<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Six month period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ___________
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
Pennsylvania 23-2451943
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 Main Street
Wellsboro, Pa. 16901
(Address of principal executive offices) (Zip code)
</TABLE>
717-724-3411
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
<PAGE>
Title Outstanding
Common Stock ( $1.00 par value) 5,220,038 Shares Issued and
Outstanding July 1, 1998
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statement of Condition - June 30, 1998 and December 31, 1997 Page 3
Consolidated Statement of Income - Six Months Ended
June 30, 1998 and June 30, 1997 Page 4
Consolidated Statement of Cash Flows - Six Months Ended
June 30, 1998 and June 30, 1997 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation Pages 7 through 19
Item 3. Information About Market Risk Pages 15 Through 17
Part II. Other Information Page 20
Item 1. Legal Proceedings
Items 2 and 3 have been omitted as they are not applicable to registrant.
Item 6. Exhibits and Reports on Form 8-K
Signatures Page 21
</TABLE>
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
Unaudited Audited
June 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash & Due From Banks $ 16,348 $ 13,449
Interest Bearing Deposits 666 804
Available-for-Sale Securities:
U.S. Treasury Securities 2,538 2,538
Securities of Other U.S. Government Agencies 76,576 74,449
Mortgage Backed Securities 115,118 129,190
Obligations of States and Municipal Subdivisions 69,137 64,614
Other Securities 50,115 35,796
--------- ---------
Total Available-for-Sale Securities 313,484 306,587
Held-to-Maturity Securities:
U.S. Treasury Securities 626 632
Securities of Other U.S. Government Agencies 699 350
Mortgage Backed Securities 499 615
--------- ---------
Total Held-to-Maturity Securities 1,824 1,597
Loans:
Loans to Political Subdivisions 6,007 5,975
Other Loans 280,197 279,488
--------- ---------
Total Loans 286,204 285,463
Less - Allowance for Possible Loan Losses (4,697) (4,913)
Unearned Income (40) (37)
--------- ---------
Loans, Net 281,467 280,513
Bank Premises and Equipment 6,724 6,720
Other Real Estate 574 230
Accrued Interest on Bonds and Loans 4,530 4,808
Other Assets 881 645
--- ---
TOTAL ASSETS $626,498 $615,353
--------- ---------
--------- ---------
LIABILITIES
Deposits:
Demand $ 50,287 $ 46,916
Interest Checking 36,854 40,880
Money Market 114,809 104,894
Savings 45,631 45,332
Other Time 197,872 204,234
--------- ---------
Total Deposits 445,453 442,256
Dividends Payable 1,023 1,013
Borrowed Funds 50,652 40,661
Federal Funds Purchased --- 10,000
Securities Sold Under Agreement to Repurchase 30,400 29,800
Other Liabilities 8,995 6,088
--------- ---------
TOTAL LIABILITIES 536,523 529,818
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,220 5,168
Authorized 10,000,000; Issued 5,220,038
and 5,168,354 in 1998 and 1997, respectively
Stock Dividend Distributable 1,706
Paid in Capital 15,468 13,799
Retained Earnings 56,616 52,519
--------- ---------
Total 77,304 73,192
Unrealized Gains on Available-for-Sale Securities 14,121 13,335
Less: Treasury Stock at Cost
118,010 shares at June 30, 1998 (1,450) (992)
105,311 shares at December 31, 1997
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 89,975 85,535
--------- ---------
TOTAL LIABILITIES &
SHAREHOLDERS' EQUITY $626,498 $615,353
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Financial Statements (Continued)
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
(Current) (PriorYear) (Current) (PriorYear)
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $7,177 $7,129 $14,190 $14,128
Interest on Balances with Depository Institutions 10 10 20 19
Interest on Loans to Political Subdivisions 96 101 185 195
Interest on Federal Funds Sold 104 68 164 124
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 3,427 3,539 6,972 7,174
Tax Exempt 985 893 1,913 1,752
Dividends 223 205 451 412
------ ------ ------ -------
Total Interest and Dividend Income 12,022 11,945 23,895 23,804
INTEREST EXPENSE
Interest on Deposits 4,512 4,554 9,006 8,973
Interest on Other Borrowings 1,189 1,292 2,419 2,610
------ ------ ------ -------
Total Interest Expense 5,701 5,846 11,425 11,583
------ ------ ------ -------
Interest Margin 6,321 6,099 12,470 12,221
Provision for Possible Loan Losses 191 181 382 362
------ ------ ------ -------
Interest Margin After Provision for Possible Loan Losses 6,130 5,918 12,088 11,859
OTHER INCOME
Service Charges on Deposit Accounts 264 274 514 540
Service Charges and Fees 62 72 139 131
Trust Department Income 329 249 645 510
Insurance Commissions, Fees and Premiums 95 124 197 233
Other Operating Income 38 319 59 363
------ ------ ------ -------
Total Other Income Before Realized Gains on Securities, Net 788 1,038 1,554 1,777
Realized Gains on Securities, (Net) 1,860 20 2,614 807
------ ------ ------ -------
Total Other Income 2,648 1,058 4,168 2,584
OTHER EXPENSES
Salaries and Wages 1,596 1,470 3,195 2,966
Pensions and Other Employee Benefits 429 401 871 870
Occupancy Expense, Net 214 183 414 355
Furniture and Equipment Expense 198 173 392 335
Other Operating Expense 1,652 1,522 3,154 3,026
------ ------ ------ -------
Total Other Expenses 4,089 3,749 8,026 7,552
------ ------ ------ -------
Income Before Income Tax Provision 4,689 3,227 8,230 6,891
Income Tax Provision 1,227 743 2,087 1,644
------ ------ ------ -------
NET INCOME $3,462 $2,484 $6,143 $5,247
------ ------ ------ ------
------ ------ ------ ------
PER SHARE DATA:
Net Income - Basic $0.68 $0.49 $1.20 $1.03
Net Income - Diluted $0.68 $0.49 $1.20 $1.03
------ ------ ------ -------
Dividend Per Share $0.20 $0.18 $0.40 $0.36
------ ------ ------ -------
Number Shares Used in Computation - Basic 5,112,218 5,113,138 5,112,218 5,113,138
Number Shares Used in Computation - Diluted 5,121,113 5,116,437 5,121,113 5,116,437
Number Shares Issued 5,220,038 5,168,354 5,220,038 5,168,354
Number Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000
---------- ---------- ---------- ----------
Dividends Actually Paid $0.20 $0.18 $0.40 $0.36
----- ----- ----- -----
----- ----- ----- -----
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net Income $3,462 $2,484 $6,143 $5,247
Other Comprehensive Income :
Unrealized holding gains on available-for-sale securities
Gains arising during the period 3,211 6,435 3,806 3,021
Reclassification adjustment (1,860) (20) (2,614) (807)
------ ------ ------ -------
Other comprehensive income before income tax 1,351 6,415 1,192 2,214
Income tax related to other comprehensive income 459 2,181 405 753
------ ------ ------ -------
5
<PAGE>
<S> <C> <C> <C> <C>
Other comprehensive income 892 4,234 787 1,461
------ ------ ------ ------
Comprehensive Income $4,354 $6,718 $6,930 $6,708
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Financial Statements (Continued)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,1998 June 30, 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,143 $ 5,247
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 382 362
Realized (Gain), on Available-for-Sale and
Held-to-Maturity Securities, Net (2,614) (807)
Provision for Depreciation 392 346
Accretion and Amortization 138 284
Deferred Income Tax (116) (130)
(Increase) Decrease in Accrued Interest
Receivable and Other Assets 42 404
Increase Accrued Interest Payable and
Other Liabilities 2,627 2,099
Net Cash Provided by Operating Activities 6,994 7,805
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 116 189
Purchase of Held-to-Maturity Securities (348) (250)
Proceeds from Sales of Available-for-Sale Securities 72,940 17,358
Proceeds from Maturities of Available-for-Sale Securities 63,817 23,360
Purchase of Available-for-Sale Securities (139,981) (26,739)
Net (Increase) Decrease in Loans (1,336) (6,567)
Purchase of Premises and Equipment (396) (297)
Sale of Foreclosed Assets 70 356
Purchase of Other Real Estate (413) (60)
Net Cash Used in Investing Activities (5,531) 7,350
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 3,197 8,750
Decrease in Short Term Borrowings (9,400) (10,850)
Proceeds from (Repayment of) Long Term Borrowings 9,991 (8,931)
Sale of Treasury Stock 24 3
Purchase of Treasury Stock (468)
Dividends Declared (2,046) (1,822)
Net Cash Provided by Financing Activities 1,298 (12,850)
INCREASE IN CASH AND CASH EQUIVALENTS $ 2,761 $ 2,305
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $14,253 14,975
CASH AND CASH EQUIVALENTS, END OF YEAR $17,014 $17,280
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $9,221 $8,297
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Income Taxes Paid $2,065 $1,617
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Financial Statements (Continued)
Notes to Consolidated Financial Statements
1. The financial information included herein, with the exception of the
Consolidated Balance Sheet dated December 31, 1997, is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations and changes in
financial position for the interim periods.
Results reported for the six-month period ended June 30, 1998 may not be
indicative of the results for the year ended December 31, 1998.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. New Statement of Financial Accounting Standards
SFAS No. 130 "Reporting Comprehensive Income", adopted in 1997, is effective for
all fiscal years beginning after December 15, 1997, and as such, it will be
effective for reporting periods in 1998. Comprehensive income includes all
changes in equity during a period from transactions and events from nonowner
sources. Before SFAS No. 130, some elements of comprehensive income were
presented in the income statement and others were reported in the equity section
of the statement of financial position. All elements now are required to be
brought together in a single amount of comprehensive income.
SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information" was also adopted in 1997. SFAS No. 131 establishes standards for
disclosures about products, services, geographic areas and major customers. The
standard is effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS No. 131 will not have a material effect on Citizens and
Northern's financial condition or results of operations.
SFAS No. 132 "Employers' Disclosure About Pensions and Other Post Retirement
Benefits" was adopted in January 1998. SFAS No. 132 revises current note
disclosure requirements for employers' pensions and other retiree benefits. It
does not address recognition or measurement issues. SFAS No. 132 is effective
for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 132
will not have a material effect on Citizens and Northern's financial condition
or results of operations.
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part 1 - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS OVERVIEW
Net after-tax income for the six month period ended June 30, 1998 amounted to
$6,143 million or $1.20 per share (on a basic and diluted basis). This compares
to $5,247 million or $1.03 per share (on a basic and diluted basis) for the same
period in 1997. Total assets at June 30, 1998 were $626,498 million compared to
total assets at June 30,1997 of $606,904 million.
Net income for the period reflects the after-tax gain on the sale of stock of a
closely held company that had been carried on the books of the Corporation for
$1.00. The stock was obtained in 1919 as collateral for a loan that was later
written off. The company represented by the stock was sold in June 1998 and the
stock was purchased for cash. The realized gain, after tax, amounted to
approximately $1,132,000 or $.22 per basic share. The same period in 1997 also
benefited from the sale of a registered trademark amounting to $199,000 after
tax or $.04 per basic share.
Excluding extraordinary income for the six-month periods ended June 30, 1998 and
June 30, 1997, earnings per common share would have amounted to $.98 and $.99,
respectively.
Results for the first six months of 1998 were in-line with management's
expectations that net income for the first half of 1998 would be about the same
as that of the first half of 1997. These expectations are contingent upon the
current interest rate environment and could change if interest rates increase or
decrease dramatically.
NET INTEREST MARGIN Net interest margin or net interest income is the dollar
amount of difference between all interest income received and interest
expense paid. The net interest spread or interest margin is the difference,
stated as a percentage, between the average rate received on all
interest-earning assets and the average rate paid on all interest-bearing
liabilities.
Net interest income for the six months ended June 30, 1998 increased $250,000
or 2 percent when compared to the same six-month period in 1997.
Respectively, gross interest income for the periods ended June 30, 1998 and
June 30, 1997 amounted to $23,895,000 and $23,804,000. Gross interest expense
for the same periods amounted to $11,425,000 and $11,583,000. Gross interest
income and gross interest expense for the six months ended December 31, 1997
totaled $24,465,000 and $11,729,000, respectively. The increase in both
numbers when compared to the six months ended June 30, 1998 can be attributed
in a large part to the three additional days in the last six months of 1997.
When making a comparison of the quarters ended June 30, 1998, March 31, 1998
and December 31, 1997 the net interest margins are $6,321,000, $6,149,000 and
$6,476,000, respectively. The numbers represented by the three quarters would
appear to reflect a decline in net interest income, however the amount of net
interest income is affected by the number of days in the respective quarters
which were 91, 90 and 92. Normally net interest income per day amounts to about
$70,000.
Average interest-bearing assets for the six months ended June 30, 1998 and June
30, 1997 were, respectively, $579,822,000 and $578,166,000. Average earning
assets for the year ended December 31, 1997 were $578,647,000. Average
interest-bearing liabilities for the six-month periods ended June 30, 1998, and
June 30, 1997 amounted to $479,623,000 and $484,819,000, respectively. Average
interest-bearing liabilities for the year ended December 31, 1997 were
$481,281,000.
8
<PAGE>
Neither the composition or volume of interest-bearing assets and
interest-bearing liabilities has changed significantly during the six months
periods being compared. A portion of the available-for-sale portfolio was
restructured during the first half of 1998 due to the prepayment speed of the
mortgage pools. The pools were replaced with FNMA zero coupon bonds and lower
coupon Federal Home Loan Mortgage Corporation instruments. A loss amounting to
$50,000 was realized as a result of the sale of the investments. Total deposits
at June 30, 1998 have increased $6,392,000 since June 30, 1997, primarily Money
Market accounts, Certificates of Deposit and Demand Deposit accounts.
The net interest spread, the difference between total interest earned on all
earning assets and the interest paid on all interest-bearing liabilities, was
3.51 percent, 3.48 percent and 3.50 percent for the six months ended June 30,
1998, June 30, 1997 and the year ended December 31, 1997, respectively. On March
2, 1998 management lowered its prime lending rate from 8.50 percent to 8.25
percent, offsetting the decrease with a reduction in rates paid on long-term
certificates of deposit. Management expects that the net interest spread for the
balance of 1998 will remain in the 3.40 percent to 3.50 percent range and that
net interest income will approximate that of 1997. CITIZENS & NORTHERN
CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
Table II - Average Balances and Rates
(In Thousands)
<TABLE>
<CAPTION>
Rate of Rate of Rate of
Return/ Return/ Return/
Cost of Cost of Cost of
funds funds funds
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS 06/30/98 % 12/31/97 % 06/30/97 %
Available-for-Sale Securities:
U. S. Treasury Securities $ 2,518 6.01 $ 2,514 5.53 $ 2,504 5.15
Securities of Other U.S. Government Agencies and 74,654 7.22 41,968 7.15 29,778 7.00
Corporations
Mortgage Backed Securities 116,262 6.52 163,942 6.75 180,623 6.68
Obligations of States and Political Subdivisions 65,671 5.87 59,554 6.04 57,902 6.10
Stock 17,250 5.27 15,039 5.81 15,197 5.47
Other Securities 11,771 7.04 4,536 1.15 4,429 1.64
Total Available-for-Sale Securities 288,126 6.50 287,553 6.51 290,433 6.45
Held-to-Maturity Securities:
U. S. Treasury Securities 628 6.10 601 5.66 598 6.41
Securities of Other U. S. Government Agencies and 508 6.75 297 7.41 242 6.67
Corporations
Mortgage Backed Securities 548 7.73 689 7.55 725 7.79
Total Held-to-Maturity Securities 1,684 6.83 1,587 6.81 1,565 7.09
Interest -bearing Due from Banks 796 5.07 795 6.79 428 8.95
Federal Funds Sold 5,913 5.59 6,132 5.45 4,681 5.34
Loans:
Real Estate Loans 225,221 8.99 223,510 9.05 221,674 9.05
Consumer 30,962 20.67 32,293 20.08 32,527 19.85
Agricultural 2,425 10.15 2,689 10.12 2,749 10.05
Commercial/Industrial 17,623 9.31 16,743 9.59 16,923 9.63
Other 708 7.69 754 8.22 558 8.31
Political Subdivisions 6,147 6.07 6,355 6.15 6,394 6.15
Leases 217 9.29 236 7.63 234 4.32
Total Loans 283,303 10.23 282,580 10.28 281,059 10.28
Total Earning Assets 579,822 8.31 578,647 8.34 578,166 8.30
Cash 12,352 12,228 12,162
Securities Valuation Reserve 20,040 9,907 6,537
Allowance for Possible Loan Losses (4,868) (4,844) (4,796)
Other Assets 5,317 5,745 5,790
Bank Premises & Equipment 6,764 6,594 6,521
Total Assets $619,427 $608,277 $604,380
INTEREST-BEARING LIABILITIES
Interest Checking $ 36,773 2.45 $ 38,334 2.47 38,738 2.46
Money Market 110,183 4.56 107,287 4.55 106,093 4.53
Savings 45,380 2.48 46,338 2.48 46,696 2.48
Certificates of Deposit 121,380 5.53 119,226 5.49 118,019 5.46
Individual Retirement Accounts 78,313 5.55 78,662 5.99 79,014 5.93
Other Time Deposits 2,076 2.14 2,223 2.52 2,138 2.36
9
<PAGE>
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Purchased 2,036 6.83 663 4.98 448 6.30
Other Borrowed Funds 83,482 5.67 88,548 5.63 93,673 5.59
Total Interest-bearing Liabilities 479,623 4.80 481,281 4.84 484,819 4.82
Demand Deposits 44,381 42,780 40,996
Other Liabilities 9,040 8,211 6,600
TOTAL LIABILITIES 533,044 532,272 532,415
Stockholders' Equity 73,101 69,440 67,598
Securities Valuation Reserve 13,282 6,565 4,367
Total Liabilities and Stockholders'
Equity $619,427 $608,277 $604,380
Interest Rate Spread 3.51 3.50 3.48
</TABLE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
Table II - Effect of Volume and Rate Changes in Interest
Income and Interest Expense
<TABLE>
<CAPTION>
Six-Month Periods Ended June 30, 1998/1997
(In Thousands) Change in Change in Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS Available-for-Sale Securities:
U. S. Treasury Securities 11 11
Securities of Other U.S. Government Agencies and 1,605 33 1,638
Corporations
Mortgage Backed Securities (2,083) (145) (2,228)
Obligations of States and Political Subdivisions 223 (62) 161
Stock 53 (14) 39
Other Securities 125 250 375
Total Available-for-Sale Securities (77) 73 (4)
Held-to-Maturity Securities:
U. S. Treasury Securities (0) 0 (0)
Securities of Other U.S. Government Agencies and 9 9
Corporations
Mortgage Backed Securities (7) (0) (7)
Total Held-to-Maturity Securities 2 0 2
Interest -bearing Due from Banks 2 (1) 1
Federal Funds Sold 34 6 40
Loans:
Real Estate Loans 157 (66) 91
Consumer (197) 168 (29)
Agricultural (16) 1 (15)
Commercial/Industrial 28 (22) 6
Other 6 (2) 4
Political Subdivisions (7) (3) (10)
Leases (0) 5 5
Total Loans (29) 81 52
Total Interest Income (68) 159 91
INTEREST-BEARING LIABILITIES
Interest Checking (24) (3) (27)
Money Market 92 18 110
Savings (16) 0 (16)
Certificates of Deposit 92 45 137
Individual Retirement Accounts (20) (148) (168)
Other Time Deposits (1) (2) (3)
Federal Funds Purchased 54 1 55
Other Borrowed Funds (287) 40 (247)
Total Interest Expense (110) (49) (159)
NET INTEREST INCOME 42 208 250
</TABLE>
10
<PAGE>
The change in interest due to both volume and rates has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar amount
of the change in each.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Losses is a reserve established by management
and the Board of Directors, which they believe will absorb future loan losses
based on management's assessment of the quality and volume of the loan
portfolio. The assessment is performed on an ongoing basis and reviewed by the
board of Directors quarterly.
The quarterly review process is performed by a loan quality committee consisting
of the President, Chief Financial Officer, Executive Vice-Presidents in charge
of loans and branch administration and monitored by the Corporation's auditor.
The committee reviews the "Watch List" (a collection of loans that have had a
history of delinquency), past due reports, nonperforming loans and historical
information related to charge-offs and recoveries by loan category.
The reserve balance is then allocated across the various loan categories to
determine the unallocated or excess reserve balance. The allocation is performed
using two different methods. The first method, a historical method based on five
years of information, calculates the ratio of average losses by type to the
average outstanding balance by type. The ratio is then applied to the current
outstanding balance of the various loan categories to determine the amount of
reserve to be allocated to the loan category. In addition to the historical
calculated amount, at times the committee will add additional amounts to the
calculated total if it is aware of a particular problem or the five-year average
is not representative of current conditions. The second allocation method
extracts loans by a quality rating system. The ratings are substandard, doubtful
and loss. Regulatory guidelines are then applied: 15 percent of the substandard
category, 50 percent of the doubtful classification and 100 percent of the loss
category loans.
Other factors used to measure the level of the reserve are loan growth, economic
conditions of the market area and peer group comparisons.
The Corporation also retains the services of an independent loan appraiser who
reviews all credit relationships in excess of $175,000 and loans of $100,000 or
more in offices where there is perceived to be excess delinquency. The latest
review was started on May 15, 1998 and concluded June 15, 1998. The results of
the latest review are disclosed in Table VI
The following tables present current and historical information on the loan
portfolio and the Reserve for Possible Loan Losses.
TABLE III
11
<PAGE>
Reserve for Possible Loan Losses Reconciliation
<TABLE>
<CAPTION>
Estimated Actual Actual Actual Actual Actual
Dec. 31, Jun. 30, Dec. 31, Dec. 31, Dec. 31, Dec 31,
1998 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
Beginning Balance January 1, $4,913,334 $4,913,334 $4,775,960 $4,579,210 $4,228,741 $3,816,982
Provision Charged to Earnings 763,416 381,708 797,032 700,500 736,500 737,496
Ea381708rnings
Year-to-Date Recoveries 125,000 66,119 124,407 167,926 187,473 194,312
Year-to-Date Charge-offs (900,000) (664,310) (784,065) (671,676) (573,504) (520,049)
Ending Balance $4,901,750 $4,696,851 $4,913,334 $4,775,960 $4,579,210 $4,228,741
</TABLE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
<TABLE>
<CAPTION>
TABLE IV - FIVE YEAR HISTORY OF LOAN LOSSES Projected
(In Thousands) 1998 1997 1996 1995 1994 1993 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loans * 298,838 285,426 278,639 264,182 258,472 238,755 265,086
Net Charge-offs 775 660 504 387 326 247 425
Allowance for Possible Loan Losses Balance 4,902 4,913 4,776 4,579 4,229 3,817 4,463
Provision for Loan Losses Charged to Earnings 768 797 701 737 737 708 736
Earnings 9,876 10,107 9,255 7,866 7,494 8,127 8,570
Earnings Coverage of Net Charge-offs 12.7 x 15.3 x 18.4 x 20.3 x 23.0 x 32.9 x 22
Allowance Coverage of Net Charge-offs 6.3 x 7.4 x 9.5 x 11.8 x 13.0 x 15.5 x 11
Loans Ninety Days or More Past Due and
Still Accruing 2,925 2,900 2,994 2,915 2,743 2,899 2,890
Net Charge-offs as a Percentage of the Provision 100.9% 82.8 % 71.9 % 52.5 % 44.2 % 34.9 % 57
Year-End Nonperforming Loans 1,200 1,412 864 279 624 843 804
Allowance as a Percentage of Gross Loans: *
Bank (1) March 31, 1998 1.64% 1.72 % 1.71 % 1.73 % 1.64 % 1.60 % 2
Peer Group (2) December 31, 1997 1.40% 1.43 % 1.50 % 1.61 % 1.65 % 1.82 % 2
* Gross Loans less Unearned Discount
</TABLE>
TABLE V - Reserve Allocation - Historical
<TABLE>
<CAPTION>
Est.
LOAN CLASSIFICATION
1998 1997 1996 1995 1994 1993 Average LossRatio Balance
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Agricultural, Municipal & 30,338 25,751 30,054 26,481 22,794 26,530 26,322 0.00115 X 30,338 = 35
Other
Real Estate - Mortgage 225,000 220,358 215,123 201,350 195,688 172,756 201,055 0.00043 X 225,000 = 97
Credit Card & Related Plans 10,000 9,084 8,902 9,934 9,896 9,212 9,406 0.01667 X 10,000 = 440
All Other Loans to Individuals 33,500 30,270 24,518 26,417 30,094 30,282 28,316 0.00587 X 33,500 = 262
Total Loans 298,838 285,426 278,639 264,182 258,472 238,755 265,099 0.00166 298,838
12
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Letter of Credit Commitments 5,500 5,012 5,106 2,633 4,415 5,046 4,442 0.00115 X 5,500 = 6
All Other Commitments
Consumer 30,000 27,728 28,049 24,811 24,202 23,323 25,623 0.00587 X 30,000 = 176
Mortgage 11,000 10,497 5,802 7,276 9,566 9,466 8,521 0.00043 X 11,000 = 5
Commercial 13,000 13,045 10,825 10,201 9,901 9,790 10,752 0.00115 X 13,000 = 15
Impaired Loans 500 274 113 228 500
Total Allocated 1,536
Unallocated 3,366
Reserve Balance 4,902
</TABLE>
The reserve balance allocation ratio is determined using the six-year average
net charge-offs divided by the six-year average loan balance by type.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
TABLE VI -Reserve Allocation Based on Regulatory Standards May 15,
1998 as compiled by the independent loan appraiser.
<TABLE>
<CAPTION>
Loan Classifications Total Classified Loans Allocation
- ------------------------------------------
<S> <C> <C>
Substandard 15 % $7,959,216 $1,193,882
Doubtful 50 % 1,060,290 530,145
Loss 100 % 13,289 13,289
FASB 114 Allocation 397,209
-------
Required Reserve 2,134,525
Unallocated 2,562,326
---------
Total Reserve 4,696,851
---------
---------
</TABLE>
13
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition
and
Results of Operations (Continued)
<TABLE>
<CAPTION>
Six-Month Periods Ended
June 30, June 30, % $
1998 1997 Change Change
<S> <C> <C> <C> <C>
Service Charges on Deposit Accounts $ 514 $ 540 (4.8) ($26)
Service Charges and Fees 139 131 6.1 8
Trust Department Income 645 510 26.5 135
Insurance Commissions, Fees and Premiums 197 233 (15.5) (36)
Other Operating Income 59 363 (83.7) (304)
Total Other Operating Income before Realized
Gains on Securities, Net 1,554 1,777 (12.5) (223)
Realized Gains on Securities, Net 2,614 807 223.9 1,807
Total Other Income $4,168 $2,584 61.3 $1,584
</TABLE>
<PAGE>
Total Other Operating Income before Realized Gains on Securities decreased 13
percent or $223,000 during the six-month period ended June 30, 1998 when
compared to the six-month period ended June 30, 1997. The decrease was caused by
the recognition of extraordinary income from the sale of a copyright or
trademark. the before-tax effect was $301,000. A comparison of the six-month
periods ended June 30, 1998 and December 31, 1997 reflect an increase of 8
percent. Categories of Other Operating Income include Service Charges on Deposit
Accounts, Other Service Charges and Fees, Trust Department Income, Bucktail Life
Insurance Co. Premiums and Other Operating Income.
Service Charges on Deposit Accounts, consisting of account activity charges and
overdraft charges, has declined slightly during the past two years. During the
six-month periods ended June 30, 1997, December 31, 1997 and June 30, 1998
monthly service charges generated amounted to $90,000, $89,000 and $86,000 ,
respectively. The fees consistently average about 56 percent service charges and
44 percent overdraft fees. The decrease is due to a decline in the number of
daily overdrafts and an increase in the number of customers utilizing Money
Market Accounts, free payroll accounts and senior citizens accounts. Payroll
accounts are free if direct deposit is utilized; the total number of accounts
has increased by nearly 600 since June 30, 1997. Also, the number of free
accounts offered to senior citizens has risen dramatically during the past year.
Service Charges and Fees, consisting of debit card fees, credit card annual
fees, official check sales and check cashing fees, has not changed significantly
when comparing the six-month periods ended June 30, 1997, December 31, 1997 and
June 30, 1998. Those fees average between $23,000 and $25,000 per month.
Trust Department Income is the largest contributor to Other Operating Income and
has posted a gain of 26 percent or $135,000 during the six-month period ended
June 30, 1998 when compared to the same period in 1997. The gain was even more
impressive at 31 percent or $151,000 when comparing the current six-month period
to the six-month period ended December 31, 1997. The significant increase posted
during the current period is directly related to the amount of trust assets
under management. For the periods ended June 30, 1998, June 30, 1997 and
December 31, 1997, trust assets under management amounted to $260,554, $211,841
and $229,500, respectively. The growth in trust assets is the result of an
aggressive sales program and increases in the market values of account holdings.
Insurance Commissions, Fees and Premiums decreased $36,000 when comparing the
six-month periods ended June 30, 1998 and June 30, 1997 and $32,000 when
comparing the six-month periods ended June 30, 1998 and December 31, 1997. The
decrease is the result of a lack of loan activity and alternate sources of
credit life and accident and health insurance.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Other Operating Income is made up primarily of safe deposit box rentals,
earnings or losses on the "Supplemental Employees Retirement Plan" ("SERP") and
gains received on the sale of bank assets. The amounts reflected for the periods
ended June 30, 1998, June 30, 1997 and December 31, 1997 were $$59,000, $363,000
and $21,000, respectively. The fluctuation in the recorded amounts is due to the
timing of the posting of "SERP" income and the variance in "SERP" income caused
by fluctuations in the balance of the "SERP" plan. Normally, Other Operating
Income will average $12,000 to $15,000 per quarter. Also, during the six-month
period ended June 30, 1997 $301,000 in extraordinary income was realized from
the sale of a Corporation trademark.
Realized Securities Gains during the six-month period ended June 30, 1998
amounted to $2,614,000. A substantial portion, or $1,711,000, was due to the
sale of stock that was carried on the books at $1.00. The stock was acquired as
collateral on a defaulted loan in 1919. The Corporation was recently liquidated
with the resulting gain. The balance of the realized gains are from the sale of
equity investments that management felt would be prudent to realize the gain on
the holdings. Also included were losses amounting to $49,000 that were part of a
small restructuring of the available-for-sale investment portfolio. During the
six months ended June 30, 1997 realized gains on the sale of equity investments
totaled $807,000. Also during the six months ended December 31, 1997 realized
gains on equity investments amounted to
15
<PAGE>
$194,000. Gains realized on equity investments are part of the total investment
return on equity securities, which include both dividends appreciation.
Dividends alone from equity investments are inadequate to compensate the
Corporation for its investment.
<TABLE>
<CAPTION>
Six-month Periods Ended
June 30, June 30, % $
1998 1997 Change Change
<S> <C> <C> <C> <C>
(In Thousands)
Salaries and Wages $3,195 $2,966 7.7 $229
Pensions and Other Employee Benefits 871 870 0.1 1
Occupancy Expense, Net 414 355 16.6 59
Furniture and Equipment Expense 392 335 17.0 57
Other Operating Expense 3,154 3,026 4.2 128
Total Other Expense $8,026 $7,552 6.3 474
</TABLE>
Salaries and Wages increased 7.7 percent or $229,000 during the six-month period
ended June 30, 1998 when compared to the six-month period ended June 30, 1997.
The increase is the result of annual merit raises as the number of full time
equivalent employees ranges between 197 to 202. When comparing the salaries and
wage totals for the six-month periods ended June 30, 1998 and December 31, 1997,
the increase amounted to $186,000 or 6 percent.
Pensions and Other Employee Benefits consists primarily of social security
taxes, group life and health insurance, contributions to the 401 (k) plan and
pension expense. The cost of Pensions and Other Employee Benefits did not change
between the six-month periods ended June 30, 1998 and June 30, 1997. A
comparison of the six-month periods ended June 30, 1998 and December 31, 1997
reflects an increase of $50,000 or 6 percent. The primary cause was a decrease
in social security expense and year-end adjustments to the 401 (k) Plan.
Occupancy Expense, consisting of insurance, maintenance, real estate taxes,
depreciation and other utilities, increased 16 percent or $59,000 when comparing
the six-month periods ended June 30, 1998 and June 30, 1997. The increase was
due to increased depreciation costs caused by the replacement of roofs on two
branch offices, an extensive remodeling of one of the branch locations and ATM
site preparation. An adjacent property was also purchased at our Wellsboro
location at a cost of $75,000. When comparing the six-month periods ended June
30, 1998 and December 31, 1997 the increase amounted to 9 percent or $32,000 due
an increase in depreciation and increased maintenance costs.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
Furniture and Equipment Expense has also increased $57,000 or 17 percent when
comparing the six-month periods ended June 30, 1998 and June 30, 1997. The
increase is due to the replacement of several vehicles and the purchases of a
statement folder inserter, a new data card embosser and a new item processing
image storage system. The combined cost of the equipment was in excess of
$150,000. A comparison of the six-month periods ended June 30, 1998 and December
31, 1997 reflects a minimal increase of only $4,000. It is expected that for the
balance of 1998 equipment maintenance will increase significantly with the
recent installation of ten ATMs and plans for the installation of three or four
additional machines.
Other Operating Expense increased 4 percent or $128,000 when comparing the
six-month period ended June 30, 1998 to the same period ended June 30, 1997.
Other Operating Expense is comprised of several components, the largest
components are the Pennsylvania Shares Tax and credit card expense; combined
they constitute just over half of Other Operating Expense. Those components
posted a combined increase of 13 percent or $193,000 when the six-month
16
<PAGE>
periods ended June 30, 1998 and June 30, 1997 are compared. When comparing the
six-month periods ended June 30, 1998 and December 31, 1997 those same
expenditures increased slightly over 6 percent or $99,0000. The increased credit
card costs are the result of increases in credit card interchange fees or
increased merchant usage fees. It should be noted that the increase in
interchange fees is more than offset in increased income The increase in
Pennsylvania Shares Tax is due to bank earnings and an increase in the market
value adjustment of the Bank's investment portfolio. Also included in Other
Operating Expense are expenses related to Bucktail Life Insurance Company, a
subsidiary of Citizens & Northern Corporation. Expenses incurred by the
subsidiary dropped $121,000 between the comparable six-month periods due to the
decline in underwriting business. There were no other material increases in
expenses classified as Other Operating Expense.
The Corporation continually monitors Other Operating Expense and has been
successful in holding those expenses to a minimum.
STATEMENT OF CONDITION
Average total assets of the Corporation were $619,427,000 and $604,380,000 for
the six-month periods ended June 30, 1998 and June 30, 1997, respectively. The
increase in average assets between the two periods can be attributed to an
increase in average deposits of $6,700,000 and an increase in the market value
adjustment of the investment portfolio. When comparing the year ended December
31, 1997 to the six-month period ended June 30, 1998 average total assets
increased $11,150,000, which also is attributable to an increase in the market
value adjustment of the investment portfolio. Unrealized gains included in total
assets for the periods ended June 30, 1998, December 31, 1997 and June 30, 1997
amounted to $20,040,000, $9,907,000 and $6,537,000, respectively.
The asset structure of the Corporation changed very little during the periods
being compared; average total available-for- sale securities changed less than 1
percent. The mix of investments making up the available-for-sale investment
portfolio did change however. Due to the high volume of prepayments and a
restructuring caused by declining interest rates, the average portfolio of
mortgage-backed investments decreased $64,361,000 between June 30, 1997 and June
30, 1998. The decline between December, 31, 1997 and June 30, 1998 amounted to
$47,680,000. The restructuring occurred in February of 1998 with the sale of
approximately $27,000,000 of higher coupon mortgage-backed investments purchased
at substantial premiums. The amortization of the premiums caused the yield on
those investments to decline significantly. The loss booked as a result of the
sale amounted to just over $49,000. The sold investments were replaced with U.
S. Agency instruments, primarily Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation instruments.
For tax purposes the portfolio of tax free municipal bonds has been grown by 13
percent between June 30, 1997 and June 30, 1998. The Corporation continuously
monitors its regular versus alternate minimum federal income tax to take
advantage of attractive tax free rates.
The loan portfolio has remained nearly unchanged both in total loans and make-up
of total loans. Real estate secured loans still comprise nearly 80 percent of
total loans. The average loan-to-deposit ratio of the Corporation for the
six-month period ended June 30, 1998 was 64 percent. Loan demand has shown some
improvement since June 30, 1998; at this writing total loans amount to just over
$288,000,000.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
The Corporation has installed 10 new automated teller machines at strategic
locations in the market area with an additional 3 or 4 units scheduled for
installation later this year. Also, the Corporation has begun the construction a
new office in Mansfield, Pennsylvania. The new office is scheduled to open in
September or October 1998 and will cost approximately $350,000 to $450,000.
On the liability side of the balance sheet the growth of interest-bearing
deposits June 30, 1997 through June 30, 1998 has been relatively flat at less
than 1 percent. The Money Market accounts and Certificates of Deposit have shown
some growth due to aggressive marketing efforts and higher rates. Average demand
deposits balances have shown significant
17
<PAGE>
growth, increasing 8 percent between the periods ended June 30, 1997 and June
30, 1998. The growth can be attributed to the opening of nearly 3,500 new
accounts since June 30, 1997.
Management expects that 1998 will bring continued competition for deposits from
credit unions, brokerage houses and other nonbank competitors and it will
continue to look for innovative deposit products to hold current customers and
attract new business.
Average borrowed funds has declined 9 percent between the comparable periods
primarily because of the lack of investment opportunities with the flatness of
the yield curve.
LIQUIDITY
Liquidity is the ability to raise cash quickly and at a reasonable cost. An
adequate liquidity position permits the Corporation to pay creditors, compensate
for unforeseen deposit fluctuations and fund unexpected loan demand. Daily
deposit decreases normally do not exceed $4,000,000 to $6,000,000 and new loan
advances net of loan repayments has not been significant.
In addition to the daily sources of cash, such as loan repayments, amortization
of mortgage-backed investments, maturing bonds and deposit growth, the
Corporation has several additional sources of liquidity: the sale of assets
(primarily available-for-sale investment securities), short-term or long-term
borrowing. Sources of borrowing include the Federal Home Loan Bank of Pittsburgh
and several correspondent bank relationships.
INTEREST RATE RISK AND MARKET RISK
The risk that arises from changes in interest rates is an inherent factor in
operating a bank. The risk associated with changes in interest rates is two
fold: the risk to earnings and the risk to the market values of assets and
liabilities.
From an earnings risk perspective, an asset sensitive institution (positive gap)
will normally benefit from rising rates and a liability sensitive (negative gap)
will benefit from falling interest rates. Citizens & Northern Corporation uses a
simulation model that calculates earnings under varying interest rate shock
scenarios, most commonly up 100, 200 and 300 basis points and the same rate
scenarios in a falling rate environment. The Asset and Liability Committee and
the Board of Directors have established a 20 percent decrease in net interest
income as a parameter at a 200 basis point (2 percent) increase in interest
rates. The model is run monthly using the current maturity schedule of the
Corporation's assets and liabilities and certain prepayment assumptions.
The risk associated with interest rate increases and decreases as they relate to
the market value of the assets and liabilities of the Corporation are also
calculated using the same model and the same rate shock of plus and minus 100,
200, and 300 basis point swings in rates. Market values are estimated by
applying present value calculations to the cash flow generated by the
Corporation's balance sheet. The Asset and Liability Committee and Board of
Directors have also imposed a market loss limit of 25 percent at a 200 basis
point rate shock.
The model utilized to create Table IX makes estimates, at each level of interest
rate change, regarding cash flows from principal repayments on loans and
mortgage-backed securities and call activity on other investment securities.
Actual results could vary significantly from these estimates which could result
in significant differences in the calculation of projected changes in net
interest margin and market value of portfolio equity. Also, the model does not
make estimates related to changes in the composition of the deposit portfolio
that could occur due to rate competition and the table does not necessarily
reflect changes that management would make to realign the portfolio as a result
of changes in interest rates.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
TABLE IX - EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
NIM = Net Interest Margin
MVPE = Market Value of Portfolio Equity
(In Thousands)
<TABLE>
<CAPTION>
At June 30, 1999 At June 30, 1998
18
<PAGE>
Estimated Estimated Estimated Estimated
Change in Estimated Change in Change in Estimated Change in Change in
Interest Rates NIM NIM NIM MVPE MVPE MVPE
(Basis Points) $ $ % $ %
<S> <C> <C> <C> <C> <C> <C>
Plus 300 20,722 (3,202) -13.38 57,929 (25,716) -30.74
Plus 200 21,840 (2,083) -8.71 66,287 (17,358) -20.75
Plus 100 22,894 (1,030) -4.30 74,782 (8,863) -10.60
Flat 23,924 83,645
Minus 100 24,820 897 3.75 92,386 8,741 10.45
Minus 200 25,558 1,635 6.83 101,058 17,413 20.82
Minus 300 26,277 2,354 9.84 109,868 26,223 31.35
</TABLE>
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists of restricted stock,
primarily of the Federal Home Loan Bank of Pittsburgh ("FHLB") and investments
in stock of banks and bank holding companies located mainly in Pennsylvania.
FHLB stock can only be sold back to the FHLB or to another member institution at
par value. Accordingly, the Corporation's investment in FHLB stock is carried at
cost, which equals par value, and is evaluated for impairment. Factors that
might cause FHLB stock to become impaired are primarily regulatory in nature and
are related to potential problems in the residential lending market; for
example, the FHLB may be required to make dividend or other payments to the
Financing Corporation, the Resolution Funding Corporation, or other entities, in
amounts that could exceed the FHLB's total equity.
Investments in bank stocks are subject to the risk factors that affect the
banking industry in general, including competition from nonbank entities, credit
risk, interest rate risk and other factors, that could result in a decline in
market prices. Also, losses could occur in individual stock held by the
Corporation because of specific circumstances related to each bank. Further,
since the stocks held are bank and bank holding companies concentrated in
Pennsylvania, these investments could decline in market value if there is a
downturn in the state's economy.
Equity securities held as of June 30, 1998 and June 30, 1997 are presented in
Table X.
TABLE X - EQUITY SECURITIES
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % Decline 20 % Decline
In In
(In Thousands) Fair Market Market
At June 30, 1998 Cost Value Value Value
<S> <C> <C> <C> <C>
Bank & Bank Holding Companies $14,911 $33,554 $(3,355) $(6,711)
Fed. Home Loan Bank and Other Restricted Stocks 4,152 4,152 (415) (830)
Total $19,063 $37,706 $(3,770) $(7,541)
</TABLE>
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % Decline 20 % Decline
In In
(In Thousands) Fair Market Market
At June 30, 1997 Cost Value Value Value
<S> <C> <C> <C> <C>
Bank & Bank Holding Companies $11,564 $23,581 $(2,358) $(4,716)
Fed. Home Loan Bank and Other Restricted Stocks 3,361 3,361 (336) (672)
Total $14,925 $26,942 $(2,694) $(5,388)
</TABLE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
<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 tier or tier one capital consists primarily of common stock, retained
earnings, surplus and non-cumulative perpetual preferred stock. Tier two
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 one; the
remainder may be tier two. The total risk-based capital ratios at June 30, 1998,
June 30, 1997 and December 31, 1997 were 23.91 percent, 22.92 percent and 22.98
percent, respectively.
The primary source of capital growth for the Corporation is earnings. Capital
growth for the six-month period ended June 30, 1998 and June 30, 1997 on an
annualized basis was 10.06 percent and 10.42 percent, respectively; capital
growth for the year ended December 31, 1997 was 9.7 percent.
Total capital of the Corporation (excluding unrealized gains on
available-for-sale securities) at June 30, 1998, June 30, 1997 and December 31,
1997 was $75,854,000, $69,257,000 and $72,200,000, respectively.
The leverage ratio (capital divided by total liabilities), excluding unrealized
gains on available-for-sale securities, at June 30, 1998, June 30, 1997 and
December 31, 1997, was 14.1 percent, 13.1 percent and 13.6 percent,
respectively.
Planned capital expenditures, including the new Mansfield office and main frame
computer upgrade, during the next 12 months will amount to an estimated $500,000
to $750,000. These capital expenditures will not have a detrimental effect on
capital ratios or results of operations.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
20
<PAGE>
YEAR 2000 COMPLIANCE
The "Year 2000" or "Y2K" problem is a computer problem that began when computers
began to store and process information. The problem occurs as a result of the
date format used in most older software and older computers. The year has often
been stored as a two digit number, e.g., 1998 as 98. When the date rolls forward
to 2000, most computers and computer software will look at the date as 00 or
1900. This could have a major impact on many calculations if not corrected.
Citizens & Northern Corporation began working on the problem in 1996 and changes
to mission critical mainframe computer software making it year 2000 complaint
are nearly complete. Testing is to begin in August of this year and expected to
be completed by December 31, 1998.
It is difficult to estimate the total cost of compliance since the work has been
done in-house and over a very long period of time. The main frame computer and
network modems will be replaced in late 1998 or early 1999 at a cost of about
$300,000. Several PCs and PC software will be replaced, and item processing
software will have to be updated. The cost of PC replacement is estimated to be
between $50,000 and $75,000 software upgrades will probably be equal to that.
Citizens & Northern Corporation has ascertained through correspondence that
most of its significant vendors are Year 2000 compliant. The Corporation is in
the process of contacting its larger commercial loan customers and has held a
seminars to discuss and explain the problem to interested customers.
INFLATION
Inflation affects nearly every aspect of banking, primarily interest rates. The
effect of inflation, when it is high, also has an impact on the cost of goods,
such as supplies, services and labor. Growth in the consumer Price Index for
1998 is projected at about 2 percent which is considered not to be inflationary.
In essence, inflation does not appear to be a problem in the near-term and
should not impact the results of operations for the balance of 1998.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part II - Other Information
21
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part II - Other Information
Item 1. Legal Proceedings
There are currently no pending lawsuits against Citizens & Northern Corporation.
Item 4. Submission of matters to a vote of security holders.
The Annual Meeting of Shareholders of Citizens and Northern Corporation
was held on Tuesday, April 21, 1998. The Board of Directors fixed the close of
business on March 9, 1998 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and any
adjournment thereof. On this record date, there were outstanding and entitled to
vote 5,114,234 shares of Common Stock.
The total number of votes cast were 3,883,878. 2,393 were voted in
person by owners or representatives and 3,881,485 were voted by proxy for the
following purposes and with the following results.
1. The election of the following as Class II Directors to serve
for a term of three years:
<TABLE>
<CAPTION>
<S> <C>
R. Bruce Haner Leonard Simpson
Susan E. Hartley Donald E. Treat
Edward L. Learn
</TABLE>
The total votes in favor of any one of the above-listed
Directors were not less than 3,841,257.
2. The ratification of the action of the Board of Directors in the
appointment of the firm of Parente, Randolph, Orlando Carey and Associates as
independent auditors of the Corporation.
<TABLE>
<CAPTION>
<S> <C>
Total Votes in Favor 3,861,816
Total Votes Against 7,247
Total Votes Abstained 14,815
</TABLE>
Item 5. Other Events
a. None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits filed as a part of this report - None
b. No reports on Form 8 - K were filed during the period ended March 31,
1998.
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Signature Page
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
August 6, 1998 By: /s/ Craig G. Litchfield
- -------------- -------------------------------------
Date President and Chief Executive Officer
August 6, 1998 By: /s/ James W. Seipler
- -------------- --------------------------------------
Date Executive Vice President and Treasurer
23
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16348
<INT-BEARING-DEPOSITS> 666
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<LOANS> 286164
<ALLOWANCE> 4697
<TOTAL-ASSETS> 626498
<DEPOSITS> 445453
<SHORT-TERM> 30400
<LIABILITIES-OTHER> 8995
<LONG-TERM> 50652
0
0
<COMMON> 5220
<OTHER-SE> 84755
<TOTAL-LIABILITIES-AND-EQUITY> 626498
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</TABLE>
