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, 1996
CITIZENS & NORTHERN CORPORATION
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2451943
(State of Incorporation) (Employer Identification Number)
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: THOMPSON STREET
RALSTON, PA 17763
MAILING ADDRESS OF EXECUTIVE OFFICE: 90-92 MAIN STREET
WELLSBORO, PA 16901
REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE): 717-265-6171
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, 1997:
$1.00 Par Value 5,062,453 Shares
The aggregate market value of the registrant's common stock held by
non-affiliates at 1, 1997 : $134,155,005
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Shareholders for the Year Ended December 31,
1996 (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 15, 1997 (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 43 of the Annual
Stock and Related Stockholder Matters Report
Item 6. Selected Financial Data Pages 43 and 44 of the
Annual Report
Item 7. Management's Discussion and Analysis Page 28 through 42 of the
of the Financial Condition and Results Annual Report
of Operations
Item 8. Financial Statements and Page 6 through 25 and page
Supplementary Data 44 of the Annual Report
Part III
Item 10. Directors and Executive Officers Page 2 through 5 of the
of the Registrant Proxy Statement
Item 11. Executive Compensation Page 5 through 9 of the
Proxy Statement
Item 12. Security Ownership of Certain Page 3 through 5 of the
Beneficial Owners and Management Proxy Statement
Item 13. Certain Relationships and Related Page 23 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 47 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
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
The information appearing in the Annual Report under the caption
"Quarterly Share Data" on page 43 and the "Summary of Quarterly Financial Data"
on page 45 is herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Summary of Operations" on page 44 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 28 through 42, 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
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(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 17, 1997, 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 5 and 6
of the Corporation's Proxy Statement dated March 17, 1997, is herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" on
page 7 of the Corporation's Proxy Statement dated March 17, 1997, 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 23 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
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1). The following consolidated financial statements and reports
are set forth in Item 8.
Page
Report of Independent Certified Public Accountants 26
Financial Statements:
Consolidated Balance Sheet - December 31, 1996 and 1995 6
Consolidated Statement of Income - Years Ended
December 31, 1996, 1995 and 1994 7
Consolidated Statement of Changes in Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994 8
Consolidated Statement of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994 9
Notes to Consolidated Financial Statements 8 - 25
4
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(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
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
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,
1996.
*omitted in the interest of brevity
5
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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, 1997 By: CRAIG G. LITCHFIELD /s/
-------------- ------------------------------
Date Craig G. Litchfield
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, 1997 By: JAMES W. SEIPLER /s/
-------------- ------------------------------
Date James W. Seipler
Treasurer
6
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BOARD OF DIRECTORS
J. ROBERT BOWER /s/ JOHN H. MACAFEE /s/
- ------------------------------------- -----------------------------------
J. Robert Bower John H. Macafee
R. ROBERT DECAMP /s/ LAWRENCE F. MASE /s/
- ------------------------------------- -----------------------------------
R. Robert DeCamp Lawrence F. Mase
R. JAMES DUNHAM /s/ ROBERT J. MURPHY /s/
- ------------------------------------- -----------------------------------
R. James Dunham Robert J. Murphy
ADELBERT E. ELDRIDGE /s/ EDWARD H. OWLETT, III /s/
- ------------------------------------- -----------------------------------
Adelbert E. Eldridge Edward H. Owlett, III
WILLIAM K. FRANCIS /s/ F. DAVID PENNYPACKER /s/
- ------------------------------------- -----------------------------------
William K. Francis F. David Pennypacker
KARL W. KROECK /s/ LEONARD SIMPSON /s/
- ------------------------------------- -----------------------------------
Karl W. Kroeck Leonard Simpson
EDWARD L. LEARN /s/ DONALD E. TREAT /s/
- ------------------------------------- -----------------------------------
Edward L. Learn Donald E. Treat
CRAIG G. LITCHFIELD /s/
- -------------------------------------
Craig G. Litchfield
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
Exhibit 13
To Our Shareholders:
The Directors and employees of Citizens & Northern take great pride in reporting
the financial results of 1996.
Mission
The challenge and mission of Citizens & Northern Corporation is to continue to
increase shareholder value by providing an above average return on investment.
To that end, our commitment and focus is on our long-term commitment to the
customers and the communities we serve. It is our vision to increase our lead of
market share in financial services by maintaining a well-trained and responsive
employee base and a portfolio of competitive products and services. We are
committed to managing change to serve the needs of our market and our customers.
Excellent customer service and competitive products will assure continued
enhancement of market share, profitability and thus increased shareholder value.
Financial Highlights
Nineteen ninety-six was a record year for C & N Corporation and its
shareholders. Net after-tax Income for 1996 totaled over $9,255,000, or $1.83
per share, compared to $7,866,000 and $1.55 per share for 1995. The results
represent an 18% increase in per share income. The Return-On-Average-Assets
ratio was 1.53%, well above the average for banks in our peer group. A major
factor contributing to the increase in Net after-tax Income for 1996 was an
18.1% increase in the Interest Margin. We saw the Interest Margin begin to widen
in late 1995 as short term interest rates fell and the rates on our longer term
investments and loans did not reprice as rapidly.
Dividends for 1996 increased to 69 cents per share, a 6.1% increase over 1995.
Shareholders also received a 1% stock dividend for
the 23rd consecutive year.
Total Assets grew to a new high of $610,192,000 for an increase of 4.1% over
1995.
Deposits increased to $430.3 million as of December 31, 1996 for a 0.2% increase
over the December 31, 1995 total of $429.5. It should be noted, however, that
the average deposits for 1996 of $430 million were 3.4% higher than the average
deposits for 1995 of $419.7 million. Net Loans totaled $273.8 million for an
increase of $14.2 million, or 5.4%, over the previous year.
It is our belief that mutual funds are competing fiercely for what could
otherwise be insured bank deposits. While we offer very competitive rates on all
our interest-bearing accounts (especially our Super Money Fund, Interest
Checking and IRAs), the historical yields on equity mutual funds for the last
two years have attracted the interest of bank depositors. As a financial service
provider with a desire to build and maintain long-term customer relationships,
we successfully market Fidelity and Federated mutual funds through our Trust
Department. The mutual fund products are for both IRA and non-IRA investment
purposes.
Stockholders' Equity before Net Unrealized Gains on Available-for-Sale
Securities increased $5.8 million, or 9.6%, to $65.8 million. C & N maintains a
strong capital position, well above the regulatory requirements.
New Service
One our most important resources is a very competent and responsive in-house
data processing department. Competence in technology is essential to providing
excellent customer service. This year we added the new Telephone Banking System
(1-717-724-3000), which provides our customers with touch tone telephone access
to their account information, to make transfers between accounts and to make
loan payments 24 hours a day, seven days a week.
Trust Department Update
Our Trust Department continues to grow in both assets-under-management and in
profitability. The total market value of Trust Assets increased in 1996 to
$222.5 million, or 22.8% over the 1995 year-end total of $181.1 million. Trust
Fee Income for 1996 increased by 17.3% over the previous year's results to $852
thousand.
Two of the Trust Department's many services, the employee benefit and investment
management services show significant growth in asset market value and new
accounts. During 1996, the Trust Department added the high quality and highly
respected Frank Russell mutual funds as an investment alternative that should
prove very appealing to employee benefit plans, as well as other Trust clients.
The Trust Department now offers three quality mutual fund alternatives: Fidelity
Funds, the Federated Funds, and the Frank Russell funds. The Bank's employee
401(k) plan converted to the Russell Funds as of January 1, 1997, showing that
we perceive the Russell Funds to be excellent investment products.
1
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Additionally, the Trust Department has designed and implemented a cutting-edge
equity investment strategy, that combines the strengths of two nationally known
and respected investment advisors: The Northern Trust Corporation and Merrill
Lynch. The Northern Trust's FOCUS Research equity specialists provide an ongoing
list of "fiduciary quality" stocks which are then analyzed by Merrill Lynch's
computer software to design a personalized investment portfolio tailored to fit
the needs of each Trust client. Already, the investment results are proving to
be very satisfactory.
Retirements
We had five retirements during 1996. William K. Francis, Bill, retired as an
employee after over 38 years with the organization, 25 of those years were as
President and CEO. During Bill's tenure as President and CEO, the bank grew from
approximately $72 million in assets to over $600 million. Additionally, under
Bill's management as President, shareholder value increased by an average annual
rate of approximately 12.5%, not including dividends. Bill continues as Chairman
of the Board, and his advice and counsel is and will continue to be a valuable
resource.
Phyllis Callear retired from our Athens office after 33 years with the
organization. Pat Marzo retired from our Elkland office after 31 years. Mary
Bustin retired from our Towanda office after 24 years. And finally, but
certainly not least, Wilson Quiggle retired from his position as the Monroeton
branch manager, after 13 years with Citizens & Northern Bank.
We wish each of our retirees, a happy and fulfilling new beginning. They gave
much to the organization and will be missed.
New Positions
As a result of the retirements, five position changes have occurred: Craig
Litchfield to President & CEO, Brian Canfield to Vice President - Branch
Administration, Mark Griffis to Vice President and Branch Manager of the Troy
office, Eileen Ranck to BankCard Manager and Jeff Aeppli to Assistant Vice
President and Branch Manager of our Monroeton office.
The employees of Citizens & Northern are our most important resource. To improve
the value and productivity of all employees, we are committed to training and
education. In 1996, we created a new position and hired Sandy Parulas as our new
full time Training Officer. The Training Officer is charged with the duty of
providing on-going teller training, and in-house seminars for all personnel.
Commitment to the Future
As an independent community financial institution, our goal is to provide
excellent financial products and services that will continue to contribute to
the financial strength of the individuals, industries, businesses and
communities we serve.
Citizens & Northern's dedicated, well-trained staff, its strong capital
position, its strong earnings and its technological resources have combined to
capture a leading market share of the banking and financial service business in
the communities we serve. We believe that by foreseeing and recognizing the
opportunities which arise in the ever changing financial services market, that
1997 and future years will prove rewarding for the Corporation and its
shareholders.
2
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Consolidated Balance Sheet
(In Thousands Except Per Share Data) December 31, December 31,
1996 1995
ASSETS
Cash & Due From Banks
Noninterest-Bearing 14,320 12,945
Interest-Bearing 655 645
Total Cash and Cash Equivalents 14,975 13,590
Available-for-Sale Securities 307,853 299,591
Held-to-Maturity Securities 1,569 1,507
(Estimated fair value of $1,579
and $1,547 in 1996 and 1995, respectively)
Loans, Net 273,821 259,603
Bank Premises and Equipment, Net 6,609 6,791
Foreclosed Assets Held for Sale 583 455
Accrued Interest Receivable 4,404 4,058
Other Assets 378 392
TOTAL ASSETS 610,192 585,987
LIABILITIES
Deposits:
Noninterest-Bearing 47,320 41,167
Interest-Bearing 382,991 388,385
Total Deposits 430,311 429,552
Dividends Payable 902 843
Borrowed Funds 104,250 85,000
Accrued Interest and Other Liabilities 3,136 3,615
TOTAL LIABILITIES 538,599 519,010
STOCKHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,117 5,067
Authorized 10,000,000; Issued 5,117,182
and 5,066,516 in 1996 and 1995, respectively
Stock Dividend Distributable 1,305 1,013
Paid in Capital 12,539 11,575
Retained Earnings 47,862 43,370
Total 66,823 61,025
Unrealized Losses on Available-for-Sale Securities 5,767 6,952
Less: Treasury Stock at Cost
104,850 shares at December 31, 1996 (997)
104,060 shares at December 31, 1995 (1,000)
TOTAL STOCKHOLDERS' EQUITY 71,593 66,977
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 610,192 585,987
The accompanying notes are an integral part of the consolidated financial
statements.
3
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Consolidated Statement of Income
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans 27,574 26,118 23,329
Interest on Balances with Depository Institutions 37 55 63
Interest on Loans to Political Subdivisions 424 421 315
Interest on Federal Funds Sold 60 79 13
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 15,943 15,151 15,268
Tax Exempt 3,012 2,667 2,655
Dividends 872 690 666
Total Interest and Dividend Income 47,922 45,181 42,309
INTEREST EXPENSE
Interest on Deposits 17,775 18,831 15,523
Interest on Other Borrowings 5,676 5,646 5,282
Total Interest Expense 23,451 24,477 20,805
Interest Margin 24,471 20,704 21,504
Provision for Possible Loan Losses 701 737 737
Interest Margin After Provision for Possible Loan Losses 23,770 19,967 20,767
OTHER INCOME
Service Charges on Deposit Accounts 1,124 1,117 1,071
Service Charges and Fees 269 273 286
Trust Department Income 852 726 582
Insurance Commissions, Fees and Premiums 555 620 602
Other Operating Income 47 60 341
Total Other Income before Realized Gains (Losses) on Securities, Net 2,847 2,796 2,882
Realized Gains (Losses) on Securities, Net 475 1,675 (219)
Total Other Income 3,322 4,471 2,663
OTHER EXPENSES
Salaries and Wages 5,887 5,385 5,004
Pensions and Other Employee Benefits 1,709 1,618 1,620
Occupancy Expense, Net 721 698 692
Furniture and Equipment Expense 726 675 556
Other Operating Expense 5,643 5,703 5,725
Total Other Expenses 14,686 14,079 13,597
Income Before Income Tax Provision 12,406 10,359 9,833
Income Tax Provision 3,151 2,493 2,339
NET INCOME 9,255 7,866 7,494
NET INCOME PER SHARE 1.83 1.55 1.48
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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Consolidated Statement of Changes in Stockholders' Equity
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Common Stock Net
Stock Dividend Paid In Retained Unealized Treasury
Shares Amount Distributable Capital Earnings Gain(Loss) Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 Per 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 Per Share (3,226) (3,226)
Stock Dividend Declared, 1% 1,013 (1,013)
Net Unrealized Holding 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
Net Income 9,255 9,255
Stock Dividend Issued 50 50 (1,013) 963
Cash Dividends Declared $.68 Per Share (3,458) (3,458)
Stock Dividend Declared, 1% 1,305 (1,305)
Sale of Treasury Stock 1 3 4
Net Unrealized Loss on
Available-for-Sale Securities (1,185) (1,185)
BALANCE DECEMBER 31, 1996 5,117 5,117 1,305 12,539 47,862 5,767 (997) 71,593
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income 9,255 7,866 7,494
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 701 737 737
Realized (Gain) Loss on Securities, Net (475) (1,675) 219
Gain on Sale of Premises and Equipment (8)
Loss on the Sale of Foreclosed Assets 70 50 16
Gain on Sale of Other Assets (265)
Provision for Depreciation 764 735 627
Accretion and Amortization 827 817 62
Deferred Income Tax (215) (100) 263
Decrease (Increase) in Accrued Interest
Receivable and Other Assets (332) 1569 (343)
(Decrease) Increase in Accrued Interest Payable and
Other Liabilities 405 (944) 378
Net Cash Provided by Operating Activities 11,000 9,055 9,180
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 138 188 196
Purchase of Held-to-Maturity Securities (199) (498) (320)
Proceeds from Sales of Available-for-Sale Securities 13,002 8,284 60,391
Proceeds from Maturities of Available-for-Sale Securities 35,468 37,256 48,972
Purchase of Available-for-Sale Securities (58,881) (60,101) (90,732)
Proceeds from Sale of Premises and Equipment 29
Proceeds from Sale of Other Assets 266
Net Increase in Loans (15,428) (6,525) (20,752)
Purchase of Premises and Equipment (582) (606) (2,113)
Sale of Foreclosed Assets 312 567 373
Net Cash Used in Investing Activities (26,170) (21,435) (3,690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 759 30,289 7,624
Increase (Decrease) in Other Borrowings 4,650 (5,000) (19,307)
Proceeds from Federal Home Loan Bank Borrowings 49,600 45,000 23,500
Repayment of Federal Home Loan Bank Borrowings (35,000) (53,500) (15,000)
Proceeds from the Sale of Treasury Stock 4
Dividends Declared (3,458) (3,226) (3,022)
Net Cash Provided by (Used In) Financing Activities 16,555 13,563 (6,205)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,385 1,183 (715)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 13,590 12,407 13,122
CASH AND CASH EQUIVALENTS, END OF YEAR 14,975 13,590 12,407
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid 23,474 25,621 20,316
Income Taxes Paid 3,449 2,487 2,405
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<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 amounts 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 - In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, investment securities 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.
Realized gains and losses on the sale of available-for-sale 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.
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.
7
<PAGE>
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, 1996 and December 31, 1995 was $583,000 and $455,000,
respectively. Foreclosed assets held for sale amounting to $510,000, $428,000
and $711,000 were acquired from the foreclosure of real estate loans during
1996, 1995 and 1994, 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 SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions".
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, accretion of discounts on investment securities and accrued
payroll.
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 5,062,203 for 1996, 1995 and 1994. The assumed exercise
of stock options (see Note 9) does not result in material dilution.
8
<PAGE>
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.
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 1996 ranged from $4,240,000 to $5,565,000. For 1995, these balances ranged
from $4,199,000 to $4,963,000. Average daily cash balances with the Federal
Reserve Bank required to cover services provided to the Bank amounted to
$425,000 throughout 1996 and 1995. Total balances restricted at December 31,
1996 and December 31, 1995 were $4,757,000 and $5,405,000, 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.
3. SECURITIES
Amortized cost and the estimated fair value of securities at December 31, 1996
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITES:
Obligations of the U.S. Treasury 2,505 (30) 2,475
Obligations of Other U.S. Government Agencies 36,212 169 (40) 36,341
Obligations of States and Political Subdivisions 54,501 1,611 (169) 55,943
Other Securities 4,962 7 4,969
Mortgage-backed Securities 184,864 1,507 (2,888) 183,483
Total Debt Securities 283,044 3,294 (3,127) 283,211
Marketable Equity Securities 16,072 8,671 (101) 24,642
Total 299,116 11,965 (3,228) 307,853
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury 699 3 (3) 699
Obligations of Other U.S. Government Agencies 100 2 102
Mortgage-backed Securities 770 22 (14) 778
Total 1,569 27 (17) 1,579
</TABLE>
9
<PAGE>
<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 SECURITES:
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
Other Securities 13,922 272 0 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>
The amortized cost and estimated fair value of investment debt securities at
December 31, 1996 follow. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties. Maturities of mortgage-backed
securities have been estimated based on the contractual maturity.
December 31, 1996
Estimated
(In Thousands) Amortized Fair
Cost Value
AVAILABLE-FOR-SALE SECURITIES:
Due in one year or less 2,642 2,674
Due after one year through five years 53,591 53,745
Due after five through ten years 31,891 32,124
Due after ten years 194,920 194,668
Total 283,044 283,211
HELD-TO-MATURITY SECURITIES:
Due in one year or less 599 600
Due after one year through five years 132 133
Due after five through ten years 386 404
Due after ten years 452 442
Total 1,569 1,579
10
<PAGE>
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1996:
<TABLE>
<CAPTION>
Within One-Five Five-Ten After Ten
One 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 2,505 5.12 2,505 5.12
Obligations of Other U.S.
Government Agencies 9,000 7.00 17,024 6.72 10,188 7.50 36,212 7.01
Obligations of States and
Political Subdivisions 1,015 6.74 6,042 7.14 4,525 6.69 42,919 5.86 54,501 6.09
Other Securities 1,015 7.74 1,987 8.42 1,960 5.65 4,962 7.19
Mortgage-Backed Securities 1,627 7.78 35,029 6.21 8,355 6.31 139,853 6.93 184,864 6.77
Total 2,642 7.38 53,591 6.43 31,891 6.71 194,920 6.71 283,044 6.66
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury 599 6.19 0 100 5.09 0 699 6.03
Obligations of Other U.S.
Government Agencies 100 7.43 100 7.43
Mortgage-Backed Securities 32 8.60 286 7.85 452 7.23 770 7.52
Total 599 6.19 132 7.71 386 7.13 452 7.23 1,569 6.85
</TABLE>
Investment securities carried at approximately $31,336,000 and $34,602,000 at
December 31, 1996 and 1995, respectively, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law.
In 1996, gross realized gains from the sale of available-for-sale securities
were $475,000. In 1995, realized gains from the sale of available-for-sale
securities amounted to $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.
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) % of % of
1996 Total 1995 Total
<S> <C> <C> <C> <C>
Real Estate - Construction 1,166 0.42% 1,284 0.49%
Real Estate - Mortgage 213,957 76.79% 200,066 75.72%
Consumer 33,420 11.99% 36,351 13.76%
Agricultural 2,603 0.93% 2,815 1.07%
Commercial 15,751 5.65% 14,445 5.47%
Other 5,014 1.80% 2,512 0.95%
Political Subdivisions 6,464 2.32% 6,546 2.48%
Lease Receivables 264 0.09% 189 0.08%
Total 278,639 100.00% 264,208 100.00%
Less Unearned Discount (42) (26)
278,597 264,182
Less Allowance for Possible Loan Losses (4,776) (4,579)
Net Loans and Lease Finance Receivables 273,821 259,603
</TABLE>
At December 31, 1996 and 1995, net unamortized loan fees and costs of $1,974,000
and $1,959,000, respectively, have been offset against the carrying value of
loans.
11
<PAGE>
There is no concentration of loans to borrowers engaged in similar businesses or
activities which exceeds 10% of total loans at December 31, 1996.
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.
Loan Maturity Distribution
December 31, 1996
(In Thousands) Over One
Year but After
One Year Less than Five
or Less Five Years Years Total
Real Estate - Construction 1,166 1,166
Real Estate - Mortgage 81,350 42,014 90,593 213,957
Consumer 9,641 20,301 3,478 33,420
Agricultural 1,088 1,265 250 2,603
Commercial 11,435 3,242 1,074 15,751
Other 384 26 4,604 5,014
Political Subdivisions 1,569 2,441 2,454 6,464
Lease Receivables 36 134 94 264
Total 106,669 69,423 102,547 278,639
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 $864,000 at December 31, 1996 and $279,000 at December 31, 1995. Interest
income on such loans is recorded only as received. No interest was received on
these loans for the years ended December 31, 1996, 1995 or 1994.
Loans on which the original terms have been restructured totaled $188,000 and
$206,000 at December 31, 1996 and 1995, respectively. None of the loans on which
the original terms were changed were past due at December 31, 1996.
Loans which were more than 90 days past due and still accruing interest at
December 31, 1996 and 1995 totaled $2,994,000 and $2,915,000, respectively.
Transactions in the allowance for possible loan losses were as follows:
(In Thousands) Years Ended December 31,
1996 1995 1994
Balance at Beginning of Year 4,579 4,229 3,817
Provision Charged to Operations 701 737 737
Loans Charged Off (672) (574) (519)
Recoveries 168 187 194
Balance at End of Year 4,776 4,579 4,229
At December 31, 1996 and 1995, the Corporation had loans amounting to
approximately $1,937,000 and $2,163,000, respectively, that were specifically
classified as impaired. The average balance of these loans amounted to
$1,548,000 and $2,076,000 for the years ended December 31, 1996 and 1995,
respectively. The allowance for loan losses related to impaired loans as of
December 31, 1996 and 1995 was $113,000 and $228,000. The following is a summary
of cash receipts on these loans and how they were applied in 1996 and 1995.
(In Thousands) 1996 1995
Cash receipts applied to reduce principal balance 56 60
Cash receipts recognized as interest income 116 45
Total Cash Receipts 172 105
12
<PAGE>
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
December 31,
(In Thousands) 1996 1995
Land 422 417
Buildings and Improvements 8,151 7,790
Furniture and Equipment 4,426 4,237
Total 12,999 12,444
Less Accumulated Depreciation 6,390 5,653
Net 6,609 6,791
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprised of the following:
Years Ended December 31,
(In Thousands) 1996 1995 1994
Building and Improvements 304 298 274
Furniture and Equipment 460 437 353
Total 764 735 627
6. DEPOSITS
The following table reflects time certificates of deposit included in total
deposits and their remaining maturities.
(In Thousands)
At December 31, 1996
2001
and
1997 1998 1999 2000 Thereafter Total
Certificates of Deposit 75,052 19,194 7,406 8,568 5,170 115,390
At December 31, 1995
2000
and
1996 1997 1998 1999 Thereafter Total
Certificates of Deposit 78,103 15,259 13,790 5,077 6,292 118,521
Included in interest-bearing deposits are jumbo certificates of deposit issued
in the amount of $100,000 or more. These certificates and their remaining
maturities are as follows:
(In Thousands) At December 31, 1996
2001
and
1997 1998 1999 2000 Thereafter Total
Jumbo Certificates of Deposit 8,931 1,346 645 712 658 12,292
At December 31, 1995
2000
and
1996 1997 1998 1999 Thereafter Total
Jumbo Certificates of Deposit 13,637 814 1,098 522 607 16,678
The interest paid on deposits of $100,000 or more amounted to $958,000, $838,000
and $668,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
13
<PAGE>
7. BORROWED FUNDS
Borrowed funds include the following: December 31,
(In Thousands) 1996 1995
Federal Funds Purchased (a)
Flexline (b)
Federal Home Loan Bank Borrowings (c) 59,600 45,000
Other Borrowed Funds (d) 44,650 40,000
Total Borrowed Funds (e) 104,250 85,000
(a) Federal Funds Purchased generally represent overnight federal funds
borrowings from correspondent banks. The maximum month-end amount of such
borrowing in 1996, 1995 and 1994 was $8,500,000, $19,000,000 and $30,000,000,
respectively. The average amount of such borrowings was $967,000, $4,774,000 and
$11,565,000 in 1996, 1995 and 1994, respectively, and the weighted average
interest rates were 5.69% in 1996, 6.37% in 1995 and 4.31% in 1994.
(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 $25,569,000 at December 31, 1996. The
weighted average interest rate for 1996, 1995 and 1994 was 5.69%, 6.37% , and
4.31%, respectively. The maximum outstanding balance was $6,000,000 in 1996,
$32,500,000 in 1995 and $30,000,000 in 1994.
(c) Federal Home Loan Bank of Pittsburgh Borrowings are as follows:
December 31,
(In Thousands) 1996 1995
Variable rate at 5.9875%, maturity April 18, 1996 10,000
Fixed rate at 6.25%, maturity June 1, 1996 10,000
Fixed rate at 5.58%, maturity December 4, 1996 15,000
Fixed rate at 5.30%, maturity January 22, 1997 15,000
Fixed rate at 5.30%, maturity February 2, 1997 9,000
Fixed rate at 5.53%, maturity December 15, 1997 10,000 10,000
Fixed rate at 5.28%, maturity January 22, 1998 10,000
Variable rate at 4.92%, maturity December 11, 2001 15,000
Fixed rate at 6.86%, maturity December 15, 2016 600
Total Federal Home Loan Bank Borrowings 59,600 45,000
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) Other Borrowed Funds consist of repurchase agreements representing the sale
and agreement to repurchase specified securities at an agreed upon price plus a
negotiated rate of interest as follows:
December 31,
(In Thousands) 1996 1995
Fixed rate at 5.83%, maturity January 23, 1996 20,000
Fixed rate at 5.70%, maturity April 24, 1997 4,850
Fixed rate at 5.68%, maturity June 22, 1997 10,000 10,000
Fixed rate at 5.10%, maturity February 27, 1998 4,800
Fixed rate at 6.00%, maturity June 15, 1998 10,000 10,000
Fixed rate at 5.57%, maturity December 18, 2001 15,000
Total Other Borrowed Funds 44,650 40,000
14
<PAGE>
As of December 31, 1996 and 1995 repurchase agreements in the amount of
$44,650,000 and $40,000,000 were collateralized by a blanket agreement with the
Federal Home Loan Bank in which the actual ownership of the securities is not
transferred. The respective carrying value of the underlying securities at
December 31, 1996 and December 31, 1995 was $51,964,000 and $22,622,000. Average
repurchase agreement borrowings for the years ended December 31, 1996, 1995 and
1994 amounted to $37,650,000, $48,618,000 and $38,454,000, respectively. The
weighted average interest rate on repurchase agreements for 1996, 1995 and 1994
was 5.96%, 5.96% and 4.56% , respectively. During 1996, 1995 and 1994 the
maximum outstanding borrowings were $44,650,000, $74,650,000 and $47,474,000,
respectively.
(e) The aggregate average funds borrowed for the years ended December 31, 1996,
1995 and 1994 were $102,088,000, $92,502,000 and $104,179,000, respectively. The
weighted average interest rate was 5.56%, 6.10% and 5.07% 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.
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.
15
<PAGE>
The following tables presents information on loans.
<TABLE>
<CAPTION>
December 31, 1996
(In Thousands) 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 149,015 9.16 2.87 8.25 150,804
Real Estate Variable 65,244 8.81 1.50 9.18 65,296
Total Real Estate 214,259 216,100
Consumer:
Consumer Fixed 23,168 9.16 2.00 10.00 23,167
Consumer Variable 869 9.24 2.00 9.50 869
Credit Card 8,543 14.90 3.10 14.90 8,543
Key Loans 840 18.00 5.01 18.00 840
Total Consumer 33,420 33,419
Agricultural 2,603 10.11 2.50 9.25 2,631
Commercial:
Commercial Fixed 6,881 9.97 3.00 9.25 6,940
Commercial Variable 8,870 9.60 3.00 9.25 8,926
Total Commercial 15,751 15,866
Other Loans 5,014 7.74 3.00 9.25 5,019
Political Subdivisions 6,464 6.51 4.00 5.50 6,587
Leases 264 8.37 4.00 9.00 257
Nonperforming 864 864
Total Loans 278,639 280,743
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
(In Thousands) 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>
(1) Average maturity represents the expected cash flow period, which in some
instances is different from the stated maturity.
16
<PAGE>
(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, 1996 and 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.
(In Thousands) December 31, 1996
Book Estimated
Value Fair Value
Noninterest-Bearing Demand Deposits 47,320 47,320
Interest-Bearing Deposits:
Money Market 100,523 100,523
Interest Checking 38,916 38,916
Savings 46,175 46,175
Certificates of Deposit 115,390 118,215
Other Time 81,987 80,863
Total Interest-Bearing Deposits 382,991 384,692
Total Deposits 430,311 432,012
(In Thousands) December 31, 1995
Book Estimated
Value Fair Value
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
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 the fair value
of existing borrowed funds.
(In Thousands) December 31, 1996
Book Estimated
Value Fair Value
Other Borrowed Funds 44,650 44,486
Federal Home Loan Bank Borrowings
Fixed Rate 44,600 43,599
Variable Rate 15,000 15,000
Total Federal Home Loan Bank Borrowings 59,600 58,599
Total Borrowed Funds 104,250 103,085
17
<PAGE>
December 31, 1995
(In Thousands) Book Estimated
Value Fair Value
Other Borrowed Funds 40,000 40,000
Federal Home Loan Bank Borrowings
Fixed Rate 35,000 35,013
Variable Rate 10,000 10,000
Total Federal Home Loan Bank Borrowings 45,000 45,013
Total Borrowed Funds 85,000 85,013
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 $49,782,000 at December 31, 1996 and
$45,786,000 at December 31, 1995 and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
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.
Year Ended December 31,
(In Thousands) 1996 1995 1994
Service cost benefits earned during the period 238 174 208
Interest cost on projected benefit obligation 370 342 322
Return on assets (821) (960) (71)
Net amortization and deferral 330 541 (339)
Amortization of transition gain (23) (23) (23)
Net periodic pension cost 94 74 97
At December 31, 1996, the accumulated benefit obligation and the vested benefit
obligation were $3,950,000 and $3,929,000, respectively. The funded status of
the Plan and amount recognized in the Corporation's consolidated balance sheet
were as follows:
(In Thousands)
December 31,
1996 1995
Plan assets at fair value 6,701 5,854
Projected benefit obligation (5,418) (5,237)
Excess (deficiency) of assets over projected
benefit obligation 1,283 617
Unrecognized net gain being recognized over employees'
average remaining service life (319) (342)
Deferred unexpected (gain) loss (502) 90
Prepaid pension cost 462 365
The projected benefit obligation at December 31, 1996 and 1995 was determined
using an assumed discount rate of 7.50% and 7.25%, respectively and an assumed
long-term rate of annual increase in compensation of 5.5% for both years. The
assumed long-term rate of return on plan assets was 8.50% as of December 31,
1996 and 1995.
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 1996, 1995 and 1994 were $413,000, $365,000 and $328,000, respectively.
18
<PAGE>
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1996, 1995 and 1994 amounted to $118,000, $75,000 and
$83,000, respectively.
In 1995, the Corporation established a Stock Incentive Plan for a selected group
of senior officers. In 1996 and 1995, the Corporation issued incentive stock
options, exercisable at fair market value as of the date of grant. The
recipients' rights to exercise these options vest ratably over a 5-year period,
and each option has a contractual expiration of 10 years. The Corporation
applies Accounting Principles Board Opinion 25 and related interpretations in
accounting for its plan. Accordingly, no compensation expense has been
recognized for the Stock Incentive Plan. Had compensation cost for the Stock
Incentive Plan been determined based on the fair values at the grant dates for
awards consistent with the method of SFAS No. 123, the effect on the
Corporation's net income and earnings per share for 1996 and 1995 would have
been insignificant. For purposes of the calculations required by SFAS No. 123,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for grants issued in 1996 and 1995, respectively: dividend yield of
4.61% and 4.82%; risk free interest rates of 6.25% and 5.59%; expected option
lives of 6 years and expected volatility of approximately 11% for each year.
A summary of the status of the Corporation's Stock Incentive Plan as of December
31, 1996 and 1995, and changes during the years then ended, is presented below:
Incentive Stock Options 1996 1995
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
Outstanding, beginning of year 12,100 20.00
Granted 11,000 25.50 12,100 20.00
Exercised (250) 20.00
Outstanding, end of year 22,850 22.65 12,100 20.00
Options exercisable at year-end 2,170
Fair value of options granted
during the year 2.95 1.93
The following table summarizes information about incentive stock options
outstanding as of December 31, 1996:
Number Number
Outstanding Exerciseable
at Remaining at
Exercise December 31, Contractual December 31,
Prices 1996 Life 1996
20.00 11,850 9 Years 2,170
25.50 11,000 10 Years
22,850 9.5 Years 2,170
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.
19
<PAGE>
The following table shows the plan's funded status reconciled with amounts
recognized in the Corporation's balance sheet at December 31, 1996 and 1995:
(In Thousands)
1996 1995
Accumulated postretirement benefit obligations
Retirees (388) (472)
Active plan participants (280) (269)
Total accumulated postretirement benefit obligations (668) (741)
Plan assets at fair value
Accumulated postretirement benefit obligation in excess
of plan assets (668) (741)
Unrecognized net gain (156) (79)
Unrecognized transition obligation 584 620
Accrued postretirement benefits cost (240) (200)
Net periodic postretirement benefit costs for 1996, 1995 and 1994 include the
following components:
(In Thousands) 1996 1995 1994
Service cost 19 13 17
Interest cost on accumulated postretirement
benefit obligation 47 53 51
Amortization of transition obligation over 21 years 30 30 36
Net periodic postretirement benefit cost 96 96 104
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.50% and 7.25%, at
December 31, 1996 and 1995, respectively.
11. INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability
at December 31, 1996 and 1995:
(In Thousands)
1996 1995
Deferred Tax Liabilities:
Bond Accretion 212 224
Depreciation 145 162
Pension Expense 163 124
Unrealized Holding Gains on Available-for-Sale
Securities 2,971 3,582
Total 3,491 4,092
Deferred Tax Assets:
Loan Fees and Costs (371) (465)
SERP Plan (134) (90)
Postretirement Benefits (88) (68)
Loan Loss Provision (1,672) (1,424)
Accrued Payroll (118) (111)
Total (2,383) (2,158)
Deferred Tax Liability, Net 1,108 1,934
The federal income tax provision is comprised of the following components:
(In Thousands) 1996 1995 1994
Currently Payable 3,366 2,593 2,069
Deferred Provision (Benefit) (215) (100) 270
Total Provision 3,151 2,493 2,339
20
<PAGE>
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.
1996 1995 1994
(In Thousands) Amount % Amount % Amount %
Expected Provision 4,342 35.0 3,626 35.0 3,343 34.0
Nontaxable Bond Interest (1,054) (8.5) (931) (9.0) (901) (9.2)
Nontaxable Loan Interest (148) (1.2) (147) (1.4) (107) (1.1)
Nondeductible Interest Expense 149 1.2 143 1.4 113 1.2
Dividends Received Deduction (156) (1.3) (103) (1.0) (102) (1.0)
Surtax Exemption (138) (1.1) (74) (0.7)
Other, Net 156 1.3 (21) (0.2) (7) (0.1)
Effective Income Tax and Rates 3,151 25.4 2,493 24.1 2,339 23.8
12. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiaries
and any associates of the foregoing persons are as follows:
<TABLE>
<CAPTION>
(In Thousands)
Beginning New Other Ending
Name of Borrower Balance Loans Repayments Changes Balance
<S> <C> <C> <C> <C> <C>
15 Directors, 2 Executive Officers 1996 4,441 661 (703) 1,042 5,441
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
</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.
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, 1996:
Contract Amount
Commitments to extend credit 44,676,000
Standby letters of credit 5,106,000
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.
21
<PAGE>
14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amount and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
To be categorized as well capitalized, a bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the
table. The Corporation's actual capital amounts and ratios are presented in the
following table.
CAPITAL RATIOS
1996 1995
As of December 31, 1996
Tier I Capital 65,826 60,025
Tier II Supplemental Capital (1) 3,957 3,453
Total Capital 69,783 63,478
Average Assets (2) 598,484 568,698
Risk Weighted Assets:
Balance Sheet 303,417 264,373
Off-Balance Sheet 13,172 11,837
Total Risk Weighted Assets 316,589 276,210
Minimum Well
Actual Requirements Capitalized
As of December 31, 1996
Total Capital to Risk Weighted Assets 22.04% 8% 10%
Tier I Capital to Risk Weighted Assets 20.79% 4% 6%
Tier I to Average Assets (2) 11.00% 4% 5%
As of December 31, 1995
Total Capital to Risk Weighted Assets 22.98% 8% 10%
Tier I Capital to Risk Weighted Assets 21.73% 4% 6%
Tier I to Average Assets (2) 10.55% 4% 5%
(1) Inclusion of the allowance for loan losses is allowed up to 1.25% of "Risk
Adjusted Assets".
(2) Excludes "Unrealized gains or (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 1997 may not exceed $10,437,000, plus Company net income
for 1997. 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 $47,862,000 at December 31, 1996, 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 equity or $6,053,000
at December 31, 1996.
22
<PAGE>
15. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern
Corporation.
CONDENSED BALANCE SHEET
(In Thousands)
December 31,
1996 1995
ASSETS
Cash 101 16
Available-for-Sale Securities 6,060 4,266
Subsidiary Investments:
Citizens & Northern Bank 64,720 61,760
Bucktail Life Insurance Company 1,474 1,408
Total Subsidiary Investments 66,194 63,168
Dividend Receivable 950 870
TOTAL ASSETS 73,305 68,320
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed Funds and Other Liabilities 810 499
Dividends Payable 902 844
Stockholders' Equity 71,593 66,977
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 73,305 68,320
CONDENSED INCOME STATEMENT
(In Thousands) Years Ended December 31,
1996 1995 1994
Dividend from Subsidiary 4,183 3,505 3,731
Other Dividend Income 142 96 73
Available-for-Sale Securities Gains 217 26 107
Expenses (118) (37) (50)
Income Before Equity in Undistributed Earnings
of Subsidiaries 4,424 3,590 3,861
Equity in Undistributed Earnings of Subsidiaries 4,831 4,276 3,633
NET INCOME 9,255 7,866 7,494
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income 9,255 7,866 7,494
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Noncash Dividends Received (578) (219) (686)
Equity Securities Gains (217) (26) (107)
Equity in Undistributed Net Income
of Subsidiaries (4,831) (4,057) (3,633)
Increase in Other Assets (80) (70) 0
Increase in Other Liabilities 51 26 99
Net Cash Provided by Operating Activities 3,600 3,520 3,167
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Available-for-Sale Securities (486) (360) (503)
Proceeds from Sale of Available-for-Sale Securities 425 68 347
Net Cash Used in Investing Activities (61) (292) (156)
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Treasury Stock 4
Dividends Declared (3,458) (3,226) (3,022)
Net Cash Used in Financing Activities (3,454)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 85 2 (11)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16 14 25
CASH AND CASH EQUIVALENTS, END OF YEAR 101 16 14
</TABLE>
23
<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, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Parente, Randolph, Orlando, Carey & Associates
Williamsport, Pennsylvania
February 6, 1997
24
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
February 6, 1997
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.
Craig G. Litchfield James W. Seipler
President & CEO Treasurer
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1996 PERFORMANCE REVIEW
Citizens and Northern Corporation ("Corporation") and its major subsidiary,
Citizens and Northern Bank ("Bank"), recorded per share earnings of $1.83 for
the year ended December 31, 1996. This compares to 1995 and 1994 per share
earnings of $1.55 and $1.48, respectively.
The record earnings achieved by the Corporation during 1996 can be attributed to
the two most important components of the income statement, the interest margin
and other operating expenses. The interest margin increased 18 percent or
$3,767,000 million over 1995 and other operating expenses increased only 4
percent or $607,000 over 1995.
As we began 1996 there was much concern in the markets that interest rates would
increase. Fortunately, the concern was unfounded. Interest rates, in fact,
remained relatively stable during 1996 except for the occasional blips caused by
mixed economic news. The Corporation's net interest margin increased from 2.99
percent in 1995 to 3.49 percent in 1996.
One of the large contributing factors to the small increase in 1996 other
operating expenses was the decrease in FDIC insurance or the contribution to the
BIF (Bank Insurance Fund). The BIF assessment for 1995 was $463,000 and for 1996
it was $2,000. The BIF fund, the 1997 assessment and its impact on 1997 earnings
will be discussed at length in management's discussion of noninterest expense.
Management is optimistic for 1997. However, interest rates and competition,
especially for deposits from nonbank competitors, are very real concerns of the
directors and management for the coming year.
NET INTEREST MARGIN
1996/1995/1994
The primary source of operating income for the Corporation is net interest
income or the net interest margin. The net interest margin is the difference
between total interest income generated by interest-bearing assets and the
interest expense paid on interest-bearing liabilities.
INTEREST INCOME
Interest income generated by the Corporation comes primarily from two asset
sources, investments and loans. Average investments during the years ended
December 31, 1996, 1995 and 1994 accounted for roughly half of the Corporation's
asset base. Total average investments for those years, respectively, amounted to
$305,125,000, $288,397,000 and $290,620,000. The interest and dividend income
produced by investments for those years amounted to $19,827,000, $18,508,000 and
$18,589,000, respectively. To put investment earnings in perspective, they
accounted for between 41 and 44 percent of total interest income produced.
The investment portfolio is comprised mostly of mortgage-backed securities; for
the years being presented they made up approximately 75 percent of the
portfolio. Mortgage-backed securities are mortgage loans to individuals that
have been packaged by various governmental agencies and sold as investment
securities. The balance of the portfolio is made up of municipal bonds, stocks
and other corporate bonds. The portfolio composition and its function will be
discussed later in management's discussion when the balance sheet is discussed.
The overall rate of return on the investment portfolio has not changed much
during the three years being compared. It has ranged from a high of 6.50 percent
in 1996 to a low of 6.39 percent in 1994.
Interest and fees on loans are the single largest source of income for the
Corporation. Average outstanding loans for the periods ended December 31, 1996,
1995 and 1994 amounted to $271,681,000, $259,143,000 and $243,147,000 ,
respectively. The income recognized during the same periods was $27,998,000,
$26,539,000 and $23,644,000, respectively.
26
<PAGE>
The Corporation's market area is made up of several small rural communities
which surround three or four more heavily populated towns. Consequently, the
loan portfolio is retail oriented, consisting mostly of real estate secured
mortgages on one to four family dwellings. Total average real estate secured
loans for the years ended December 31, 1996, 1995 and 1994 amounted to
$210,289,000, $198,936,000 and $185,535,000, respectively, and make up
approximately 75 percent of the total loan portfolio. The income generated
during the same three years was $19,277,000, $18,201,000 and $15,983,000,
respectively. The remaining 25 percent of the portfolio is made up of retail
consumer loans, commercial loans and tax free loans to local municipalities. The
composition of the loan portfolio will be discussed more thoroughly in the
balance sheet portion of Management's Discussion and the discussion of the
allowance for possible loan losses.
The rate of return produced by the loan portfolio was 10.31 percent, 10.24
percent and 9.72 percent, respectively, for the years ended December 31, 1996,
1995 and 1994. The returns for the major categories of loans ranged from a high
of between 16.53 and 18.13 percent for consumer loans including credit cards to
a low of between 6.00 and 6.45 percent on tax free municipal loans. Real estate
secured loans produced a return of 9.17 percent, 9.15 percent and 8.61 percent
for the years ended December 31, 1996, 1995 and 1994, respectively.
Other interest income producing assets included federal funds sold and
interest-bearing deposits held with correspondent banks. The balances held and
income produced were considered insignificant for discussion purposes.
INTEREST EXPENSE
The return on the Corporation's assets and equity are dependent on the spread
between rates paid on earning assets and interest costs related to
interest-bearing liabilities. Interest-bearing liabilities are made up of
deposits and borrowed funds. The year ended December 31, 1996 saw the lowest
deposit growth in recent years. Average total deposits including demand deposits
increased only 3.4 percent during 1996. This compares to growth rates of 4.9
percent and 3.7 percent for 1995 and 1994, respectively. Competition for
deposits came primarily from banks and from nonbank sources, such as credit
unions, mutual funds and the Corporation's own Trust Department .
The Corporation uses five primary sources of interest-bearing deposits. Two of
the sources are considered long term and three are short term, term meaning the
length of the repricing period for the deposit.
Certificates of Deposit and Individual Retirement Accounts are considered long
term instruments. Certificates of Deposit are the largest source of deposits.
The maturity schedule of certificates ranges from one month to five years.
Average balances carried in certificates of deposits for the years ended
December 31, 1996, 1995 and 1994 were $117,596,000, $112,493,000 and
$109,174,000, respectively. The average rate paid for those deposits for the
same periods , respectively, was 5.47 percent, 5.50 percent and 4.43 percent.
Individual Retirement Accounts are the other source of long term funding. These
accounts carry an eighteen month maturity schedule and the rate changes
quarterly. The Corporation had in the past been successful in growing the
balances in these accounts by paying higher than market rates. However, due to
mutual fund competition, the balances carried in Individual Retirement Accounts
dropped about $3,000,000 during 1996. Average balances and rates paid on
Individual Retirement Accounts during the years ended December 31, 1996, 1995
and 1994 were respectively, $79,076,000 at 5.77 percent, $78,534,000 at 6.58
percent and $70,537,000 at 6.92 percent.
Short term deposits or deposits that reprice more frequently are Money Market
accounts, Interest Checking accounts and Savings accounts. Money Market accounts
are the second largest and a very important source of funds. The Corporation has
paid higher than the market rate for these deposits and has been successful in
attracting and maintaining large average balances. Average balances carried for
the years ended December 31, 1996, 1995 and 1994 , respectively, were
$100,618,000, $91,773,000 and $79,050,000. Rates paid for those same periods
were, respectively, 4.53 percent, 4.93 percent and 3.84 percent. Interest
Checking accounts allow unlimited checking activity and earn a lesser rate of
interest. Average balances and rates paid on these accounts for the years ended
December 31, 1996, 1995 and 1994 were, respectively, $40,558,000 at 2.46
percent, $42,118,000, at 4.02 percent and $41,061,000 at 3.31 percent. The final
short term interest-bearing accounts that the Corporation carries are the
Regular Savings accounts. Regular Savings come in two forms, passbook and
statement, and both pay the same rate of interest. Regular Savings have
traditionally been the backbone of the Corporation's core deposit base. Balances
in Regular Savings accounts typically did not vary, regardless of the rate paid.
This has changed somewhat in the past couple of years as average balances have
begun to decline. Average balances for the years ended December 31, 1996, 1995
and 1994 were $46,751,000, $48,261,000 and $53,853,000, respectively. The rate
paid for each of the three years was 2.50 percent.
The Corporation also carries noninterest-bearing Demand Deposits; average
balances for the past three years, respectively, were $42,500,000, $39,313,000
and $39,282,000.
27
<PAGE>
The final type of interest-bearing liability found on the Corporation balance
sheet is borrowing, both short and long term. The Corporation normally uses
short term borrowing for liquidity purposes, i.e., deposit fluctuations, etc.
This may be in the form of overnight Federal funds borrowed from a correspondent
or a repurchase agreement arranged through the Federal Home Loan Bank of
Pittsburgh. Long term borrowing is used to leverage the Corporation's strong
capital base to enhance earnings. Long term borrowings may be in the form of
repurchase agreements or secured borrowing, also through the Federal Home Loan
Bank of Pittsburgh. Short term borrowing is defined as overnight up to one year.
Long term borrowing will carry a maturity of one year or more.
Average balances carried as short and long term borrowing for the years ended
December 31, 1996, 1995 and 1994 amounted to $102,088,000, $92,502,000 and
$104,179,000, respectively. Average rates for the same periods respectively,
were 5.56 percent, 6.09 percent and 5.07 percent.
To summarize the discussion of the interest margin it is important to note the
change in the net interest spread. The spread for 1994 was 3.39 percent.
However, late in 1994 interest rates began to rise and the spread began to
narrow. During 1995 rates continued to rise until the fall of 1995 and the
spread for that year declined to 2.99 percent. Late in 1995 as inflation worries
subsided and the inflation rate stabilized at about 3 percent, the rates began
to decline. Rates remained relatively stable during 1996 and produced a net
spread of 3.49 percent which is reflected in the record earnings posted during
1996.
A more complete discussion of the assets and liabilities of the Corporation may
be found under the discussion of the balance sheet later in Management's
Discussion.
28
<PAGE>
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Change
(In Thousands) Years Ended December 31, Increase (Decrease)
1996 1995 1994 96/95 95/94
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Available-for-Sale Securities:
U S Treasury Securities 128 128 128
Securities of Other U S Government Agencies and 2,124 691 617 1,433 74
Corporations
Mortgage-Backed Securities 13,113 13,665 14,055 (552) (390)
Obligations of States and Political Subdivisions 3,012 2,667 2,655 345 12
Stock 872 690 666 182 24
Other Securities 472 568 375 (96) 193
Total Available-for-Sale Securities 19,721 18,409 18,496 1,312 (87)
Held-to-Maturity Securities:
U S Treasury Securities 42 22 3 20 19
Securities of Other U S Government Agencies and
Corporations 4 4
Mortgage-Backed Securities 59 77 90 (18) (13)
Obligations of States and Political Subdivisions
Stock
Other Securities
Total Held-to-Maturity Securities 105 99 93 6 6
Interest -bearing Due from Banks 37 55 63 (18) (8)
Federal Funds Sold 60 79 13 (19) 66
Loans:
Real Estate Loans 19,277 18,201 15,983 1,076 2,218
Consumer 6,402 6,164 5,799 238 365
Agricultural 278 315 296 (37) 19
Commercial/Industrial 1,577 1,404 1,219 173 185
Other 25 19 19 6 0
Political Subdivisions 424 421 315 3 106
Leases 16 15 13 1 2
Total Loan Income 27,999 26,539 23,644 1,460 2,895
Total Interest Income 47,922 45,181 42,309 2,741 2,872
INTEREST-BEARING LIABILITIES
Interest Checking 998 1,695 1,360 (697) 335
Money Market 4,556 4,526 3,038 30 1,488
Savings 1,169 1,198 1,344 (29) (146)
Certificates of Deposit 6,431 6,183 4,841 248 1,342
Individual Retirement Accounts 4,563 5,165 4,879 (602) 286
Other Time Deposits 58 64 61 (6) 3
Federal Funds Purchased 55 304 498 (249) (194)
Other Borrowed Funds 5,621 5,342 4,784 279 558
Total Interest Expense 23,451 24,477 20,805 (1,026) 3,672
Net Interest Income 24,471 20,704 21,504 3,767 (800)
</TABLE>
(1) Net interest income, if reflected on a fully tax equivalent basis, would
have amounted to 25,963,000, 22,037,000, and 22,820,000 for 1996, 1995, and
1994, respectively.
29
<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
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS 12/31/96 % 12/31/95 % 12/31/94 %
Available-for-Sale Securities:
U. S. Treasury Securities 2,506 5.11 2,510 5.10 2,512 5.10
Securities of Other U.S. Government Agencies and
Corporations 30,514 6.96 10,639 6.49 9,761 6.32
Mortgage-Backed Securities 197,581 6.64 208,469 6.55 219,627 6.40
Obligations of States and Political Subdivisions 49,700 6.06 41,756 6.39 40,464 6.56
Stock 16,342 5.34 13,547 5.09 13,010 5.12
Other Securities 6,905 6.84 10,148 5.60 4,011 9.35
Total Available-for-Sale Securities 303,548 6.50 287,069 6.41 289,385 6.39
Held-to-Maturity Securities:
U. S. Treasury Securities 698 6.02 324 6.79 50 6.00
Securities of Other U. S. Government Agencies and
Corporations 50 8.00
Mortgage-Backed Securities 829 7.12 1,004 7.67 1,185 7.34
Obligations of States and Political Subdivisions
Stock
Other Securities
Total Held-to-Maturity Securities 1,577 6.66 1,328 7.45 1,235 7.29
Interest -bearing Due from Banks 455 8.13 996 5.52 1,114 5.92
Federal Funds Sold 1,100 5.45 1,301 6.07 346 3.76
Loans:
Real Estate Loans 210,289 9.17 198,936 9.15 185,535 8.61
Consumer 35,305 18.13 36,230 17.01 35,073 16.53
Agricultural 2,750 10.11 3,051 10.32 3,028 9.78
Commercial/Industrial 16,207 9.73 13,998 10.03 13,843 8.81
Other 237 10.55 238 7.98 272 6.99
Political Subdivisions 6,629 6.40 6,524 6.45 5,244 6.01
Leases 201 7.96 166 4.00 152 8.55
Total Loans 271,618 10.31 259,143 10.24 243,147 9.72
Net Loans & Leases 271,618 10.31 259,143 10.24 243,147 9.72
Total Earning Assets 578,298 8.29 549,837 8.22 535,227 7.91
Cash 11,502 11,834 13,775
Securities Valuation Reserve 5,924 (2,668) (851)
Allowance for Possible Loan Losses (4,726) (4,484) (4,064)
Other Assets 6,617 4,737 4,372
Bank Premises & Equipment 6,793 6,774 6,199
Total Assets 604,408 566,030 554,658
INTEREST-BEARING LIABILITIES
Interest Checking 40,558 2.46 42,118 4.02 41,061 3.31
Money Market 100,618 4.53 91,773 4.93 79,050 3.84
Savings 46,751 2.50 48,261 2.48 53,853 2.50
Certificates of Deposit 117,596 5.47 112,493 5.50 109,174 4.43
Individual Retirement Accounts 79,076 5.77 78,534 6.58 70,537 6.92
Other Time Deposits 1,937 2.99 2,465 2.60 2,555 2.39
Federal Funds Purchased 967 5.69 4,774 6.37 11,565 4.31
Other Borrowed Funds 101,121 5.56 87,728 6.09 92,614 5.17
Total Interest-bearing Liabilities 488,624 4.80 468,146 5.23 460,409 4.52
Demand Deposits 42,500 39,313 39,282
Other Liabilities 6,794 4,844 2,877
TOTAL LIABILITIES 537,918 512,303 502,568
Stockholders' Equity 62,797 55,961 52,629
Securities Valuation Reserve 3,693 (2,234) (539)
Total Liabilities and Stockholders' Equity 604,408 566,030 554,658
Interest Rate Spread 3.49 2.99 3.39
</TABLE>
(*) Average balaces do not include unrealized gains and losses on
Available-for-Sale Securities.
30
<PAGE>
TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST
INCOME AND INTEREST EXPENSE
Years Ended
December 31, 1996/1995
(In Thousands) Change in Change in Total
Volume Rate Change
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities
Securities of Other U.S. Government
Agencies and Corporations 1,380 53 1,433
Mortgage Backed Securities (725) 173 (552)
Obligations of States and Political Subdivisions 472 (127) 345
Stock 148 34 182
Other Securities (312) 216 (96)
Total Available-for-Sale Securities 963 349 1,312
Held-to-Maturity Securities:
U. S. Treasury Securities 20 20
Securities of Other U.S. Government Agencies
and Corporations 4 4
Mortgage Backed Securities (13) (5) (18)
Obligations of States and Political Subdivisions
Stock
Other Securities
Total Held-to-Maturity Securities 11 (5) 6
Interest -bearing Due from Banks (139) 121 (18)
Federal Funds Sold (11) (8) (19)
Loans:
Real Estate Loans 1,041 35 1,076
Consumer (151) 389 238
Agricultural (31) (6) (37)
Commercial/Industrial 213 (40) 173
Other (0) 6 6
Political Subdivisions 7 (4) 3
Leases 1 1
Total Loans 1,080 380 1,460
Total Interest Income 1,904 837 2,741
INTEREST- BEARING LIABILITIES
Interest Checking (61) (636) (697)
Money Market 199 (169) 30
Savings (38) 9 (29)
Certificates of Deposit 279 (31) 248
Individual Retirement Accounts 36 (638) (602)
Other Time Deposits (21) 15 (6)
Federal Funds Purchased (220) (29) (249)
Other Borrowed Funds 650 (371) 279
Total Interest Expense 824 (1,850) (1,026)
NET INTEREST INCOME 1,080 2,687 3,767
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.
31
<PAGE>
Table III - Continued
Years Ended
December 31, 1995/1994
(In Thousands) Change in Change in Total
Volume Rate Change
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 15 169 184
Other (3) 3
Political Subdivisions 83 23 106
Leases 2 2
Total Loans 1,484 1,410 2,894
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)
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.
32
<PAGE>
NONINTEREST INCOME
1996/1995/1994
Noninterest income is composed of six major components: Service Charges on
Deposit Accounts, Service Charges and Fees, Trust Department Income, Insurance
Commissions, Fees and Premiums, Other Operating Income and Realized Net Gains or
(Losses) on Securities. The percentages cited below during the discussion of the
components of Noninterest Income are derived using Noninterest Income Before
Gains or (Losses) on Securities, Net.
Income generated from Service Charges on Deposit Accounts is from fees assessed
on some checking accounts for monthly service charges and per-check charges for
checks drawn and checks deposited and for charges assessed for checking account
overdrafts. Deposit Account Fees represented 55 percent and Overdraft Fees were
45 percent of the total Service Charges on Deposit Accounts. Service Charges on
Deposit Accounts for the years ended December 31, 1996, 1995 and 1994 accounted
for 39 percent, 40 percent and 37 percent of total Noninterest Income,
respectively.
Other Service Charges and Fees are derived from debit card fees, credit card
annual fees, fees for bank customer data processing services and other various
fees such as check cashing fees for non customers, fees for bank money orders,
cashier checks, traveler's checks, etc. Other Service Charges and Fees
represented approximately 10 percent of the total Noninterest Income Before
Realized Gains or (Losses) on Securities in each of the three years being
presented.
Trust Department Income is the second largest source of noninterest income. For
the years ended December 31, 1996, 1995 and 1994, respectively, Trust Department
Income amounted to 30 percent, 26 percent and 20 percent of total noninterest
income. Trust Department Income for the year ended December 31, 1996 increased
17 percent when compared to the same period in 1995. This increase can be
attributed to an increase in trust accounts and trust assets. The increase in
the market value of trust assets had a large impact on trust fees in 1996. Trust
Department Income for the year ended December 31, 1995 increased nearly 25
percent when compared to the year ended December 31, 1994. This is the result of
higher market values for trust assets in 1995 and a new fee schedule implemented
January 1, 1995. Also, several large estates settled during 1995 generated
additional trust fees.
Insurance Commissions, Fees and Premiums account for approximately 22 percent of
total noninterest income for the years ended December 31, 1995 and December 31,
1994. For 1995 the total was $620,000 and for 1994 the total was $602,000.
During 1996 this category of noninterest income totaled $555,000, down about 10
percent from 1995. The 10 percent decline between the comparable years was due
to a decrease of $21,000 in accident and health premiums and a decrease of
$45,000 in life insurance premiums written in 1996.
Other Operating Income, consisting primarily of safe deposit box rental income,
amounted to between 1 and 2 percent of Noninterest Income Before Realized Gains
or (Losses) on Securities in 1996 and 1995. However, in the year ended December
31, 1994, the Corporation sold a 1987-4 residual interest certificate that had
been carried as an Other Asset since 1989. The asset was carried in Other Assets
at the request of the FDIC as it was considered less than investment-grade
quality. The gain on the sale of the certificate in 1994 amounted to $265,000.
During the years ended December 31, 1996 and 1995, there was a relatively small
amount of selling activity in the Available-for-Sale investment portfolio. In
1995, 11 bank or bank holding company stocks were sold, 1 owned by the
Corporation and 10 owned by the Bank. The stocks were sold because they were, in
management's judgment, over priced or they were not listed on a recognized
securities exchange. If banks held stocks that were not listed on a recognized
exchange, the FDIC required that they be sold. In fact, the predominate reason
for selling stock in any of the three years was for that reason. In 1996,
between the Corporation and the Bank, 6 issues of stock were sold; 2 had become
over-priced, 1 was a direct cash buyout and 3 were unlisted. Also, in 1996 the
Corporation sold 1 other bond that was criticized during an examination and 2
municipal bonds that were nearing their prerefunded date. In 1994, the
Corporation sold 3 stocks and the Bank sold 1 stock that management felt had
become over-priced. The Bank also sold 3 stocks that were not listed. Also in
1994, as interest rates began to rise, the Corporation sold a large portion of
its investment in mortgage-backed securities. Several of the sold securities
were funded by short term borrowings and the spread between the investments and
the borrowed funds had begun to disappear. The market value of the securities
had also begun to erode. Gross losses taken during the restructuring amounted to
$999,000 and gains totaled $780,000.
33
<PAGE>
TABLE IV - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) % %
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts 1,124 0.63 1,117 4.30 1,071
Service Charges and Fees 269 (1.47) 273 (4.55) 286
Trust Department Income 852 17.36 726 24.74 582
Insurance Commissions, Fees and Premiums 555 (10.48) 620 2.99 602
Other Operating Income 47 (21.67) 60 (82.40) 341
Total Other Operating Income before Realized
Securities Gains (Losses) on Securities, Net 2,847 1.82 2,796 (2.98) 2,882
Realized Gains (LOsses) on Securities, Net 475 (71.64) 1,675 (864.84) (219)
Total Other Income 3,322 (25.70) 4,471 67.89 2,663
</TABLE>
OTHER NONINTEREST EXPENSE
1996/1995/1994
Other noninterest expense consists of Salaries and Wages, Pension and Other
Benefit Expenses, Occupancy Expense, Furniture and Equipment Expense and Other
Operating Expense.
Salaries and Wages increased $502,000 or 9.3 percent when comparing the years
ended December 31, 1996 and December 31, 1995. The increase can be attributed to
merit raises, an increase of two full time equivalent employees and an increase
in incentive payment expense of $105,000. Merit raises and additional employees
accounted for 7 percent of the increase and incentive payments accounted for
just over 2 percent. The increase of 7.6 percent in wages paid during 1995 over
1994 was attributable to merit raises and an increase of full time equivalent
employees from 196 at year end 1994 to 200 at year end 1995.
Pension and Other Employee Benefits increased $91,000 or 5.6 percent when
comparing the years ended December 31, 1996 and December 31, 1995. The increase,
although minimal, can be attributed to an increase in two expense items: $48,000
in contributions to the Corporation's 401 (k) plan due to increased employee
participation and $43,000 in the Corporate contribution to the supplemental
retirement plan due to changes in actuarial assumptions. When comparing the
years ended December 31, 1995 and December 31, 1994 there was almost no change
in the amounts of expense recorded.
Occupancy Expense varied only slightly when comparing the expense recorded in
1996 to that of 1995 and 1994. The change between the years ended December 31,
1996 and December 31, 1995 was 3.3 percent and was caused equally by an increase
in depreciation and fuel used for heating. The difference in expense totals when
comparing 1995 to 1994 was less than 1 percent.
Furniture and Equipment Expense increased 7.5 percent or $51,000 when comparing
the year ended December 31, 1996 to the previous year. The increase was caused
by higher depreciation costs and higher equipment maintenance expense. The
depreciation increase can be attributed to enhancements costing just over
$45,000 made to the checking account statement imaging system. Furniture and
equipment expense increased $119,000 or 21.4%, when comparing 1995 to 1994. The
increase can also be attributed to depreciation expense and software maintenance
agreements associated with the statement imaging system that became operational
in 1994. These additional expenditures have more than been offset by a reduction
in personnel and postage costs.
Other Operating Expense did not increase or decrease significantly when
comparing the years ended December 31, 1996, 1995 and 1994. The major components
of Other Operating Expense or those that exceed 10 percent of the total are
Pennsylvania Shares Tax, FDIC insurance (1994 only) and credit card processing
expense.
Pennsylvania Shares Tax is based on the total capital of the Bank subsidiary and
amounted to $544,000, $495,000 and $461,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The tax will normally increase annually about
1 percent of the current year's earnings after payment of the dividend. This
amounts to approximately $50,000 per year, depending on earnings.
34
<PAGE>
The annual expense for FDIC insurance paid on Bank deposits has declined
significantly since 1994. During 1994 the Bank paid $.235 cents annually per
$100.00 of its deposit base or a total of $883,000. During 1995, the Insurance
Fund reached its statutory mandated level of 1.25 percent of insured deposits
and the Bank received a refund of $254,000. The net insurance paid for 1995
amounted to $463,000. Beginning in 1996, institutions considered low risk were
assigned an insurance rate of $500.00 per quarter; consequently the total
insurance paid for 1996 was $2,000. For the first six months of 1997 the charge
to earnings for FDIC insurance will approximate $ .64 cents per $100.00 of
insured deposits or just over $27,000. The six month premium for the last half
of 1997 will be assessed when deposit data is available. The total insurance
expense for 1997 is expected to be about $55,000.
The largest Other Operating Expense category is credit card processing costs.
The Corporation is a major card issuer and processor for 54 banks in
northeastern Pennsylvania. The cost of card issuance and item processing for the
years ended December 31, 1996, 1995 and 1994 amounted to $2,220,000, $1,928,000
and $1,760,000, respectively. The controlling factor for this expense is the
number of cardholders and transaction volume. It is expected that cardholder
numbers and volumes have peaked and that the expense will not show significant
increases in the near future.
TABLE V- COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
% %
1996 Change 1995 Change 1994
<S> <C> <C> <C> <C> <C>
Salaries and Wages 5,887 9.32 5,385 7.61 5,004
Pensions and Other Employee Benefits 1,709 5.62 1,618 (0.12) 1,620
Occupancy Expense, Net 721 3.30 698 0.87 692
Furniture and Equipment Expense 726 7.56 675 21.40 556
Other Operating Expense 5,643 (1.05) 5,703 (0.38) 5,725
Total Other Expense 14,686 4.31 14,079 3.54 13,597
</TABLE>
INCOME TAXES
The Corporation's Income Tax Provision reflected as a per share cost to
stockholders, amounted to $.62, $.49 and $.46, respectively, for 1996, 1995 and
1994. The amount of income tax payable per common share for those years was
$.66, $.51 and $.41, respectively. The per share tax payable for 1996 is a
reasonable estimate as the return has not been prepared as of the date of this
analysis.
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.
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 annual charges to
earnings. The adequacy of the reserve and the budgeted charge to earnings is
reviewed by management quarterly and a report made to the Corporation's Board of
Directors.
The procedures used to perform the review are as follows:
1. A review of the most current appraisal of the outside independent appraiser.
2. Regulatory examinations.
3. Loss projections for the current year.
4. A monthly review of the "Watch List" by management and the Board of
Directors.
5. Regulatory requirements.
35
<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 or more which have been previously
classified.
The report prepared by the loan appraiser isolates and attempts to determine and
quantify known risks in the loan portfolio. The loans are then categorized by
the appraiser's perceived risk. The categories are: loans that are improperly
documented (special mention), substandard, doubtful and loss. The last loan
appraisal was made as of May 31, 1996 and the report was dated July 26,1996. The
loan appraisal reported "Substandard" loans at $6,873,000, up 16 percent since
the 1995 review, loans categorized as "Doubtful" amounted to $276,000 or a
decline of 23 percent since the 1995 review and loans classified as "Loss"
totaled $82,000, down 24 percent from the previous year.
REGULATORY EXAMINATIONS
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 1996 was conducted by the Federal Deposit
Insurance Corporation as of March 27, 1996. Management also charges off loans at
the end of each quarter that it feels are uncollectible.
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, such as 1991, 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
1996, the Corporation's reserve was slightly higher than that of its peer group
when comparing the latest information available.
Statement of Financial Accounting Standards (SFAS) 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.
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
1996 are collateral dependent. Based on this analysis, the Corporation has
established an allowance of $113,000, included in the allowance for possible
loan losses as of December 31, 1996, related to impaired loans.
36
<PAGE>
<TABLE>
<CAPTION>
TABLE VI - SIX YEAR HISTORY OF LOAN LOSSES
(In Thousands)
1996 1995 1994 1993 1992 1991 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C>
Gross Loans 278,639 264,182 258,472 238,755 225,475 199,072 244,099
Net Charge offs 504 387 326 247 518 3,142 854
Allowance for Possible Loan Losses Balance 4,776 4,579 4,229 3,817 3,356 2,548 3,884
Provision for Loan Losses Charged to
Earnings 701 737 737 708 1,326 3,151 1,227
Earnings 9,255 7,866 7,494 8,127 7,290 5,643 7,613
Earnings Coverage of Net Charge offs 18.4 x 20.3 x 23.0 x 32.9 x 14.1 x 1.8 x 8.9 x
Allowance Coverage of Net Charge offs 9.5 x 11.8 x 13.0 x 15.5 x 6.5 x 0.8 x 4.5 x
Loans Ninety Days of More Past Due and
Still Accruing 2,994 2,915 2,743 2,899 2,532 3,810 2,982
Net Charge offs as a Percent of the
Provision 71.9 % 52.5 % 44.2 % 34.9 % 39.1 % 99.7 % 69.6 %
Year-End Nonperforming Loans 864 279 624 843 1,351 417 730
Allowance as a Percentage of Gross Loans.
Bank (1) 1.71 % 1.73 % 1.64 % 1.60 % 1.49 % 1.28 % 1.59 %
Peer Group (2) 1.50 % 1.61 % 1.65 % 1.82 % 1.60 % 1.44 % 1.60 %
</TABLE>
(1) At December 31, 1996
(2) At September 30, 1996
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. Once a loan appears on the "Watch List" it is not removed until
the independent appraiser determines that circumstances surrounding the credit
provide justification.
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 the
sum of 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. This calculation is made
quarterly and compared to the reserve balance. At December 31, 1996 the
unallocated portion of the reserve using this calculation would have been
$2,335,000, compared to $3,243,000 using the historical net charge-off method.
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.
37
<PAGE>
TABLE VII - ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1966 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year 4,579 4,229 3,817 3,356 2,548
Charge Offs
Real Estate Loans 157 38 95 32
Installment Loans 240 236 266 195 218
Credit Card and Related Plans 201 184 144 183 139
Commercial and Other Loans 74 116 109 105 293
Total Charge Offs 672 574 519 578 682
Recoveries
Real Estate Loans 22 4
Installment Loans 53 60 68 84 59
Credit Card and Related Plans 38 41 42 41 22
Commercial and Other Loans 55 86 80 206 83
Total Recoveries 168 187 194 331 164
Net Charge Offs 504 387 325 247 518
Additions Charged to Operations 701 737 737 708 1,326
Balance at End of Year 4,776 4,579 4,229 3,817 3,356
</TABLE>
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES BY TYPE
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Mortgage 58 38 35 35 18
Consumer 303 286 241 205 188
Commercial 630 604 443 583 558
Letters of Credit Commitments 54 86 112 115
Impaired Loans 113 228
All Other Commitments 369 320 300 299 351
Total Allcocated 1,473 1,530 1,105 1,234 1,230
Unallocated 3,303 3,049 3,124 2,583 2,126
Total Allowance 4,776 4,579 4,229 3,817 3,356
</TABLE>
The above allocation is based on estimates and subjective judgments and is not
necessarily indicative of the specific amounts or loan categories in which
losses may occur.
38
<PAGE>
TABLE IX - FIVE YEAR SUMMARY OF LOANS BY TYPE
<TABLE>
<CAPTION>
(In Thousands) 1996 % 1995 % 1994 % 1993 % 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate-Construction 1,166 0.42 1,284 0.49 2,539 0.98 2,224 0.93 993
Real Estate-Mortgage 213,957 76.79 200,066 75.72 193,095 74.72 176,518 73.92 162,597
Consumer 33,420 11.99 36,351 13.76 37,531 14.52 37,713 15.79 39,173
Agricultural 2,603 0.93 2,815 1.07 3,154 1.22 3,207 1.36 3,065
Commercial 15,751 5.65 14,445 5.47 13,625 5.27 13,046 5.46 14,578
Other 5,014 1.80 2,512 0.95 2,459 0.95 1,782 0.75 1,492
Political Subdivisions 6,464 2.32 6,546 2.48 5,870 2.27 4,114 1.72 3,428
Lease Receivables 264 0.09 189 0.07 168 0.07 176 0.07 190
Total 278,639 100.00 264,208 100.00 258,441 100.00 238,780 100.00 225,516
Less Unearned Discount (42) (26) (23) (25) (41)
278,597 264,182 258,418 238,755 225,475
Less Allowance for Possible
Loan Losses (4,776) (4,579) (4,229) (3,817) (3,356)
Net Loans and Lease
Financing Receivables 273,821 259,603 254,189 234,938 222,119
</TABLE>
BALANCE SHEET
Average Total Assets of the Corporation for the year ended December 31, 1996
were $604,408,000. This compares to average total assets for the years ended
December 31, 1995 and December 31, 1994 of $566,030,000 and $554,658,000,
respectively.
During the years ended December 31, 1996, 1995 and 1994, the investment
portfolio accounted for about half of the asset base. The investments are nearly
all classified as Available-for-Sale Securities. This means that they are
marked-to-market at the close of each calendar quarter. The market value
adjustment is recorded net of tax in the Corporation's Capital. The Corporation
uses several types of investment vehicles.
A small portion of the portfolio is made up of US Treasury Securities. These
instruments normally carry a lower relative interest rate and are used as
collateral for certain deposits.
U S Agency Securities are also a part of the portfolio and carry a slightly
higher rate than the U S Treasuries. They are issued by several governmental
agencies such as GNMA, FNMA FHLB, etc. They are also used as collateral for
certain deposits.
The largest part of the portfolio is made up of mortgage-backed securities. The
securities are issued by FNMA, Freddie Mac or the FHLB. The securities carry a
substantially higher rate and a higher risk than the treasuries or the agencies.
The risk is not one of default, but market. As interest rates rise, the
investments lose market value and cause negative adjustments to capital as they
are marked-to-market. They are also subject to large prepayments in a falling
rate environment as consumers refinance their mortgages. During periods of large
prepayments, the security is subject to higher monthly premium amortization and
a much lower return, if it was purchased at a premium, as many are. The
securities are used also for collateral for borrowings and for liquidity
purposes since they amortize monthly.
Tax-Free Municipal Bonds make up the second largest portion of the portfolio.
The municipal bonds are used for Federal tax reduction purposes because a
portion of the interest received is not taxable and for that reason carry a
smaller coupon rate and a longer maturity. The effect of carrying the municipals
is to lower the effective tax rate by about 8.5 percent. In terms of real
dollars this would amount to slightly over a $1,000,000 tax savings for 1996.
The Corporation also holds corporate bonds and stocks of Pennsylvania banks and
Pennsylvania bank holding companies. The corporate bonds are purchased very
selectively because they carry a higher risk of default and higher interest
rates. Corporate bonds during the past three years have made up only 2 to 3
percent of the total portfolio. Stock holdings of the Corporation have averaged
between $13,000,000 and $16,000,000 for the last three years. The rate of return
on stocks is somewhat smaller than their bond counterparts, however, 70 percent
of the dividend received is non-taxable and this raises the effective rate of
return. Historically, the unrealized appreciation in the stock value has
generated an acceptable investment return when added to the dividend return.
39
<PAGE>
Loans have represented about 45 percent of Total Average Assets and generated 58
percent of Total Interest Income over the past three years. Approximately 75
percent of the loan portfolio is real estate secured. Loans secured by 1-4
family dwellings are the major portion of the real estate secured portfolio.
Historically, loans secured by 1-4 family dwellings have had a very low default
rate. Approximately 34.3 percent of loans outstanding are to commercial and
business enterprises; the remaining 65.7 percent are consumer loans, including
credit cards. Loan concentrations by business type are approximately as follows:
7.3 percent (390 total loans) to service businesses (e.g., hotels, motels,
hospitals), 7.0 percent (330 total loans) to retail businesses, 4.5 percent
(about 238 loans) to finance companies, insurance companies and real estate
related businesses, 4.0 percent to agricultural businesses, primarily dairy
farms and 4.0 percent to manufacturing concerns, engaged primarily in timber and
lumber related businesses. The Corporation has always been and will strive to be
a major provider of credit to individuals and businesses in our market area. At
December 31, 1996, the Corporation had 27,963 loans outstanding.
About 1 percent of the Corporation's assets is in buildings and equipment. There
are 15 Citizens and Northern offices, including its headquarters, in Tioga,
Bradford, Lycoming and Sullivan counties. All of the offices are modern and
attractive banking facilities. In addition, the Corporation maintains a large
trust division in its corporate headquarters and a satellite trust office in
Bradford County.
The liability side of the balance sheet includes a variety of deposit products
used by the diverse customer base. The Corporation currently has 24,000 deposit
customers in its market area.
The most popular product in terms of dollar totals is the certificate of
deposit. Certificates of deposit offer a wide variety of rates and terms which
range from 1 month to 60 months and depending on the term offer a higher rate of
interest. Interest rates at December 31, 1996 ranged from 4.75 percent to 6.25
percent.
The next largest source of deposits for the Corporation is the money market
account. The rate paid on this account is slightly higher than other
interest-bearing Checking Accounts because the balance requirements are higher
and the debit activity is limited to 6 per month. The rate being paid at
December 31, 1996 was 4.57 percent. The rate on this account type changes weekly
and is 90 percent of the 91 day Treasury bill auction rate on accounts that
maintain collected balances of $5,000.00. The Corporation also provides an
interest checking account that is similar to the money market account. These
accounts may have unlimited debit activity, however, the rate paid is 50 percent
of the 91 day Treasury bill rate on collected balances of $2,500.00 or higher.
If the balance drops below $2,500.00 the rate is then 25 percent of the Treasury
bill rate. This rate is also set weekly. Average balances in interest checking
accounts declined slightly in 1996 as a result of the change in the rate paid as
of November 1, 1995. The rate previously paid was 79 percent of the 91 day
Treasury bill rate and as mentioned above it is now 50 percent of the bill rate.
The Corporation also offers the still very popular regular savings account. The
account comes in two forms: passbook and statement. The account pays a rate of
2.50 percent which is very competitive for our market area. The Corporation has
always considered these core deposits. The average balance for this type of
account has experienced some erosion during the past three years. Average
balances during 1994 amounted to nearly $54,000,000 and at year end 1996 the
average had declined to $46,751,000. At this writing the current balance is just
over $45,000,000. The probable cause for the decline in balances is movement to
higher interest instruments and alternative investments, especially mutual
funds.
Demand deposit average balances have remained stable during the past three
years, averaging between $39,000,000 and $42,000,000. The Corporation offers a
variety of checking account types, with one designed to attempt to meet the
individual needs of anyone in our market area. The total number of checking
accounts being serviced at December 31, 1996 was 18,300.
The largest remaining component of liabilities consists of borrowings. Borrowed
funds may be in the form of unsecured overnight Federal Funds purchased, fixed
term borrowings secured by a blanket floating-lien agreement and Repurchase
agreements secured by individual securities. Fixed and floating rate term
borrowing covered by the floating-lien agreement at December 31, 1996, December
31, 1995 and December 31, 1994 amounted to $59,600,000, $45,000,000 and
$53,500,000, respectively. Repurchase agreements at the end of the same periods
totaled, respectively, $44,650,000, $40,000,000 and $45,000,000. There were no
Federal Funds purchased at December 31, 1996, 1995 and 1994.
The terms for fixed rate borrowings and Repurchase Agreements range from 3
months to 5 years. Also included in the borrowings is a $15,000,000, 5 year loan
tied to the LIBOR rate and repriced quarterly. The Corporation has the option to
repay the credit at the repricing dates.
The floating-lien agreement loans are with the Federal Home Loan Bank of
Pittsburgh, a major source of funding for the Corporation. The loans secured by
repurchase agreements are placed with either Solomon Brothers or Morgan Stanley.
40
<PAGE>
The Capital accounts of the Corporation will be discussed later in Management's
Discussion in the Capital section.
LIQUIDITY
Bank liquidity is the ability to quickly raise cash at a reasonable cost in
order to serve customer needs and to operate efficiently by meeting short term
obligations on a timely basis. An adequate liquidity position permits the
Corporation to pay creditors, to allow for unforeseen deposit runoffs, to fund
unexpected increases in loan demand and to fund loan growth without making
costly balance sheet adjustments. Normally, day to day deposit decreases do not
vary more than $4,000,000 to $6,000,000 and new loan advances, net of loan
repayments, average less than $100,000 daily. During 1996, there were
exceptional periods when deposits declined as much as $15,000,000 for several
days before recovering to normal levels.
To accommodate such fluctuations in deposits and the funding needed to support
loan growth, the Corporation has several cash generating resources. Beyond the
regular and on-going liquidity generated by loan repayments, amortization of
mortgage-backed securities, the maturing of bonds and the routine growth in
deposits, the Corporation has several additional sources for meeting its
liquidity needs: the sale of assets (primarily investment securities),
short-term or long-term borrowing (e.g., federal funds purchased and Federal
Home Loan Bank borrowings) and attracting short-term deposits (principally
certificates of deposit). When deposits decline for short periods or when loan
demand increases unexpectedly, the Corporation relies on several credit lines.
The Corporation maintains a "Flexline" of credit and an "Open-Repo Plus" program
with the Federal Home Loan Bank of Pittsburgh, and overnight borrowing
agreements with several of its correspondent banks, principally Mellon Bank and
the Atlantic Central Bankers Bank. The Federal Home Loan Bank borrowing is
secured by the Corporation's mortgage loans and mortgage-backed securities.
Additionally, the Corporation uses repurchase agreements placed with Solomon
Brothers and Morgan Stanley to borrow short-term funds secured by investment
assets.
INTEREST RATE RISK
Business risk that exists and arises from changes in interest rates is an
inherent factor in operating a bank. Bank assets are predominantly composed of
long-term bonds, term loans with amortizations over periods up to 20 years and
other long-term assets. Funding for these assets comes principally from
short-term deposits: demand deposits (checking accounts), money market accounts,
certificates of deposit with maturities of 1 to 60 months and regular savings
accounts. When short-term funding sources, whose interest rates can change
frequently, are used to fund long-term assets, whose rates change much less
frequently, Interest Rate Risk exists.
Two methods used to measure Interest Rate Risk are the impact on net interest
income and the impact on the market value of the Bank. Quantifying interest rate
risk can be achieved using several methods. Many experts and regulators agree
that sophisticated Income Simulation Models provide the best way to measure and
predict the effects of Interest Rate Risk. The Corporation uses such a model to
calculate the Interest Rate Risk and its potential effect on net interest income
and market value. The simulation model is used monthly by the Corporation. Using
interest rate increases and decreases of 100, 200 and 300 basis points, the
model measures and projects potential changes in net interest income and
calculates the discounted present value of anticipated cash flows of the assets
and liabilities to arrive at a net market value under the base most likely and
"what if" scenarios. The simulation is performed using a number of different
asset and liability mix scenarios that allows management to measure on a "what
if" basis. The Corporation's Board of Directors has established ranges within
which the Interest Rate Risk effects on income and market value may fall when
interest rates are simulated to increase or decrease 200 basis points. The
acceptable range for fluctuations in net interest income is minus 20 percent
from the base most likely one-year scenario. The acceptable range for market
value is minus 25 percent from the base most likely one-year scenario.
Theoretically, a 20 percent decrease in net interest income would approximate
$4,900,000. Likewise, a 25 percent decrease in the Corporation's market value
would be approximately $18,000,000. The Corporation's modeling results at
December 31, 1996, indicate that the level of net interest income risk due to
varying interest rate movements is within internal risk tolerance guidelines.
The model used by the Corporation, Sendero, has the capability of applying the
embedded options inherent in any balance sheet such as prepayments during a
period of declining interest rates or runoffs of certain deposits during rising
rates. The model is flexible enough to allow several rates to be applied to
several different balance sheet assumptions.
Interest rate fluctuations do 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.
41
<PAGE>
The Corporation has for the past several years maintained
a negative gap position using borrowed funds to fund a large portion of its
holdings of mortgage-backed securities. 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.
42
<PAGE>
TABLE X - RATE SENSITIVE ASSETS AND RATE SENSITIVE LIABILITIES
<TABLE>
<CAPTION>
As of December 31, 1996
(In Thousands) Under One to Five Five to Ten Over Ten Non-
ASSETS One Year Years Years Years Interest Total
<S> <C> <C> <C> <C> <C> <C>
Interest-Bearing Deposits 655 655
Available-for-Sale Securities:
U.S.Treasury Securities 2,475 2,475
U.S.Agency Securities 9,045 17,090 10,206 36,341
Mortgage-Backed Securities 1,655 34,708 8,263 138,857 183,483
Municipals 1,019 6,502 4,785 43,637 55,943
Other Bonds 1,015 1,986 1,968 4,969
Stocks 24,642 24,642
Total Available-for-Sale Securities 2,674 53,745 32,124 219,310 307,853
Held-to-Maturity Securities:
U.S.Treasury Securities 599 100 699
U. S Agency Securities 100 100
Mortgage-Backed Securities 32 286 452 770
Total Held-to-Maturity Securities 599 132 386 452 1,569
Loans and Lease Financing:
Real Estate-Construction 1,166 1,166
Real Estate-Mortgage 81,350 42,014 55,003 35,590 213,957
Consumer 9,641 20,301 1,420 2,058 33,420
Agricultural 1,088 1,265 97 153 2,603
Commercial 11,435 3,242 676 398 15,751
Other 384 26 4,604 5,014
Political Subdivisions 1,569 2,441 1,454 1,000 6,464
Leases 36 134 94 264
Total Loans 106,669 69,423 58,650 43,897 278,639
Less: Unearned Discount (42) (42)
Allowance for Possible Loan
Losses (4,776) (4,776)
Net Loans and Leases 106,669 69,423 58,650 43,897 (4,818) 273,821
Federal Funds Sold 0
Cash and Due From Banks 14,320 14,320
Other Assets 11,974 11,974
Total Assets 110,597 123,300 91,160 263,659 21,476 610,192
LIABILITIES AND EQUITY
Interest-Bearing Deposits:
Money Market 100,523 100,523
NOW and SNOW 38,916 38,916
Christmas/Fund Clubs 867 867
CD's 75,052 40,338 115,390
Reg/Key Savings 46,175 46,175
GPS 698 698
IRA's 80,422 80,422
Total Interest-Bearing Deposits 296,478 40,338 0 46,175 382,991
Demand Deposits 47,320 47,320
Repurchase Agreements 14,850 29,800 44,650
Borrowed Funds:
Variable
Fixed 34,000 25,000 600 59,600
Total Borrowed Funds 34,000 25,000 600 59,600
Other Liabilities 902 3,136 4,038
Stockholders' Equity 71,593 71,593
Total Liabilities and Equity 346,230 95,138 0 94,095 74,729 610,192
Interest Rate Sensitivity Gap (235,633) 28,162 91,160 169,564 (53,253)
</TABLE>
43
<PAGE>
CAPITAL ADEQUACY
Under regulations published by the Federal Deposit Insurance Corporation, and
other bank regulators, a bank's capital must be divided into two tiers. The
first consists primarily of common stock, retained earnings, surplus and
noncumulative perpetual preferred stock, if any. The second tier includes the
allowance for possible loan losses (limited to 1.25 percent of risk weighted
assets), cumulative preferred stock and subordinated debt.
Risk based capital guidelines published in 1990 require banks to maintain a risk
based capital ratio of 8 percent, 4 percent of which must be tier 1; the
remainder may be tier 2.
The primary source of capital growth for Citizens and Northern Corporation is
earnings. The growth of capital attributable to earnings, net of dividends, for
the years ended December 31, 1996, 1995 and 1994 was 9.7 percent, 8.4 percent
and 8.8 percent, respectively. The Corporation has also increased its dividend
for each of the last three years.
The total capital of the Corporation at December 31, 1996, excluding net
unrealized gains or losses on Available-for-Sale Securities, amounted to
$65,826,000. This compares to total capital of $60,025,000 and $55,395,000 at
December 31, 1995 and 1994, respectively.
Total capital of the Corporation at December 31, 1996, 1995, and 1994,
respectively, including the adjustment to the reserve for unrealized gains and
losses on available-for-sale securities, amounted to $71,593,000, $66,977,000
and $46,796,000. For financial reporting purposes SFAS No. 115 requires that
investment securities held as available-for-sale be marked-to-market on the last
day of each accounting quarter and the adjustment, net of taxes, included in
shareholders' equity. This adjustment can have a significant impact on
shareholders' equity as evidenced on December 31, 1994, when the net after tax
depreciation amounted to $8,589,000. For regulatory purposes, the adjustment to
capital is excluded from capital adequacy ratio calculations.
There are no planned capital expenditures which would have a detrimental effect
on the capital ratios or the results of operations.
INFLATION
Inflation affects nearly every aspect of banking, primarily interest rates,
which have been discussed in detail earlier under Interest Rate Risk. The effect
of inflation, when it is high, is also felt with the purchase of goods, such as
supplies, services and labor used to provide banking products to our customers.
However, Inflation has not been a major factor in the control of other
noninterest expense during the past few years. The near-term outlook for
inflation appears to be good.
44
<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 1996, 1995 and 1994 as furnished by brokers and other
sources considered by the Corporation to be reliable.
<TABLE>
<CAPTION>
1996 1995 1994
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 22.50 20.50 0.17 20.25 18.50 0.16 16.88 16.50 0.15
Second Quarter 22.75 21.00 0.17 20.25 18.75 0.16 18.31 17.50 0.15
Third Quarter 23.25 21.50 0.17 20.00 19.50 0.16 18.75 18.38 0.155
Fourth Quarter 25.50 22.50 0.18 20.50 19.75 0.17 20.25 19.00 0.16
plus plus plus
1 % stock 1 % stock 1 % stock
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK AND PER SHARE DATA
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
1.83 1.48 1.61 1.44
Cash Dividends Declared 0.68 Net Income 0.60 0.54 0.47
Cash Dividends Declared on an Historical Basis 0.69 0.65 0.615 0.54 0.48
Stock Dividend 1 % 1 % 1 % 1 % 1 %
Number of Shares Outstanding(excluding
shares held in treasury) 5,012,082 4,962,456 4,913,322 4,864,674 4,816,508
Number of Shares Used for Computation 5,062,203 5,062,203 5,062,203 5,062,203 5,109,615
Number of Shares Issued 5,117,182 5,066,516 5,016,352 4,966,684 4,917,508
Number of Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Stockholders' Equity Per Share 14.14 13.23 9.24 11.16 8.91
Stockholders' Equity Per Share (*) 13.00 11.86 10.94 10.06 8.91
Number of stockholders at Year End 2119 2,027 1,901 1,819 1,809
</TABLE>
(*) Does not include unrealized holding gains or losses on available-for-sale
securities.
(a) For purposes of this computation, the number of shares outstanding,
excluding shares held in treasury, has been increased for the effects of the 1%
stock dividend issued in January following each year-end.
Known "market makers" who handle Citizens & Northern Corporation stock
transactions are:
Hopper Soliday & Company Ryan Beck & Company Merrill Lynch, Pierce,
PO Box 4548, Lancaster PA 17601 3 Parkway Fenner & Smith, Inc.
1703 Oregon Pike, Lancaster PA Philadelphia, PA 19102 One West Third Street
17064 800-342-2325 Williamsport, PA 17701
800-526-6371 800-937-0769
Sandler O'Neill & Partners Ferris, Baker Watts
Two World Trade Center 6 Bird Cage Walk
104th Floor Holidaysburg, PA 16648
New York, NY 10048 800-343-5149
800-635-6851
45
<PAGE>
<TABLE>
<CAPTION>
FIVE YEAR SUMMARY OF OPERATIONS
(In Thousands)
INCOME STATEMENT 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Interest Income 47,922 45,181 42,309 39,122 38,807
Interest Expense 23,451 24,477 20,805 18,396 18,724
Interest Margin 24,471 20,704 21,504 20,726 20,083
Provision for Possible Loan Losses 701 737 737 708 1,326
Interest Margin After Provision for Possible Loan Losses 23,770 19,967 20,767 20,018 18,757
Other Income 2,847 2,796 2,882 2,706 2,369
Securities Gains (Losses) 475 1,675 (219) 646 298
Other Expenses 14,686 14,079 13,597 12,919 11,744
Income Before Income Tax Provision 12,406 10,359 9,833 10,451 9,680
Income Tax Provision 3,151 2,493 2,339 2,557 2,390
Income Before Cumulative Effect of Accounting Change 9,255 7,866 7,494 7,894 7,290
Cumulative Effect of Change in Accounting for Income Taxes (233)
(Benefit)
Net Income 9,255 7,866 7,494 8,127 7,290
BALANCE SHEET AT YEAR END
Total Securities (1) 310,077 301,743 261,820 302,096 217,811
Loans (Excluding Unearned Discount) 278,597 264,182 258,472 238,755 225,475
Total Assets 610,192 585,987 546,478 560,055 466,119
Total Deposits 430,311 429,552 399,263 391,639 367,196
Stockholders' Equity Before Adjustment for Unrealized Gain or
Loss on Available-for-Sale Securities 65,826 60,025 55,385 50,913 n/a
Stockholders' Equity 71,593 66,977 46,796 56,505 45,510
AVERAGE BALANCE SHEET
Total Securities (Amortized Cost) (1) 306,680 290,694 292,080 258,874 225,439
Loans (Excluding Unearned Discount) 271,618 259,143 243,147 227,683 211,038
Earning Assets 578,298 549,837 535,227 489,121 437,848
Total Assets 604,408 566,030 554,658 508,400 456,679
Total Deposits 429,036 414,958 395,512 381,396 357,121
Stockholders' Equity Before Adjustment for Unrealized Gain or
Loss on
Available-for-Sale Securities 62,797 55,961 52,629 n/a n/a
Stockholders' Equity 66,490 53,727 52,090 46,693 42,875
FINANCIAL RATIOS
Return on Stockholders' Equity (4) 14.7% 14.1% 14.2% n/a n/a
Return on Stockholders' Equity (3) 13.9% 14.5% 14.4% 17.4% 17.0%
Return on Assets (3) 1.53% 1.39% 1.35% 1.60% 1.60%
Stockholders' Equity to Assets (4) 10.49% 9.84% 9.49% n/a n/a
Stockholders' Equity to Assets (3) 11.00% 9.58% 9.39% 9.18% 9.39%
Stockholders' Equity to Loans (3) 24.5% 20.9% 21.4% 20.5% 20.3%
Net Income to:
Total Interest Income 19.3% 17.4% 17.7% 20.8% 18.8%
Interest Margin 37.8% 38.0% 34.8% 39.2% 36.3%
Dividend as a % of Net Income 37.4% 41.0% 40.3% 33.5% 33.0%
</TABLE>
(1) Includes Interest-Bearing Due from Banks and Fed Funds Sold
(2) Balance Sheet at Year End
(3) Average Balance Sheet, Including Valuation Reserve
(4) Average Balance Sheet, Excluding Valuation Reserve
46
<PAGE>
SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents summarized quarterly financial data for 1996 and
1995 (In thousands, except per share data).
<TABLE>
<CAPTION>
1996 Quarter Ended
Mar 31 June 30 Sept 30 Dec 31
<S> <C> <C> <C> <C>
Interest Income 11,725 11,999 12,094 12,104
Interest Expense 5,786 5,786 5,936 5,943
Interest Margin 5,939 6,213 6,158 6,161
Provision for Possible Loan Losses 175 175 175 176
Interest Margin After Provision for
Possible Loan Losses 5,764 6,038 5,983 5,985
Other Income 675 696 727 749
Securities Gains (Losses) 97 171 183 24
Other Expense 3,605 3,606 3,652 3,823
Income Before Income Taxes 2,931 3,299 3,241 2,935
Income Tax Provision 752 812 875 712
Net Income 2,179 2,487 2,366 2,223
Net Income Per Share 0.43 0.49 0.47 0.47
1995 Quarter Ended
Mar 31 June 30 Sept 30 Dec 31
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 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 0.34 0.33 0.41 0.47
</TABLE>
47
<PAGE>
TRUST DEPARTMENT
(In Thousands) 1996 1995 1994 1993 1992
Assets 222,541 181,351 146,178 147,804 132,550
Earnings 852 726 582 546 476
The composition of trust assets and liabilities for the years ending 1996, 1995
and 1994 are shown in the following table:
1996 1995 1994
INVESTMENTS
Bonds 77,977 75,363 66,003
Stock 79,815 69,520 45,592
Savings and Money Market Funds 28,389 12,512 14,682
Mutual Funds 34,173 22,207 17,568
Mortgages 506 115 109
Real Estate 852 889 977
Miscellaneous 829 745 1,247
Total 222,541 181,351 146,178
ACCOUNTS
Estates 872 2,124 1,455
Trusts 54,458 41,297 36,343
Guardianships 1,716 1,437 1,316
Pension/Profit Sharing 93,451 76,605 60,647
Investment Management 72,044 59,888 46,417
Total 222,541 181,351 146,178
STOCKHOLDER INQUIRIES
A copy of the Corporation's Annual Report for the year ended December 31, 1996,
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.
48
<PAGE>
DESCRIPTION OF BUSINESS
Citizens & Northern Corporation ("Corporation") is a one bank holding company
whose principal subsidiary is Citizens & 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, 1996 the Bank had total assets of $610,192,000, total deposits of
$430,311,000 and total loans outstanding of $278,639,000.
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 division 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, 1996, the Bank had a total of 202 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.
49
<PAGE>
CITIZENS & NORTHERN CORPORATION AND
CITIZENS & NORTHERN BANK BOARD OF DIRECTORS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
J. Robert Bower William K. Francis John H. Macafee Edward H. Owlett III
Pharmacist Chairman and Operator, Attorney in law firm of
Chief Executive Officer Mapoval Farms, Inc. Owlett, Lewis & Ginn, P.C.
R. Robert DeCamp
President, Karl W. Kroeck Lawrence F. Mase F. David Pennypacker
Patterson Lumber Co. Farmer Retired, formerly C.P.A. in firm of
President, Mases's, Inc. Pennypacker & Zeigler,
P.C.
R. James Dunham Edward L. Learn
President, R. J. Dunham, Owner, Learn Hardware & Robert J. Murphy Leonard Simpson
Inc. Building Supply, formerly Retired, formerly Attorney at law
Department Store Purina Mills, Inc. Attorney in law firm of
Davis, Murphy, Niemiec and
Adelbert E. Eldridge Smith Donald E. Treat
Retired Regional Director Craig G. Litchfield Owner, Treat Hardware
of Susquehanna Region of President
Pennsylvania Electric Co.
Directors Emeriti
Laurence R. Kingsley Edward H. Owlett Howard W. Skinner
Owner, Attorney in law firm of Retired, formerly
L. R. Kingsley Lumber Owlett, Lewis & Ginn, Senior Vice President
P.C.
ADVISORY BOARDS
Athens Knoxville Sayre Troy
Terry R. Depew Mary Rose Sacks Stephan W. Bowen Mark C. Griffis
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 Laurence 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 Edward H. Owlett III
Leslie W. Miller, Jr. Liberty Towanda & F. David Pennypacker
Ann L. Yuscavage Monroeton
East Smithfield Lyle R. Brion Larry D. Sharer Wysox
Peggy Brown Gary Dinnison Wilson S. Quiggle Debra S. Kithcart
Roy L. Beardslee Lawrence F. Mase Jeffery E. Aeppli 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>
50
<PAGE>
CITIZENS & NORTHERN BANK OFFICERS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
William K. Francis Russell H. Bauman Gerald W. Smith Matthew Lundgren
Chairman and Auditor Trust Officer Assistant Trust Officer
Chief Executive Officer
Stephan W. Bowen Shawn M. Schreck Glenda A. Marzo
Craig G. Litchfield Assistant Vice President Assistant Vice President Assistant Auditor
President and Compliance Officer
Jeffery E. Aeppli Sandra J. McNeal
Assistant Vice President Assistant Cashier
Robert W. Anderson Robert E. Bolt David C. Schucker Judith L. Metcalf
Vice President, Assistant Vice President Assistant Vice President Assistant Cashier
Data Processing
Peggy A. Brown James H. Shelmire Leonard Mitchell III
Thomas L. Briggs Assistant Vice President Systems Analyst Collection Officer
Vice President and
Senior Trust Officer Phyllis W. Callear Jan L. Southworth Joan F. Johnson
Assistant Vice President Assistant Vice President Assistant Cashier
Brian L. Canfield
Vice President Daniel P. Clark Nancy L. Tubbs Karen L. Keck
Assistant Vice President Assistant Vice President Bookkeeping Manager
Terry R. Depew
Vice President Helen W. Ferris Lois C. Wood Janet R. Ordway
Assistant Vice President Assistant Vice President Assistant Cashier
Keith E. Ferguson
Vice President Joan L. Grenell Mary J. Wood Sandra A. Parulas
Assistant Vice President Trust Officer Training Officer
Wayne E. Gavitt
Vice President Nicholas Helf, Jr. Ann L. Yuscavage Karen B. Peterson
Employee Benefit Officer Assistant Vice President Assistant Cashier
Mark C. Griffis
Vice President Elaine F. Johnston Sandra G. Andrews Eileen K. Ranck
Assistant Vice President Assistant Cashier Bankcard Manager
Kim L. Miller
Vice President Debra S. Kithcart Bonnie L. Bennett Virginia L. Reap
Assistant Vice President Assistant Cashier Assistant Cashier
Matthew P. Prosseda
Vice President Linda L. Kriner Joan M. Blackwell Joseph A. Snell
Assistant Vice President Assistant Cashier Assistant Controller
James W. Seipler and Trust Officer
Cashier & Controller Marcella Chaykosky Twila G. Starr
Rhonda J. Litchfield Assistant Cashier Assistant Cashier
Larry D. Sharer Investment Officer
Vice President Rick Cisco Charmaine H. Stempel
Randy R. Meckes Technical Support Manager Assistant Cashier
Richard L. Wilkinson Assistant Vice President and Security Officer
Vice President Jerome Coleman
Jeffrey B. Osgood Assistant Cashier Barbara J. Walters
Kathleen M. Osgood Assistant Vice President Assistant Cashier
Corporate Secretary and Personnel Officer Diane B. Elvidge
Assistant Cashier Eric E. Wertz
Klas G. Anderson Wilson S. Quiggle Assistant Bankcard Officer
Assistant Vice President Assistant Vice President Rita Y. Fisk
Assistant Cashier
Mary Rose Sacks
Assistant Vice President
</TABLE>
51
<PAGE>
CITIZENS & NORTHERN CORPORATION OFFICERS
William K. Francis Craig G. Litchfield James W. Seipler Kathleen M. Osgood
Chairman and President Treasurer Corporate Secretary
Chief Executive
Officer
52
Exhibit 21
LIST OF SUBSIDIARIES
Jurisdiction or
Name State of Incorporation
- ---- ----------------------
Citizens & Northern Bank Pennsylvania
Bucktail Life Insurance Company Arizona
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 14320
<INT-BEARING-DEPOSITS> 655
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 307853
<INVESTMENTS-CARRYING> 1569
<INVESTMENTS-MARKET> 1579
<LOANS> 278597
<ALLOWANCE> 4776
<TOTAL-ASSETS> 610192
<DEPOSITS> 430311
<SHORT-TERM> 28850
<LIABILITIES-OTHER> 3136
<LONG-TERM> 75400
0
0
<COMMON> 5117
<OTHER-SE> 66476
<TOTAL-LIABILITIES-AND-EQUITY> 610192
<INTEREST-LOAN> 27998
<INTEREST-INVEST> 19827
<INTEREST-OTHER> 97
<INTEREST-TOTAL> 47922
<INTEREST-DEPOSIT> 17775
<INTEREST-EXPENSE> 23451
<INTEREST-INCOME-NET> 24471
<LOAN-LOSSES> 701
<SECURITIES-GAINS> 475
<EXPENSE-OTHER> 14686
<INCOME-PRETAX> 12406
<INCOME-PRE-EXTRAORDINARY> 12406
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9255
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.83
<YIELD-ACTUAL> 8.29
<LOANS-NON> 864
<LOANS-PAST> 2994
<LOANS-TROUBLED> 188
<LOANS-PROBLEM> 1937
<ALLOWANCE-OPEN> 4579
<CHARGE-OFFS> 672
<RECOVERIES> 168
<ALLOWANCE-CLOSE> 4776
<ALLOWANCE-DOMESTIC> 1473
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3303
</TABLE>
