2,815 1.07 3,154 1.22
Commercial 14,445 5.47 13,625 5.27
Other 2,512 0.95 2,459 0.95
Political Subdivisions 6,546 2.48 5,870 2.27
Lease Receivables 189 0.07 168 0.07
- -------------------------------------------------------------------------------------------------------------------
Total 264,208 100.00 258,495 100.00
Less Unearned Discount (26) (23)
- -------------------------------------------------------------------------------------------------------------------
264,182 258,472
Less Allowance for Possible Loan Losses (4,579) (4,229)
- -------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Finance Receivables $ 259,603 $ 254,243
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1995 and 1994, net unamortized loan fees and costs of
$1,959,000 and $2,032,000, respectively, have been offset against the carrying
value of loans.
There is no concentration of loans to borrowers engaged in similar businesses or
activities which exceeds 10% of total loans at December 31, 1995.
The Corporation grants commercial, residential and personal loans to customers
primarily in Tioga, Bradford, Sullivan and Lycoming counties. Although the
Corporation has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contracts is dependent on the local economic
conditions within the region.
<TABLE>
<CAPTION>
Loan Maturity Distribution
December 31, 1995
Over One
Year but
Less than Over
One Year Five Five
or Less Years Years Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 1,284 $ $ $ 1,284
Real Estate - Mortgage 87,133 46,794 66,139 200,066
Consumer 13,541 12,806 10,004 36,351
Agricultural 1,343 1,347 125 2,815
Commercial 11,313 2,858 274 14,445
Other 1,201 107 1,204 2,512
Political Subdivisions 1,357 2,435 2,754 6,546
Lease Receivables 36 153 0 189
- --------------------------------------------------------------------------------
Total $117,208 $66,500 $80,500 $264,208
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Loans in the preceding table with maturities over one year but less than five
years and over five years are all fixed rate loans. All loans due on demand or
at a variable rate are shown as one year or less.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $279,000 at December 31, 1995 and $624,000 at December 31, 1994. Interest
income on such loans is recorded only as received. No interest was received on
these loans for the years ended December 31, 1995, 1994 or 1993.
Loans on which the original terms have been restructured totaled $206,000 and
$207,000 at December 31, 1995 and December 31, 1994, respectively. None of the
loans on which the original terms were changed were past due at December 31,
1995.
11
<PAGE>
Loans which were more than 90 days past due and still accruing interest at
December 31, 1995 and December 31, 1994 totaled $2,916,000 and $2,743,000,
respectively.
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
1995 1994 1993
<S> <C> <C> <C>
Balance at Beginning of Year $4,229 $3,817 $3,356
Provision Charged to Operations 737 737 708
Loans Charged Off (574) (519) (578)
Recoveries 187 194 331
- --------------------------------------------------------------------------------
Balance at End of Year $4,579 $4,229 $3,817
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1995, the Corporation had loans amounting to approximately
$2,163,000 that were specifically classified as impaired. The average balance of
these loans amounted to $2,076,000 for the year ended December 31, 1995. The
allowance for loan losses related to impaired loans amounted to approximately
$228,000 at December 31, 1995. The following is a summary of cash receipts on
these loans and how they were applied in 1995.
(In Thousands)
Cash receipts applied to reduce principal balance $ 60
Cash Receipts Recognized As Interest Income 45
- --------------------------------------------------------------------------------
Total Cash Receipts $105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1995 1994
<S> <C> <C>
Land $ 335 $ 350
Buildings and Improvements 7,878 7,880
Furniture and Equipment 4,237 5,057
- --------------------------------------------------------------------------------
Total 12,450 13,287
Less Accumulated Depreciation 5,659 6,367
- --------------------------------------------------------------------------------
Net $ 6,791 $ 6,920
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
Building and Improvements $ 298 $ 274 $ 254
Furniture and Equipment 437 353 298
- --------------------------------------------------------------------------------
Total $ 735 $ 627 $ 552
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
6. DEPOSITS
The following table reflects time certificates of deposit included in total
deposits and their remaining maturities.
<TABLE>
<CAPTION>
(In Thousands) At December 31, 1995
2000
1996 1997 1998 1999 and Thereafter Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $78,103 $15,259 $13,790 $5,077 $6,292 $118,521
<CAPTION>
At December 31, 1994
1999
1995 1996 1997 1998 and Thereafter Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $69,481 $13,202 $6,319 $10,620 $2,677 $102,299
</TABLE>
Included in interest-bearing deposits are certificates of deposit issued in the
amount of $100,000 or more. These certificates and their remaining maturities
are as follows:
<TABLE>
<CAPTION>
(In Thousands) At December 31, 1995
2000
1996 1997 1998 1999 and Thereafter Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $13,637 $814 $1,098 $522 $607 $16,678
<CAPTION>
At December 31, 1994
1999
1995 1996 1997 1998 and Thereafter Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $6,435 $427 $130 $1,083 $100 $8,175
</TABLE>
The interest paid on deposits of $100,000 or more amounted to $838,000, $668,000
and $444,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
7. BORROWED FUNDS
Borrowed funds include the following:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1995 1994
<S> <C> <C>
Federal Funds Purchased (a)
Flexline (b)
Other Borrowed Funds (c) $45,000 $53,500
Repurchase Agreements (d 40,000 45,000
- ----------------------------------------------------------------------
Total Borrowed Funds (e) $85,000 $98,500
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
(a) Federal Funds Purchased generally represent overnight federal funds
borrowings from correspondent banks. The maximum month-end amount of such
borrowing in 1995, 1994 and 1993 was $19,000,000, $30,000,000
and $30,000,000, respectively. The average amount of such borrowings was
$4,774,000, $11,565,000 and $13,914,000 in 1995, 1994 and 1993, respectively,
and the weighted average interest rates were 6.37% in 1995, 4.31% in 1994 and
3.35% in 1993.
(b) Flexline is a line of credit with the Federal Home Loan Bank of Pittsburgh
used on an overnight basis. The total amount available under the line is 10% of
the qualifying assets or approximately $54,000,000 at December 31, 1995. The
weighted average interest rate for 1995, 1994 and 1993 was 6.37%, 4.31% , and
3.35%, respectively. The maximum outstanding balance was $32,500,000 in 1995,
$30,000,000 in 1994 and $40,000,000 in 1993.
13
<PAGE>
(c) Other Borrowed Funds consist of separate loans with the Federal Home Loan
Bank of Pittsburgh.
<TABLE>
<CAPTION>
(In Thousands) December 31,
1995 1994
<S> <C> <C>
Fixed rate at 6.17%, maturity April 2, 1995 $ $ 10,000
Fixed rate at 5.96%, maturity May 19, 1995 5,000
Fixed rate at 5.86%, maturity June 12, 1995 5,000
Fixed rate at 5.84%, maturity June 23, 1995 5,000
Fixed rate at 5.64%, maturity June 30, 1995 5,000
Variable rate at 5.625%, maturity July 12, 1995 3,500
Variable rate at 5.69%, maturity July 27, 1995 10,000
Variable rate at 5.99%, maturity April 18, 1996 10,000 10,000
Fixed rate at 6.25%, maturity June 3, 1996 10,000
Fixed rate at 5.58%, maturity December 4, 1996 15,000
Fixed rate at 5.53%, maturity December 15,1997 10,000
- ----------------------------------------------------------------------
Total Other Borrowed Funds $ 45,000 $ 53,500
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
All advances are collateralized by the Corporation's Federal Home Loan Bank
stock, mortgage-backed securities and first mortgage loans under a blanket
floating-lien agreement.
(d) Repurchase Agreements represent the sale and agreement to repurchase
specified securities at an agreed upon price plus a negotiated rate of interest
as follows:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1995 1994
<S> <C> <C>
Fixed rate at 6.00%, maturity February 27, 1995 $ $25,000
Fixed rate at 6.40%, maturity March 13, 1995 20,000
Fixed rate at 5.83%, maturity January 25, 1996 20,000
Fixed rate at 5.68%, maturity June 22, 1997 10,000
Fixed rate at 6.00%, maturity June 15, 1998 10,000
- --------------------------------------------------------------------------------
Total Repurchase Agreements $40,000 $45,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The weighted average interest rate on repurchase agreements for 1995, 1994 and
1993 was 5.96%, 4.56%, and 3.41% respectively. The respective carrying value of
the underlying securities at December 31, 1995 and 1994 was $22,622,000 and
$74,524,000, respectively. As of December 31, 1995 repurchase agreements in the
amount of $20,000,000 were collateralized by a blanket agreement with the
Federal Home Loan Bank in which the actual ownership of the securities is not
transferred. During 1995, 1994 and 1993 the maximum outstanding borrowings were
$74,650,000, $47,474,000 and $38,307,000, respectively.
(e) The aggregate average funds borrowed for the years ended December 31, 1995,
1994 and 1993 were $92,502,000, $104,179,000 and $76,366,000, respectively. The
weighted average interest rate was 6.10%, 5.07% and 4.70% for those same
periods.
8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about
Fair Value of Financial Instruments", requires disclosure of fair value
information for financial instruments. Fair value estimates are made at a
specific point in time, based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or
discount that could result from offering for sale at one time the Corporation's
entire holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision.
14
<PAGE>
Changes in assumptions can significantly affect the estimates. Estimated fair
values have been determined by the Corporation using historical data,
as generally provided by the Corporation's regulatory reports, and an estimation
methodology suitable for each category of financial instruments. The method for
determining the estimated fair value of the Corporation's investment securities
is described in Note 1. The Corporation's fair value estimates, methods and
assumptions are set forth below for the Corporation's other financial
instruments.
CASH AND DUE FROM BANKS - The carrying amounts for cash and due from banks
reported in the consolidated balance sheet approximates these assets' fair
value.
LOANS - Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories. The fair value of performing loans,
except residential mortgage and credit card loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loan. The estimate of maturity is based on the Corporation's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions. For
performing residential mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates using discount rates on
secondary market sources adjusted to reflect differences in servicing and credit
costs. For credit card loans, cash flows and maturities are estimated based on
contractual interest rates and historical experience. Fair value on
nonperforming loans is based on recent appraisals or estimates prepared by the
Corporation's lending officers.
The following table presents information on loans.
<TABLE>
<CAPTION>
(In Thousands) December 31, 1995
Average Average Estimated
Book Historical Maturity Discount Calculated
Value Yield % (Years)(1) Rate %(2) Fair Value
<S> <C> <C> <C> <C> <C>
Real Estate:
Real Estate Fixed $130,787 9.07 4.14 9.41 $128,324
Real Estate Variable 70,338 8.44 0.54 9.18 70,384
- -----------------------------------------------------------------------------------------------------------------------------------
Total Real Estate 201,125 198,708
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 25,168 10.05 1.36 10.10 25,156
Consumer Variable 1,083 9.08 0.04 9.68 1,083
Credit Card 9,259 14.90 3.10 14.90 9,259
Key Loans 841 18.00 5.01 18.00 841
- -----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 36,351 36,339
- -----------------------------------------------------------------------------------------------------------------------------------
Agricultural 2,815 10.17 1.43 10.80 2,874
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial
Commercial Fixed 5,451 9.75 1.50 10.00 5,451
Commercial Variable 8,940 9.72 0.04 10.75 8,940
- ----------------------------------------------------------------------------------------------------------------------------------
Total Commercial 14,391 14,391
- ----------------------------------------------------------------------------------------------------------------------------------
Other Loans 2,512 7.89 0.27 9.50 2,510
Political Subdivisions 6,546 6.35 4.40 7.13 6,431
Leases 189 8.56 2.05 9.00 153
Nonperforming 279 279
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $264,208 $261,685
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
Average Average Estimated
Book Historical Maturity Discount Calculated
Value Yield % (Years) (1) Rate % (2) Fair Value
<S> <C> <C> <C> <C> <C>
Real Estate:
Real Estate Fixed $118,049 9.15 4.03 9.75 $114,347
Real Estate Variable 77,067 8.17 0.40 8.60 76,748
- -----------------------------------------------------------------------------------------------------------------------------------
Total Real Estate 195,116 191,095
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 25,382 8.91 1.18 10.60 25,081
Consumer Variable 1,134 8.82 0.04 9.10 1,134
Credit Card 9,896 14.90 3.10 14.90 9,896
Key Loans 1,119 18.00 5.10 18.00 1,119
- -----------------------------------------------------------------------------------------------------------------------------------
Total Consumer 37,531 37,230
- -----------------------------------------------------------------------------------------------------------------------------------
Agricultural 3,102 10.02 1.52 9.73 3,120
- -----------------------------------------------------------------------------------------------------------------------------------
Commercial
Commercial Fixed 4,045 9.68 1.29 10.00 4,031
Commercial Variable 9,580 9.64 0.04 9.35 9,580
- -----------------------------------------------------------------------------------------------------------------------------------
Total Commercial 13,625 13,611
- -----------------------------------------------------------------------------------------------------------------------------------
Other Loans 2,459 7.69 0.36 8.50 2,463
Political Subdivisions 5,870 6.19 4.00 6.84 5,686
Leases 168 8.42 1.84 8.00 168
Nonperforming 624 624
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans $258,495 $253,997
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Average maturity represents the expected cash flow period, which in some
instances is different from the stated maturity.
(2) Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
value presented above would be indicative of the value negotiated in an actual
sale.
DEPOSITS - The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market and interest checking
accounts is equal to the amount payable on demand at December 31, 1995. The fair
value of all other deposit categories is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
<TABLE>
<CAPTION>
December 31, 1995
(In Thousands)
Book Estimated
Value Fair Value
<S> <C> <C>
Noninterest-Bearing Demand Deposits $41,167 $41,167
Interest-Bearing Deposits:
Money Market 95,679 95,679
Interest Checking 43,180 43,180
Savings 46,051 46,051
Certificates of Deposit 118,521 119,376
Other Time 84,954 84,743
Total Interest-bearing Deposits 388,385 389,029
- ---------------------------------------------------------------------------
Total Deposits $429,552 $430,196
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
December 31, 1994
(In Thousands)
Book Estimated
Value Fair Value
<S> <C> <C>
Noninterest-bearing Demand Deposits $42,855 $42,855
Interest-bearing Deposits:
Money Market 81,387 81,387
Interest Checking 42,098 42,098
Savings 52,587 52,587
Certificates of Deposit 102,299 102,912
Other Time 78,037 78,037
- ---------------------------------------------------------------------------
Total Interest-bearing Deposits 356,408 357,021
- ---------------------------------------------------------------------------
Total Deposits $399,263 $399,876
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market, commonly referred to as the core deposit
intangible.
BORROWED FUNDS - Rates currently available to the Corporation for borrowed funds
with similar terms and remaining maturities are used to estimate fair value of
existing borrowed funds.
<TABLE>
<CAPTION>
December 31, 1995
(In Thousands)
Book Estimated
Value Fair Value
<S> <C> <C>
Securities Sold Under Agreement to Repurchase $40,000 $40,000
Other Borrowing from the Federal Home Loan Bank:
Fixed Rate 35,000 35,013
Variable Rate 10,000 10,000
- ---------------------------------------------------------------------------
Total Other Borrowings 45,000 45,013
- ---------------------------------------------------------------------------
Total Borrowed Funds $85,000 $85,013
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
(In Thousands)
Book Estimated
Value Fair Value
<S> <C> <C>
Securities Sold Under Agreement to Repurchase $45,000 $45,000
Other Borrowing from the Federal Home Loan Bank:
Fixed Rate 30,000 30,035
Variable Rate 23,500 23,500
- ---------------------------------------------------------------------------
Total Other Borrowings 53,500 53,535
- ---------------------------------------------------------------------------
Total Borrowed Funds $98,500 $98,535
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - There is no
material difference between the notional amount and the estimated fair value of
off-balance sheet items which totaled $45,786,000 at December 31, 1995 and
$44,583,000 at December 31, 1994 and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
17
<PAGE>
9. EMPLOYEE BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Corporation's funding policy is consistent with the
funding requirements of federal law and regulations. Plan assets are comprised
of common stock and U S Government and corporate debt securities. Net periodic
pension cost includes the following components.
<TABLE>
<CAPTION>
Year Ended December 31,
(In Thousands)
1995 1994 1993
<S> <C> <C> <C>
Service cost benefits earned during the period $ 174 $ 208 $ 201
Interest cost on projected benefit obligation 342 322 312
Return on assets (960) (71) (271)
Net amortization and deferral 541 (339) (112)
Amortization of transition gain (23) (23) (22)
- ---------------------------------------------------------------------------
Net periodic pension cost $ 74 $ 97 $ 108
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
At December 31, 1995, the accumulated benefit obligation and the vested benefit
obligation were $4,025,000 and $4,012,000, respectively. The funded status of
the Plan and amount recognized in the Corporation's consolidated balance sheet
were as follows:
<TABLE>
<CAPTION>
December 31,
<S> <C> <C>
1995 1994
Plan assets at fair value $ 5,854 $ 4,882
Projected benefit obligation (5,237) (4,236)
- ------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 617 646
Unrecognized net gain being recognized over employees'
average remaining service life (342) (365)
Deferred unexpected (gain) loss 90 (72)
- -----------------------------------------------------------------------------
Prepaid pension cost $ 365 $ 209
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
The projected benefit obligation at December 31, 1995 and 1994 was determined
using an assumed discount rate of 7.25% and 8.25 %, respectively, and an
assumed long-term rate of compensation of 5.5% for both years. The assumed long-
term rate of return on plan assets was 8.50% as of December 31, 1995 and 8.0% as
of December 31, 1994.
The Corporation has a profit sharing plan which incorporates the tax deferred
salary savings provisions of Section 401 (k) of the Internal Revenue Code. The
Corporation's matching contributions to the plan depend upon the tax deferred
contributions of employees. The Corporation's basic and matching contributions
for 1995, 1994 and 1993 were $365,000, $328,000 and $351,000, respectively.
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1995, 1994 and 1993 amounted to $75,000, $83,000 and
$166,000, respectively.
The Corporation has a Stock Incentive Plan for a selected group of senior
officers. Nonqualified options to purchase shares of the Corporation's stock
were issued in 1995 with an exercise price of $20.00 per share. The period of
the options is 10 years commencing from the date of the grant, December 21,
1995. Not more than 20% of the options may be exercised in any one year. The
options are not exercisable until 1 year from the date of the grant.
<TABLE>
<CAPTION>
Shares Under
Option
1995
<S> <C>
Outstanding, beginning of year
Granted during the year 12,100
Canceled during the year
Outstanding, end of year 12,100
</TABLE>
At December 31, 1995, there were 47,900 shares reserved for future grants.
18
<PAGE>
10. POSTRETIREMENT HEALTH CARE INSURANCE BENEFITS
The Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits and life insurance to employees who meet certain
age and length of service requirements. Effective January 1, 1992, the plan
contains cost-sharing features which cause participants to pay for all further
increases in costs related to benefit coverage. The Corporation's policy is to
fund the cost of the plan in amounts equal to the Corporation's share of medical
benefits and life insurance premium costs.
The following table shows the plan's funded status reconciled with amounts
recognized in the Corporation's balance sheet at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ (472) $ (410)
Active plan participants (269) (274)
- ----------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligations (741) (684)
Plan assets at fair value
- ----------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets (741) (684)
Unrecognized net gain (79) (135)
Unrecognized transition obligation 620 656
- ----------------------------------------------------------------------------------------------------
Accrued postretirement benefits cost $ (200) $ (163)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Net periodic benefit cost for 1995, 1994 and 1993 includes the following
components:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
Service cost $ 13 $ 17 $ 18
Interest cost on accumulated postretirement benefit obligation 53 51 53
Amortization of transition obligation over 21 years 30 36 37
- ----------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 96 $104 $ 108
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% and 8.25%, at December 31, 1995 and
1994, respectively.
11. INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability
(asset) at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
<S> <C> <C>
xxDeferred Tax Liabilities:
Bond Accretion $ 224 $ 188
Depreciation 162 124
Pension Expense 124 70
Unrealized Gains on Available-for-Sale Securities 3,582 --
- -----------------------------------------------------------------------------------------
Total 4,092 382
- -----------------------------------------------------------------------------------------
Deferred Tax Assets:
Loan Fees and Costs (465) (567)
SERP Plan (90) (101)
Postretirement Benefits (68) (57)
Loan Loss Provision (1,424) (1,205)
Accrued Payroll (111)
Unrealized Losses on Available-for-Sale Securities (4,425)
- -----------------------------------------------------------------------------------------
Total (2,158) (6,355)
- -----------------------------------------------------------------------------------------
19
<PAGE>
Deferred Tax Liability(Asset), Net $ 1,934 $ (5,973)
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
The federal income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
Currently Payable $ 2,593 $ 2,069 $ 2,715
Deferred Provision (Benefit) (100) 270 (158)
Total Provision $ 2,493 $ 2,339 $ 2,557
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The following tabulation is a reconciliation of the expected provision for
federal income taxes determined by application of the statutory rates at which
income is expected to be taxed and the actual income tax provision.
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
(In Thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Expected Provision $ 3,626 35.0 $ 3,343 34.0 $ 3,658 35.0
Nontaxable Bond Interest (931) (9.0) (901) (9.2) (914) (8.7)
Nontaxable Loan Interest (147) (1.4) (107) (1.1) (68) (0.7)
Nondeductible Interest Expense 143 1.4 113 1.2 98 0.9
Dividends Received Deduction (103) (1.0) (102) (1.0) (77) (0.7)
Surtax Exemption (74) (0.7) (76) (0.7)
- --------------------------------------------------------------------------------------------
Other, Net (21) (0.2) (7) (0.1) (64) (0.6)
- --------------------------------------------------------------------------------------------
Effective Income Tax and Rates $ 2,493 24.1 $ 2,339 23.8 $ 2,557 24.5
- --------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
12. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiary and
any associates of the foregoing persons are as follows:
<TABLE>
<CAPTION>
(In Thousands)
Beginning Other Ending
Name of Borrower Balance New Loans Repayments Changes Balance
<S> <C> <C> <C> <C> <C>
15 Directors, 3 Executive Officers 1995 $4,132 $2,046 $(1,638) $(99) $4,441
15 Directors, 4 Executive Officers 1994 3,566 1,910 (1,349) 5 4,132
15 Directors, 5 Executive Officers 1993 3,696 358 (388) (100) 3,566
</TABLE>
The above transactions were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than normal risks of collectibility. Other changes represent
transfers in and out of the related party category.
13. OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract amounts of these instruments
express the extent of involvement the Corporation has in particular classes of
financial instruments.
20
<PAGE>
The Corporation's exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of these instruments.
The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1995:
<TABLE>
<CAPTION>
Contract Amount
<S> <C>
Commitments to extend credit $43,153,000
Standby letters of credit $ 2,633,000
</TABLE>
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Corporation evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation, for extensions of credit is based on management's credit assessment
of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
14. REGULATORY MATTERS
Federal regulators have adopted capital adequacy standards for all bank holding
companies and banks which measure a banking company's capital to the risk
profile of its assets. The regulation assigns a risk factor to each asset
classification for the purpose of determining risk-based assets. Capital is then
measured in relation to risk-based assets and in 1995 and 1994 bank holding
companies and banks must have a total capital ratio of 8% of their risk-based
assets. At least half of this capital or 4% must be in Tier 1 (core capital),
which consists of stockholders' equity and qualifying perpetual preferred stock
together with related surplus and retained earnings. The remaining portion or
Tier 2 Capital, consists of limited life preferred stock, qualifying debt
instruments and the allowance for possible loan losses.
The Corporation's total capital ratio as of December 31, 1995 and 1994 was
18.72% and 18.36%, respectively. At December 31, 1995 and 1994, the core capital
to risk-weighted assets was 17.47% and 17.11%, respectively. Capital ratio
calculations exclude unrealized gains and losses on available-for-sale
securities.
Restrictions imposed by Federal Reserve Regulation H limit dividend payments in
any year to the current year's net income plus the retained net income of the
prior two years without any approval of the Federal Reserve Board. Accordingly,
Company dividends in 1996 may not exceed $9,112,000, plus Company net income for
1996. Additionally, banking regulators limit the amount of dividends that may be
paid by the Bank to the Corporation. Retained earnings against which dividends
may be paid without prior approval of the banking regulators amounted to
approximately $43,370,000 at December 31, 1995, subject to the minimum capital
ratio requirements noted above.
Restrictions imposed by federal law prohibit the Corporation from borrowing from
the Bank unless the loans are secured in specific amounts. Such secured loans to
the Corporation are generally limited to 10% of the Bank's stockholders' equity
or $5,576,000 at December 31, 1995.
21
<PAGE>
15. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern
Corporation.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
(In Thousands)
December 31,
1995 1994
<S> <C> <C>
ASSETS
Cash $ 16 $ 14
Available-for-Sale Securities 4,266 3,163
Subsidiary Investments
Citizens and Northern Bank 61,760 42,582
Bucktail Life Insurance Company 1,408 1,287
Total Subsidiary Investments 63,168 43,869
Dividend Receivable 870 800
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 68,320 $ 47,846
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed Funds and Other Liabilities 500 264
Dividend Payable 843 786
Stockholders' Equity 66,977 46,796
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 68,320 $ 47,846
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
Dividend from Subsidiary $ 3,505 $ 3,731 $ 4,300
Other Dividend Income 96 73 28
Available-for-Sale Securities Gains 26 107
Expenses (37) (50) (6)
- ----------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Earnings of Subsidiaries 3,590 3,861 4,322
Equity in Undistributed Earnings of Subsidiaries 4,276 3,633 3,805
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 7,866 $ 7,494 $ 8,127
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,866 $ 7,494 $ 8,127
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Noncash Dividends Received (219) (686) (1,150)
Equity Securities Gains (26) (107)
Equity in Undistributed Net Income of Subsidiaries (4,276) (3,633) (3,805)
Increase in Other Assets (70) (170)
Increase in Other Liabilities 26 99 96
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,301 3,167 3,098
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Available-for-Sale Securities (141) (503) (408)
Proceeds from Sale of Available-for-Sale Securities 68 347
- ----------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (73) (156) (408)
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Declared (3,226) (3,022) (2,724)
- ----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2 (11) (34)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14 25 69
- ----------------------------------------------------------------------------------------------------
22
</TABLE>
<PAGE>
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16 $ 14 $ 25
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Citizens & Northern Corporation
We have audited the accompanying consolidated balance sheets of Citizens &
Northern Corporation and subsidiaries ("Corporation") as of December 31, 1995
and 1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens & Northern
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the financial statements, the Corporation changed its
methods of accounting for securities and income taxes in 1993.
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
WILLIAMSPORT, PENNSYLVANIA
JANUARY 22, 1996
23
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL PLANNING
January 19, 1996
To the Stockholders and Board of Directors of Citizens & Northern Corporation
Management of Citizens & Northern Corporation and its subsidiaries has prepared
the consolidated financial statements and other information in the "Annual
Report and Form 10-K" in accordance with generally accepted accounting
principles and is responsible for its content and accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting and related
matters. Parente, Randolph, Orlando, Carey & Associates and the Company's
internal auditors have direct access to the Audit Committee.
William K. Francis James W. Seipler
Chairman, Treasurer
President & CEO
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
1995 PERFORMANCE REVIEW
Citizens and Northern Corporation ("Corporation") and its major subsidiary,
Citizens and Northern Bank ("Bank"), recorded per share earnings of $1.57 for
the year ended December 31, 1995. This compares to 1994 and 1993 per share
earnings of $1.50 and $1.62, respectively.
Operating earnings for the years ended December 31, 1995 and December 31, 1994
were adversely affected by rising interest rates and declining net interest
margins when compared to the year ended December 31, 1993. Net interest margins
for the years ended December 31, 1995, 1994, and 1993 were 2.99%, 3.39% and
3.70%, respectively.
The net interest margin began to show improvement during the second half of 1995
and management expects this trend to continue into 1996. This should provide a
wider net interest margin than 1995; however, we will not reach levels achieved
in 1993.
Management feels confident that if interest rates remain stable during 1996 the
Corporation will likely achieve earnings comparable to 1995. The Corporation
should again in 1996 outperform its peer group as it has for the past several
years.
NET INTEREST MARGIN
1995/1994/1993
Primary operating income of the Corporation is derived from the net interest
margin. The net interest margin is the difference between total interest income
on interest producing assets and interest expense paid on interest bearing
liabilities.
INTEREST INCOME
Average earning assets for 1995, 1994 and 1993, respectively, were $549,837,000,
$535,227,000 and $489,121,000. The average rate of return provided by the assets
amounted to 8.22%, 7.91% and 8.06%, respectively. Earning assets of the
Corporation consist primarily of investments and loans.
The investment portfolio contains over half of the earning assets base. The
average balance of the investment portfolio for the comparable periods was
$288,397,000, $290,620,000 and $257,858,000, respectively. The return on the
investment portfolio for the comparable periods was 6.41%, 6.40% and 6.24%,
respectively.
The investment portfolio is composed primarily of fixed rate mortgage-backed
securities issued by FNMA and FHLMC. Mortgage-backed instruments are preferred
because they provide an adequate rate of return and cash flow from monthly
payments. The down side of the instruments is prepayments during periods of
falling interest rates. The portfolio also contains a predetermined level of tax
free municipal securities which helps maintain a tax rate much lower than the
statutory rate. The balance of the portfolio consists of corporate bonds and
stock of Pennsylvania banks and Pennsylvania bank holding companies.
The average balance of the loan portfolio for 1995, 1994 and 1993 was
$259,142,000, $243,147,000 and $227,683,000, respectively. The average rate of
return on the loan base for the comparable periods was 10.24%, 9.72% and 10.07%,
respectively.
The loan base of the Corporation is heavily weighted with mortgage loans to
customers in our market area, primarily single family residential mortgages. The
portfolio does, however, contain a large number of farm mortgages since farming
is a primary industry in the Corporation's market area. The balance of the
portfolio is made up of consumer loans, including credit cards, commercial loans
and loans to municipalities.
On the other side of the balance sheet, average interest-bearing liabilities for
the periods ended December 31, 1995, 1994 and 1993 totaled $468,146,000,
$460,409,000 and $421,837,000, respectively. The average cost of interest-
bearing liabilities was 5.23%, 4.52% and 4.36%, respectively, for the comparable
periods.
25
<PAGE>
The largest single source of interest-bearing liabilities is deposits. The
largest deposit source historically has been time certificates of deposit. The
certificates carry maturities ranging from six months to five years and over the
years have provided a reliable source of funds to provide residential mortgages.
Other major fund providers are money market and individual retirement accounts.
The Corporation considers these core deposits and pays a slightly higher rate of
return than other financial institutions in our market area. Passbook and
statement savings have also been stable sources of low cost core deposits.
Average balances on interest-bearing deposits for the periods ended December 31,
1995, 1994 and 1993 were $375,644,000, $356,230,000, and $345,471,000,
respectively. The cost of the associated deposit liabilities was, respectively,
for the comparable periods, 5.00%, 4.36% and 4.29%.
The balance of the liability base consists of noninterest-bearing demand
deposits and borrowed funds. The primary source of borrowed funds is the Federal
Home Loan Bank of Pittsburgh. The Federal Home Loan Bank's primary function is
to provide mortgage financing and as such it provides short and long term
credits using the Corporation's mortgage loans and mortgage-backed securities as
a collateral base. The Corporation uses the borrowed funds to purchase
mortgaged-backed instruments for its investment portfolio.
The average balance of these short and long term borrowings for the periods
ended December 31, 1995, 1994 and 1993 amounted to $92,502,000, $104,179,000 and
$76,366,000. The average cost of these borrowings for the comparable periods was
6.10%, 5.07% and 4.81%, respectively.
The borrowed fund base does carry some risk. The funds are borrowed for
relatively short terms, normally from one month to three years and the
associated assets have much longer maturities. This creates a large negative gap
which could have a detrimental impact on earnings during periods of rising
interest rates. Management, however, continually monitors the interest rate risk
and has set parameters using a 200 basis point upside interest rate swing.
Upward interest rate movements also cause market value depreciation of the
investment portfolio; parameters have also been set based on a 200 basis point
upward shift.
Management and the Board of Directors feel that the capital of the Corporation
is adequate to support the interest rate risk and market value depreciation
parameters imposed on management to support the inherent risk.
Tables I through V present the relationship between interest income, interest
expense and average balance sheet categories for the comparable periods.
26
<PAGE>
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Change
Years Ended December 31, Increase (Decrease)
(In Thousands)
1995 1994 1993 95/94 94/93
INTEREST INCOME
<S> <C> <C> <C> <C> <C>
Available-for-Sale Securities (2):
U S Treasury Securities $ 128 $ 128 $ $ $ 128
Obligations of Other U S Government Agencies and Corporations 691 617 74 617
Mortgage Backed Securities 13,665 14,055 3,911 (390) 10,144
Obligations of States and Political Subdivisions 2,667 2,655 12 2,655
Stock 690 666 24 666
Other Securities 568 375 193 375
- ----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 18,409 18,496 3,911 (87) 14,585
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities (2):
U S Treasury Securities 22 3 55 19 (52)
Obligations of Other U S Government Agencies and Corporations
Mortgage-backed Securities 77 90 8,289 (13) (8,199)
Obligations of States and Political Subdivisions 2,616 (2,616)
Stock 599 (599)
Other Securities 616 (616)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 99 93 12,175 6 (12,082)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 55 63 32 (8) 31
Federal Funds Sold 79 13 77 66 (64)
Loans:
Real Estate Loans 18,201 15,983 15,327 2,218 656
Consumer 6,164 5,799 5,886 365 (87)
Agricultural 315 296 284 19 12
Commercial/Industrial 1,404 1,219 1,186 185 33
Other 19 19 34 0 (15)
Political Subdivisions 421 315 195 106 120
Leases 15 13 15 2 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loan Income 26,539 23,644 22,927 2,895 717
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 45,181 42,309 39,122 2,872 3,187
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest Checking 1,695 1,360 1,066 335 294
Money Market 4,526 3,038 2,612 1,488 426
Savings 1,198 1,344 1,449 (146) (105)
Certificates of Deposit 6,183 4,841 5,334 1,342 (493)
Individual Retirement Accounts 5,165 4,879 4,263 286 616
Other Time Deposits 64 61 85 3 (24)
Federal Funds Purchased 304 498 466 (194) 32
Other Borrowed Funds 5,342 4,784 3,121 558 1,663
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 24,477 20,805 18,396 3,672 2,409
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (1) $ 20,704 $ 21,504 $ 20,726 $ (800) $ 778
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net interest income, if reflected on a fully tax equivalent basis, would
have amounted to $22,037,000, $22,820,000, and $21,326,000, for 1995, 1994, and
1993, respectively.
(2) The Corporation adopted Statement of Financial Accounting Standards No. 115
as of December 31, 1993, and reclassified a substantial portion of its
securities from "held-to-maturity" to "available-for-sale".
27
<PAGE>
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
<TABLE>
<CAPTION>
Rate of Rate of Rate of
(In Thousands) Return/ Return/ Return/
Cost of Cost of Cost of
Funds Funds Funds
EARNING ASSETS 1995 % 1994 % 1993 %
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities: (*)
U S Treasury Securities $ 2,510 5.10 $ 2,512 5.10 $
Obligations of Other U S Government Agencies and Corporations 10,639 6.49 9,761 6.32
Mortgage-backed Securities 208,469 6.55 219,627 6.40 59,196 6.61
Obligations of States and Political Subdivisions 41,756 6.39 40,464 6.56
Stock 13,547 5.09 13,010 5.12
Other Securities 10,148 5.60 4,011 9.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 287,069 6.41 289,385 6.39 59,196 6.61
- -----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U S Treasury Securities 324 6.79 50 6.00 892 6.17
Obligations of Other U S Government Agencies and Corporations
Mortgage-Backed Securities 1,004 7.67 1,185 7.34 143,965 5.76
Obligations of States and Political Subdivisions 37,044 7.06
Stock 9,745 6.15
Other Securities 7,016 8.78
- -----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,328 7.45 1,235 7.29 198,662 6.13
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Due from Banks 996 5.52 1,114 5.92 1,016 3.15
Federal Funds Sold 1,301 6.07 346 3.76 2,564 3.00
Loans:
Real Estate Loans 198,936 9.15 185,535 8.61 169,465 9.04
Consumer 36,230 17.01 35,073 16.53 37,528 15.68
Agricultural 3,051 10.32 3,028 9.78 3,020 9.40
Commercial/Industrial 13,998 10.03 13,843 8.81 13,886 8.54
Other 238 7.98 272 6.99 500 6.80
Political Subdivisions 6,524 6.45 5,244 6.01 3,098 6.29
Leases 166 9.04 152 8.55 193 7.77
- -----------------------------------------------------------------------------------------------------------------------------------
Total Loans 259,143 10.24 243,147 9.72 227,690 10.07
Less Unearned Discount (7)
Net Loans and Leases 259,143 10.24 243,147 9.72 227,683 10.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 549,837 8.22 535,227 7.91 489,121 8.06
Cash 11,834 13,775 12,107
Securities Valuation Reserve (2,668) (851)
Allowance for Possible Loan Losses (4,484) (4,064) (3,627)
Other Assets 4,737 4,372 5,686
Bank Premises & Equipment 6,774 6,199 5,113
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets 566,030 554,658 508,400
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest Checking 42,118 4.02 41,061 3.31 38,784 2.75
Money Market 91,773 4.93 79,050 3.84 81,277 3.12
Savings 48,261 2.48 53,853 2.50 50,654 2.86
Certificates of Deposit 112,493 5.50 109,174 4.43 111,021 4.80
Individual Retirement Accounts 78,534 6.58 70,537 6.92 61,116 6.98
Other Time Deposits 2,465 2.60 2,555 2.39 2,619 3.25
Federal Funds Purchased 4,774 6.37 11,565 4.31 13,914 3.35
Other Borrowed Funds 87,728 6.09 92,614 5.17 62,452 5.14
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 468,146 5.23 460,409 4.52 421,837 4.36
Demand Deposits 39,313 39,282 35,925
Other Liabilities 4,844 2,877 3,945
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 512,303 502,568 461,707
Stockholders' Equity 55,961 52,629 46,693
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve (2,234) (539)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 566,030 $ 554,658 $508,400
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 2.99 3.39 3.70
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Average balances do not include unrealized gains and losses on
Available-for-Sale Securities.
28
<PAGE>
TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME
AND INTEREST EXPENSE
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1995/1994
Change Change
in In Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U S Treasury Securities $ $ $
Securities of Other U S Government Agencies and Corporations 57 17 74
Mortgage-Backed Securities (716) 326 (390)
Obligations of States and Political Subdivisions 83 (71) 12
Stock 27 (3) 24
Other Securities 522 (329) 193
- ------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities (27) (60) (87)
- ------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U S Treasury Securities 19 19
Securities of Other U S Government Agencies and Corporations
Mortgage-Backed Securities (17) 4 (13)
Obligations of States and Political Subdivisions
Stock
Other Securities
- -----------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 2 4 6
- -----------------------------------------------------------------------------------------------
Interest-Bearing Due from Banks (4) (4) (8)
Federal Funds Sold 48 18 66
Loans:
Real Estate Loans 1,191 1,027 2,218
Consumer 194 171 365
Agricultural 2 17 19
Commercial/Industrial 15 170 185
Other (3) 3
Political Subdivisions 83 23 106
Leases 2 2
- -----------------------------------------------------------------------------------------------
Total Loans 1,484 1,411 2,895
- -----------------------------------------------------------------------------------------------
Total Interest Income 1,503 1,369 2,872
- -----------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest Checking 36 299 335
Money Market 534 954 1,488
Savings (139) (7) (146)
Certificates of Deposit 152 1,190 1,342
Individual Retirement Accounts 549 (263) 286
Other Time Deposits (2) 5 3
Federal Funds Purchased (362) 168 (194)
Other Borrowed Funds (273) 831 558
- -----------------------------------------------------------------------------------------------
Total Interest Expense 495 3,177 3,672
- -----------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 1,008 $(1,808) $ (800)
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</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
amounts of the change in each.
29
<PAGE>
TABLE III - CONTINUED
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31, 1994/1993
Change Change
in in Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U S Treasury Securities $ 128 $ $ 128
Securities of Other U S Government Agencies and Corporations 617 617
Mortgage-backed Securities 10,271 (127) 10,144
Obligations of States and Political Subdivisions 2,655 2,655
Stock 666 666
Other Securities 375 375
- ------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 14,712 (127) 14,585
- ------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U S Treasury Securities (51) (1) (52)
Securities of Other U S Government Agencies and Corporations
Mortgage-backed Securities (10,205) 2,006 (8,199)
Obligations of States and Political Subdivisions (1,308) (1,308) (2,616)
Stock (299) (300) (599)
Other Securities (616) (616)
- ------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities (12,479) 397 (12,082)
- ------------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 4 27 31
Federal Funds Sold (79) 15 (64)
Loans:
Real Estate Loans 1,406 (752) 654
Consumer (396) 309 (87)
Agricultural 1 12 13
Commercial/Industrial (4) 36 32
Other (17) 1 (16)
Political Subdivisions 129 (9) 120
Leases 1 1
- ------------------------------------------------------------------------------------------------
Total Loans 1,119 (402) 717
- ------------------------------------------------------------------------------------------------
Total Interest Income 3,277 (90) 3,187
- ------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest Checking 66 229 295
Money Market (74) 500 426
Savings 88 (193) (105)
Certificates of Deposit (88) (405) (493)
Individual Retirement Accounts 652 (36) 616
Other Time Deposits (3) (22) (25)
Federal Funds Purchased (87) 119 32
Other Borrowed Funds 1,554 109 1,663
- ------------------------------------------------------------------------------------------------
Total Interest Expense 2,108 301 2,409
- ------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 1,169 $ (391) $ 778
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</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
amounts of the change in each.
30
<PAGE>
NONINTEREST INCOME
1995/1994/1993
Noninterest income for the year ended December 31, 1995 and 1994 increased
$1,808,000, or 68% over 1994. The increase is due to gains on the sales of
stocks of Pennsylvania banks and Pennsylvania bank holding companies. The sales
were prompted by increases in value due to merger activity. Management and the
Board of Directors felt that it would be prudent to lock in this increase in
value. Some of the sales were the result of a recent FDIC ruling that bank
stocks not listed on a recognized exchange must be disposed of or moved to the
holding company.
Service charges on deposit accounts increased $46,000 or 4.3% for the
comparable years 1995 and 1994. The increase was the result of increased usage
of account services and fees generated by the new statement imaging system
installed in late 1994. The new system has been overwhelmingly accepted by the
customer base and has streamlined operations. Customer checks are now destroyed
after ninety days and the customer receives an image of the check in their
statement.
The Trust Department recorded earnings of $726,000 versus $582,000, when
comparing periods ended December 31, 1995 and December 31, 1994, an increase of
24.7%. Trust Department fees are based on the market value of customer accounts
and during 1995 the stock market posted significant increases in value, thereby
increasing trust fees. The Trust Department also settled several estates during
1995 which also contributed additional fee income.
Insurance commissions, fees, and premiums generated by the Corporation's
insurance subsidiary, Bucktail Life Insurance Company, increased only slightly
when comparing 1995 to 1994.
Other operating income declined sharply during the year ended December 31, 1995,
due to the income recorded during 1994 from the sale of an "Other Asset". Gain
from that sale amounted to $265,000. The sale of fully depreciated item
processing equipment and interest income generated by tax refunds also
contributed $24,000 to 1994 other operating income. Had these items been
excluded from 1994 totals, other operating income would have increased $8,000
during 1995.
Total noninterest income in 1994 declined $689,000, a decrease of 20.55% when
compared to 1993. The decline was due to realized securities gains in 1993
totaling $646,000. In 1994, realized losses on available-for-sale securities
amounted to $219,000.
Other operating income increased significantly in 1994 compared to 1993 due to
the sale of an "Other Asset" for a gain of $265,000, as described above. The
asset was a 1987-4 residual interest certificate which had been classified as
noninvestment grade by the FDIC in 1989. The asset had been written down to a
$1.00 carrying value at the request of the FDIC. Income recorded on the asset
during 1994 and 1993 amounted to $15,000 and $194,000, respectively.
Other entries causing an increase in noninterest income in 1994 over 1993
included the sale of fully depreciated equipment of $14,000 and interest on tax
refunds of $10,000. The tax refunds totaled $56,000 on amended returns for 1990
and 1991.
TABLE VI - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
(In Thousands)
Years Ended December 31,
% %
1995 Change 1994 Change 1993
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $ 1,117 4.30 $ 1,071 (0.93) $ 1081
Service Charges and Fees 273 (4.55) 286 12.16 255
Trust Department Income 726 24.74 582 6.59 546
Insurance Commissions, Fees and Premiums 620 2.99 602 0.67 598
Other Operating Income 60 (82.40) 341 50.88 226
Realized Gains (Losses) on Securities, Net 1,675 (864.84) (219) (133.90) 646
- --------------------------------------------------------------------------------------------------------------------
Total Other Income $ 4,471 67.89 $ 2,663 (20.55) $ 3,352
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
OTHER NONINTEREST EXPENSE
1995/1994/1993
Other noninterest expense increased $482,000 or a modest 3.5% when comparing the
year ended December 31, 1995 with the year ended December 31, 1994.
Salaries and wages increased $381,000, an increase of 7.6%, when comparing the
years 1995 and 1994. The increase was due to merit raises and an increase in
full time equivalent employees from 194 at year end 1994 to 200 at year end
1995.
Furniture and equipment expense increased $119,000 or 21.4%, when comparing 1995
to 1994. The increase can be attributed to depreciation expense and software
maintenance agreements associated with the statement imaging system that became
operational in the fall of 1994. These additional expenditures should be reduced
over the long term by a reduction in personnel and postage costs.
Other operating expense declined $22,000 in 1995 when compared to 1994. The
single largest factor contributing to the decrease was FDIC insurance. Insurance
costs decreased by $420,000, net of a refund of $253,508 received in September
1995. As a well capitalized institution, the Corporation benefited from a
reduction in rates during 1995 that resulted from the Bank Insurance Fund's
attainment of statutory reserve levels. Relatedly, the Corporation will pay a
flat amount of $2,000 for 1996.
Several categories of other operating expense increased in 1995, most notably
credit card processing costs. Credit card processing costs increased $172,000
when comparing 1995 to 1994. The increased cost is related to interchange fees
which are the cost to the Corporation for the use of its credit cards on other
networks.
Other expense items reflecting increases during 1995 were Pennsylvania Shares
Tax $30,000, bank examination charges $32,000, repairs and maintenance to
equipment $33,000 and other losses $37,000.
Noninterest expense for the period ended December 31, 1994 increased $678,000
or 5.25% when compared to the period ended December 31, 1993.
Salaries and wages increased $240,000 or 5.04% when comparing the years 1994 and
1993. The increase can be attributed to merit increases and an increase in the
number of full time equivalent employees. There were 194 full time equivalent
employees at December 31, 1994 and 189 at December 31, 1993.
Pension and employee benefits declined slightly in 1994 compared to 1993. The
decline was due to the drop in the contribution to the profit sharing plan
brought about by the retirement of several employees who had been with the Bank
for several years. The retirement of two executive officers also caused a
decrease of $83,000 in the amount of the contribution to the Corporation's
Supplemental Executive Retirement Plan.
Occupancy expense during 1994 increased $70,000 when compared to 1993. This was
due to increased building maintenance costs, including janitor supplies and
depreciation. Depreciation expense increased $20,000 over 1993 due to the
construction of a new office in East Smithfield and extensive renovation of
other offices.
Furniture and equipment expense increased 9.45% when comparing 1994 to 1993. The
increased expense is due to depreciation on the previously mentioned check
imaging system. The cost of the system was $877,000.
A comparison of 1994 and 1993 other operating expense shows an increase of
$362,000 or 6.75%. This increase can be attributed to the following items:
credit card processing costs, FDIC insurance, Pennsylvania shares tax and
donations. Credit card costs increased $273,000 due to increased transaction
volume and card holders. FDIC insurance increased $45,000 because of increased
coverage levels and Pennsylvania shares tax increased, because of capital
growth. The Corporation also made two large donations during 1994: a building in
the village of Elkland, Pa. to the local library and appreciated stock to the
Soldiers and Sailors Hospital in Wellsboro, Pa. The building had a book value of
$61,000 and the stock had a carrying value of $36,000.
32
<PAGE>
TABLE VII- COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
(IN THOUSANDS) YEARS ENDED DECEMBER 31,
% %
1995 Change 1994 Change 1993
<S> <C> <C> <C> <C> <C>
Salaries and Wages $ 5,385 $ 7.61 $ 5,004 $ 5.04 $ 4764
Pensions and Other Employee Benefits 1,618 (0.12) 1,620 (2.53) 1662
Occupancy Expense, Net 698 0.87 692 11.25 622
Furniture and Equipment Expense 675 21.40 556 9.45 508
Other Operating Expense 5,703 (0.38) 5,725 6.75 5363
- ------------------------------------------------------------------------------------------
total other expense $14,079 $ 3.54 $13,597 $ 5.25 $12,919
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
The Corporation's income tax provision reflected as a per share cost to
stockholders amounted to $.50, $.47 and $.51, respectively for 1995, 1994, and
1993. The amount of income tax payable per common share for those years was
$.52, $.41 and $.54, respectively. The per share tax payable for 1995 is a
reasonable estimate as the return has not been prepared.
The difference between the amount of income tax currently payable and the amount
reflected in the Corporation's income statement is caused by temporary
differences. Generally, temporary differences occur when an item of income or
expense is included in taxable income during different accounting periods for
financial statement and tax return purposes.
The most significant items creating temporary differences are accretion on
bonds, depreciation, loan loss expense, loan fees and expense and employee
benefit plans.
There are items included in the income statement that are not fully taxable,
including dividends received from certain domestic corporations and a portion of
interest received on municipal bonds and loans.
During 1993, Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", was adopted. The standard requires deferred income taxes to
be recorded at current tax rates. With the implementation of SFAS No. 109, the
Corporation recognized an increase in income amounting to $233,000. This
adjustment was the result of a decline in current tax rates. The adjustment was
reflected as "The Cumulative Effect of an Accounting Change" on the
Corporation's income statement.
The reader should refer to Note 11 of the "Notes to the Consolidated Financial
Statements" for a more complete analysis of income tax expense.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is a reserve created by charges to
earnings to cover current and future losses which may occur in the loan
portfolio. The balance in the reserve is reviewed by management and the Board of
Directors quarterly. Factors used to determine the adequacy include the
following:
1. Portfolio quality as determined by a review of an outside loan appraiser.
2. Regulatory examinations.
3. A monthly review of the "Watch List" by management and the Board of
Directors.
4. Regulatory requirements.
5. Ability to recover losses and earnings coverage of losses.
33
<PAGE>
PORTFOLIO QUALITY
The Corporation employs the services of an independent loan appraiser who
reviews loans based on parameters supplied by the Board of Directors. The review
is very comprehensive and includes the examination of loan documentation,
borrower's cash flow or ability to repay based on current financial information
and the collateral associated with each loan. The appraiser reviews all loans of
$175,000 or more and all loans of $100,000 which have been previously
classified.
The report prepared by the loan appraiser isolates all loans the reviewer
perceives to be problems. The loans are then categorized as loans that are
improperly documented, substandard, doubtful and loss. The loan appraisal was
completed in the third quarter of 1995.
The loan portfolio is normally reviewed annually by the FDIC or the Pennsylvania
Department of Banking. After each review a list of charge-offs is presented to
management. The examination in 1995 was conducted by the Pennsylvania Department
Lof Banking as of March 31, 1995.
Management also charges off loans at the end of each quarter that it feels are
uncollectible.
TABLE VIII - CLASSIFIED LOAN COMPARISONS
<TABLE>
<CAPTION>
Brown Brown Brown Brown
Consulting Consulting Consulting Consulting
Nov 92 May 93 June 94 June 95
(In Thousands)
<S> <C> <C> <C> <C>
Substandard $7,338 $7,647 $9,823 $5,911
Doubtful 1,143 668 346 59
LOSS 321 40 91 107
- --------------------------------------------------------------------------------
Total $8,802 $8,355 $10,260 $6,377
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
% of Net Loans 3.9% 3.6% 4.0% 2.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
PROJECTED LOSS PREDICTIONS
The Corporation also prepares loss predictions, quarterly, based on charge-off
history and current portfolio quality. The predictions are calculated on the
ratio of charge-offs by loan type applied to the current outstanding balance of
that particular loan category. The ratios are calculated using a six year
history of charge-offs.
Two predictions are prepared: most likely and worst case. The most likely
prediction uses the most recent six year history excluding any year that
experienced abnormally large charge-offs and any year that had abnormally low
recoveries. The worst case includes years of exceptionally high charge-offs.
After the estimated charge-offs are determined using the two methods, the
reserve balance is calculated and a determination is made as to its adequacy. If
it is found that the reserve will be inadequate, the budgeted charge to earnings
is adjusted. The reserve is then divided into allocated and unallocated
portions. A comparison is also made to the Corporation's peer group. At year end
1995 the Corporation's reserve was slightly higher than that of its peer group
when comparing the latest information available.
Statement of Financial Accounting Standards No. 114 became effective in 1995.
SFAS No. 114 requires that certain impaired loans be reflected in the
Corporation's balance sheet using one of the following valuation methods: (1)
the present value of expected future cash flows discounted at the loan's
effective interest rate, (2) the loan's observable market price, or (3) the fair
value of the collateral associated with the loan.
SFAS No. 114 does not apply to the majority of the Corporation's loans. Large
groups of smaller-balance homogeneous loans may be collectively evaluated for
impairment. Examples of such loans include residential mortgage, credit card and
consumer installment loans.
34
<PAGE>
The Corporation has implemented SFAS No. 114 by evaluating its impaired loans
based on the fair value of the collateral since all of the impaired loans in
1995 are collateral dependent. Based on this analysis, the Corporation has
established an allowance of $228,000, included in the allowance for possible
loan losses as of December 31, 1995, related to impaired loans.
TABLE IX - LOAN LOSS HISTORY FOR THE PAST SIX YEARS
<TABLE>
<CAPTION>
(In Thousands)
1995 1993 1992 1991 1990 Average
<S> <C> <C> <C> <C> <C> <C>
Net Loans * $264,182 $238,755 $225,475 $199,072 $190,544 $196,643
Net Charge-offs 387 247 518 3,142 115 676
Allowance for Possible Loan Losses Balance 4,579 3,817 3,356 2,548 2,539 3,010
Provision for Loan Losses Charged to Earnings 737 708 1,326 3,151 326 998
Earnings 7,866 8,127 7,290 5,643 5,342 5,966
Earnings Coverage of Net Charge-offs 20.3x 32.9x 14.1x 1.8x 46.5x 8.8x
Allowance Coverage of Net Charge-offs 11.8x 15.5x 6.5x 0.8x 22.1x 4.4x
Loans Ninety Days or More Past Due and
Still Accruing 2,915 2,899 2,532 3,810 2,425 2,475
Net Charge-offs as a Percent of the Provision 52.5% 34.9% 39.1% 99.7% 35.3% 67.8%
Year-End Nonaccrual Loans 279 843 1,351 417 309 546
Allowance as a Percentage of Gross Loans: *
Bank (1) 1.73% 1.60% 1.49% 1.28% 1.33% 1.30%
Peer Group (2) 1.61% %1.82% 1.60% 1.44% 1.34% 1.33%
</TABLE>
* Gross Loans less Unearned Discount
(1) At December 31, 1995
(2) At September 30, 1995
MONTHLY "WATCH LIST" REVIEW
The Corporation prepares a monthly "Watch List" of delinquent or otherwise
potential problem loans. The list is distributed to branch managers or lending
officers responsible for the loans. The branch manager or lending officer must
update each loan with its current status. A review of the updated list isolates
loans which are still delinquent, possible charge-offs, bankruptcies,
foreclosures, etc.
This list also reflects large problem loans that may require a separate reserve
allocation or an increase in the monthly charge to earnings in addition to the
budgeted amount.
REGULATORY REQUIREMENTS
The FDIC, in conjunction with other regulatory agencies, issued an interagency
policy statement outlining the responsibility of the Board of Directors as it
relates to the loan loss reserve. The statement requires that the Board of
Directors maintain an allowance for loan losses that is at least equal to all
substandard loans after a deduction for the collateral that is associated with
those loans, one-half of all loans classified as doubtful and one-hundred
percent of all loans classified as loss.
In addition, the Board of Directors must ensure that all loan guidelines are
adhered to, that all loan documentation is in place and that all collateral
liens are perfected.
35
<PAGE>
TABLE X - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $4,229 $3,817 $3,356 $2,548 $2,539
- -----------------------------------------------------------------------------------------------------------------------------------
Charge-Offs
Real Estate Loans 38 95 32 15
Installment Loans 236 266 195 218 213
Credit Card and Related Plans 184 144 183 139 154
Commercial and All Other Loans 116 109 105 293 2,893
- -----------------------------------------------------------------------------------------------------------------------------------
Total Charge-Offs 574 519 578 682 3,275
- -----------------------------------------------------------------------------------------------------------------------------------
Recoveries
Real Estate Loans 4 15
Installment Loans 60 68 84 59 72
Credit Card and Related Plans 41 42 41 22 3
Commercial and All Other Loans 86 80 206 83 43
- -----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 187 194 331 164 133
- -----------------------------------------------------------------------------------------------------------------------------------
Net Charge-Offs 387 325 247 518 3,142
Additions Charged to Operations 737 737 708 1,326 3,151
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $4,579 $4,229 $3,817 $3,356 $2,548
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
TABLE XI - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES BY LOAN TYPE
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Mortgage $ 38 $ 35 $ 35 $ 18 $ 11
Consumer 286 241 205 188 136
Commercial 604 443 583 558 653
Letters of Credit Commitments 54 86 112 115
FASB 114 Allocation 228
All Other Commitments 320 300 299 351
Total Allocated 1,530 1,105 1,234 1,230 800
Unallocated 3,049 3,124 2,583 2,126 1,748
Total Allowance $ 4,579 $ 4,229 $ 3,817 $ 3,356 $ 2,548
</TABLE>
ABILITY TO REPLENISH THE RESERVE THROUGH EARNINGS
The Corporation has demonstrated the ability, when necessary, to accommodate
large loan losses during periods of adverse economic conditions without
severely impacting earnings or stockholder value. At year end 1995 the
earnings coverage of net charge-offs was 20 times.
TABLE XII - FIVE YEAR LOAN SUMMARY
<TABLE>
<CAPTION>
(In Thousands) 1995 % 1994 % 1993 % 1992 % 1991 %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate - Construction $ 1,284 0.49 $ 2,593 .98 $ 2,224 0.93 $ 993 0.44 $ 982 0.49
Real Estate - Mortgage 200,066 75.72 193,095 74.72 176,518 73.92 162,597 72.10 135,897 68.25
Consumer 36,351 13.76 37,531 14.52 37,713 15.79 39,173 17.37 38,305 19.24
Agricultural 2,815 1.07 3,154 1.22 3,207 1.34 3,065 1.36 2,467 1.24
Commercial 14,445 5.47 13,625 5.27 13,046 5.46 14,578 6.46 16,366 8.22
Other 2,512 0.95 2,459 0.95 1,782 0.75 1,492 0.66 614 0.31
Political Subdivisions 6,546 2.48 5,870 2.27 4,114 1.72 3,428 1.52 4,368 2.19
Lease Receivables 189 0.07 168 0.07 176 0.07 190 0.08 129 0.06
- -----------------------------------------------------------------------------------------------------------------------------------
Total 264,208 100.00 258,495 100.00 238,780 100.00 225,516 100.00 199,128 100.00
Less Unearned Discount (26) (23) (25) (41) (56)
- -----------------------------------------------------------------------------------------------------------------------------------
264,182 258,472 238,755 225,475 199,072
Less Allowance for Possible
Loan Losses (4,579) (4,229) (3,817) (3,356) (2,548)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease
Financing Receivables $259,603 $254,243 $234,938 $222,119 $196,524
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
BALANCE SHEET
Average total assets of the Corporation for the year ended December 31, 1995
totaled $566,030,000. This compares to average total assets for the years ended
December 31, 1994 and December 31, 1993 of $554,658,000 and $508,400,000,
respectively.
The increase in average total assets for 1995 amounted to $11,372,000 or 2.1%
when comparing 1995 to year end 1994. The increase during the two periods can
be attributed to an increase in average total deposits of $19,445,000 or 4.9%.
Deposit increases between the comparable periods centered around the higher
interest-bearing deposit categories, namely money market accounts, certificates
of deposit and individual retirement accounts. Average balances in other
interest-bearing accounts and demand deposits remained relatively flat between
the comparable periods.
The increase in average total deposits between the years ended December 31, 1994
and December 31, 1993 was slightly less at $14,116,000 or 3.7%. The deposits
categories which increased during these periods were individual retirement
accounts, interest checking accounts and regular savings accounts. Certificates
of deposit and money market accounts recorded slight decreases between the
comparable periods. Average demand deposits increased from $35,925,000 to
$39,282,000 between December 31, 1995 and 1994, respectively.
Average borrowed funds used to fund a portion of the investment in available-
for-sale securities and over night deposit fluctuations declined to $92,502,000
for 1995 from an average balance of $104,179,000 in 1994. The decrease in
average borrowed funds between 1995 and 1994 is due to an increase in interest
rates that began in 1994. The increased rates prompted a sale of a large
portion of the available-for-sale securities in late 1994. The sale amounted to
about $20,000,000 and the proceeds were used to reduce borrowed fund balances.
Interest rates on borrowed funds declined slightly through the last half of 1995
and management expects this trend to continue into 1996. The decrease in rates
has resulted in increased interest margins and, as a result, management has
increased borrowings to $99,000,000 at January 31, 1996.
Average total investments during 1995 declined $2,556,000 when compared to
1994. This, as previously mentioned, was the result of decreased borrowings.
Average total investments increased $30,642,000 during 1994 when compared to
1993. The increase was supported by an increase in average borrowed funds during
the comparable periods. The periods being compared also enjoyed relatively large
interest margins.
As reflected in Table II of this section, at December 31, 1993 management
reclassified nearly all of its investment portfolio from held-to-maturity
securities to available-for-sale securities. This decision was prompted by the
implementation of Statement of Financial Accounting Standards No. 115 as
required by the Financial Accounting Standards Board. The SFAS requires that the
investment portfolio be segregated into three distinct categories: held-to-
maturity, available-for-sale and trading account securities.
Held-to-maturity securities, as the title implies, must be held to maturity and
are carried at amortized cost. Available-for-sale securities are carried at
amortized cost and marked to market on financial statement presentation dates.
The market value adjustment is carried as an equity reserve, net of applicable
income tax.
The decision to reclassify the securities was made because the Board of
Directors and management decided that since the investment portfolio comprises
more than half of the Corporation's asset base it must be managed on a regular
basis to take advantage of changing market conditions which could leave the
Corporation and corporate earnings vulnerable to these changing market
conditions. Management and the Board of Directors are cognizant of the fact that
the required adjustment to capital caused by market value changes can be
substantial and have in place parameters which are monitored monthly. The
portfolio of available-for-sale securities is monitored closely and priced
frequently, especially during periods of interest rate instability.
Average total loans amounted to $259,142,000, $243,147,000 and $227,690,000,
respectively for the comparable periods ended December 31, 1995, 1994 and 1993.
The increase amounted to 6.6% during 1995 and 6.8% during 1994 as compared to
the year ended December 31, 1993. The increase in average total loans for all
comparable periods was centered around real estate secured loans as all other
loan categories, with the exception of municipal loans, were relatively flat.
Average municipal loans, however, did increase $2,146,000 between December 31,
1993 and December 31, 1994 as a result of an authority secured loan to a local
hospital expansion project.
37
<PAGE>
Average equity remained strong for the three years being compared. Average
equity to average assets for the years ended December 31, 1995, 1994 and 1993
was 9.9%, 9.5% and 9.2%, respectively. Average equity to average deposits was
13.5%, 13.3% and 12.2%, respectively for the same comparable periods. The
percentages presented do not reflect equity adjustments resulting from equity
reserves created by unrealized gains or losses on the Corporation's portfolio of
available-for-sale securities.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is the Corporation's ability to raise funds on short notice due to
deposit fluctuations, unusually heavy loan demand or the maintenance of required
reserves. The primary source of funds for the Corporation is core deposits.
Deposits considered core are those whose balances remain relatively stable
during a period of several years.
Daily deposit fluctuations normally do not vary more than $2,000,000 to
$5,000,000 up or down. However, the Corporation has a few customers who can
cause total deposits to vary as much as $7,000,000 to $8,000,000 for short
periods. When deposits decline for short periods, the Corporation has the
availability of several credit sources. The Corporation maintains a Flexline of
credit with the Federal Home Loan Bank of Pittsburgh and overnight borrowing
agreements with several of its correspondent banks, namely Mellon Bank and the
Atlantic Central Bankers Bank. The Corporation also uses repurchase agreements
secured by securities held in the investment portfolio.
Interest rate sensitivity is a measure of the Corporation's asset and liability
maturity schedule. It considers the maturity date of each asset and liability to
be the date at which that asset or liability will carry a different interest
rate. A positive interest rate gap indicates that more assets than liabilities
are maturing during a given period. Conversely, a negative gap shows that more
liabilities than assets are maturing during that same period. The normal
measurement period is one year. The interest rate gap can have a dramatic effect
on the interest margin of the Corporation during periods of falling or rising
interest rates.
Interest rate fluctuations also impact the market value of the Corporation's
investments which are carried as available-for-sale securities and have to be
marked to the current market value at the end of each quarter. Rising interest
rates can cause significant depreciation in the portfolio. Conversely, falling
interest rates can dramatically increase the value of the portfolio. Interest
rate fluctuations can also affect the loan portfolio and the Corporation's
deposit base. However, those assets and liabilities are considered as long term
and are not for sale.
The Corporation uses a simulation model to measure both the risk to the interest
margin and the market value of the investment portfolio. As previously
mentioned, a one year time frame is used and rate swings of from 100 basis
points (1%) to 400 basis points (4%) both rising and falling are applied to the
asset and liability base. The model projects the net interest margin through all
interest rate scenarios and it calculates an estimated market value adjustment
through the same scenarios. The model is run monthly and is reviewed carefully
by the Asset and Liability Committee and the Board of Directors. The portfolio
is also repriced monthly to provide an actual market value appreciation or
depreciation that is also reported to the Board of Directors. During volatile
interest rate periods the portfolio is repriced more frequently to provide
information which may be needed for immediate Board action.
At December 31, 1995 the Corporation enjoyed a market value appreciation within
its available-for-sale investment securities of $10,534,000, or a net after tax
adjustment of $6,952,000. This compares to a market value depreciation of
$13,014,000 or $8,589,000 after tax adjustment at December 31, 1994. The after
tax amount at December 31, 1993 was a positive $5,592,000. The after tax amount
is carried as a capital reserve and is added to or deducted from shareholders'
equity. The reserve adjustment is posted quarterly. If any of the securities are
sold, the adjustment is moved from equity and reflected in the net income of the
Corporation in the quarter it occurs.
The Corporation has for the past several years maintained a negative gap
position of varying levels depending on the current interest rate structure.
This position, with its inherent risk, has added significantly to the
Corporation's bottom line and capital base. Realizing the risk, the Board of
Directors and management monitor the risk levels very closely and frequently.
38
<PAGE>
TABLE XIII - RATE SENSITIVE ASSETS AND RATE SENSITIVE LIABILITIES
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
(In Thousands) Under One to Five to Over
One Year Five Ten Ten Non-
Years Years Years Interest Total
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Bearing Deposits $ 645 $ $ $ $ $ 645
Available-for-Sale Securities:
Obligations of the U S Treasury 2,500 2,500
Obligations of Other U S Govt. Agcy. 7,092 5,122 12,214
Mortgage-backed Securities 25,576 25,701 155,119 206,396
Obgl. of States & Pol. Subdivisions 1,009 3,950 6,435 32,188 43,582
Corporate Debt Securities 1,035 1,000 15 12,144 14,194
Stocks 20,705 20,705
Total Available-for-Sale Securities 2,044 33,026 39,243 225,278 299,591
Held-to-Maturity Securities:
Obligations of the US Treasury 598 598
Mortgage-backed Securities 106 803 909
Total Held-to-Maturity Securities 598 106 803 1,507
Loans and Lease Financing:
Real Estate-Construction 1,284 1,284
Real Estate-Mortgage 87,133 46,794 44,423 21,716 200,066
Consumer 13,541 12,806 68 9,936 36,351
Agricultural 1,343 1,347 104 21 2,815
Commercial 11,313 2,858 274 14,445
Other 1,201 107 1,204 2,512
Political Subdivisions 1,375 2,435 1,240 1,496 6,546
Leases 36 153 189
Total Loans 117,226 66,500 47,313 33,169 264,208
Less: Unearned Discount (26) (26)
Allowance for Possible Loan Losses (4,579) (4,579)
- -----------------------------------------------------------------------------------------------------------------
Net Loans and Leases 117,226 66,500 47,313 33,169 (4,605) 259,603
- -----------------------------------------------------------------------------------------------------------------
Federal Funds Sold 0
- -----------------------------------------------------------------------------------------------------------------
Cash and Due From Banks 12,945 12,945
- -----------------------------------------------------------------------------------------------------------------
Other Assets 4,058 7,638 11,696
- -----------------------------------------------------------------------------------------------------------------
Total Assets $ 123,973 $100,124 $ 86,662 $259,250 $ 15,978 $585,987
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
Interest-Bearing Deposits:
Money Market $ 95,679 $ $ $ $ $ 95,679
NOW and SNOW 43,180 43,180
Christmas/Fund Clubs 828 828
CD's 77,926 40,482 113 118,521
Reg/Key Savings 46,051 46,051
GPS 912 912
IRA's 83,214 83,214
Total Interest-Bearing Deposits 300,827 40,482 113 46,963 388,385
Demand Deposits 41,167 41,167
Repurchase Agreements 20,000 20,000 40,000
Borrowed Funds:
Variable 10,000 10,000
Fixed 15,000 20,000 35,000
- -----------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 25,000 20,000 45,000
- -----------------------------------------------------------------------------------------------------------------
Other Liabilities 843 3,615 4,458
- -----------------------------------------------------------------------------------------------------------------
Stockholders' Equity 66,977 66,977
- -----------------------------------------------------------------------------------------------------------------
Total Liabilities and Equity 346,670 80,482 113 46,963 111,759 585,987
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity Gap $(222,697) $ 19,642 $ 86,549 $212,287 $(95,781) $ 0
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
CAPITAL ADEQUACY
The total capital of the Corporation at December 31, 1995, excluding the
valuation reserve, amounted to $60,025,000. This compares to total capital of
$55,385,000 and $50,913,000 at December 31, 1994 and 1993, respectively.
Total capital of the Corporation at December 31, 1995, 1994, and 1993,
respectively, including the adjustment to the reserve for unrealized gains and
losses on available-for-sale securities, amounted to $66,977,000, $46,796,000
and $56,505,000.
The capital to assets ratio excluding the valuation reserve, at December 31,
1995, 1994 and 1993 was 10.2%, 10.1% and 9.1%. The capital to deposits ratio at
the same dates was 14.0%, 13.9% and 13.0%, respectively.
The Corporation's risk-based capital ratio, which measures the amount of risk
assets to total capital, was 18.72%, 18.36% and 17.35%, respectively, at
December 31, 1995, 1994, and 1993.
There are no planned capital expenditures which would have a detrimental effect
on the capital ratios or the results of operations.
The following table examines the Corporation's capital.
TABLE XIV - CAPITAL RATIOS
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1995 1994
<S> <C> <C>
TIER I Total Stockholders' Equity $ 60,025 $ 55,385
TIER II Allowance for Possible Loan Losses (1) 4,295 4,047
- ---------------------------------------------------------------------------------
Total Qualifying Capital $ 64,320 $ 59,432
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Risk Adjusted Assets - Balance Sheet $ 298,339 $ 279,807
Risk Adjusted Assets - Off Balance Sheet $ 45,261 $ 43,943
- --------------------------------------------------------------------------------
Total Risk Adjusted Assets $ $343,600 $ 323,750
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Ratios
TIER I Capital Ratio 17.47% 17.11%
Minimum Required December 31, 1995 4.00%
Minimum Required December 31, 1994 4.00%
Total Capital Ratio - Actual 18.72% 18.36%
Minimum Required December 31, 1995 8.00%
Minimum Required December 31, 1994 8.00%
</TABLE>
(1) Allowable inclusion equals up to 1.25% of Risk Adjusted Assets
40
<PAGE>
QUARTERLY SHARE DATA
THE CORPORATION'S STOCK IS NOT TRADED ON AN ESTABLISHED STOCK EXCHANGE. HOWEVER,
STOCK TRANSACTIONS ARE EFFECTED THROUGH VARIOUS BROKERS WHO MAINTAIN A MARKET IN
THE CORPORATION'S STOCK OR TRADES ARE MADE ON A PERSON TO PERSON BASIS. THE
FOLLOWING TABLE SETS FORTH THE APPROXIMATE HIGH AND LOW SALES PRICES OF THE
COMMON STOCK DURING 1995, 1994 AND 1993 AS FURNISHED BY BROKERS AND OTHER
SOURCES CONSIDERED BY THE CORPORATION TO BE RELIABLE.
<TABLE>
<CAPTION>
1995 1994 1993
Dividend Dividend Dividend
Declared Declared Declared
per per per
High Low Quarter High Low Quarter High Low Quarter
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter $20.25 $18.50 $0.16 $16.88 $16.50 $0.15 $12.00 $11.63 $0.13
Second Quarter 20.25 18.75 0.16 18.31 17.50 0.15 15.00 12.00 0.13
Third Quarter 20.00 19.50 0.16 18.75 18.38 0.155 15.50 15.00 0.15
Fourth Quarter 20.50 19.75 0.17 20.25 19.00 0.16 16.25 15.00 0.15
plus plus plus
1 % stock 1 % stock 1 % stock
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK AND PER SHARE DATA
- -----------------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Net Income $1.57 $1.50 $1.62 $1.45 $1.10
Cash Dividends Declared $.64 $.60 $.54 $.48 $.43
Cash Dividends Declared on an Historical basis $.65 $.615 $.56 $.50 $.465
Stock Dividend 1 % 1 % 1 % 1 % 1 %
Number of Shares Outstanding
(excluding shares held in treasury) 4,962,456 4,913,322 4,864,674 4,816,508 4,768,818
Number of Shares Used for Computation 5,012,081 5,012,081 5,012,081 5,020,191 5,110,590
Number of Shares Issued 5,066,516 5,016,352 4,966,684 4,917,508 4,868,818
Number of Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Stockholders' Equity Per Share $13.36 $9.34 $11.27 $9.07 $7.95
Stockholders' Equity Per Share (*) $11.98 $11.05 $10.16 $9.07 $7.95
Number of Stockholders at Year End 2,027 1,901 1,819 1,809 1,775
</TABLE>
(*) Does not include unrealized holding gains or losses on available-for-sale
securities.
Known "market makers" who handle Citizens and Northern Corporation stock
transactions are:
HOPPER SOLIDAY & COMPANY RYAN BECK & COMPANY
1500 Walnut Street 3 Parkway
PHILADELPHIA, PA 19102 PHILADELPHIA, PA 19102
800-526-6371 800-342-2325
MERRILL LYNCH, PIERCE, SANDLER O'NEILL & PARTNERS
Fenner & Smith, Inc. Two World Trade Center
ONE WEST THIRD STREET 104th Floor
WILLIAMSPORT, PA 17701 New York, NY 10048
800-937-0769 800-635-6851
FERRIS, BAKER WATTS
6 Bird Cage Walk
Holidaysburg, PA 16648
800-343-5149
41
<PAGE>
FIVE YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT 1995 1994 1993 1992 1991
Interest Income $45,181 $42,309 $39,122 $38,807 $39,120
Interest Expense 24,477 20,805 18,396 18,724 21,806
- ------------------------------------------------------------------------------------------------------------------------
Interest Margin 20,704 21,504 20,726 20,083 17,314
Provision for Possible Loan Losses 737 737 708 1,326 3,151
- ------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 19,967 20,767 20,018 18,757 14,163
Other Income 2,796 2,882 2,706 2,369 2,460
Securities Gains (Losses) 1,675 (219) 646 298 1,257
Other Expenses 14,079 13,597 12,919 11,744 10,616
- ------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 10,359 9,833 10,451 9,680 7,264
Income Tax Provision 2,493 2,339 2,557 2,390 1,621
Income Before Cumulative Effect of Accounting Change $7,866 7,494 7,894 7,290 5,643
Cumulative Effect of Change in Accounting for Income Taxes (Benefit) -- -- (233) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net Income $7,866 $7,494 $8,127 $7,290 $5,643
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AT YEAR END
Total Securities (1) $301,743 $261,820 $302,096 $217,811 $169,571
Loans (Excluding Unearned Discount) 264,182 258,472 238,755 225,475 199,072
Earning Assets 549,837 516,898 537,813 440,474 418,899
Total Assets 585,987 546,478 560,055 466,119 440,895
Total Deposits 429,552 399,263 391,639 367,196 344,122
Stockholders' Equity Before Adjustment for Unrealized Gain or Loss
on Available-for-Sale Securities 60,025 55,385 50,913 n/a n/a
Stockholders' Equity 66,977 46,796 56,505 45,510 40,628
AVERAGE BALANCE SHEET
Total Securities (Amortized Cost) (1) 290,694 $291,734 $258,874 $225,439 $200,996
Loans (Excluding Unearned Discount) 259,143 243,147 227,683 211,038 194,711
Earning Assets 549,837 535,227 489,121 437,848 396,259
Total Assets 566,030 554,658 508,400 456,679 417,147
Total Deposits 414,957 395,512 381,396 357,121 336,263
Stockholders' Equity Before Adjustment for Unrealized Gain or Loss
on Available-for-Sale Securities 55,961 52,629 n/a n/a n/a
Stockholders' Equity 53,727 52,090 46,693 42,875 38,722
FINANCIAL RATIOS
Return on Stockholders' Equity (4) 14.1% 14.2% n/a n/a n/a
Return on Stockholders' Equity (3) 14.6% 14.4% 17.4% 17.0% 14.6%
Return on Assets (3) 1.39% 1.35% 1.60% 1.60% 1.35%
Stockholders' Equity to Assets (4) 9.84% 9.49% n/a n/a n/a
Stockholders' Equity to Assets (3) 9.49% 9.39% 9.18% 9.39% 9.28%
Stockholders' Equity to Loans (3) 20.9% 21.4% 20.5% 20.3% 19.9%
Net Income to:
Total Interest Income 17.4% 17.7% 20.8% 18.8% 14.4%
Interest Margin 38.0% 34.8% 39.2% 36.3% 32.6%
Cash Dividend, as a % of Net Income 41.0% 40.3% 33.5% 33.0% 39.3%
(1) Includes Interest-Bearing Due from Banks
(2) Balance Sheet at Year End
(3) Average Balance Sheet, Including Valuation Reserve
(4) Average Balance Sheet, Excluding Valuation Reserve
</TABLE>
42
<PAGE>
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 1995 and
1994 (In thousands, except per share data).
<TABLE>
<CAPTION>
1995 Quarter Ended
Mar 31 Jun 30 Sep 30 Dec 31
<S> <C> <C> <C> <C>
Interest Income $ 10,734 $ 11,116 $ 11,675 $ 11,656
Interest Expense 6,095 6,135 6,264 5,983
- --------------------------------------------------------------------------------------------------------------------
Interest Margin 4,639 4,981 5,411 5,673
Provision for Possible Loan Losses 184 184 184 185
- --------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 4,455 4,797 5,227 5,488
Other Income 718 711 693 674
Securities Gains (Losses) 774 77 378 446
Other Expense 3,647 3,662 3,388 3,382
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 2,300 1,923 2,910 3,226
Income Tax Provision 575 256 840 822
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 1,725 $ 1,667 $ 2,070 $ 2,404
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ .34 $ .33 $ .41 $ .48
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
1994 Quarter Ended
Mar 31 Jun 30 Sep 30 Dec 31
Interest Income $ 10,049 $ 10,353 $ 10,772 $ 11,135
Interest Expense 4,605 4,978 5,357 5,865
- --------------------------------------------------------------------------------------------------------------------
Interest Margin 5,444 5,375 5,415 5,270
Provision for Possible Loan Losses 184 185 184 184
- --------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 5,260 5,190 5,231 5,086
Other Income 857 659 651 715
Securities Gains (Losses) 542 153 27 (941)
Other Expense 3,386 3,425 3,346 3,440
- --------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,273 2,577 2,563 1,420
Income Tax Provision 820 693 585 241
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 2,453 $ 1,884 $ 1,978 $ 1,179
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Net Income Per Share $ .49 $ .38 $ .39 $ .24
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
TRUST DEPARTMENT
<TABLE>
<CAPTION>
(In Thousands) 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Assets $181,351 $146,178 $147,804 $132,550 $112,215
Earnings 726 582 546 476 506
</TABLE>
The composition of trust assets and liabilities for the years ended 1995, 1994
and 1993 are shown in the following table:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INVESTMENTS
Bonds $ 75,363 $ 66,003 $ 65,761
Stock 69,520 45,592 52,658
Savings and Money Market Funds 12,512 14,682 12,479
Mutual Funds 22,207 17,568 14,920
Mortgages 115 109 141
Real Estate 889 977 1,048
Miscellaneous 745 1,247 797
- ----------------------------------------------------------------------------
Total $ 181,351 $ 146,178 $ 147,804
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
ACCOUNTS
Estates 2,124 1,455 349
Trusts 41,297 36,343 37,869
Guardianships 1,437 1,316 1,807
Pension/Profit Sharing 76,605 60,647 59,701
Investment Management 59,888 46,417 48,078
- ----------------------------------------------------------------------------
Total $ 181,351 $ 146,178 $ 147,804
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
STOCKHOLDER INQUIRIES
A copy of the Corporation's Annual Report for the year ended December 31, 1995,
on Form 10-K as required to be filed with the Securities and Exchange
Commission, will be furnished to a stockholder without charge upon written
request to the Corporation's Treasurer at its principal office at P O Box 58,
Wellsboro, Pa 16901.
This statement has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation.
44
<PAGE>
DESCRIPTION OF BUSINESS
Citizens and Northern Corporation ("Corporation") is a one bank holding company
whose principal subsidiary is Citizens and Northern Bank ("Bank").
The Bank is a Pennsylvania banking institution that was formed pursuant to the
consolidation of Northern National Bank of Wellsboro and Citizens National Bank
of Towanda on October 1, 1971. In May of 1972, the Bank merged with the First
National Bank of Ralston and on October 1, 1977, merged with the Sullivan County
National Bank. Then on January 1, 1984 the Bank merged with the Farmers National
Bank of Athens. On May 1, 1990, The First National Bank of East Smithfield
merged with the Bank. The Bank has held its current name since May 6, 1975, at
which time the Bank changed its charter from a National bank to a Pennsylvania
bank. The Bank's principal office is located in Wellsboro, Pennsylvania. On
December 31, 1995 the Bank had total assets of $585,987,000, total deposits of
$429,522,000 and total loans outstanding of $259,603,000.
The Bank provides an extensive range of banking services, including checking
accounts, savings accounts, certificates of deposit, money market accounts,
personal, commercial and installment loans and such types of deposits and other
loans that are common to a full service bank of its size and structure. The Bank
also maintains a trust department that provides full fiduciary services.
The Corporation also owns a subsidiary, Bucktail Life Insurance Company, which
provides credit life and accident and health insurance on behalf of the Bank.
The business generated by Bucktail Life Insurance Company is insignificant in
relation to the total business of the Corporation.
The main office of the Bank is located at 90-92 Main Street, Wellsboro,
Pennsylvania. The Bank has a total of fifteen (15) banking offices, all located
in the Pennsylvania counties of Bradford, Lycoming, Sullivan and Tioga. All such
properties are owned by the Bank. There are no encumbrances against any of the
Bank's properties.
As of December 31, 1995, the Bank had a total of 200 full time equivalent
employees. The Bank provides a variety of employee benefits and considers its
relationship with its employees to be good.
All phases of the Bank's business are competitive. The Bank primarily competes
in the market area composed of Tioga and Bradford counties, and portions of
Lycoming and Sullivan counties. The Bank competes with approximately 15
commercial banks, including local commercial banks headquartered in our market
area as well as other commercial banks with branches in the Bank's market area.
Some of the banks that have branches in the Bank's market area are larger in
overall size than the Bank. The Bank, along with other commercial banks,
competes with respect to its lending activities as well as in attracting demand
and savings deposits with savings banks, savings and loan associations,
insurance companies, regulated small loan companies and credit unions. The Bank
also competes with insurance companies, investment counseling firms, mutual
funds and other business firms and individuals in corporate trust and investment
management services.
The Bank is generally competitive with all financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
45
<PAGE>
CITIZENS & NORTHERN CORPORATION AND
CITIZENS & NORTHERN BANK BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
J. Robert Bower William K. Francis Lawrence F. Mase F. David Pennypacker
Pharmacist Chairman, President and President, Mase's Inc. C.P.A. in firm of
Chief Executive Officer Pennypacker & Zeigler, P.C.
R. Robert DeCamp Robert J. Murphy
President and CEO, Laurence R. Kingsley Retired, formerly Leonard Simpson
Patterson Lumber Co. Inc. Owner, L.R. Kingsley Attorney in law firm of Attorney at Law
Lumber Davis, Murphy, Niemiec &
R. James Dunham Smith Howard W. Skinner
President, R. J. Dunham Edward L. Learn Retired, formerly Senior
Department Store Feed Mill Manager, Edward H. Owlett, III Vice President
Purina Mills Inc. Attorney in law firm of
Adelbert E. Eldridge Owlett, Lewis & Ginn, P.C. Donald E. Treat
Retired Regional Director John H. Macafee Owner, Treat Hardware
of Susquehanna Region of Operator
Pennsylvania Electric Co. Mapoval Farms Inc.
DIRECTOR EMERITUS
Edward H. Owlett
Attorney in law firm of
Owlett, Lewis & Ginn, P.C.
ADVISORY BOARDS
ATHENS KNOXVILLE SAYRE TROY
Terry W. Depew Mary Rose Sacks Stephan W. Bowen Brian L. Canfield
R. Bruce Haner Clyde E. Beard Susan Hartley Dennis F. Beardslee
Wayne E. Lowery Gerald Bliss George Howell Roy W. Cummings, Jr.
John H. Macafee Grant Gehman Laurance Reagan J. Robert Garrison
David Rosenbloom Karl W. Kroeck John Steadle Gregory W. Powers
Howard W. Skinner
LAPORTE TIOGA WELLSBORO
DUSHORE Randy R. Meckes Lois C. Wood Richard L. Wilkinson
Wayne E. Gavitt Kenneth F. Fry Joseph R. Borden, Jr. Donald Abplanalp
Ronald A. Gutosky Marvin L. Higley John E. Brackley J. Robert Bower
P. Dean Homer Walter B. Neidig Donald E. Treat R. Robert DeCamp
Dennis McCarty Leonard Simpson Jean L. Ward R. James Dunham
Kerry A. Meehan M. Frank Ward Edward H. Owlett, III
Leslie W. Miller, Jr. LIBERTY F. David Pennypacker
Ann L. Yuscavage TOWANDA &
EAST Smithfield LYLE R. BRION MONROETON WYSOX
Peggy Brown Gary Dinnison Larry D. Sharer Debra S. Kithcart
Roy L. Beardslee Lawrence F. Mase Wilson S. Quiggle Lucille P. Donovan
Laurence R. Kingsley Ray E. Wheeland Allen M. Alper Robert L. Fulmer
Liston Pepper ADELBERT E. Eldridge WALTER E. Warburton, Jr.
BENNETT R. Young RALSTON Robert J. Murphy
Daniel P. Clark Jeffrey A. Smith
ELKLAND George E. Bittner James Towner
Scott A. Keck William W. Brooks, III Jerome C. Violette
Eric Beard Willard S. Kuser
John C. Kenyon
Edward L. Learn
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
CITIZENS & NORTHERN BANK OFFICERS
<S> <C> <C> <C>
William K. Francis Stephan W. Bowen David C. Schucker Mark C. Griffis
Chairman, President & Assistant Vice President Assistant Vice President Bankcard Plan Manager
Chief Executive Officer
Thomas L. Briggs James H. Shelmire Joan F. Johnson
Craig G. Litchfield Trust Officer Systems Analyst Assistant Cashier
Senior Vice President
Peggy A. Brown Gerald W. Smith Karen L. Keck
Robert W. Anderson Assistant Vice President Trust Officer Bookkeeping Manager
Vice President - Data
Processing Phylis W. Callear Jan L. Southworth Glenda R. Marzo
Assistant Vice President Assistant Vice President Assistant Auditor
Brian L. Canfield
Vice President Daniel P. Clark Nancy L. Tubbs Patrica Marzo
Assistant Vice President Assistant Vice President Assistant Cashier
Terry R. Depew
Vice President Helen W. Ferris Lois C. Wood Sandra J. McNeal
Assistant Vice President Assistant Vice President Assistant Cashier
Keith E. Ferguson
Vice President Joan L. Grenell Mary J. Wood Judith L. Metcalf
Assistant Vice President Trust Officer Assistant Cashier
Wayne E. Gavitt
Vice President Nicholas Helf, Jr. Ann L. Yuscavage Leonard Mitchell, III
Trust Officer Assistant Vice President Collection Officer
Scott A. Keck
Vice President Elaine F. Johnston Raechelle N. Acker Janet R. Ordway
Assistant Vice President Assistant Cashier Assistant Cashier
Matthew P. Prosseda
Vice President Debra S. Kithcart Sandra G. Andrews Karen B. Peterson
Assistant Vice President Assistant Cashier Assistant Cashier
James W. Seipler
Cashier & Controller Rhonda J. Litchfield Bonnie L. Bennett Eileen K. Ranck
Trust Officer Assistant Cashier Bankcard Operations
Larry D. Sharer Manager
Vice President Randy R. Meckes Joan M. Blackwell
Assistant Vice President Assistant Cashier Virginia L. Reap
Richard L. Wilkinson Assistant Cashier
Vice President Kim L. Miller Marcella Chaykosky
Assistant Vice President Assistant Cashier Joseph A. Snell
Kathleen M. Osgood Assistant Controller
Corporate Secretary Jeffrey B. Osgood Rick Cisco
Assistant Vice President Technical Support Twila G. Starr
Klas G. Anderson & Personnel Officer Manager Assistant Cashier
Assistant Vice President
Wilson S. Quiggle Jerome Coleman Charmaine H. Stempel
Russell H. Bauman Assistant Vice President Assistant Cashier Assistant Cashier
Auditor & Security Officer
Mary Rose Sacks Diane B. Elvidge
Robert E. Bolt Assistant Vice President Assistant Cashier Barbara J. Tubbs
Assistant Vice President Assistant Cashier
Shawn M. Schreck Rita Y. Fisk
Assistant Vice President Assistant Cashier Eric E. Wertz
& Compliance Officer Bankcard Credit Officer
</TABLE>
CITIZENS & NORTHERN CORPORATION OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
William K. Francis Craig G. Litchfield James W. Seipler Kathleen M. Osgood
Chairman, President & Senior Vice President Treasurer Corporate Secretary
Chief Executive Officer
</TABLE>
47
<PAGE>
Exhibit 21
LIST OF SUBSIDIARIES
Jurisdiction or
NAME STATE OF INCORPORATION
Citizens & Northern Bank Pennsylvania
Bucktail Life Insurance Company Arizona
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000810958
<NAME> CITIZENS AND NORTHERN CORP
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,945
<SECURITIES> 301,098
<RECEIVABLES> 0
<ALLOWANCES> 4,579
<INVENTORY> 0
<CURRENT-ASSETS> 313,181
<PP&E> 6,791
<DEPRECIATION> 0
<TOTAL-ASSETS> 585,987
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 5,067
<OTHER-SE> 61,910
<TOTAL-LIABILITY-AND-EQUITY> 585,987
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 737
<INTEREST-EXPENSE> 24,477
<INCOME-PRETAX> 10,359
<INCOME-TAX> 2,493
<INCOME-CONTINUING> 7,866
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,866
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
</TABLE>
