<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1997
COMMISSION FILE NUMBER: 0-16084
CITIZENS AND NORTHERN CORPORATION
STATE OF INCORPORATION: PENNSYLVANIA
I.R.S. EMPLOYER IDENTIFICATION NUMBER: 23-2451943
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE) : 717-724-3411
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: THOMPSON STREET
RALSTON, PA 17763
MAILING ADDRESS OF EXECUTIVE OFFICE: 90-92 MAIN STREET
WELLSBORO, PA 16901
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (D) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
----- -----
As of July 1, 1997 5,168,354 COMMON SHARES WERE OUTSTANDING
1
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Statements of Condition--June 30, 1997 and December 31, 1996.............. 3
Consolidated Statements of Income--Three Months Ended June 30, 1997, 1996.............. 4
Six Months Ended June 30, 1997, June 30, 1996........................................ 5
Consolidated Statements of Cash Flows--Six Months Ended June 30, 1997, 1996............ 6
Notes to Consolidated Financial Statements............................................. 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 8-19
PART II. OTHER INFORMATION 20
Items 1,2,3, and 5 have been omitted as they are not applicable to the registrant
ITEM 6. Exhibits and Reports on FORM 8-K..............................................
(a) Exhibits..........................................................................
(b) Reports on FORM 8-K...............................................................
Signature Page......................................................................... 21
</TABLE>
2
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet
(In Thousands)
<TABLE>
<CAPTION>
AUDITED
UNAUDITED DECEMBER 31,
JUNE 30, 1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash & Due From Banks.............................................. 16,679 14,320
Interest Bearing Deposits.......................................... 601 655
------------- ------------
17,280 14,975
Available-for-Sale Securities:
U.S. Treasury Securities......................................... 2,484 2,475
Securities of Other U.S. Government Agencies..................... 26,948 36,341
Mortgage Backed Securities....................................... 173,898 183,483
Obligations of States and Municipal Subdivisions................. 62,043 55,943
Other Securities................................................. 30,404 29,611
------------- ------------
Total Available-for-Sale Securities............................ 295,777 307,853
Held-to-Maturity Securities:
U.S. Treasury Securities......................................... 598 699
Securities of Other U.S. Government Agencies..................... 350 100
Mortgage Backed Securities....................................... 682 770
------------- ------------
Total Held-to-Maturity Securities.............................. 1,630 1,569
Loans:
Loans to Political Subdivisions.................................. 6,586 6,555
Other Loans...................................................... 278,299 272,084
------------- ------------
Total Loans.................................................... 284,885 278,639
Less--Allowance for Possible Loan Losses....................... (4,809) (4,776)
Unearned Income.............................................. (50) (42)
------------- ------------
Loans, Net................................................. 280,026 273,821
Bank Premises and Equipment........................................ 6,560 6,609
Other Real Estate.................................................. 286 583
Accrued Interest on Bonds and Loans................................ 4,337 4,404
Other Assets....................................................... 1,008 378
------------- ------------
TOTAL ASSETS....................................................... 606,904 610,192
------------- ------------
------------- ------------
LIABILITIES
Deposits:
Demand........................................................... 48,915 47,320
Interest Checking................................................ 37,732 38,916
Money Market..................................................... 105,787 100,523
Savings.......................................................... 47,009 46,175
Other Time....................................................... 199,618 197,377
------------- ------------
Total Deposits................................................. 439,061 430,311
Dividends Payable.................................................. 911 902
Borrowed Funds..................................................... 50,669 59,600
Federal Funds Purchased............................................ 4,000
Securities Sold Under Agreement to Repurchase...................... 29,800 44,650
Other Liabilities.................................................. 5,978 3,136
------------- ------------
TOTAL LIABILITIES.................................................. 530,419 538,599
SHAREHOLDERS' EQUITY
Common Stock, Par Value $1.00 per Share............................ 5,168 5,117
Authorized 10,000,000; Issued 5,168,354 and 5,117,182
in 1997 and 1996, respectively
Stock Dividend Distributable..................................... 1,305
Paid in Capital.................................................... 13,795 12,539
Retained Earnings.................................................. 51,290 47,862
------------- ------------
Total 70,253 66,823
Unrealized Gains on Available-for-Sale Securities 7,228 5,767
Less: Treasury Stock at Cost
105,761 shares at June 30, 1997.................................. (996)
105,101 shares at December 31, 1996.............................. (997)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY......................................... 76,485 71,593
------------- ------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................... 606,904 610,192
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
3
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED
(In Thousands) (Unaudited) JUNE 30,
<S> <C> <C>
1997 1996
------------ ------------
INTEREST INCOME
Interest and Fees on Loans..................................... 7,129 6,807
Interest on Balances with Depository Institutions.............. 10 10
Interest on Loans to Political Subdivisions.................... 101 106
Interest on Federal Funds Sold................................. 68 23
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable...................................................... 3539 4,065
Tax Exempt................................................... 893 761
Dividends.................................................... 205 227
------------ ------------
Total Interest and Dividend Income............................. 11,945 11,999
INTEREST EXPENSE
Interest on Deposits........................................... 4554 4,371
Interest on Other Borrowings................................... 1292 1,415
------------ ------------
Total Interest Expense......................................... 5,846 5,786
------------ ------------
Interest Margin................................................ 6,099 6,213
Provision for Possible Loan Losses............................. 181 175
------------ ------------
Interest Margin After Provision for Possible................... 5,918 6,038
Loan Losses
OTHER INCOME
Service Charges on Deposit Accounts............................ 274 288
Service Charges and Fees....................................... 72 67
Trust Department Income........................................ 249 183
Insurance Commissions, Fees and Premiums....................... 124 149
Other Operating Income......................................... 319 9
------------ ------------
Total Other Income Before Realized Gains on Securities, Net.... 1,038 696
Realized Gains on Securities, (Net)............................ 20 171
------------ ------------
Total Other Income............................................. 1,058 867
OTHER EXPENSES
Salaries and Wages............................................. 1470 1,473
Pensions and Other Employee Benefits........................... 401 420
Occupancy Expense, Net......................................... 183 189
Furniture and Equipment Expense................................ 173 177
Other Operating Expense........................................ 1522 1,347
------------ ------------
Total Other Expenses........................................... 3,749 3,606
------------ ------------
Income Before Income Tax Provision............................. 3,227 3,299
Income Tax Provision........................................... 743 812
------------ ------------
NET INCOME..................................................... 2,484 2,487
------------ ------------
------------ ------------
PER SHARE DATA:
Net Income....................................................... 0.49 0.49
------------ ------------
Dividend Per Share............................................... 0.18 0.17
------------ ------------
Number Shares Used in Computation................................ 5,062,507 5,062,453
Number Shares Issued............................................. 5,168,354 5,117,182
Number Shares Authorized......................................... 10,000,000 10,000,000
Dividends Actually Paid.......................................... 0.18 0.17
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
4
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF INCOME SIX MONTHS ENDED
(In Thousands) (Unaudited) JUNE 30,
<S> <C> <C>
1997 1996
------------ -----------
INTEREST INCOME
Interest and Fees on Loans..................................... 14,128 13,530
Interest on Balances with Depository Institutions.............. 19 17
Interest on Loans to Political Subdivisions.................... 195 212
Interest on Federal Funds Sold................................. 124 58
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable...................................................... 7,174 8,059
Tax Exempt................................................... 1,752 1,441
Dividends.................................................... 412 407
------------ -----------
Total Interest and Dividend Income............................. 23,804 23,724
INTEREST EXPENSE
Interest on Deposits........................................... 8,973 8,769
Interest on Other Borrowings................................... 2,610 2,803
------------ -----------
Total Interest Expense......................................... 11,583 11,572
------------ -----------
Interest Margin................................................ 12,221 12,152
Provision for Possible Loan Losses............................. 362 350
------------ -----------
Interest Margin After Provision for Possible................... 11,859 11,802
Loan Losses
OTHER INCOME
Service Charges on Deposit Accounts............................ 540 558
Service Charges and Fees....................................... 131 130
Trust Department Income........................................ 510 388
Insurance Commissions, Fees and Premiums....................... 233 268
Other Operating Income......................................... 363 27
------------ -----------
Total Other Income Before Realized Gains on Securities, Net.... 1,777 1,371
Realized Gains on Securities, (Net)............................ 807 268
------------ -----------
Total Other Income............................................. 2,584 1,639
OTHER EXPENSES
Salaries and Wages............................................. 2,966 2,922
Pensions and Other Employee Benefits........................... 870 885
Occupancy Expense, Net......................................... 355 367
Furniture and Equipment Expense................................ 335 365
Other Operating Expense........................................ 3,026 2,672
------------ -----------
Total Other Expenses........................................... 7,552 7,211
------------ -----------
Income Before Income Tax Provision............................. 6,891 6,230
Income Tax Provision........................................... 1,644 1,564
------------ -----------
NET INCOME..................................................... 5,247 4,666
------------ -----------
------------ -----------
PER SHARE DATA:
Net Income....................................................... 1.04 0.92
------------ -----------
Dividend Per Share............................................... 0.36 0.34
------------ -----------
Number Shares Used in Computation................................ 5,062,507 5,062,453
Number Shares Issued............................................. 5,168,354 5,117,182
Number Shares Authorized......................................... 10,000,000 10,000,000
Dividends Actually Paid.......................................... 0.36 0.34
------------ -----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
5
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
PERIODS ENDED
JUNE 30
--------------------
<S> <C> <C>
(IN THOUSANDS) 1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................................. 5,247 4,666
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses....................................................... 362 350
Realized (Gain) Loss on Securities, Net.................................................. (807) (268)
Provision for Depreciation............................................................... 346 381
Accretion and Amortization............................................................... 284 429
Deferred Income Tax...................................................................... (130) (20)
Decrease (Increase) in Accrued Interest Receivable and Other Assets...................... 404 (1,682)
(Decrease) Increase in Accrued Interest Payable and Other Liabilities.................... 2,099 3,869
--------- ---------
Net Cash Provided by Operating Activities................................................ 7,805 7,725
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities.................................. 189 82
Purchase of Held-to-Maturity Securities.................................................... (250) (200)
Proceeds from Sales of Available-for-Sale Securities....................................... 17,358 11,071
Proceeds from Maturities of Available-for-Sale Securities.................................. 23,360 20,418
Purchase of Available-for-Sale Securities.................................................. (26,739) (51,937)
Net Increase in Loans...................................................................... (6,567) (5,643)
Purchase of Premises and Equipment......................................................... (297) (174)
Sale of Foreclosed Assets.................................................................. 356 174
Purchase of Foreclosed Assets.............................................................. (60) (331)
--------- ---------
Net Cash Used in Investing Activities.................................................... 7,350 (26,540)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits................................................................... 8,750 403
Increase (Decrease) in Short Term Borrowings............................................... (10,850) 7,650
Proceeds from (Repayment of) Long Term Borrowings.......................................... (8,931) 14,000
Proceeds from the Sale of Treasury Stock................................................... 3
Dividends Declared......................................................................... (1,822) (1,704)
--------- ---------
Net Cash Provided by (Used In) Financing Activities...................................... (12,850) 20,349
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. 2,305 1,534
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................................. 14,975 13,590
--------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR....................................................... 17,280 15,124
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid.............................................................................. 8,297 9,052
Income Taxes Paid.......................................................................... 1,617 1,876
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
6
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 1. Financial Statements (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The financial information included herein, with the exception of the
Consolidated Balance Sheet dated December 31, 1996, is unaudited; however, such
information reflects all adjustments ( consisting solely of normal recurring
adjustments ) that are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations and changes in
financial position for the interim periods.
Results reported for the six-month period ended June 30, 1997 may not be
indicative of the results for the year ended December 31, 1997.
This document has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
7
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
EARNINGS OVERVIEW
The Corporation reported net income for the six months ended June 30,
1997 of $5,247,000, or $1.04 per common share. This compares to $4,666,000,
or $.92 per share, for the six-month period ended June 30, 1996 and $.91 per
share for the six month period ended December 31, 1996. Income for the
six-month period ended June 30, 1997 increased 13.04 percent when compared to
the same six - month period in 1996. The increase was the result of realized
gains on the sale of certain equity investments and the sale of a copyright.
The gross realized gains amounted to $807,000; this compares to realized
gains reported June 30, 1996 of $268,000 and $207,000 for the last six months
of 1996. The directors and management of the Corporation expect that 1997
will produce results comparable to those reported for 1996. This assumption
is based on the current interest rate environment and could change if the
FOMC decides to raise rates again in 1997.
NET INTEREST MARGIN
Six-Month Periods Ended June 30, 1997/1996
The net spread between the rate of return on earning assets and the cost of
interest-bearing liabilities declined slightly when compared to the six-month
period ended June 30, 1996. The net spread for the six-month periods ended June
30, 1997 and June 30, 1996 was 3.48 percent and 3.55 percent, respectively. The
net spread for the year ended December 31, 1996 was 3.49 percent. The gross rate
of return on earning assets for the six-month periods ended June 30, 1997, June
30, 1996 and the year ended December 31, 1996 was 8.30 percent, 8.31 percent and
8.29 percent, respectively. The average cost of interest-bearing liabilities for
the same periods was 4.82 percent, 4.76 percent and 4.80 percent, respectively.
Interest rates have remained relatively flat since the FOMC increased the
Federal Funds rate by 25 basis points at its April 1997 meeting. The Corporation
is anticipating very little change in the current rate structure for the balance
of the third quarter with a possible small hike in the fourth quarter.
The average rate of return on the portfolio of Available-for-Sale
investments remained nearly unchanged during the periods being compared.
However, the average balance for the six-month period ended June 30, 1997 has
declined about $16,000,000 when compared to the average outstanding balances
held for the six months ended June 30, 1996. Average balances have declined
just over $13,000,000 since December 31, 1996. The decrease is caused by
payments on mortgage-backed securities being used to fund loan demand. The
payment stream on the mortgage-backed instruments averages about $2,100,000
per month.
Average gross loans for the periods ended June 30, 1997, December 31, 1996
and June 30, 1996 totaled $281,059,000, $271,618,000 and $264,895,000,
respectively. The composition of the portfolio has remained unchanged with loans
secured by real estate remaining the largest single category of loans. Other
loan categories also remained unchanged with the exception of consumer loans
which declined slightly. The average rate of return on the loan portfolio has
declined slightly from 10.46 percent for the six months ended June 30 1996 to
the current 10.28 percent. The loan portfolio returned 10.31 percent for the
year ended December 31, 1996.
On the liability side of the balance sheet, average total interest-bearing
deposit balances have stayed at nearly the same level for the periods ended June
30, 1997 and June 30, 1996. Average interest-bearing balances for the periods,
respectively, amounted to $390,698,000 and $388,999,000. Average interest-
bearing balances for the year ended December 31, 1997 were $386,536,000. The
Corporation still maintains a strong base of Money Market accounts and average
balances have increased more than $7,000,000 since the period ended June 30,
1996. Other deposit categories have remained flat or declined slightly. The
corporation has had difficulty attracting deposits due to the flow of funds into
mutual funds and the competition in our market area from credit unions.
Average borrowed funds for the six months ended June 30, 1997 have decreased
$5,489,000 when compared to the six months ended June 30, 1996 and $7,448,000
when compared to the year ended December 31, 1996. The decline will more than
likely continue into 1997 as the yield curve remains relatively flat. Investment
opportunities with spreads large enough to make the risk worthwhile are scarce.
Management is expecting interest rates to increase another 25 basis points
in the last half of 1997, possibly in the last quarter of the year.
Tables I and II are provided to reflect average balances and rates paid for
the quarters ended June 30, 1997, June 30, 1996 and the year ended December 31,
1996, respectively.
8
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations (continued)
TABLE I--ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
<TABLE>
<CAPTION>
RATE RATE RATE
PERIOD EARNED/ PERIOD EARNED/ PERIOD EARNED/
(IN THOUSANDS) ENDED PAID ENDED PAID ENDED PAID
- ---------------------------------------------------------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS............................................ 06/30/97 % 12/31/96 % 06/30/96 %
Available-for-Sale Securities:
U. S. Treasury Securities................................. 2,504 5.15 2,506 5.11 2,507 5.15
Securities of Other U. S. Government Agencies and......... 29,778 7.00 30,514 6.96 24,693 6.90
Mortgage Backed Securities................................ 180,623 6.68 197,581 6.64 206,841 6.55
Obligations of States and Political Subdivisions.......... 57,902 6.10 49,700 6.06 46,201 6.29
Stock..................................................... 15,197 5.47 16,342 5.34 16,805 4.90
Other Securities.......................................... 4,429 1.64 6,905 6.84 9,562 8.10
--------- ----- --------- ----- --------- -----
Total Available-for-Sale Securities................... 290,433 6.45 303,548 6.50 306,609 6.48
--------- ----- --------- ----- --------- -----
Held-to-Maturity Securities:
U. S. Treasury Securities................................. 598 6.41 698 6.02 698 6.07
Securities of Other U. S. Government Agencies and
Corporations............................................ 242 6.67 50 8.00 16 12.60
Mortgage Backed Securities................................ 725 7.79 829 7.12 866 6.75
Obligations of States and Political Subdivisions
Stock
Other Securities
--------- ----- --------- ----- --------- -----
Total Held-to-Maturity Securities..................... 1,565 7.09 1,577 6.66 1,580 6.51
--------- ----- --------- ----- --------- -----
Interest -bearing Due from Banks.......................... 428 8.95 455 8.13 575 5.96
Federal Funds Sold........................................ 4,681 5.34 1,100 5.45 2,176 5.38
Loans:
Real Estate Loans......................................... 221,674 9.05 210,289 9.17 203,930 9.41
Consumer.................................................. 32,527 19.85 35,305 18.13 35,192 17.70
Agricultural.............................................. 2,749 10.05 2,750 10.11 2,676 10.17
Commercial/Industrial..................................... 16,923 9.63 16,207 9.73 16,014 9.76
Other..................................................... 558 8.31 237 10.55 229 7.93
Political Subdivisions.................................... 6,394 6.15 6,629 6.40 6,680 6.40
Leases.................................................... 234 4.31 201 7.96 174 8.11
--------- ----- --------- ----- --------- -----
Total Loans........................................... 281,059 10.28 271,618 10.31 264,895 10.46
--------- ----- --------- ----- --------- -----
Total Earning Assets...................................... 578,166 8.30 578,298 8.29 575,835 8.31
Cash...................................................... 12,162 11,502 12,549
Securities Valuation Reserve.............................. 6,537 5,924 6,936
Allowance for Possible Loan Losses........................ (4,796) (4,726) (4,581)
Other Assets.............................................. 5,790 6,617 5,597
Bank Premises & Equipment................................. 6,521 6,793 6,946
--------- ----- --------- ----- --------- -----
Total Assets.......................................... 604,380 604,408 603,282
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
INTEREST-BEARING LIABILITIES
Interest Checking......................................... 38,738 2.46 40,558 2.46 40,735 2.45
Money Market.............................................. 106,093 4.53 100,618 4.53 99,006 4.52
Savings................................................... 46,696 2.48 46,751 2.50 47,186 2.50
Certificates of Deposit................................... 118,019 5.46 117,596 5.47 118,745 5.55
Individual Retirement Accounts............................ 79,014 5.93 79,076 5.77 81,067 5.41
Other Time Deposits....................................... 2,138 2.36 1,937 2.99 2,260 2.41
Federal Funds Purchased................................... 448 6.30 967 5.69 1,829 5.95
Other Borrowed Funds...................................... 93,673 5.59 101,121 5.56 99,162 5.59
--------- ----- --------- ----- --------- -----
Total Interest-bearing Liabilities........................ 484,819 4.82 488,624 4.80 489,990 4.76
Demand Deposits........................................... 40,996 42,500 41,871
Other Liabilities....................................... 6,600 6,794 5,278
--------- ----- --------- ----- --------- -----
TOTAL LIABILITIES......................................... 532,415 537,918 537,139
Stockholders' Equity...................................... 67,598 62,797 60,555
--------- ----- --------- ----- --------- -----
Securities Valuation Reserve.............................. 4,367 3,693 5,588
--------- ----- --------- ----- --------- -----
Total Liabilities and Stockholders'
Equity.................................................. 604,380 604,408 603,282
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
Interest Rate Spread...................................... 3.48 3.49 3.55
--------- ----- --------- ----- --------- -----
--------- ----- --------- ----- --------- -----
</TABLE>
9
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Table II--Analysis of the Effect of Volume and Rate Changes in Interest Income
and Interest Expense
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED JUNE 30, 1997/1996
-----------------------------------------
<S> <C> <C> <C>
CHANGE IN CHANGE IN TOTAL
(IN THOUSANDS) VOLUME RATE CHANGE
------------- ------------- -----------
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities
Securities of Other U.S. Government Agencies and Corporations.................. 176 13 189
Mortgage Backed Securities..................................................... (872) 142 (730)
Obligations of States and Political Subdivisions............................... 353 (42) 311
Stock.......................................................................... (18) 23 5
Other Securities............................................................... (140) (208) (348)
------ ------ ------
Total Available-for-Sale Securities.......................................... (501) (72) (573)
------ ------ ------
Held-to-Maturity Securities:
U. S. Treasury Securities...................................................... (3) 1 (2)
Securities of Other U.S. Government Agencies and Corporations.................. 7 (0) 7
Mortgage Backed Securities..................................................... (17) 16 (1)
Obligations of States and Political Subdivisions
Stock
Other Securities
------ ------ ------
Total Held-to-Maturity Securities............................................ (13) 17 4
------ ------ ------
Interest-bearing Due from Banks.................................................. 2 2
Federal Funds Sold............................................................... 66 66
Loans:
Real Estate Loans.............................................................. 773 (334) 439
Consumer....................................................................... (187) 299 112
Agricultural................................................................... 4 (2) 2
Commercial/Industrial.......................................................... 43 (10) 33
Other.......................................................................... 14 0 14
Political Subdivisions......................................................... (9) (8) (17)
Leases......................................................................... 6 (8) (2)
------ ------ ------
Total Loans.................................................................. 644 (63) 581
------ ------ ------
Total Interest Income............................................................ 196 (116) 80
------ ------ ------
INTEREST-BEARING LIABILITIES
Interest Checking................................................................ (24) 3 (21)
Money Market..................................................................... 159 5 164
Savings.......................................................................... (6) (4) (10)
Certificates of Deposit.......................................................... (20) (56) (76)
Individual Retirement Accounts................................................... (53) 203 150
Other Time Deposits.............................................................. (1) (1) (2)
Federal Funds Purchased.......................................................... (43) 3 (40)
Other Borrowed Funds............................................................. (153) (1) (154)
------ ------ ------
Total Interest Expense........................................................... (141) 152 11
------ ------ ------
NET INTEREST INCOME.............................................................. 337 (268) 69
------ ------ ------
------ ------ ------
</TABLE>
The change in interest due to both volume and rates has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amount of the change in each.
10
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part 1--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Losses is a reserve established by
management, which it believes will be adequate to absorb future loan losses
based on management's assessment of the quality of the total loan portfolio. The
assessment is performed on an ongoing basis and reviewed by the Board of
Directors quarterly.
The quarterly assessment process is conducted by a loan quality committee
which consists of the President, Chief Financial Officer, Executive Vice
Presidents in charge of loans and branch administration and the Auditor. The
committee reviews the "Watch List", a collection of loans that have had a
history of delinquency, past due reports, nonperforming loans and historical
information related to charge-offs and recoveries by loan categories.
The committee then allocates the reserve balance across the various loan
categories to determine the unallocated portion. The committee uses two methods
of allocation. The first calculates a ratio of average losses by type to the
average outstanding balance by type. The ratio is then applied to the current
outstanding balance of the various loan categories to determine the portion of
the reserve to be allocated. The second method extracts loans by a quality
rating system. The loans are categorized as "Substandard", "Doubtful" and
"Loss". Regulatory guidelines of 15 percent of substandard, 50 percent of
doubtful and 100 percent of loss are applied to establish reserve allocations.
The following allocations are as of March 31, 1997 as the committee had not
completed the second quarter review at this writing. The second quarter
allocations should not vary greatly from those of the first quarter presented
here. The Corporation also employs and relies heavily on an independent loan
appraiser. However, his work is only performed annually and on loans of $175,000
or higher. Although the 1997 appraisal has been completed the report will not be
available until late in August.
Other factors used to evaluate the reserve level are loan growth, economic
conditions of the market area and peer group comparisons.
Tables III through VI present current and historical information related to
the Allowance for Possible Loan Losses.
Table III--Reconciliation of the Reserve for Possible Loan Losses
<TABLE>
<CAPTION>
ESTIMATE ACTUAL ACTUAL
DEC. 31, ACTUAL DEC. 31, DEC. 31, ACTUAL
(IN THOUSANDS) 1997 JUNE 30, 1997 1996 1995 DEC 31, 1994
------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Beginning Balance January 1,t............ 4,775,960 4,775,960 4,579,210 4,228,741 3,816,982
Provision Charged to Earnings............ 723,500 361,752 700,500 736,500 737,496
Year-to-Date Recoveries.................. 196,167 51,779 167,926 187,473 194,312
Year-to-Date Charge-offs................. (495,627) (380,722) (671,676) (573,504) (520,049)
------------ ------------- ------------ ------------ ------------
Ending Balance........................... 5,200,000 4,808,769 4,775,960 4,579,210 4,228,741
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
</TABLE>
11
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part 1--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Table IV--Loan Loss History and Other Statistics
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 EST 1996 1995 1994 1993
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net Loans*............................... 293,542 278,597 264,182 258,472 238,755
Net Charge-offs.......................... 447 504 387 326 247
Allowance for Possible Loan Losses
Balance................................ 5,052 4,776 4,579 4,229 3,817
Provision for Loan Losses Charged to..... 724 701 737 737 708
Earnings................................. 9,300 9,255 7,866 7,494 8,127
Earnings Coverage of Net Charge-offs..... 20.8x 18.4x 20.3x 23.0x 32.9x
Allowance Coverage of Net Charge-offs.... 11.3x 9.5x 11.8x 13.0x 15.5x
Loans Ninety Days or More Past Due and
Still Accruing......................... 2,900 2,994 2,915 2,743 2,899
Net Charge offs as a Percent of the
Provision.............................. 61.7% 71.9% 52.5% 44.2% 34.9%
Year-End Nonperforming Loans............. 864 279 624 843
Allowance as a Percentage of
Gross Loans: *
Bank(1).................................. 1.72% 1.71% 1.73% 1.64% 1.60%
Peer Group(2)............................ 1.49% 1.50% 1.61% 1.65% 1.82%
</TABLE>
<TABLE>
<CAPTION> 1992 1991 AVERAGE
(IN THOUSANDS) --------- --------- ---------
<S> <C> <C> <C>
Net Loans*............................... 225,475 199,072 209,222
Net Charge-offs.......................... 518 3,142 732
Allowance for Possible Loan Losses
Balance................................ 3,356 2,548 3,329
Provision for Loan Losses Charged to..... 1,326 3,151 1,051
Earnings................................. 7,290 5,643 6,525
Earnings Coverage of Net Charge-offs..... 14.1x 1.8x 8.9x
Allowance Coverage of Net Charge-offs.... 6.5x 0.8x 4.5x
Loans Ninety Days or More Past Due and
Still Accruing......................... 2,532 3,810 2,556
Net Charge offs as a Percent of the
Provision.............................. 39.1% 99.7% 69.6%
Year-End Nonperforming Loans............. 1,351 417 625
Allowance as a Percentage of
Gross Loans: *
Bank(1).................................. 1.49% 1.28% 1.60%
Peer Group(2)............................ 1.42% 1.44% 1.59%
</TABLE>
- ------------------------
* Gross Loans less Unearned Discount
(1) Estimated Year-end 1997
(2) At March 31, 1997
Averages are based on the years 1991 through 1996
12
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Table V--Allocation of the Allowance for Possible Loan Losses based on
Historical Data
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
---------
LOAN CLASSIFICATION EST 1996 1995 1994 1993 1992 1991 AVERAGE
- ------------------- --------- --------- --------- --------- --------- --------- --------- -----------
Commercial & Agricultural................ 26,600 29,832 26,318 22,649 26,376 22,712 23,541 25,238
Real Estate - Construction............... 1,250 1,166 1,284 2,593 2,224 993 982 1,540
Real Estate - Mortgage................... 223,492 213,957 200,066 193,095 170,532 162,434 136,716 179,467
Credit Card & Related Plans.............. 10,000 8,902 9,934 9,896 9,212 9,991 6,694 9,105
All Other Loans to Individuals........... 32,000 24,518 26,417 30,094 30,282 29,182 31,762 28,709
Lease Financing.......................... 200 222 163 145 154 162 129 163
Total Loans............................ 293,542 278,597 264,182 258,472 238,780 225,474 199,824 244,222
Letter of Credit Commitments............. 5,000 5,106 2,633 4,415 5,046 4,670 N/A 4,191
All Other Commitments....................
Consumer................................. 28,000 28,049 24,811 24,202 23,323 22,174 N/A 23,628
Mortgage................................. 6,000 5,802 7,276 9,566 9,466 9,117 N/A 8,856
Commercial............................... 11,000 10,825 10,201 9,901 9,790 5,670 N/A 8,891
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
Reserve Allocation.......................
Fasb 114 Allocation......................
Unallocated Portion......................
--------- --------- --------- --------- --------- --------- --------- -----------
Reserve Balance..........................
--------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C>
LOAN CLASSIFICATION
- -------------------
Commercial & Agricultural................ 0.02006 X 26,600 = 534
Real Estate - Construction............... 0.00000 X 1,250 = 0
Real Estate - Mortgage................... 0.00027 X 223,492 = 61
Credit Card & Related Plans.............. 0.01369 X 10,000 = 137
All Other Loans to Individuals........... 0.00605 X 32,000 = 194
Lease Financing.......................... 0.00000 X 200 = 0
Total Loans............................
Letter of Credit Commitments............. 0.00000 X 5,000 = 0
All Other Commitments....................
Consumer................................. 0.00605 X 28,000 = 170
Mortgage................................. 0.00027 X 6,000 = 2
Commercial............................... 0.02006 X 11,000 = 221
----------- ------------ ---------
----------- ------------ ---------
Reserve Allocation....................... 1,318
Fasb 114 Allocation...................... 113
Unallocated Portion...................... 3,621
----------- ------------ ---------
Reserve Balance.......................... 5,052
----------- ------------ ---------
----------- ------------ ---------
</TABLE>
- ------------------------
The reserve allocation is determined by using the six-year average net
charge-offs divided by the six-year average loan balance by type.
Table VI--Allocation of The Allowance for Possible Loan Losses Based on
Regulatory Standards
FDIC RESERVE ALLOCATION MAR 31, 1997
- --------------------------------------- ------------
Substandard @ 15%...................... 999,008
Doubtful @ 50%......................... 36,000
Loss @ 100%............................ 174,348
------------
Required Reserve....................... 1,209,356
Unallocated............................ 3,591,959
------------
Reserve Balance........................ 4,801,315
------------
------------
13
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
Table VII--Major Categories of Noninterest Income
<TABLE>
<CAPTION>
SIX-MONTH PERIODS
ENDED
JUNE 30,
-------------------- $ %
1997 1996 CHANGE CHANGE
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Service Charges on Deposit Accounts..................... 540 558 (18) (3.23)
Service Charges and Fees................................ 131 130 1 0.77
Trust Department Income................................. 510 388 122 31.44
Ins. Commissions, Fees and Premiums..................... 233 268 (35) (13.06)
Other Operating Income.................................. 363 27 336 1,244.44
--------- --------- ----- ---------
Total Other Income, Excl. Realized Sec. Gains........... 1,777 1,371 406 29.61
--------- --------- ----- ---------
Realized Gains on Sec., Net............................. 807 268 539 201.12
--------- --------- ----- ---------
Total Other Income...................................... 4,361 3,010 1,351 44.88
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
Total Other Income increased 29.6 percent when comparing the six months
ended June 30, 1997 to the same six-month period in 1996 and 20.4 percent when
compared to the six months beginning July 1, 1996 and ending December 31, 1996.
Other Operating Income consists of Service Charges on Deposit Accounts, Other
Service Charges and Fees, Trust Department Income, Insurance Commissions and
Fees, and Other Operating Income. The significant increase recorded during the
six-month period being reviewed was due to the sale of a registered logo owned
by the Corporation; the copyright was sold for $301,000.
Service Charges on Deposit Accounts consist of fees generated by the use of
the deposit accounts and overdraft charges. There was not a significant change
when comparing the six months ended June 30, 1997 to the six months ended
December 31, 1996 or the six months ended June 30, 1996. The fees collected
monthly are nearly evenly split between overdraft charges and checking account
maintenance. The total monthly fees collected average about $92,000.
Other Service Charges and Fees is comprised of debit card fees, credit card
annual fees, fees for issuing official checks, noncustomer check cashing fees
and other miscellaneous fees. A comparison of the current six-month period, the
previous six months and the six months ended June 30, 1996 reveals a negligible
amount of change. Normally, the miscellaneous fees average about $22,000 per
month.
Trust Department Income is the second largest contributor to noninterest
income, excluding realized securities gains. Income generated by the Trust
Department for the six months ended June 30, 1997, December 31, 1996 and June
30, 1996, respectively, amounted to $510,000, $464,000 and $388,000. The
observable increase in Trust income is due to an increase in the number of
accounts under management and the increase in the market value of the trust
assets. There has been an increase of nearly 100 accounts since June 30, 1996.
The Trust Department normally contributes $80,000 to $85,000 in income per
month.
Insurance Commissions, Fees and Premiums generated by Bucktail Life
Insurance Company for the six-month periods June 30, 1997, December 31, 1996 and
June 30, 1996 were $233,000, $287,000 and $268,000, respectively. Premiums
generated in the six months ended December 31, 1996 were slightly higher than
the other comparable six month periods as it included seven months of premium
income. Also, life premiums experienced a decline from an average of $17,000 per
month during 1996 to $10,000 per month during the current six-month period.
The insurance company writes life and accident and health insurance on the
bank's consumer loan portfolio.
Other Operating Income for the six months ended June 30, 1997, December
31, 1996 and June 30, 1996 amounted to $363,000, $27,000 and $20,000,
respectively. The large increase posted during the six-month period ended
June 30, 1997 reflects the sale of the copyright mentioned earlier. Also
posted during the first six months of 1997 was $18,000 in income associated
with the Corporation's Supplemental Retirement Plan. This income had
previously been added back to the Asset account. Other Operating Income is
normally $8,000 to $12,000 per month.
Realized Securities Gains and Losses amounted to $807,000 during the
first six months of 1997. The recognized gains were primarily from the sale
of bank stocks which management and the Board of Directors felt had become
overpriced in relation to the book value and some had been driven up in price
because of merger speculation. It was deemed appropriate to lock in the
appreciated value. The Corporation also sold two thirds of it Student Loan
portfolio due to disappointing returns on that asset; a premium amounting to
$28,000 was realized.
14
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
The following table compares the various categories of other expense for the
periods ended June 30, 1997 and June 30, 1996.
Table VIII--Major Categories of Noninterest Expense
<TABLE>
<CAPTION>
SIX-MONTH PERIODS
ENDED
JUNE 30,
--------------------
<S> <C> <C> <C> <C>
$ %
1997 1996 CHANGE CHANGE
--------- --------- ----------- -----------
Salaries and Wages................................. 2,966 2,922 44 1.51
Pensions and Other Employee Benefits............... 870 885 (15) (1.69)
Occupancy Expense, Net............................. 355 367 (12) (3.27)
Furniture and Equipment Expense.................... 335 365 (30) (8.22)
Other Operating Expense............................ 3,026 2,672 354 13.25
--------- --------- ----------- -----------
Total Other Expense................................ 7,552 7,211 341 4.73
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
Other Noninterest Expense consists of Salaries and Wages, Pension and Other
Benefit Expense, Furniture and Equipment Expense and Other Operating Expense.
Salaries and Wages increased $44,000 when comparing the six-month periods
ended June 30, 1997 and June 30, 1996 and no increase when comparing the
six-month period ended December 31, 1996 to the current six-month period. The
absence of an increase in salaries and wages even after merit increases can be
attributed to several retirements, including the Corporation's President's.
The increase in Pensions and Other Employee Benefits when comparing the
six-month periods ended June 30, 1997 and June 30, 1996 was negligible at 2
percent. When comparing the current period to the six months ended December 31,
1996, the increase amounted to 5.5 percent due to the payment of accumulated
sick days to 1996 retirees and adjustments made to budgeted contributions to the
401 (k) Plan in December 1996 as annual income figures were known.
Furniture and Equipment Expense amounted to $355,000, $354,000 and
$367,000, respectively, for the six-month periods ended June 30, 1997,
December 31, 1996 and June 30, 1996. Furniture and Fixtures Expense consists
of maintenance, rental and depreciation and normally does not vary
significantly, averaging $115,000 to $120,000 per month. Other Operating
Expense averages between $450,000 and $500,000 per month. The five largest
Other Operating Expense categories are credit card processing costs,
Pennsylvania Shares Tax, Bucktail Life Ins. Co. commissions and fees,
advertising, postage and Directors' fees. Combined they make up 62 percent of
Other Operating Expense. The largest contributor to Other Operating Expense
is credit card processing costs. Credit card processing costs amounted to
$1,151,000 for the current six-month period and $1,022,000 during the same
period in 1996; for the six-month period ended December 31, 1996 costs
amounted to $1,199,000. On the income side, credit cards generated interest
and fees amounting to $1,839,000 for the six month period ended June 30,
1997, contributing net monthly income of about $110,000.
Other Operating Expense increased 13 percent and 2 percent, respectively,
when comparing the six-month periods ended June 30, 1996 and December 31, 1996
to the current six-month period.
15
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
STATEMENT OF CONDITION
Average total assets of the Corporation have remained relatively unchanged
during the past year. Average total assets, for the six-month periods ended June
30, 1997, June 30, 1996 and the year ended December 31, 1996 were $604,380,000,
$603,282,000 and $604,408,000, respectively.
The asset side of the balance sheet saw a decline in the average
investment portfolio as the amortization of the mortgage-backed investments
was used to fund loan growth. The municipal bond portfolio has increased from
an average balance of $46,201,000 during the six-month period ended June
30,1996 to $57,902,000 at the end of the current six-month period. The
increase is due to the favorable after tax returns available on tax free
investments. The respective average balance of the loan portfolio was
$264,895,000, $281,059,000 and $271,618,000 for the six-month periods ended
June 30, 1997, June 30, 1996 and the year ended December 31, 1996. The loan
growth was centered around real estate secured loans as other loan categories
showed little or no change. Consumer loans did decline slightly as just over
$2,000,000 in students loans were sold.
There are no immediate plans to make any changes in the asset structure of
the Corporation. Mortgage-backed securities will continue to pay down about
$2,100,000 per month and be used to fund loans as the demand requires.
The liability side of the balance sheet has also remained relatively
constant during the past twelve to fifteen months. Average total deposits have
begun to show some improvement after a lackluster 1996. Interest Checking,
Individual Retirement Accounts and Certificates of Deposit did decline slightly
during 1996; however, the decline was offset by the strength of the Money Market
Accounts which continue to exhibit growth. Total average borrowed funds have
declined to an average balance of $93,673,000 for the six-month period ended
June 30, 1996. This compares to an annual average of $101,121,000 for 1996 and a
six-month average of $99,162,000 for the six months ended June 30, 1997. The
decrease is the result of paying off borrowings of $4,850,000 in April 1997 and
$10,000,000 in June 1997. The primary source of borrowed funds is repurchase
agreements placed with the Federal Home Loan Bank of Pittsburgh and other
brokers. Terms of the Repurchase Agreements range from one to five years. Other
borrowed funds are in the form of term loans with the Federal Home Loan Bank of
Pittsburgh which are secured by a blanket security agreement.
Interest rate fluctuations cause the market value of the investment
portfolio to vary by wide margins during periods of rising and falling rates.
The net adjustments to capital for June 30, 1997, December 31, 1996 and June 30,
1996 were $7,228,000, $5,767,000 and $2,315,000, respectively. Interest rates
have stabilized during the second quarter of 1997 after a slight rise in the
first quarter. Management expects rates to remain about the same for the
remainder of 1997.
The Corporation's capital remains well in excess of regulatory guidelines
and will be discussed later in Management's Discussion and Analysis.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The Corporation is able to absorb short term deposit fluctuations or meet
unusually heavy loan demand, should either occur, by using a flexline of credit
available through the Federal Home Loan Bank of Pittsburgh, repurchase
agreements or payments derived from amortizing investments. The flexline of
credit provides the Corporation with a credit line which approximates 10 percent
of the Corporation's borrowing capacity, or about $28.5 million. Repurchase
agreements are secured with mortgage-backed instruments. The maturities of the
repurchase agreements generally range from one to five years. The Corporation
also has credit lines with correspondent banks totaling approximately
$15,000,000 and amortizing payments received on the investment portfolio amount
to about $2,100,000 each month.
The Corporation uses a computer model to measure the theoretical effect of
increases or decreases in interest rates on the market value and the net
interest margin. The model shocks the rate of return on the earning assets of
the bank and the rates paid on interest-bearing liabilities. The rate shock is
applied to the assets and liabilities based on the stated maturity of the asset
or liability. For instance, Money Market accounts reprice weekly; therefore the
rate is shocked immediately. One, two and three hundred basis points are the
shock intervals. The Asset and Liability Policy set by the Board of Directors
imposes limits on the change in net interest income and market value of
portfolio equity at a 200 basis point increase in interest rates. Net interest
income may not decline more than 20 percent and the change in market value of
portfolio equity may not decline more than 25 percent. The Board of Directors
feels that the parameters are reasonable based on the capital strength of the
Corporation.
Capital expenditures planned during the next 12 months could amount to
$1,000,000. The largest of these will be the installation of Automated Teller
Machines at an estimated cost of between $200,000 and $500,000 depending on the
type and number installed. Other expenditures for capital assets between now and
December 31, 1997 will amount to approximately $500,000. The planned capital
expenditures will not have an adverse effect on liquidity or projected earnings
of the Corporation.
16
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Condition and Results of
Operations (continued)
Table IX--Rate Sensitive Assets and Rate Sensitive Liabilities
<TABLE>
<CAPTION>
UNDER ONE TO FIVE FIVE TO TEN OVER TEN NON-
ONE YEAR YEARS YEARS YEARS INTEREST TOTAL
---------- ----------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Bearing Deposits........................... 601 601
'Available-for-Sale" Securities:
U.S. Treasury Securities.......................... 2,484 2,484
U.S. Agency Securities............................ 22,125 4,823 26,948
Mortgage Backed Securities........................ 364 32,734 2,834 137,966 173,898
Municipals........................................ 2,154 6,665 4,350 48,874 62,043
Other Bonds....................................... 1,000 1,592 1,284 3,876
Stocks............................................ 26,528 26,528
---------- ----------- ----------- --------- --------- ---------
Total "Available-for-Sale" Securities............... 2,518 42,883 30,901 219,475 295,777
'Held-to-Maturity" Securities:
U.S.Treasury Securities........................... 499 99 598
U.S.Agency Securities............................. 200 150 350
Mortgage Backed Securities........................ 27 309 346 682
---------- ----------- ----------- --------- --------- ---------
Total "Held-to-Maturity" Securities:................ 499 126 509 496 1,630
Loans and Lease Financing:
Real Estate-Construction.......................... 713 713
Real Estate-Mortgage.............................. 89,527 46,891 43,502 38,387 218,307
Consumer.......................................... 12,234 13,385 1,419 10,424 37,462
Agriculture....................................... 1,285 1,265 97 72 2,719
Commercial........................................ 11,534 3,564 676 1,127 16,901
Other............................................. 219 26 627 872
Political Subdivisions............................ 1,569 2,441 1,454 1,122 6,586
Leases............................................ 36 107 127 270
Nonperforming Loans............................... 1,055 1,055
---------- ----------- ----------- --------- --------- ---------
Total Loans......................................... 117,117 67,679 47,148 51,886 1,055 284,885
Less: Unearned Discount............................. (50) (50)
Allowance for Possible Loan Losses.............. (4,809) (4,809)
---------- ----------- ----------- --------- --------- ---------
Net Loans and Leases................................ 117,117 67,679 47,148 51,886 (3,804) 280,026
Federal Funds Sold
Cash and Due From Banks............................. 16,679 16,679
Other Assets........................................ 12,191 12,191
---------- ----------- ----------- --------- --------- ---------
---------- ----------- ----------- --------- --------- ---------
Total Assets........................................ 120,735 110,688 78,558 271,857 25,066 606,904
LIABILITIES AND EQUITY
Interest Bearing Deposits:
Money Market...................................... 105,787 105,787
NOW and SNOW...................................... 37,732 37,732
Christmas/Fund Clubs.............................. 1,898 1,898
CD's.............................................. 62,288 55,843 1 118,132
Reg/Key Savings................................... 47,009 47,009
GPS............................................... 714 714
IRA's............................................. 78,874 78,874
---------- ----------- ----------- --------- --------- ---------
Total Interest-Bearing Deposits..................... 286,579 55,843 1 47,723 390,146
Demand Deposits..................................... 48,915 48,915
Federal Funds Purchased............................. 4,000 4,000
Repurchase Agreements............................... 29,800 29,800
Borrowed Funds:
Variable.......................................... 15,000 15,000
Fixed............................................. 34,000 1,669 35,669
---------- ----------- ----------- --------- --------- ---------
Total Borrowed Funds................................ 49,000 1,669 50,669
Other Liabilities................................... 911 5,978 6,889
Stockholders' Equity................................ 7,228 69,257 76,485
---------- ----------- ----------- --------- --------- ---------
Total Liabilities and Equity........................ 377,518 57,512 1 47,723 124,150 606,904
---------- ----------- ----------- --------- --------- ---------
Interest Rate Sensitivity Gap....................... (256,783) 53,176 78,557 224,134 (99,084)
---------- ----------- ----------- --------- --------- ---------
---------- ----------- ----------- --------- --------- ---------
</TABLE>
17
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Table X--Rate Shock Analysis and the Theoretical Effect on Equity Market Values
for the Period Ended June 30, 1997
(In Thousands)
<TABLE>
<CAPTION>
-3.00 -2.00 -1.00 FLAT 1.00 2.00 3.00
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
BOOK VALUE................................... 606,904 606,904 606,904 606,904 606,904 606,904 606,904
MARKET VALUE................................. 662,792 645,932 630,363 618,224 601,737 591,641 582,035
CHANGE....................................... 55,888 39,028 23,459 11,320 (5,167) (15,263) (24,869)
LIABILITIES
BOOK VALUE................................... 530,419 530,419 530,419 530,419 530,419 530,419 530,419
MARKET VALUE................................. 544,257 539,253 534,383 529,857 525,028 520,535 516,159
CHANGE....................................... (13,838) (8,834) (3,964) 562 5,391 9,884 14,260
EQUITY
BEG BALANCE.................................. 69,257 69,257 69,257 69,257 69,257 69,257 69,257
ASSET CHANGE................................. 55,888 39,028 23,459 11,320 (5,167) (15,263) (24,869)
LIAB CHANGE.................................. (13,838) (8,834) (3,964) 562 5,391 9,884 14,260
MARKET VALUE................................. 111,307 99,451 88,752 81,139 69,481 63,878 58,648
</TABLE>
Table XI--Current Exposure to Hypothetical Change in Interest Rates for the
Period Ended June 30, 1997
MV OF PORTFOLIO
NET INTEREST INCOME EQUITY
CHANGE IN RATES PROJECTED PROJECTED
BASIS POINTS CHANGE CHANGE
- ----------------- --------------------- ---------------------
300 -4.8 27.72
200 -3.9 21.27
100 -3.4 14.37
0 0.0 0.00
-100 5.6 -9.38
-200 10.6 -22.57
-300 15.7 -37.18
18
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
Part I--Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
CAPITAL
Total capital of the Corporation, excluding unrealized gains on
Available-for-Sale Securities, at June 30, 1997, December 31, 1996 and June
30, 1996 amounted to $69,257,000, $65,826,000 and $62,987,000, respectively,
and as shown in the following table, is well in excess of regulatory guidelines.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
1997 1996 1996
--------- ------------ ---------
<S> <C> <C> <C>
Leverage Ratio (Equity/Total Liabilities).................................... 13.1% 12.2% 11.6%
TIER I Total Stockholders' Equity............................................ 69,257 65,826 62,987
TIER II Allowance for Possible Loan Losses (1)............................... 3,995 3,957 3,881
Total Qualifying Capital................................................. 73,252 69,783 66,868
Risk Adjusted Assets--Balance Sheet.......................................... 305,608 303,417 298,168
Risk Adjusted Assets--Off Balance Sheet...................................... 13,957 13,172 12,280
Total Risk Adjusted Assets................................................... 319,565 316,589 310,448
Ratios
TIER I Capital to Risk Weighted Assets................................... 21.67% 20.79% 20.29%
Minimum Required June 30, 1997........................................... 4.00%
Minimum Required December 31, 1996....................................... 4.00%
Minimum Required June 30, 1996........................................... 4.00%
Total Capital to Risk Weighted Assets.................................... 22.92% 22.04% 21.54%
Minimum Required December 31, 1996....................................... 8.00%
Minimum Required December 31, 1995....................................... 8.00%
Minimum Required December 31, 1994....................................... 8.00%
</TABLE>
- ------------------------
(1) Allowable addition may not exceed 1.25 percent of Risk Adjusted Assets.
19
<PAGE>
(CITIZENS) AND NORTHERN CORPORATION--FORM 10--Q
Part II--Other Information
Item 1. Legal Proceedings
Citizens and Northern Corporation is not a litigant in any pending material
lawsuits.
It is the opinion of the counsel of Citizens and Northern Corporation that
minor lawsuits which are pending will not have a significant or materially
detrimental affect on the capital of the Corporation or in any way affect the
results of operations.
Item 4. Submission of Matters to A vote of Security Holders
The Annual Meeting of Shareholders of Citizens & Northern Corporation was
held on Tuesday, April 15, 1997. The Board of Directors fixed the close of
business on March 3, 1997 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof. On this record date, there were outstanding and entitled to
vote 5,062,453 shares of Common Stock.
The total number of votes cast were 3,970,104. All were voted by proxy for
the following purposes and with the following results.
1. The election of the following as Class I Directors to serve for a term of
three years:
R. Robert DeCamp Edward H. Owlett III
Adelbert E. Eldridge F. David Pennypacker
Robert J. Murphy
The total votes in favor of any one of the above listed Directors were not
less than 3,932,031.
2. The approval and adoption of the Citizens & Northern Corporation 1996
Independent Directors Stock Option Plan.
Total Votes in Favor............. 3,414,568
Total votes Against.............. 485,308
Total Votes Abstained............ 70,228
3. The ratification of the action of the Board of Directors in the
appointment of the firm of Parente, Randolph, Orlando, Carey & Associates
as independent auditors of the Corporation.
Total Votes in Favor............. 3,955,607
Total Votes Against.............. 2,250
Total Votes Abstained............ 12,247
Item 5. Other Events
a. None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits filed as part of this report--None
b. No reports on Form 8-K were filed during the period ended June 30, 1997
20
<PAGE>
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q
SIGNATURE PAGE
--------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date Aug. 6, 1997 CRAIG G. LITCHFIELD /S/
-------------------------------------
Craig G. Litchfield
President and Chief Executive Officer
Date Aug. 6, 1997 JAMES W. SEIPLER /S/
-------------------------------------
James W. Seipler
Treasurer
(Chief Financial Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000810958
<NAME> CITIZENS & NORTHERN
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 16,679
<INT-BEARING-DEPOSITS> 601
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 295,777
<INVESTMENTS-CARRYING> 1,630
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<LOANS> 284,835
<ALLOWANCE> 4,809
<TOTAL-ASSETS> 606,904
<DEPOSITS> 439,061
<SHORT-TERM> 53,800
<LIABILITIES-OTHER> 6,889
<LONG-TERM> 30,669
0
0
<COMMON> 5,168
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<TOTAL-LIABILITIES-AND-EQUITY> 606,904
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<SECURITIES-GAINS> 807
<EXPENSE-OTHER> 7,552
<INCOME-PRETAX> 6,891
<INCOME-PRE-EXTRAORDINARY> 6,891
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,247
<EPS-PRIMARY> 1.04
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<LOANS-NON> 1,055
<LOANS-PAST> 2,501
<LOANS-TROUBLED> 185
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