<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-16084
DECEMBER 31, 1997
</TABLE>
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, 1998:
<TABLE>
<S> <C>
$1.00 Par 5,114,229
Value Shares
</TABLE>
The aggregate market value of the registrant's common stock held by
non-affiliates at March 1, 1998: $180,276,572 (a date within 60 days of the date
hereof
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from the Registrant's 1997 Annual Report to Shareholders are
incorporated herein by reference in response to Part II, hereof. The
Registrant's definitive Proxy Statement to be used in connection with the 1998
Annual Meeting of shareholders is incorporated herein by reference in partial
response to Part III, hereof.
<TABLE>
<CAPTION>
LOCATION IN FORM 10-K INCORPORATED INFORMATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
PART II
- --------------------------------------------------------
Item 5. Market for Registrant's Common Stock and Related Page 42 of the Annual Report
Stockholder Matters
Item 6. Selected Financial Data Pages 42 and 43 of the Annual Report
Item 7. Management's Discussion and Analysis of the Page 27 through 44 of the Annual Report
Financial Condition and Results of Operations
Item 7a Quantitative and Qualitative Disclosures about Pages 39 and 40 of the Annual Report
Market Risk
Item 8. Financial Statements and Supplementary Data Pages 6 through 23 and 42 through 45 of the Annual
Report
<CAPTION>
PART III
- --------------------------------------------------------
<S> <C>
Item 10. Directors and Executive Officers of the Page 2 through 5 of the Proxy Statement
Registrant
Item 11. Executive Compensation Page 5 through 9 of the Proxy Statement
Item 12. Security Ownership of Certain Beneficial Owners Page 3 through 5 of the Proxy Statement
and Management
Item 13. Certain Relationships and Related Transactions Page 21 of the Annual Report
Page 12 of the Proxy Statement
</TABLE>
Number of pages, not including Cover Page, is 11
2
<PAGE>
PART I
ITEM 1. BUSINESS
The information appearing in the Annual Report under the caption
"Description of Business" on page 45 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
Information relating to the location of banking offices is located on page
46 of the Annual Report of the Corporation and is herein incorporated by
reference.
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.
3
<PAGE>
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 42 and the "Summary of Quarterly Financial Data" on page 44
is herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Summary of Operations" on page 43 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 27 through 44, 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.
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 23, 1998, 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 23, 1998, is herein incorporated
by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" on page 8
of the Corporation's Proxy Statement dated March 23, 1998, 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 5 through 7 of the Corporation's Proxy Statement is herein incorporated by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS
Information appearing in footnote 13 to the Consolidated Financial
Statements included on page 21 in the Annual Report is herein incorporated by
reference.
4
<PAGE>
Information appearing under the caption "Certain Transactions" on page 12 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.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Certified Public Accountants..................................... 24
Financial Statements:
Consolidated Balance Sheet--December 31, 1997 and 1996............................... 6
Consolidated Statement of Income--Years Ended December 31, 1997, 1996 and 1995....... 7
Consolidated Statement of Changes in Stockholders' Equity --Years Ended December 31,
1997, 1996 and 1995................................................................ 8
Consolidated Statement of Cash Flows--Years Ended December 31, 1997, 1996 and 1995... 9
Notes to Consolidated Financial Statements........................................... 8-23
</TABLE>
(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)
<TABLE>
<C> <S> <C>
2. Plan of Acquisition, Reorganization, Arrangement, Not
Liquidation or Succession 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 10
22. Published Report Regarding Matters Submitted to Vote of Not
Security Holders applicable
23. Consents of Experts and Counsel Not
applicable
24. Power of Attorney Not
applicable
27. Financial Data Schedules None
28. Information from Reports Furnished to State Insurance Not
Regulatory Authorities applicable
99. Additional Exhibits Not
applicable
</TABLE>
5
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
1997.
*omitted in the interest of brevity
6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
<TABLE>
<C> <C> <S> <C>
March 19, 1998 /S/ CRAIG G. LITCHFIELD
------------------- --------------------------------
Date Craig G. Litchfield
PRESIDENT AND CHIEF EXECUTIVE OFFICER
By:
</TABLE>
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.
<TABLE>
<C> <C> <S> <C>
March 19, 1998 /S/ JAMES W. SEIPLER
------------------- --------------------------------
Date James W. Seipler
By: TREASURER
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
BOARD OF DIRECTORS
/s/ J. ROBERT BOWER /s/ JOHN H. MACAFEE
- ------------------------------
------------------------------
J. Robert Bower John H. Macafee
/s/ R. ROBERT DECAMP /s/ LAWRENCE F. MASE
- ------------------------------
------------------------------
R. Robert DeCamp Lawrence F. Mase
/s/ R. JAMES DUNHAM /s/ ROBERT J. MURPHY
- ------------------------------
------------------------------
R. James Dunham Robert J. Murphy
/s/ ADELBERT E. ELDRIDGE /s/ EDWARD H. OWLETT, III
- ------------------------------
------------------------------
Adelbert E. Eldridge Edward H. Owlett, III
/s/ WILLIAM K. FRANCIS /s/ F, DAVID PENNYPACKER
- ------------------------------
------------------------------
William K. Francis F, David Pennypacker
/s/ KARL W. KROECK /s/ LEONARD SIMPSON
- ------------------------------
------------------------------
Karl W. Kroeck Leonard Simpson
/s/ EDWARD L. LEARN /s/ DONALD E. TREAT
- ------------------------------
------------------------------
Edward L. Learn Donald E. Treat
/s/ CRAIG G. LITCHFIELD
- ------------------------------
Craig G. Litchfield
</TABLE>
8
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
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
23.1 Consert of Parente, Orlando, Carey, & Associates
</TABLE>
9
<PAGE>
EXHIBIT 13
TO OUR SHAREHOLDERS:
The year 1997 was a very successful one for the shareholders of
Citizens & Northern. Your company achieved record earnings due to the commitment
and hard work of the directors, officers and employees.
C & N'S MISSION
As a community-based financial services provider, C & N serves the
needs and interests of four major constituencies: our SHAREHOLDERS, our
CUSTOMERS, our COMMUNITIES, and our EMPLOYEES. Creating shareholder value can
only be achieved through commitment to serving the needs of our customers and
communities of which we are a part. Serving the needs of the customers and
communities can only be reached with well-trained and competent employees, who
are focused on providing the best personal service found anywhere. Management's
role is to provide employees with the necessary support, coaching and strategic
direction, which will empower them to take personal responsibility for
fulfilling our customers' financial services needs.
1997 FINANCIAL HIGHLIGHTS
Last year was another record year for Citizens & Northern Corporation.
Net after-tax income rose by 9.2% to $10.1 million, or $1.98 per share (basic),
and $1.97 (diluted) the highest in C & N's 133-year history. This translates to
a Return-On-Average-Assets of 1.66% and a Return-On-Equity of 14.56%.
A non-recurring income item contributed somewhat to the increased
income for 1997. We received a payment in excess of $301,000 for a trademark,
which we had been using on our Debit Cards and, other electronic delivery
products. Of course, we incurred related expenses approaching $100,000 to
replace marketing materials and debit cards that used the trademark.
Additionally, we had an increase in net before-tax security gains over 1996 of
$526,000.
Shareholder dividends on a historical basis increased to 74 cents per
share in 1997 compared to 69 cents in 1996, an increase of 7.2%. The last trade
price in 1997 for Citizens & Northern Corporation stock was $33.50, which is an
$8.00 increase over the last trade price in 1996 for a share value increase of
over 31%. Shareholders of record for the last dividend of 1997 also received a
1% stock dividend.
Total assets as of December 31, 1997 increased modestly to $615.3
million. Total year-end deposits were up by nearly $12 million, or 2.78%, from
the previous year. Total loans rose $6.8 million, or 2.44%, over the same
period. Stockholders' Equity before net unrealized gains on available-for-sale
securities rose over $6.3 million, or 9.7%. A strong equity position provides
your bank with opportunities to grow and to handle unexpected adverse economic
situations.
We were pleased that the annual FDIC Summary of Deposits as of June 30,
1997 indicated that our market share of deposits in each of the four counties we
serve again increased. C & N continues to have the greatest market share of bank
deposits in Bradford, Sullivan and Tioga counties.
NEW PRODUCTS & SERVICES
At the beginning of 1997, we began offering Telephone Banking
(1-717-724-3000). This service provides customers with 24-hour telephone access
to information about their accounts, to transfer funds between accounts, and to
make loan payments. Usage of this service continues to increase. We are now
seeing over 3,500 Telephone Banking transactions per month.
During 1997, we began offering our own Home Equity Line of Credit. This
product has a very attractive variable rate and is unique in its ability to be
tailored to each customer's needs. We believe this service will grow to be a
substantial portion of our customer loan portfolio.
Plans began in 1997 for the installation of C & N's first Automated
Teller Machines. It is our intention to have nine ATMs operating throughout our
market area before April 1, 1998. ATMs are expensive but necessary service
delivery devices. We believe they will enable us to maintain and increase our
profitable deposit base and market share.
TRUST AND FINANCIAL SERVICES
The Trust and Financial Services Division of Citizens & Northern Bank
continued its growth in assets-under-management and revenue generated. Despite
the transfer of a $20 million account early in 1997, the total market value of
1
<PAGE>
trust assets-under-management increased 3% from $222.5 million to $229.5
million. Trust Department income increased 17.8% to over $1 million last year.
The employee retirement benefit and investment management services
products offered by our Trust Division continue to enjoy significant growth in
assets-under-management and number of accounts. The highly respected Frank
Russell Mutual Funds and our Trust Division's own cutting-edge equity investment
strategy have both provided excellent investment returns for our Trust and
Financial Services customers.
YEAR 2000 STRATEGY
There has been and will continue to be much media attention directed at
the serious concerns with problems which could occur with computers and other
automated systems when we reach the year 2000.
Since early 1997, the staff in our Management Information Systems
Department has led a group of employees from all areas of the bank through the
design and implementation of a complete and thorough action plan, which prepares
C & N for changes we need to make for the year 2000. We are well along in the
process and believe that the bank and all of its systems will be 2000 compliant
by late 1998. During 1999, we will retest all our systems to assure complete
compliance with the year 2000 issues. Early in January 1998, an on-site review
of our year 2000 strategy by the FDIC confirmed that our actions are on schedule
and appropriate.
RETIREMENT, NEW STAFF
Last year marked the retirement of Twila starr of our Laporte
Office. Twila retired after 32 years with the bank. We wish her a happy and
fulfilling retirement.
As 1998 began, we welcomed two new people to serve our Towanda area
customers and prospects. James E. Parks is our new Vice President and Towanda
Branch Manager and Deborah Scott has joined us as the new Bradford and
Sullivan area Vice President and Trust Officer.
Jim Parks has spent the previous 25 years with other area banking
institutions. Debbie Scott has 17 years of banking and trust experience. Both
are headquartered at our Towanda Office. We believe their commitment to
customer needs in the Towanda and Bradford/Sullivan area will result in
additional valuable banking and trust relationships.
MARKETING FOCUS
During 1997, we developed a new marketing strategy and action plan.
We will be implementing changes and actions set forth in the plans throughout
1998 and beyond. These strategies and actions will maintain and increase
C&N's market share.
OUR PEOPLE. OUR FUTURE
We are committed to maintaining a well-trained, dedicated staff. We
believe that we are differentiated from our competitors by the quality of our
service and the strength of the relationships our experienced people build
with our customers and communities.
Our strong capital position, our exceptional earnings and our
technological resources combine to position Citizens & Northern Bank to best
serve the current and future interests of our constituents.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data) December 31, December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash & Due From Banks
Noninterest-Bearing $ 13,449 $ 14,320
Interest-Bearing 804 655
- -----------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 14,253 14,975
Available-for-Sale Securities 306,587 307,853
Held-to-Maturity Securities
(Estimated fair value of $1,623 and $1,579 in 1997 and 1996, respectively) 1,597 1,569
Loans, Net 280,513 273,821
Bank Premises and Equipment, Net 6,720 6,609
Foreclosed Assets Held for Sale 230 583
Accrued Interest Receivable 4,808 4,404
Other Assets 645 378
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $615,353 $610,192
===================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $ 46,916 $ 47,320
Interest-Bearing 395,340 382,991
- -----------------------------------------------------------------------------------------------------------------------------------
Total Deposits 442,256 430,311
Dividends Payable 1,013 902
Borrowings on Short-Term Line of Credit 10,000 ----
Federal Home Loan Bank Borrowings 40,661 59,600
Other Borrowed Funds 29,800 44,650
Accrued Interest and Other Liabilities 6,088 3,136
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 529,818 538,599
STOCKHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,168 5,117
Authorized 10,000,000; Issued 5,168,354 and 5,117,182 in 1997 and 1996, respectively
Stock Dividend Distributable 1,706 1,305
Paid in Capital 13,799 12,539
Retained Earnings 52,519 47,862
- -----------------------------------------------------------------------------------------------------------------------------------
Total 73,192 66,823
Net Unrealized Gain on Available-for-Sale Securities 13,335 5,767
Less: Treasury Stock at Cost
105,311 shares at December 31, 1997 (992)
104,850 shares at December 31, 1996 (997)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 85,535 71,593
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $615,353 $610,192
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
INTEREST INCOME
<S> <C> <C> <C>
Interest and Fees on Loans $28,660 $27,574 $26,118
Interest on Balances with Depository Institutions 54 37 55
Interest on Loans to Political Subdivisions 391 424 421
Interest on Federal Funds Sold 334 60 79
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 14,361 15,943 15,151
Tax Exempt 3,595 3,012 2,667
Dividends 874 872 690
- ----------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 48,269 47,922 45,181
- ----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 18,292 17,775 18,831
Interest on Other Borrowings 5,020 5,676 5,646
- ----------------------------------------------------------------------------------------------------------------
Total Interest Expense 23,312 23,451 24,477
- ----------------------------------------------------------------------------------------------------------------
Interest Margin 24,957 24,471 20,704
Provision for Possible Loan Losses 797 701 737
- ----------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 24,160 23,770 19,967
- ----------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 1,076 1,124 1,117
Service Charges and Fees 281 269 273
Trust Department Income 1,004 852 726
Insurance Commissions, Fees and Premiums 462 555 620
Other Operating Income 384 47 60
- ----------------------------------------------------------------------------------------------------------------
Total Other Income before Realized Gains on Securities, Net 3,207 2,847 2,796
Realized Gains on Securities, Net 1,001 475 1,675
- ----------------------------------------------------------------------------------------------------------------
Total Other Income 4,208 3,322 4,471
- ----------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and Wages 5,975 5,887 5,385
Pensions and Other Employee Benefits 1,691 1,709 1,618
Occupancy Expense, Net 726 721 698
Furniture and Equipment Expense 723 726 675
Other Operating Expense 5,980 5,643 5,703
- ----------------------------------------------------------------------------------------------------------------
Total Other Expenses 15,095 14,686 14,079
- ----------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 13,273 12,406 10,359
Income Tax Provision 3,166 3,151 2,493
- ----------------------------------------------------------------------------------------------------------------
NET INCOME $10,107 $ 9,255 $ 7,866
================================================================================================================
NET INCOME PER SHARE - BASIC $1.98 $1.81 $1.54
================================================================================================================
NET INCOME PER SHARE - DILUTED $1.97 $1.81 $1.54
================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Common Stock
Stock Dividend Paid In
Shares Amount Distributable Capital
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 5,016 $5,016 $1,016 $10,610
Net Income
Stock Dividend Issued 51 51 (1,016) 965
Cash Dividends Declared $.63 Per Share
Stock Dividend Declared, 1% 1,013
Net Unrealized Gain on Available -for-Sale Securities
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 5,067 5,067 1,013 11,575
Net Income
Stock Dividend Issued 50 50 (1,013) 963
Cash Dividends Declared $.68 Per Share
Stock Dividend Declared, 1% 1,305
Shares Issued from Treasury Related to Exercise of Stock 1
Options
Net Unrealized Loss on Available -for-Sale Securities
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 5,117 5,117 1,305 12,539
Net Income
Stock Dividend Issued 51 51 (1,305) 1,254
Cash Dividends Declared $.73 Per Share
Stock Dividend Declared, 1% 1,706
Shares Issued from Treasury Related to Exercise of Stock 6
Options
Net Unrealized Gain on Available -for-Sale Securities
===========================================================================================================================
BALANCE DECEMBER 31, 1997 5,168 $5,168 $1,706 $13,799
===========================================================================================================================
<CAPTION>
Net
Retained Unrealized Treasury
Earnings Gain (Loss) Stock Total
<S> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1994 $39,743 ($8,589) ($1,000) $46,796
Net Income 7,866 7,866
Stock Dividend Issued
Cash Dividends Declared $.63 Per Share (3,226) (3,226)
Stock Dividend Declared, 1% (1,013)
Net Unrealized Gain on Available -for-Sale Securities 15,541 15,541
- ----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 43,370 6,952 (1,000) 66,977
Net Income 9,255 9,255
Stock Dividend Issued
Cash Dividends Declared $.68 Per Share (3,458) (3,458)
Stock Dividend Declared, 1% (1,305)
Shares Issued from Treasury Related to Exercise of Stock 3 4
Options
Net Unrealized Loss on Available -for-Sale Securities (1,185) (1,185)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 47,862 5,767 (997) 71,593
Net Income 10,107 10,107
Stock Dividend Issued
Cash Dividends Declared $.73 Per Share (3,744) (3,744)
Stock Dividend Declared, 1% (1,706)
Shares Issued from Treasury Related to Exercise of Stock 5 11
Options
Net Unrealized Gain on Available -for-Sale Securities 7,568 7,568
======================================================================================================================
BALANCE DECEMBER 31, 1997 $52,519 $13,335 ($992) $85,535
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income $10,107 $ 9,255 $ 7,866
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 797 701 737
Realized Gain on Securities, Net (1,001) (475) (1,675)
Loss on Sale of Foreclosed Assets, Net 97 70 50
Provision for Depreciation 723 764 735
Accretion and Amortization 773 827 817
Deferred Income Tax 10 (215) (100)
Decrease (Increase) in Accrued Interest
Receivable and Other Assets 163 (332) 1,569
( Decrease) Increase in Accrued Interest Payable and
Other Liabilities (848) 405 (944)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,821 11,000 9,055
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 755 138 188
Purchase of Held-to-Maturity Securities (781) (199) (498)
Proceeds from Sales of Available-for-Sale Securities 134,157 13,002 8,284
Proceeds from Maturities of Available-for-Sale Securities 64,768 35,468 37,256
Purchase of Available-for-Sale Securities (186,798) (58,881) (60,101)
Net Increase in Loans (7,652) (15,428) (6,525)
Purchase of Premises and Equipment (834) (582) (606)
Sale of Foreclosed Assets 419 312 567
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 4,034 (26,170) (21,435)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 11,945 759 30,289
Increase in Borrowings on short-term Line of Credit 10,000 --- ---
Increase (Decrease) in Other Borrowed Funds (14,850) 4,650 (5,000)
Proceeds from Federal Home Loan Bank Borrowings 15,074 49,600 45,000
Repayment of Federal Home Loan Bank Borrowings (34,013) (35,000) (53,500)
Proceeds from the Sale of Treasury Stock 11 4 ---
Dividends Declared (3,744) (3,458) (3,226)
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (15,577) 16,555 13,563
- --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (722) 1,385 1,183
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,975 13,590 12,407
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $14,253 $14,975 $13,590
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $22,380 $23,474 $25,621
================================================================================================================================
Income Taxes Paid $3,512 $3,449 $2,487
================================================================================================================================
</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 & Northern Corporation ("Corporation"), and its
subsidiaries, Citizens & 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. Lending activity includes commercial loans, mortgage
loans, consumer installment loans, credit cards, lease financing as well as
specialized instruments such as commercial letters-of-credit. Deposit services
provided include various types of checking accounts, passbook and statement
savings, money market accounts, interest checking accounts, individual
retirement accounts and certificates of deposit.
The Corporation provides Trust Department services, including the administration
of trusts and estates, retirement plans, and other employee benefit plans.
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 - 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.
Amortization of premiums and accretion of discounts on available-for-sale
securities are recorded using the level yield method over the remaining
contractual life of the securities, adjusted for actual prepayments.
7
<PAGE>
Realized gains and losses on the sale of available-for-sale and held-to-maturity
securities are computed on the basis of specific identification of the adjusted
cost of each security.
The fair values of the majority of the Corporation's investments are estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued. The carrying values of restricted equity securities
approximate fair values.
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.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual status when, in the opinion of management,
collection of interest is doubtful. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income is generally not recognized
on specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation. Repair and maintenance expenditures which extend
the useful life of an asset are capitalized and other repair expenditures are
expensed as incurred.
When premises or equipment are retired or sold, the remaining cost and
accumulated depreciation are removed from the account and any gain or loss is
credited or charged to income. Depreciation expense is computed using the
straight-line method.
FORECLOSED ASSETS HELD FOR SALE - Foreclosed assets held for sale consist of
real estate acquired by foreclosure and are carried at the lower of fair value
minus estimated cost to sell or cost. The book value of foreclosed assets held
for sale at December 31, 1997 and December 31, 1996 was $230,000 and $583,000,
respectively. Foreclosed assets held for sale amounting to $163,000, $510,000
and $428,000 were acquired from the foreclosure of real estate loans during
1997, 1996 and 1995, 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
8
<PAGE>
appreciation rights or grants of restrictive stock. The number of shares
that may be issued under the Plan shall not exceed 60,000.
POSTRETIREMENT BENEFITS - Net periodic postretirement benefits costs are based
on provisions of Statement of Financial Accounting Standards (SFAS) No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions".
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, pension expense, depreciation
of bank premises and equipment, and postretirement benefits.
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. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common
stock outstanding. SFAS No. 128, "Earnings Per Share" requires presentation of
two new amounts, basic and diluted net income per share. The adoption of SFAS
No. 128 is required for all reporting periods after December 15, 1997 and
requires the restatement of net income per share for all prior periods.
The number of shares used in calculating net income and cash dividends per share
reflect the retroactive effect of stock dividends declared in the fourth quarter
of each year presented, payable in the first quarter of the following year. The
following data show the amounts used in computing net income per share and the
weighted average number of shares of dilutive stock options.
<TABLE>
<CAPTION>
Common Earnings
Income Shares Per
Numerator Denominator Share
------------------------------------------------------------
1997
<S> <C> <C> <C>
Net Income per share - basic $10,107,000 5,113,218 $1.98
Stock options 5,427
- -------------------------------------------------------------------------------------------------------------
Net Income per share - diluted $10,107,000 5,118,645 $1.97
=============================================================================================================
1996
Net Income per share - basic $9,255,000 5,113,079 $1.81
Stock options 1,224
- -------------------------------------------------------------------------------------------------------------
Net Income per share - diluted $9,255,000 5,114,303 $1.81
=============================================================================================================
1995
Net Income per share - basic and diluted $7,866,000 5,113,079 $1.54
=============================================================================================================
</TABLE>
Net income per share, as determined under accounting principles in effect prior
to SFAS No. 128, would be the same as the basic net income per share amounts
reported by the Corporation for 1997, 1996 and 1995.
9
<PAGE>
3. 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 1997 ranged from $4,580,000 to $5,446,000. For 1996, these balances ranged
from $4,240,000 to $5,565,000. Average daily cash balances with the Federal
Reserve Bank required to cover services provided to the Bank amounted to
$425,000 throughout 1997 and 1996. Total balances restricted at December 31,
1997 and December 31, 1996 were $5,827,000 and $4,757,000, 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.
4. SECURITIES
Amortized cost and the fair value of securities at December 31, 1997 and 1996
are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C> <C> <C>
Obligations of the U.S. Treasury $ 2,520 $ 18 $ 2,538
Obligations of Other U.S. Government Agencies 74,188 312 $ (51) 74,449
Obligations of States and Political Subdivisions 62,009 2,606 (1) 64,614
Corporate Debt Securities 3,851 29 (107) 3,773
Mortgage-backed Securities 127,664 1,585 (59) 129,190
- -----------------------------------------------------------------------------------------------------------------------------------
Total Debt Securities 270,232 (218) 274,564
4,550
Equity Securities 16,149 15,875 (1) 32,023
===================================================================================================================================
Total $ 286,381 $ 20,425 $ (219) $ 306,587
===================================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 632 $ (2) $ 630
Obligations of Other U.S. Government Agencies 350 $ 8 358
Mortgage-backed Securities 615 28 (8) 635
===================================================================================================================================
Total $ 1,597 36 $ (10) $ 1,623
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C> <C> <C>
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
Corporate Debt 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
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 0 102
Mortgage-backed Securities 770 22 (14) 778
================================================================================================================================
Total $ 1,569 $ 27 $ (17) $ 1,579
================================================================================================================================
</TABLE>
10
<PAGE>
The amortized cost and fair value of investment debt securities at December 31,
1997 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.
<TABLE>
<CAPTION>
December 31, 1997
(In Thousands) Amortized Fair
Cost Value
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C>
Due in one year or less $ 3,104 $ 3,126
Due after one year through five years 15,357 15,894
Due after five through ten years 54,488 54,874
Due after ten years 197,283 200,670
==================================================================================================
Total $ 270,232 $ 274,564
==================================================================================================
HELD-TO-MATURITY SECURITIES:
Due after one year through five years $ 755 $ 756
Due after five through ten years 368 374
Due after ten years 474 493
==================================================================================================
Total $ 1,597 $ 1,623
==================================================================================================
</TABLE>
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1997:
(In Thousands)
<TABLE>
<CAPTION>
Within One-Five Five-Ten After Ten
One Year Yield Years Yield Years Yield Years Yield Total Yield
AVAILABLE-FOR-SALE SECURITIES:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of the U.S. Treasury $ 2,520 6.01 $ 2,520 6.01
Obligations of Other U.S.
Government Agencies $49,000 7.04 $ 25,188 7.40 74,188 7.16
Obligations of States and
Political Subdivisions $2,104 7.45 5,728 6.80 3,971 6.48 50,206 5.79 62,009 5.98
Corporate Debt Securities 1,000 7.75 1,019 8.25 550 8.75 1,282 5.64 3,851 7.32
Mortgage-backed Securities 6,090 7.47 967 8.31 120,607 7.01 127,664 7.04
==================================================================================================================================
Total $3,104 7.55 $15,357 7.03 $54,488 7.04 $197,283 6.74 $270,232 6.83
==================================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 632 6.86 $ 632 6.86
Obligations of Other U.S.
Government Agencies 100 7.49 $ 100 7.23 $ 150 8.21 350 7.72
Mortgage-backed Securities 23 8.72 268 7.69 324 7.09 615 7.41
==================================================================================================================================
Total $ 755 7.00 $ 368 7.57 $ 474 7.44 $ 1,597 7.26
==================================================================================================================================
</TABLE>
Investment securities carried at approximately $65,684,000 and $31,336,000 at
December 31, 1997 and 1996, respectively, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law.
In 1997, gross realized gains from the sale of available-for-sale securities
were $2,883,000 and gross realized losses were $1,882,000. In 1996 and 1995,
realized gains from the sale of available-for-sale securities amounted to
$475,000 and $1,675,000, respectively.
11
<PAGE>
5. NET LOANS AND LEASE FINANCE RECEIVABLES
Major categories of loans and leases included in the loan portfolio are
summarized as follows:
<TABLE>
<CAPTION>
At December 31,
(In Thousands) % of % of
1997 Total 1996 Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 406 0.14% $ 1,166 0.42%
Real Estate - Mortgage 219,952 77.05% 213,957 76.80%
Consumer 33,094 11.59% 33,420 11.99%
Agriculture 2,424 0.85% 2,603 0.93%
Commercial 17,176 6.02% 15,751 5.65%
Other 6,260 2.19% 5,014 1.80%
Political Subdivisions 5,895 2.07% 6,464 2.32%
Lease Receivables 256 0.09% 264 0.09%
- ----------------------------------------------------------------------------------------------------------------
Total 285,463 100.00% 278,639 100.00%
Less Unearned Discount (37) (42)
- ----------------------------------------------------------------------------------------------------------------
285,426 278,597
Less Allowance for Possible Loan Losses (4,913) (4,776)
- ----------------------------------------------------------------------------------------------------------------
Net Loans and Lease Finance Receivables $280,513 $273,821
================================================================================================================
</TABLE>
At December 31, 1997 and 1996, net unamortized loan fees and costs of $1,932,000
and $1,974,000, respectively, have been offset against the carrying value of
loans.
There is no concentration of loans to borrowers engaged in similar businesses or
activities which exceeds 10% of total loans at December 31, 1997.
The Corporation grants commercial, residential and personal loans to customers
primarily in Tioga, Bradford, Sullivan and Lycoming counties. Although the
Corporation has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contracts is dependent on the local economic
conditions within the region.
<TABLE>
<CAPTION>
Loan Maturity Distribution
December 31, 1997
(In Thousands) Over One
Year but After
One Year Less than Five
or Less Five Years Years Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 406 $ 406
Real Estate - Mortgage 75,011 $56,762 $ 88,179 219,952
Consumer 11,911 14,427 6,756 33,094
Agriculture 1,073 1,294 57 2,424
Commercial 11,909 4,400 867 17,176
Other 384 26 5,850 6,260
Political Subdivisions 1,894 1,712 2,289 5,895
Lease Receivables 30 121 105 256
===============================================================================================================================
Total $102,618 $78,742 $104,103 $285,463
===============================================================================================================================
</TABLE>
12
<PAGE>
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 $1,412,000 at December 31, 1997 and $864,000 at December 31, 1996. Interest
income on such loans is recorded only as received.
Loans on which the original terms have been restructured totaled $174,000 and
$188,000 at December 31, 1997 and December 31, 1996, respectively. None of the
loans on which the original terms were changed were past due at December 31,
1997.
Loans which were more than 90 days past due and still accruing interest at
December 31, 1997 and December 31, 1996 totaled $1,986,000 and $2,994,000,
respectively.
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Balance at Beginning of Year $4,776 $4,579 $4,229
Provision Charged to Operations 797 701 737
Loans Charged Off (784) (672) (574)
Recoveries 124 168 187
- --------------------------------------------------------------------------------------------------------------
Balance at End of Year $4,913 $4,776 $4,579
==============================================================================================================
</TABLE>
At December 31, 1997 and 1996, the Corporation had loans amounting to
approximately $1,412,000 and $1,937,000, respectively, that were specifically
classified as impaired. The average balance of impaired loans amounted to
$1,208,000, $1,548,000 and $2,076,000 for 1997, 1996 and 1995, respectively. The
allowance for loan losses related to impaired loans amounted to approximately
$274,000 at December 31, 1997 and $113,000 at December 31, 1996. The following
is a summary of cash receipts on these loans and how they were applied in 1997.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C> <C>
1997 1996 1995
Cash receipts applied to reduce principal balance $ 79 $ 56 $ 60
Cash receipts recognized as interest income 86 116 45
- ----------------------------------------------------------------------------------------------------------------
Total $165 $172 $105
================================================================================================================
</TABLE>
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1997 1996
<S> <C> <C>
Land $ 432 $ 422
Buildings and Improvements 8,472 8,151
Furniture and Equipment 4,889 4,426
- ------------------------------------------------------------------------------------------------------------
Total 13,793 12,999
Less Accumulated Depreciation 7,073 6,390
- ------------------------------------------------------------------------------------------------------------
Net $6,720 $6,609
============================================================================================================
</TABLE>
13
<PAGE>
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1997 1996 1995
<S> <C> <C> <C>
Buildings and Improvements $296 $304 $298
Furniture and Equipment 427 460 437
=============================================================================================
Total $723 $764 $735
=============================================================================================
</TABLE>
7. DEPOSITS
The following table reflects time deposits included in total deposits and their
remaining maturities.
<TABLE>
<CAPTION>
At December 31, 1997
(In Thousands) 1998 1999 2000 2001 2002 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $ 82,083 $16,005 $11,986 $7,556 $4,049 $34 $121,713
Yield 5.39% 5.77% 6.24% 5.97% 6.06% 5.57% 5.58%
Individual Retirement Accounts 56,509 24,408 80,917
Yield 5.90% 5.90% 5.90%
- ----------------------------------------------------------------------------------------------------------------------------
Total Time Deposits $138,592 $40,413 $11,986 $7,556 $4,049 $34 $202,630
Yield 5.60% 5.84% 6.24% 5.97% 6.06% 5.57% 5.70%
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1996
(In Thousands) 1997 1998 1999 2000 2001 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $ 75,052 $19,194 $7,406 $8,568 $5,086 $84 $115,390
Yield 5.24% 5.70% 5.98% 6.45% 6.04% 5.90% 5.49%
Individual Retirement Accounts 48,622 31,797 80,419
Yield 6.17% 6.17% 6.17%
- ----------------------------------------------------------------------------------------------------------------------------
Total Time Deposits $123,674 $50,991 $7,406 $8,568 $5,086 $84 $195,809
Yield 5.61% 5.84% 5.98% 6.45% 6.04% 5.90% 5.70%
============================================================================================================================
</TABLE>
Included in interest-bearing deposits are time deposits issued in the amount of
$100,000 or more. These certificates and their remaining maturities are as
follows:
<TABLE>
<CAPTION>
At December 31, 1997
(In Thousands) 1998 1999 2000 2001 2002 Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $12,883 $1,360 $920 $781 $894 $16,838
Yield 5.56% 6.11% 6.47% 6.12% 6.22% 5.72%
Individual Retirement Accounts 6,878 1,419 8,297
Yield 5.90% 5.90% 6.17%
- --------------------------------------------------------------------------------------------------------------
Total Time Deposits $19,761 $2,779 $920 $781 $894 $25,135
Yield 5.68% 6.00% 6.47% 6.12% 6.22% 5.78%
==============================================================================================================
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
(In Thousands) 1997 1998 1999 2000 2001 Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $ 8,931 $1,346 $645 $712 $658 $12,292
Yield 5.51% 5.82% 6.47% 6.65% 6.16% 5.70%
Individual Retirement Accounts 6,724 2,041 8,765
Yield 6.17% 6.17% 6.17%
- -------------------------------------------------------------------------------------------------------------------
Total Time Deposits $15,655 $3,387 $645 $712 $658 $21,057
Yield 5.79% 6.03% 6.47% 6.65% 6.16% 5.89%
===================================================================================================================
</TABLE>
The interest paid on deposits of $100,000 or more amounted to $898,000, $958,000
and $838,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
8. BORROWED FUNDS
<TABLE>
<CAPTION>
Borrowed funds include the following: December 31,
(In Thousands) 1997 1996
<S> <C> <C>
Federal Funds Purchased (a) $ ----- $ ---
Flexline (b) 10,000 ---
Federal Home Loan Bank Borrowings (c) 40,661 $ 59,600
Other Borrowed Funds (d) 29,800 44,650
======================================================================================================
Total Borrowed Funds (e) $80,461 $104,250
======================================================================================================
</TABLE>
(a) Federal Funds Purchased generally represent overnight federal funds
borrowings from correspondent banks. The maximum month-end amount of such
borrowing in 1997, 1996 and 1995 was $10,000,000, $8,500,000 and $19,000,000,
respectively. The average amount of such borrowings was $663,000, $967,000 and
$4,774,000 in 1997, 1996 and 1995, respectively, and the weighted average
interest rates were 4.98% in 1997, 5.69% in 1996 and 6.37% in 1995.
(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 $24,500,000 at December 31, 1997. The
weighted average interest rate for 1997, 1996 and 1995 was 4.98%, 5.96% , and
6.37%, respectively. The maximum outstanding balance was $20,000,000 in 1997,
$6,000,000 in 1996 and $32,500,000 in 1995.
(c) Federal Home Loan Bank of Pittsburgh borrowings are as follows:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1997 1996
<S> <C> <C>
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
Fixed rate at 5.28%, maturity January 22, 1998 $10,000 10,000
Fixed rate at 5.86% maturity February 5, 1998 5,000
Variable rate at 5.75%, maturity December 11, 2001 15,000 15,000
Variable rate at 5.749, maturity December 11, 2001 10,000
Fixed rate at 6.86% maturity December 15, 2016 587 600
Fixed rate at 6.83% maturity June 5, 2017 74
=================================================================================================
Total Federal Home Loan Bank Borrowings $40,661 $59,600
=================================================================================================
</TABLE>
All advances are collateralized by the Corporation's Federal Home Loan Bank
stock, mortgage-backed securities and first mortgage loans under a blanket
floating-lien agreement.
15
<PAGE>
(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:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1997 1996
<S> <C> <C>
Fixed rate at 5.70%, maturity April 24, 1997 $ 4,850
Fixed rate at 5.68%, maturity June 22, 1997 10,000
Fixed rate at 5.10%, maturity February 27, 1998 $ 4,800 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 15,000
=========================================================================================================================
Total Other Borrowed Funds $29,800 $44,650
=========================================================================================================================
</TABLE>
As of December 31, 1997 and 1996, the outstanding repurchase agreements were
collateralized by a blanket agreement with the Federal Home Loan Bank in which
the actual ownership of securities is not transferred. The respective carrying
value of the underlying securities at December 31, 1997 and 1996 was $33,742,000
and $51,964,000. Average daily repurchase agreement borrowings for the years
ended December 31, 1997, 1996 and 1995 amounted to $37,481,000, $37,650,000 and
$48,618,000, respectively. The weighted average interest rate on repurchase
agreements for 1997, 1996 and 1995 was 5.77%, 5.96%, and 5.96% respectively.
During 1997, 1996 and 1995 the maximum outstanding borrowings were $44,650,000,
$44,650,000 and $74,650,000, respectively.
(e) The aggregate average funds borrowed for the years ended December 31, 1997,
1996 and 1995 were $88,549,000, $102,088,000 and $92,502,000, respectively. The
weighted average interest rate was 5.63%, 5.56% and 6.10% for those same
periods.
9. ESTIMATED FAIR VALUE OF 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, 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
values.
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
loans. 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 based on historical
experience. For credit card loans, cash flows and maturities are estimated based
on contractual interest rates and historical experience. Fair value of
nonperforming loans is based on recent appraisals or estimates prepared by the
Corporation's lending officers.
The following tables present information on loans.
16
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Average
Book Historical Discount
Value Yield Rate(1) Fair Value
Real Estate:
<S> <C> <C> <C> <C>
Real Estate Fixed $162,745 8.87 8.50 $165,551
Real Estate Variable 56,230 8.49 7.13 56,261
- ---------------------------------------------------------------------------------------------------
Total Real Estate 218,975 221,812
- ---------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 23,130 9.63 9.90 23,116
Consumer Variable 589 8.90 9.25 589
Credit Card 8,528 14.90 14.90 8,528
Key Loans 847 18.00 18.00 847
- ---------------------------------------------------------------------------------------------------
Total Consumer 33,094 33,080
- ---------------------------------------------------------------------------------------------------
Agricultural 2,395 10.05 9.00 2,406
- ---------------------------------------------------------------------------------------------------
Commercial
Commercial Fixed 9,130 9.53 9.50 9,129
Commercial Variable 8,046 9.55 9.50 8,045
- ---------------------------------------------------------------------------------------------------
Total Commercial 17,176 17,174
- ---------------------------------------------------------------------------------------------------
Other Loans 6,260 7.89 8.50 6,273
Political Subdivisions 5,895 6.11 5.50 6,082
Leases 256 7.72 8.00 203
Nonperforming 1,412 1,412
===================================================================================================
Total Loans $285,463 $288,442
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Average
Book Historical Discount
Value Yield Rate(1) Fair Value
Real Estate:
<S> <C> <C> <C> <C>
Real Estate Fixed $149,015 9.16 8.25 $150,804
Real Estate Variable 65,244 8.81 9.18 65,296
- ---------------------------------------------------------------------------------------------------
Total Real Estate 214,259 216,100
- ---------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 23,168 9.16 10.00 23,167
Consumer Variable 869 9.24 9.50 869
Credit Card 8,543 14.90 14.90 8,543
Key Loans 840 18.00 18.00 840
- ---------------------------------------------------------------------------------------------------
Total Consumer 33,420 33,419
- ---------------------------------------------------------------------------------------------------
Agriculture 2,603 10.11 9.25 2,631
- ---------------------------------------------------------------------------------------------------
Commercial
Commercial Fixed 6,881 9.97 9.25 6,940
Commercial Variable 8,870 9.60 9.25 8,926
- ---------------------------------------------------------------------------------------------------
Total Commercial 15,751 15,866
- ---------------------------------------------------------------------------------------------------
Other Loans 5,014 7.74 9.25 5,019
Political Subdivisions 6,464 6.51 5.50 6,587
Leases 264 8.37 9.00 257
Nonperforming 864 864
===================================================================================================
Total Loans $278,639 $280,743
===================================================================================================
</TABLE>
(1) 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.
17
<PAGE>
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, 1997. The
fair value of all other deposit categories is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities.
<TABLE>
<CAPTION>
December 31, 1997
(In Thousands) Book Value Fair Value
<S> <C> <C>
Noninterest-bearing Demand Deposits $46,916 $46,916
Interest-bearing Deposits:
Money Market 104,894 104,894
Interest Checking 40,880 40,880
Savings 45,332 45,332
Certificates of Deposit 121,713 125,098
Individual Retirement Accounts 80,917 79,624
Other Time 1,604 1,604
- ---------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 395,340 397,432
- ---------------------------------------------------------------------------------------------------------
Total Deposits $442,256 $444,348
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
(In Thousands)
Book Value Fair Value
<S> <C> <C>
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
Individual Retirement Accounts 80,419 79,295
Other Time 1,568 1,568
- ----------------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 382,991 384,692
- ----------------------------------------------------------------------------------------------------------------
Total Deposits $430,311 $432,012
================================================================================================================
</TABLE>
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market, commonly referred to as the core deposit
intangible.
BORROWED FUNDS - Rates currently available to the Corporation for borrowed funds
with similar terms and remaining maturities are used to estimate the fair value
of existing borrowed funds.
18
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
(In Thousands)
Book Value Fair Value
<S> <C> <C>
Borrowings on Short-Term Line of Credit $10,000 $10,000
Securities Sold Under Agreement to Repurchase 29,800 29,394
Other Borrowings from the Federal Home Loan Bank:
Fixed Rate 15,661 15,032
Variable Rate 25,000 25,000
- -----------------------------------------------------------------------------------------------------
Total Other Borrowings 40,661 40,032
=====================================================================================================
Total Borrowed Funds $80,461 $79,426
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
(In Thousands) Book
Value Fair Value
<S> <C> <C>
Securities Sold Under Agreement to Repurchase $44,650 $44,486
Borrowings from the Federal Home Loan Bank:
Fixed Rate 44,600 43,599
Variable Rate 15,000 15,000
- ---------------------------------------------------------------------------------------------------------
Total Other Borrowings 59,600 58,599
=========================================================================================================
Total Borrowed Funds $104,250 $103,085
=========================================================================================================
</TABLE>
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - There is no
material difference between the notional amount and the fair value of
off-balance sheet items which totaled $51,270,000 at December 31, 1997 and
$49,782,000 at December 31, 1996 and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
10. EMPLOYEE BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan (the "Plan")
for all employees meeting certain age and length of service requirements.
Benefits are based primarily on years of service and the average annual
compensation during the highest five consecutive years within the final ten
years of employment. The Corporation's funding policy is consistent with the
funding requirements of federal law and regulations. Plan assets are comprised
of common stock and U S Government and corporate debt securities. Net periodic
pension cost includes the following components.
<TABLE>
<CAPTION>
Year Ended December 31,
(In Thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost benefits earned during the period $ 234 $ 238 $ 174
Interest cost on projected benefit obligation 400 370 342
Return on assets (1,222) (821) (960)
Net amortization and deferral 672 330 541
Amortization of transition gain (23) (23) (23)
- -------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 61 $ 94 $ 74
===================================================================================================================
</TABLE>
At December 31, 1997, the accumulated benefit obligation and the vested benefit
obligation were $4,340,000 and $4,308,000, respectively. The funded status of
the Plan and amount recognized in the Corporation's consolidated balance sheet
were as follows:
19
<PAGE>
<TABLE>
<CAPTION>
(In Thousands) December 31,
1997 1996
<S> <C> <C>
Plan assets at fair value $ 7,628 $ 6,701
Projected benefit obligation (6,059) (5,418)
- --------------------------------------------------------------------------------------------------------------------
Excess of assets over projected benefit obligation 1,569 1,283
Unrecognized net gain being recognized over employees'
average remaining service life (297) (319)
Deferred unexpected (gain) (800) (502)
- --------------------------------------------------------------------------------------------------------------------
Prepaid pension cost $ 472 $ 462
====================================================================================================================
</TABLE>
The projected benefit obligation at December 31, 1997 and 1996 was determined
using an assumed discount rate of 7.0% and 7.5%, respectively, and an assumed
long-term rate of compensation of 5.0% for 1997 and 5.5% for 1996. The assumed
long-term rate of return on plan assets was 8.50% as of December 31, 1997 and
1996.
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 1997, 1996 and 1995 were $436,000, $413,000 and $365,000, respectively.
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1997, 1996 and 1995 amounted to $35,000, $118,000 and
$75,000, respectively.
In 1995, the Corporation established a Stock Incentive Plan for a selected group
of senior officers. In 1997, 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 1997, 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 assumptions.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Volatility 19% 11% 11%
Expected option lives 6 Years 6 Years 6 Years
Risk-free interest rate 5.78% 6.25% 5.59%
Dividend Yield 4.05% 4.61% 4.82%
</TABLE>
A summary of the status of the Corporation's Stock Incentive Plan as of December
31, 1997, 1996 and 1995, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
Incentive Stock Options 1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 22,850 $22.65 12,100 $ 20.00
Granted 15,000 33.25 11,000 25.50 12,100 $20.00
Exercised (590) 20.00 (250) 20.00
Forfeited (700) 20.00
- -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 36,560 $27.09 22,850 $22.65 12,100 $20.00
===================================================================================================================================
Options exercisable at year-end 5,920 2,170
Fair value of options granted
during the year $5.88 $2.95 $1.93
</TABLE>
The following table summarizes information about incentive stock options
outstanding as of December 31, 1997:
20
<PAGE>
<TABLE>
<CAPTION>
Number Number
Outstanding Exercisable
at Remaining at
Exercise December 31, Contractual December 31,
Prices 1997 Life In Years 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
$20.00 10,560 8 3,720
$25.50 11,000 9 2,200
$33.25 15,000 10
---------------------------------------------------------------------
36,560 9.12 5,920
=====================================================================
</TABLE>
11. POSTRETIREMENT HEALTH CARE INSURANCE BENEFITS
The Corporation sponsors a defined benefit health care plan that provides
postretirement medical benefits and life insurance to employees who meet certain
age and length of service requirements. Effective January 1, 1992, the plan
contains cost-sharing features which cause participants to pay for all further
increases in costs related to benefit coverage. The Corporation's policy is to
fund the cost of the plan in amounts equal to the Corporation's share of medical
benefits and life insurance premium costs.
The following table shows the plan's funded status reconciled with amounts
recognized in the Corporation's balance sheet at December 31, 1997 and 1996:
(In Thousands)
<TABLE>
<CAPTION>
1997 1996
Accumulated postretirement benefit obligations
<S> <C> <C>
Retirees $(437) $(388)
Active plan participants (278) (280)
- -------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligations (715) (668)
Plan assets at fair value -- --
- -------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation in excess of plan assets (715) (668)
Unrecognized net gain (113) (156)
Unrecognized transition obligation 547 584
- -------------------------------------------------------------------------------------------------------
Accrued postretirement benefits cost $(281) $(240)
=======================================================================================================
</TABLE>
Net periodic postretirement costs for 1997, 1996, and 1995 include the following
components:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost $19 $19 $13
Interest cost on accumulated postretirement benefit obligation 48 47 53
Amortization of transition obligation over 21 years 29 30 30
- --------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $96 $96 $96
==========================================================================================================================
</TABLE>
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% at December 31, 1997 and 1996.
12. INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability
at December 31, 1997 and 1996:
21
<PAGE>
(In Thousands)
<TABLE>
<CAPTION>
1997 1996
Deferred Tax Liabilities:
<S> <C> <C>
Bond Accretion $ 14 $ 212
Depreciation 124 145
Pension Expense 166 163
Unrealized Holding Gains on Available-for Sale Securities 6,870 2,971
- ----------------------------------------------------------------------------------------------------------
Total 7,174 3,491
- ----------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Loan Fees and Costs (281) (371)
SERP Plan (55) (134)
Postretirement Benefits (101) (88)
Loan Loss Provision (1,720) (1,672)
Accrued Payroll ----- (118)
- ----------------------------------------------------------------------------------------------------------
Total (2,157) (2,383)
- ----------------------------------------------------------------------------------------------------------
Deferred Tax Liability, Net $5,017 $1,108
=========================================================================================================================
</TABLE>
The federal income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
<S> <C> <C> <C>
Currently Payable $3,156 $3,366 $2,593
Deferred Provision (Benefit) 10 (215) (100)
- ------------------------------------------------------------------------------------------------------------------------
Total Provision $3,166 $3,151 $2,493
========================================================================================================================
</TABLE>
The following tabulation is a reconciliation of the expected provision for
federal income taxes determined by application of the statutory rates at which
income is expected to be taxed and the actual income tax provision.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
(In Thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Expected Provision $4,646 35.0 $4,342 35.0 $3,626 35.0
Nontaxable Bond Interest (1,249) (9.4) (1,054) (8.5) (931) (9.0)
Nontaxable Loan Interest (137) (1.0) (148) (1.2) (147) (1.4)
Nondeductible Interest Expense 167 1.3 149 1.2 143 1.4
Dividends Received Deduction (161) (1.2) (156) (1.3) (103) (1.0)
Surtax (112) (0.8) (138) (1.1) (74) (0.7)
Exemption
Other, Net 12 ---- 156 1.3 (21) (0.2)
- ---------------------------------------------------------------------------------------------------------------------
Effective Income Tax and Rates $3,166 23.9 $3,151 25.4 $2,493 24.1
=====================================================================================================================
</TABLE>
13. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiary and
any associates of the foregoing persons are as follows:
(In Thousands)
<TABLE>
<CAPTION>
Beginning New Other Ending
Name of Borrower Balance Loans Repayments Changes Balance
<S> <C> <C> <C> <C> <C>
15 Directors, 2 Executive Officers 1997 $ 5,441 $ 736 $(2,096) $ 1,497 $ 5,578
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
</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.
14. 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
22
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
Contract Amount
<S> <C>
Commitments to extend credit $46,258,000
Standby letters of credit $ 5,012,000
</TABLE>
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Corporation evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation, for extensions of credit is based on management's credit assessment
of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
15. 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, 1997, 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.
<TABLE>
<CAPTION>
At December 31,
1997 1996
<S> <C> <C>
Tier I Capital $ 72,200 $ 65,826
Tier II Supplemental Capital (1) 4,150 3,957
- -------------------------------------------------------------------------------------------
Total Capital $ 76,350 $ 69,783
===========================================================================================
Average Assets (2) $588,071 $598,484
Risk Weighted Assets:
Balance Sheet $318,655 $303,417
Off-Balance Sheet 13,384 13,172
- -------------------------------------------------------------------------------------------
Total Risk Weighted Assets $332,039 $316,589
===========================================================================================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Minimum Well
Actual Requirements Capitalized
- ---------------------------------------------------------------------------------------------------------------
As of December 31, 1997
<S> <C> <C> <C>
Total Capital to Risk Weighted Assets 22.99% > = 8% > = 10%
Tier I Capital to Risk Weighted Assets 21.74% > = 4% > = 6%
Tier I to Average Assets (2) 12.28% > = 4% > = 5%
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%
</TABLE>
(1) Inclusion of the allowance for possible 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 1998 may not exceed $12,160,000, plus Company net income
for 1998. 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 $56,298,000 at December 31, 1997, 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 stockholder's equity
(excluding unrealized gains on available-for-sale-securities) or $6,633,000 at
December 31, 1997.
24
<PAGE>
16. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern
Corporation.
CONDENSED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31,
1997 1996
ASSETS
<S> <C> <C>
Cash $ 3 $ 101
Available-for-Sale Securities 9,101 6,060
Subsidiary Investments
Citizens & Northern Bank 76,405 64,720
Bucktail Life Insurance Company 1,616 1,474
- --------------------------------------------------------------------------------------------------------------------
Total Subsidiary Investments 78,021 66,194
Dividends Receivable 1,100 950
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 88,225 $ 73,305
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed Funds and Other Liabilities $ 1,677 $ 810
Dividend Payable 1,013 902
Stockholders' Equity 85,535 71,593
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 88,225 $ 73,305
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
CONDENSED INCOME STATEMENT
(In Thousands)
1997 1996 1995
<S> <C> <C> <C>
Dividend from Subsidiary $ 3,980 $4,183 $3,505
Other Dividend Income 186 142 96
Available-for-Sale Securities Gains 74 217 26
Expenses (77) (118) (37)
- -----------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Earnings of Subsidiaries 4,163 4,424 3,590
Equity in Undistributed Earnings of Subsidiaries 5,944 4,831 4,276
===========================================================================================================
NET INCOME $10,107 $9,255 $7,866
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
CONDENSED STATEMENT OF CASH FLOWS
(In Thousands) 1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Income $10,107 $9,255 $7,866
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Noncash Dividends Received ---- (578) (219)
Equity Securities Gains (74) (217) (26)
Equity in Undistributed Net Income of Subsidiaries (5,944) (4,831) (4,276)
Increase in Other Assets (150) (80) (70)
Increase in Other Liabilities 111 51 26
- --------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 4,050 3,600 3,301
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Available-for-Sale Securities (602) (486) (141)
Proceeds from Sale of Available-for-Sale Securities 187 425 68
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (415) (61) (73)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Treasury Stock 11 4 ----
Dividends Declared (3,744) (3,458) (3,226)
- --------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,733) (3,454) (3,226)
- --------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (98) 85 2
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 101 16 14
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3 $ 101 $ 16
==============================================================================================================
</TABLE>
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
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, 1997
and 1996, 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, 1997. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens & Northern
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of computing net income per share.
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
WILLIAMSPORT, PENNSYLVANIA
FEBRUARY 3, 1998
26
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
February 3, 1998
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
- -------------------------------------------------------------------------------
CAUTIONARY STATEMENT
THIS REPORT CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" INCLUDING STATEMENTS
CONCERNING PLANS, OBJECTIVES, FUTURE EVENTS OR PERFORMANCE AND ASSUMPTIONS AND
OTHER STATEMENTS WHICH ARE OTHER THAN STATEMENTS OF HISTORICAL FACT. CITIZENS &
NORTHERN CORPORATION AND ITS SUBSIDIARIES WISHES TO CAUTION READERS THAT THE
FOLLOWING IMPORTANT FACTORS, AMONG OTHERS, MAY HAVE AFFECTED AND COULD IN THE
FUTURE AFFECT THE CORPORATION'S ACTUAL RESULTS AND COULD CAUSE THE CORPORATION'S
ACTUAL RESULTS FOR SUBSEQUENT PERIODS TO DIFFER MATERIALLY FROM THOSE EXPRESSED
IN ANY FORWARD-LOOKING STATEMENT MADE BY OR ON BEHALF OF THE CORPORATION HEREIN:
THE EFFECT OF CHANGES IN LAWS AND REGULATIONS, INCLUDING FEDERAL AND STATE
BANKING LAWS AND REGULATIONS, WITH WHICH THE CORPORATION MUST COMPLY, AND THE
ASSOCIATED COST OF COMPLIANCE WITH SUCH LAWS AND REGULATIONS EITHER CURRENTLY OR
IN THE FUTURE AS APPLICABLE; THE EFFECT OF CHANGES IN ACCOUNTING POLICIES AND
PRACTICES, AS MAY BE ADOPTED BY THE REGULATORY AGENCIES AS WELL AS THE FINANCIAL
ACCOUNTING STANDARDS BOARD, OR OF CHANGES IN THE CORPORATION'S ORGANIZATION,
COMPENSATION AND BENEFIT PLANS; THE EFFECT ON THE CORPORATION'S COMPETITIVE
POSITION WITHIN ITS MARKET AREA OF THE INCREASING CONSOLIDATION WITHIN THE
BANKING AND FINANCIAL SERVICES INDUSTRIES, INCLUDING THE INCREASED COMPETITION
FROM THE LARGER REGIONAL BANKING ORGANIZATIONS AS WELL AS NONBANK PROVIDERS OF
VARIOUS FINANCIAL SERVICES; THE EFFECT OF CHANGES IN INTEREST RATES; AND THE
EFFECT OF CHANGES IN THE BUSINESS CYCLE AND DOWNTURNS IN THE LOCAL, REGIONAL OR
NATIONAL ECONOMIES.
- -------------------------------------------------------------------------------
27
<PAGE>
GLOSSARY OF FREQUENTLY USED TERMS
AVAILABLE-FOR-SALE SECURITIES - DEBT AND EQUITY SECURITIES THAT ARE REPORTED AT
FAIR VALUE, WITH UNREALIZED GAINS AND LOSSES EXCLUDED FROM EARNINGS AND
REPORTED, NET OF DEFERRED TAXES, AS A SEPARATE COMPONENT OF STOCKHOLDERS'
EQUITY.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - A RESERVE CREATED BY A PERIODIC CHARGE TO
EARNINGS TO PREVENT AN UNEXPECTED IMPACT ON EARNINGS OR CAPITAL OF THE
CORPORATION IN THE EVENT OF LOAN DEFAULT. THIS AMOUNT REPRESENTS AN ESTIMATE OF
THE POTENTIAL CREDIT LOSS INHERENT IN THE LOAN PORTFOLIO AS OF A POINT IN TIME.
AMORTIZATION - THE SYSTEMATIC CHARGE TO EARNINGS TO REDUCE THE PREMIUM PAID FOR
AN INVESTMENT SECURITY.
CAPITAL RATIOS AND COMPONENTS:
1. CAPITAL RATIOS
A. LEVERAGE RATIO - THE RATIO OF TOTAL EQUITY TO TOTAL LIABILITIES.
B. RETURN ON EQUITY - NET INCOME DIVIDED BY EQUITY.
C. RISK-BASED CAPITAL RATIO - RATIO OF EQUITY TO RISK WEIGHTED ASSETS.
2. COMPONENTS OF CAPITAL
A. CAPITAL STOCK - INVESTOR OWNERSHIP OF COMMON STOCK IN THE CORPORATION
STATED AS PAR
VALUE.
B. PAID-IN-CAPITAL - VALUE OF COMMON STOCK IN EXCESS OF THE PAR VALUE.
C. RETAINED EARNINGS - ACCUMULATED EARNINGS LESS DIVIDENDS PAID TO COMMON
SHAREHOLDERS.
D. STOCK DIVIDEND DISTRIBUTABLE - NON-CASH DIVIDEND PAYABLE IN COMMON
STOCK OF THE CORPORATION.
E. TIER I CAPITAL OR EQUITY - SUM OF COMMON STOCK, PAID-IN-CAPITAL AND
RETAINED EARNINGS.
F. TIER II CAPITAL - SUM OF SUBORDINATED DEBT, PREFERRED STOCK,
CONVERTIBLE DEBT SECURITIES AND A CALCULATED PORTION OF THE RESERVE
FOR LOAN LOSSES
G. TOTAL CAPITAL - SUM OF TIER I AND TIER II CAPITAL
CORE DEPOSITS - A SUBJECTIVE DOLLAR VALUE OF DEPOSITS THAT MANAGEMENT FEELS
WILL BE UNAFFECTED BY INTEREST RATES.
DEMAND DEPOSIT - A NONINTEREST-BEARING DEPOSIT WITH NO STATED MATURITY AND
REQUIRES NO NOTICE OF WITHDRAWAL.
EARNING ASSETS - INTEREST-BEARING ASSETS OWNED BY THE CORPORATION CONSISTING
PREDOMINANTLY OF INVESTMENTS AND LOANS.
HELD-TO-MATURITY SECURITIES - SECURITIES PURCHASED WITH THE INTENT AND
ABILITY TO BE HELD TO MATURITY; CARRIED ON THE BOOKS AT COST.
INTEREST-BEARING LIABILITIES - ALL INTEREST-BEARING DEPOSITS AND BORROWINGS
OF THE CORPORATION.
INTEREST RATE RISK - THE RISK THAT CHANGES IN INTEREST RATES COULD ADVERSELY
AFFECT THE VALUE OF THE CORPORATION OR ITS FUTURE EARNINGS.
MORTGAGE-BACKED SECURITIES - A POOL OF MORTGAGES SOLD ON THE SECONDARY
MARKET. THE INTEREST RATE PAID IS THE WEIGHTED AVERAGE COUPON RATE OF THE
UNDERLYING MORTGAGES.
MVPE- MARKET VALUE OF PORTFOLIO EQUITY - THE MARKET VALUE OF ASSETS LESS THE
MARKET VALUE OF LIABILITIES. THE MARKET VALUE OF ASSETS AND
AND LIABILITIES IS THE PRESENT VALUE OF ALL FUTURE CASH FLOWS AT CURRENT
MARKET RATES. THIS AMOUNT DOES NOT INCLUDE ASSETS AND LIABILITIES THAT ARE NOT
FINANCIAL INSTRUMENTS, SUCH AS PREMISES AND EQUIPMENT, ACCRUED INTEREST
RECEIVABLE OR PAYABLE, DEFERRED TAXES, ETC.
NIM - NET INTEREST MARGIN - TOTAL INTEREST INCOME LESS TOTAL INTEREST
EXPENSE.
NONPERFORMING LOANS - IMPAIRED LOANS CLASSIFIED AS NONACCRUAL DUE TO
NONPERFORMANCE OF CREDITORS.
OTHER REAL ESTATE - REAL ESTATE ACQUIRED THROUGH A DEED IN LIEU OF
FORECLOSURE OR FORECLOSURE PROCEEDINGS AGAINST A CREDITOR.
RISK ADJUSTED ASSETS - THE SUM OF THE CORPORATION'S ASSETS DEEMED TO BE AT
RISK. CALCULATION OF RISK ASSETS IS PERFORMED USING PERCENTAGES SUPPLIED BY THE
REGULATORS.
SENDERO MODEL - A PC BASED SIMULATION MODEL PURCHASED FROM THE SENDERO
CORPORATION WHICH SIMULATES INTEREST INCOME AND MARKET VALUE BEHAVIOR UNDER
VARIOUS INTEREST RATE SCENARIOS USING A VARIETY OF ASSET AND LIABILITY MIXES.
WATCH LIST - A LIST OF LOANS IN THE PORTFOLIO THAT HAVE BEEN ISOLATED FOR A
VARIETY OF REASONS: DELINQUENCY, COLLATERAL, CASH FLOW, DOCUMENTATION, ETC.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1997 PERFORMANCE REVIEW
Citizens and Northern Corporation ("Corporation") and its major subsidiary,
Citizens and Northern Bank ("Bank"), recorded basic per share earnings of $1.98,
$1.81 and $1.54, respectively, for the years ended December 31, 1997, 1996.
Diluted earnings per share amounted to $1.97, $1.81 and $1.54 for the years
ended December 31, 1997, 1996 and 1995, respectively. Return on the
Corporation's equity, excluding the net unrealized gain or loss on
available-for-sale securities, for the years ended 1997, 1996 and 1995 amounted
to 14.56 percent, 14.74 percent and 14.06 percent, respectively.
Operating income, including the net interest margin and other operating income,
except for realized securities gains , finished the year slightly higher than
1996 and 1995. The net interest margin excluding the provision for possible loan
losses increased 2.0 percent when compared to 1996 and was 20.5 percent ahead of
1995. Other operating income excluding realized gains on the sales of
available-for-sale securities increased 12.6 percent and 14.7 percent when
compared to 1996 and 1995, respectively.
It should be noted that during the fourth quarter of 1997 the provision for
possible loan losses was increased approximately $73,000, in comparison to the
first three quarters. The increase was caused by higher than normal credit card
losses in the last quarter of 1997 and the desire of the Board of Directors to
maintain a reserve for possible loan losses that approximates 1.71 percent of
the loan portfolio. The Corporation's reserve for possible loan losses, as a
percentage of total gross loans, exceeds that of its peer group by about 20
basis points (.2 percent).
Realized gains on the portfolio of available-for-sale securities contributed
before tax profits of $1,001,000 in 1997. This compares to $475,000 and
$1,675,000 in 1996 and 1995, respectively. The portfolio of available-for-sale
securities was extensively restructured during 1997 as older, seasoned
mortgage-backed securities were sold and replaced with higher yielding
investments that should improve future earnings. Several of the investments were
sold at a considerable loss which was offset by the sale of equity investments
that had accumulated substantial appreciation.
Another key to the Corporation's success in 1997 was the control of other
operating expense. Other operating expense increased 2.78 percent over 1996 and
7.21 percent over 1995. Going forward into 1998 the control of other operating
expense will play a major role in the profitability of the Corporation.
The Corporation's Board of Directors and management team feel very confident
going forward, and with good reason: your Corporation has in place an excellent
earning asset base, a sound deposit base and a well trained staff to take the
Corporation into the next century.
OUTLOOK FOR 1998
Given the same rate environment for 1998 as we experienced during 1997, earnings
will probably mirror those of 1997. However, if rates suddenly change
substantially in either direction (300 basis points), earnings could be pushed
somewhat lower. If, however rates change by 50 to 100 basis points in 1998
earnings would not be materially affected.
Other Corporation endeavors for 1998 will include the installation of several
Automated Teller Machines, enhancement of the marketing department by hiring a
full time marketing person, and the development of a transfer pricing system
that will provide management with a tool for more detailed department, branch
and product profitability analysis. The Corporation will also begin to test Year
2000 changes that will be implemented, tentatively, by January 1, 1999.
The prime focus of the Corporation in 1998 will be to remain a strong
independent community bank serving the people, the businesses and the
communities of its market area.
29
<PAGE>
NET INTEREST MARGIN
1997/1996/1995
The primary source of operating income for the Corporation is 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. The investment portfolio has traditionally
comprised about half of the base of earning assets. Nearly all of the
Corporation's investments are classified as available-for-sale, excluding
approximately $1,600,000 held by the Corporation's insurance subsidiary,
Bucktail Life Insurance Company.
The investment portfolio is funded primarily by deposits and borrowed funds.
Approximately 42 percent of the available-for-sale securities portfolio consists
of mortgage-backed securities offered by the Federal National Mortgage
Association, Federal Home Loan Bank and the Government National Mortgage
Association. The balance of the portfolio is made up of federal agency,
municipal and corporate bonds, Federal Agency bonds, U. S. Treasury securities
and equity investments of other banks and bank holding companies primarily in
Pennsylvania.
The rate of return on the investment portfolio has remained relatively constant
during 1997, 1996 and 1995 at 6.51 percent, 6.50 percent and 6.39 percent,
respectively. The portfolio is primarily a long term investment vehicle and does
not have a great deal of turnover with the exception of mortgage-backed
securities that provide a monthly flow of payments. The portfolio is, however,
monitored continuously for long-term profit maximization, especially during
periods of interest rate volatility, and at such time the Corporation may sell
selected securities from the available-for-sale category.
The portion of the investment portfolio that is funded by borrowed funds
declined in 1997 as the spread between the interest rates on borrowed funds and
the return on investments narrowed. Average borrowed funds for the years ended
December 31, 1997, 1996 and 1995 amounted to $89,211,000, $102,088,000 and
$92,502,000, respectively.
Equity investments, consisting of Federal Home Bank Stock and other equity
investments in bank and bank holding companies, make up approximately 6 percent
of available-for -sale securities. The return on the equity investments is
slightly lower than the balance of the portfolio so to balance the rate of
return on the equity investments with the remainder of the available-for-sale
securities, management will periodically sell certain equity investments to
recognize accumulated appreciation.
The loan portfolio makes up most of the balance of the earning asset base and is
the largest contributor to total interest income. 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 mortgage loans to customers in our
market area made up 79 percent, 77 percent and 77 percent of the loan portfolio
for 1997, 1996 and 1995, respectively. Respectively, they contributed 70
percent, 69 percent and 68 percent of the total interest income derived from the
loan portfolio. The balance of the loan portfolio includes consumer installment
loans and commercial loans. The Corporation also has an extensive credit card
operation which provides credit cards to the Corporation's customer base and 56
other agent banks in Pennsylvania. The return on the Corporation's total loan
portfolio for the years ended December 31, 1997, 1996 and 1995 amounted to 10.28
percent, 10.31 percent and 10.24 percent, 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.
30
<PAGE>
INTEREST EXPENSE
The liability side of the balance sheet is made up of stockholders' equity,
interest-bearing liabilities and noninterest-bearing demand deposits and other
liabilities. The return on the Corporation's assets and equity are dependent on
the spread between rates paid on earning assets and the rate of interest paid on
interest-bearing liabilities. Interest-bearing liabilities are made up of
deposits and borrowed funds. The years ended December 31, 1997 and 1996 saw
increased competition for deposit products. Average total deposits, including
demand deposits, increased only 1.4 percent during 1997. This compares to growth
rates of 3.4 percent and 4.9 percent for 1996 and 1995, respectively.
Competition for deposits came from banks and nonbank sources, including credit
unions and mutual funds.
The Corporation has five primary sources of interest-bearing deposits. Two of
the sources are considered long term and three are short term, based on 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 single source of
deposits. The maturity schedule of certificates ranges from one month to five
years. Average balances carried in certificates of deposit for the years ended
December 31, 1997, 1996 and 1995 were $119,226,000, $117,596,000 and
$112,493,000, respectively. The average rate paid for those deposits for the
same periods , respectively, was 5.49 percent, 5.47 percent and 5.50 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
have remained flat for 1997 and 1996 after an increase of $8,000,000 between
1994 and 1995. Average balances and rates paid on Individual Retirement Accounts
during the years ended December 31, 1997, 1996 and 1995 were, respectively,
$78,662,000 at 5.99 percent, $79,076,000 at 5.77 percent and $78,534,000 at 6.58
percent.
Short term deposits (deposits that reprice more frequently) are Money Market
accounts, Interest Checking accounts and Savings accounts. Money Market accounts
are the Corporation's second largest source of deposits. 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, 1997, 1996 and 1995 , respectively, were
$107,287,000, $100,618,000 and $91,773,000. Average rates paid for those same
periods were, respectively, 4.55 percent, 4.53 percent and 4.93 percent.
Interest Checking accounts allow unlimited checking activity but earn a lesser
rate of interest. Average balances and rates paid on these accounts for the
years ended December 31, 1997, 1996 and 1995 were, respectively, $38,334,000 at
2.47 percent, $40,558,000 at 2.46 percent and $42,118,000 at 4.02 percent.
Finally, the last short term interest-bearing accounts carried by the
Corporation 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 have not varied, 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, 1997, 1996 and 1995 were $46,338,000, $46,751,000 and $48,261,000,
respectively. The rate paid for each of the three years was approximately 2.50
percent.
The Corporation also carries noninterest-bearing Demand Deposits; average
balances for the past three years, respectively, were $42,780,000, $42,500,000
and $39,313,000.
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
bank or a repurchase agreement arranged through the Federal Home Loan Bank of
Pittsburgh or a broker. 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 or a broker. Short term borrowing is
defined as overnight up to one year. Long term borrowing carries a maturity of
one year or more.
Average balances carried as short and long term borrowing for the years ended
December 31, 1997, 1996 and 1995 amounted to $89,211,000, $102,088,000 and
$92,502,000, respectively. Average rates for the same periods, respectively,
were 5.63 percent, 5.56 percent and 6.09 percent. The decline in average
borrowed funds is the result of a flat yield curve during 1997.
To summarize the discussion of the interest margin it is important to note the
change in the net interest spread. The spread for 1995 was 2.99 percent,
reflecting a rise in interest rates beginning in late 1994. During 1995 rates
continued to rise until the fall of that year. Late in 1995, as inflation
worries subsided and the inflation rate stabilized at about 3 percent, the rates
began to
31
<PAGE>
decline. Rates remained relatively stable during 1996 and 1997 and produced a
net spread of 3.49 percent in 1996 and 3.50 percent for 1997. The interest rate
concern for 1998 appears to be a decline in rates. A decline in rates of 2 or 3
percent may cause a substantial portion of the loan portfolio to be rewritten at
lower lower rates. This would create a stream of payments that would have to be
invested at lower rates. Theoretically, this would be offset by a decline in
rates paid on deposit products, therefore the impact on the net spread would be
minimal, however, due to competitive pressures it may not be possible to fully
reprice the entire deposit base. The Corporation is negatively gapped, which
means the liabilities of the Corporation would reprice much quicker than the
earning assets. This should cause the net interest margin to widen. Table X
attempts to quantify the change in the net interest margin at different levels
of rising and falling interest rates, however, as previously stated the table
does not account for rate competition and consumer options related to deposit
products.
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.
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Change
(In Thousands) Years Ended December 31, Increase (Decrease)
1997 1996 1995 97/96 96/95
INTEREST INCOME Available-for-Sale Securities:
<S> <C> <C> <C> <C> <C>
U S Treasury Securities $ 139 $ 128 $ 128 $ 11 $ ---
Securities of Other U S Government Agencies and Corporations 3,002 2,124 691 878 1,433
Mortgage-backed Securities 11,060 13,113 13,665 (2,053) (552)
Obligations of States and Political Subdivisions 3,595 3,012 2,667 583 345
Stock 874 872 690 2 182
Other Securities 52 472 568 (420) (96)
- ----------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 18,722 19,721 18,409 (999) 1,312
- ----------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U S Treasury Securities 34 42 22 (8) 20
Securities of Other U S Government Agencies and Corporations 22 4 --- 18 4
Mortgage-backed Securities 52 59 77 (7) (18)
- ----------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 108 105 99 3 6
- ----------------------------------------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 54 37 55 17 (18)
Federal Funds Sold 334 60 79 274 (19)
Loans:
Real Estate Loans 20,218 19,277 18,201 941 1,076
Consumer 6,484 6,402 6,164 82 238
Agricultural 272 278 315 (6) (37)
Commercial/Industrial 1,606 1,577 1,404 29 173
Other 62 25 19 37 6
Political Subdivisions 391 424 421 (33) 3
Leases 18 16 15 2 1
- ----------------------------------------------------------------------------------------------------------------------------
Total Loan Income 29,051 27,999 26,539 1,052 1,460
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Income 48,269 47,922 45,181 347 2,741
============================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 945 998 1,695 (53) (697)
Money Market 4,879 4,556 4,526 323 30
Savings 1,150 1,169 1,198 (19) (29)
Certificates of Deposit 6,549 6,431 6,183 118 248
Individual Retirement Accounts 4,713 4,563 5,165 150 (602)
Other Time Deposits 56 58 64 (2) (6)
Federal Funds Purchased 33 55 304 (22) (249)
Other Borrowed Funds 4,987 5,621 5,342 (634) 279
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 23,312 23,451 24,477 (139) (1,026)
============================================================================================================================
Net Interest Income (1) $24,957 $24,471 $20,704 $ 486 $ 3,767
============================================================================================================================
</TABLE>
(1) Net interest income, if reflected on a fully tax equivalent basis, would
have amounted to $26,773,000, $25,963,000, and $22,037,000 for 1997, 1996, and
1995, respectively.
32
<PAGE>
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
<TABLE>
<CAPTION>
Rate of Rate of Rate of
(In Thousands) Return/ Return/ Return/
Cost of Cost of Cost of
funds funds funds
EARNING ASSETS 12/31/97 % 12/31/96 % 12/31/95 %
Available-for-Sale Securities:
<S> <C> <C> <C> <C> <C> <C>
U. S. Treasury Securities $ 2,514 5.53 $ 2,506 5.11 $ 2,510 5.10
Securities of Other U.S. Government Agencies and Corporations 41,968 7.15 30,514 6.96 10,639 6.49
Mortgage-backed Securities 163,942 6.75 197,581 6.64 208,469 6.55
Obligations of States and Political Subdivisions 59,554 6.04 49,700 6.06 41,756 6.39
Stock 15,039 5.81 16,342 5.34 13,547 5.09
Other Securities 4,536 1.15 6,905 6.84 10,148 5.60
- ---------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 287,553 6.51 303,548 6.50 287,069 6.41
- ---------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 601 5.66 698 6.02 324 6.79
Securities of Other U. S. Government Agencies and Corporations 297 7.41 50 8.00 --- ---
Mortgage-backed Securities 689 7.55 829 7.12 1,004 7.67
Total Held-to-Maturity Securities 1,587 6.81 1,577 6.66 1,328 7.45
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 795 6.79 455 8.13 996 5.52
Federal Funds Sold 6,132 5.45 1,100 5.45 1,301 6.07
Loans:
Real Estate Loans 223,510 9.05 210,289 9.17 198,936 9.15
Consumer 32,293 20.08 35,305 18.13 36,230 17.01
Agricultural 2,689 10.12 2,750 10.11 3,051 10.32
Commercial/Industrial 16,743 9.59 16,207 9.73 13,998 10.03
Other 754 8.22 237 10.55 238 7.98
Political Subdivisions 6,355 6.15 6,629 6.40 6,524 6.45
Leases 236 7.63 201 7.96 166 9.04
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans 282,580 10.28 271,618 10.31 259,143 10.24
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 578,647 8.34 578,298 8.29 549,837 8.22
Cash 12,228 11,502 11,834
Securities Valuation Reserve 9,907 5,924 (2,668)
Allowance for Possible Loan Losses (4,844) (4,726) (4,484)
Other Assets 5,745 6,617 4,737
Bank Premises & Equipment 6,594 6,793 6,774
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets 608,277 604,408 566,030
=================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 38,334 2.47 40,558 2.46 42,118 4.02
Money Market 107,287 4.55 100,618 4.53 91,773 4.93
Savings 46,338 2.48 46,751 2.50 48,261 2.48
Certificates of Deposit 119,226 5.49 117,596 5.47 112,493 5.50
Individual Retirement Accounts 78,662 5.99 79,076 5.77 78,534 6.58
Other Time Deposits 2,223 2.52 1,937 2.99 2,465 2.60
Federal Funds Purchased 663 4.98 967 5.69 4,774 6.37
Other Borrowed Funds 88,548 5.63 101,121 5.56 87,728 6.09
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 481,281 4.84 488,624 4.80 468,146 5.23
Demand Deposits 42,780 42,500 39,313
Other Liabilities 8,211 6,794 4,844
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 532,272 537,918 512,303
Stockholders' Equity 69,440 62,797 55,961
- ---------------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve 6,565 3,693 (2,234)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $608,277 $604,408 $566,030
=================================================================================================================================
Interest Rate Spread 3.50 3.49 2.99
=================================================================================================================================
</TABLE>
(*) Average balances do not include unrealized gains and losses on
Available-for-Sale Securities.
33
<PAGE>
TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME
AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31, 1997/1996
(In Thousands) Change in Change In Total
Volume Rate Change
EARNING ASSETS Available-for-Sale Securities:
<S> <C> <C> <C>
U. S. Treasury Securities $ --- $ 11 $ 11
Securities of Other U.S. Government Agencies and Corporations 818 60 878
Mortgage-backed Securities (2,273) 220 (2,053)
Obligations of States and Political Subdivisions 595 (12) 583
Stock (17) 19 2
Other Securities (123) (297) (420)
- ------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities: (1,000) 1 (999)
- ------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities (6) (2) (8)
Securities of Other U.S. Government Agencies and Corporations 18 18
Mortgage-backed Securities (11) 4 (7)
Total Held-to-Maturity Securities 1 2 3
- ------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 22 (5) 17
Federal Funds Sold 274 (0) 274
Loans:
Real Estate Loans 1,192 (251) 941
Consumer (319) 401 82
Agricultural (6) 0 (6)
Commercial/Industrial 51 (22) 29
Other 41 (4) 37
Political Subdivisions (17) (16) (33)
Leases 3 (1) 2
- ------------------------------------------------------------------------------------------------------------------------------
Total Loans 945 107 1,052
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 242 105 347
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest Checking (55) 2 (53)
Money Market 302 21 323
Savings (10) (9) (19)
Certificates of Deposit 89 29 118
Individual Retirement Accounts (25) 175 150
Other Time Deposits 8 (10) (2)
Federal Funds Purchased (17) (5) (22)
Other Borrowed Funds (709) 75 (634)
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense (417) 278 (139)
- ------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 659 $ (173) $ 486
==============================================================================================================================
</TABLE>
The change in interest due to both volume and rates has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
34
<PAGE>
TABLE III - CONTINUED
<TABLE>
<CAPTION>
Years Ended December 31, 1996/1995
(In Thousands) Change in Change in Total
Volume Rate Change
EARNING ASSETS Available-for-Sale Securities:
<S> <C> <C> <C>
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)
- ----------------------------------------------------------------------------------------------------------------------------------
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 --- 6 6
Political Subdivisions 7 (4) 3
Leases 1 ---- 1
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 1,080 380 1,460
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,905 836 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 825 (1,851) (1,026)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $1,080 $2,687 $3,767
==================================================================================================================================
</TABLE>
The change in interest due to both volume and rates has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
35
<PAGE>
NONINTEREST INCOME
1997/1996/1995
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. On an overall basis, Noninterest Income
increased $360,000, or 12.6 percent, in 1997 compared to 1996. The increase in
noninterest income for 1997 includes a gain of $301,000 from the sale of a
copyrighted logo. Excluding this gain, other noninterest income would have
increased 2 percent over the year ended December 31, 1996 and 4 percent over the
year ended December 31, 1995.
Income generated from Service Charges on Deposit Accounts is from fees assessed
on checking accounts for monthly service charges, 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 for the years ended
December 31, 1997 and 1996, respectively. Service Charges on Deposit Accounts
for the years ended December 31, 1997, 1996 and 1995 accounted for 34 percent,
39 percent and 40 percent of total Noninterest Income, respectively. Excluding
the sale of the copyright, Service Charges on Deposit Accounts would have
contributed 37 percent of other noninterest income for 1997.
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 noncustomers, fees for bank money orders,
cashier checks, traveler's checks, etc. Annually, Other Service Charges and Fees
contributed approximately 10 percent of the total Noninterest Income 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, 1997, 1996 and 1995, respectively, Trust Department
Income amounted to 35 percent, 30 percent and 26 percent of total noninterest
income. The contribution percentage calculated for 1997 excludes the sale of the
previously mentioned copyright. Trust Department Income has increased
approximately 18 percent when comparing the years ended December 31, 1997 and
1996 and 17 percent when comparing 1996 to 1995. The increase can be attributed
to an increase in trust accounts and trust assets. Assets under management for
the years ended December 31, 1997, 1996 and 1995, respectively, were
$229,500,000, $222,541,000 and $181,351,000. The increase in the market value of
trust assets had a large impact on trust fees during 1997 and 1996.
Insurance Commissions, Fees and Premiums generated by the Corporation's
subsidiary, Bucktail Life Insurance Company, accounted for 16 percent, 19
percent and 22 percent of Noninterest Income for the years ended December 31,
1997,1996 and 1995, respectively. Insurance Commissions, Fees and Premiums have
been declining due to the availability of less expensive term policies for loan
repayment protection from other insurance companies. The contribution percentage
to Other Noninterest Income was calculated excluding the sale of the copyright.
36
<PAGE>
Realized Gains and Losses on available-for-sale securities for the year ended
December 31, 1997 amounted to $1,001,000. During 1997, $109,016,000 in
mortgage-backed available-for-sale securities were sold at a loss of $1,773,000.
Securities with a weighted average return of 6.59 percent were sold and the
proceeds were invested in securities with an average expected rate of return of
7.24 percent. The purpose of the restructuring was to increase annual income and
increase the market value of portfolio equity. The realized loss on the
restructuring transaction is expected to be recovered through enhanced earnings
in 2.3 years. These losses were more than offset by gains from the sales of bank
stocks in the amount of $2,774,000 in 1997.
During 1996 and 1995, realized gains amounted to $475,000, and $1,675,000,
respectively, primarily from the sale of equity investments.
TABLE IV - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
% %
(In Thousands) 1997 Change 1996 Change 1995
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $1,076 (4.27) $1,124 0.63 $1,117
Service Charges and Fees 281 4.46 269 (1.47) 273
Trust Department Income 1,004 17.84 852 17.36 726
Insurance Commissions, Fees and Premiums 462 (16.76) 555 (10.48) 620
Other Operating Income 384 717.02 47 (21.67) 60
- ----------------------------------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized
Gains on Securities, Net 3,207 12.64 2,847 1.82 2,796
Realized Gains on Securities, Net 1,001 110.74 475 (71.64) 1,675
- ----------------------------------------------------------------------------------------------------------------------------
Total Other Income $4,208 26.67 $3,322 (25.70) $4,471
============================================================================================================================
</TABLE>
OTHER NONINTEREST EXPENSE
1997/1996/1995
Other noninterest expense consists of Salaries and Wages, Pension and Other
Employee Benefit Expenses, Occupancy Expense, Furniture and Equipment Expense
and Other Operating Expense. Total Other Expense for the year ended December 31,
1997 increased 2.78 percent when compared to the year ended December 31, 1996
and 7.22 percent when compared to the year ended December 31, 1995.
Salaries and Wages for the year ended December 31, 1997 increased $88,000 and
$590,000, respectively, when compared to the years ended December 31, 1996 and
1995. Several retirements, including the retirement of the Corporation's former
President, had the effect of limiting the increase in 1997, as certain positions
were not replaced. 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.
Pension and Other Employee Benefits for the year ended December 31, 1997
declined 1.05 percent when compared to the year ended December 31, 1996. The
decrease can be attributed to a decrease of $53,000 in group health care costs,
a decrease of $33,000 in pension expense and a decrease of $83,000 in the
contribution to the Supplemental Employees Retirement Plan. The decrease in
health care costs is attributed to lower rates in 1997. The decrease in the
pension contribution can be attributed to
37
<PAGE>
the performance of the plan and its fully funded status. Contributions to the
Supplemental Employees Retirement Plan were smaller due to the retirement of the
Corporation's President. 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 Employees Retirement Plan due to changes in
actuarial assumptions.
Occupancy Expense varied only slightly when comparing the expense recorded in
1997 to that of 1996 and 1995. The change between the years ended December 31,
1997 and December 31, 1996 was an increase of .69 percent. The increase between
the years ended December 31, 1996 and 1995 was also minimal, at 3.30 percent.
Occupancy costs for 1998 may increase slightly with the installation of ATMs.
Furniture and Equipment Expense decreased $3,000 when comparing the years ended
December 31, 1997 and 1996. There was a 7.5 percent or $51,000 increase 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. The
installation of the previously mentioned ATMs will increase equipment
maintenance costs in 1998; however, it should be insignificant. Capital
expenditures on equipment for 1998 are estimated to be in the range of
$1,000,000, including ATMs, enhancements to the mainframe computer, replacement
of older PCs, and the installation of a gas generator to protect the integrity
of the Corporation's information systems in the event of a fire or other natural
disaster.
Other Operating Expense increased 5.97 percent when comparing the years ended
December 31, 1997 and 1996. The largest contributor to those increased costs was
the Corporation's credit card operation. Those costs increased $239,000. It
should be noted that a portion of those increased costs resulted from the sale
of the Corporation's copyrighted debit card logo. Due to the sale of the logo, a
new advertising campaign had to be developed and new supplies, including cards,
had to be purchased. Those costs amounted to approximately $100,000. (Credit
card income, included in interest and fees on loans, also increased $250,000.)
The Corporation also posted net losses of $97,000 on the sale of real estate
acquired through defaulted real estate loans, compared to a loss of $70,000
during 1996. Other Operating Expense did not increase or decrease significantly
when comparing the years ended December 31, 1996 and 1995. The major components
of Other Operating Expense, or those that exceed 10 percent of the total, are
Pennsylvania Shares Tax and credit card processing costs.
TABLE V- COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) % %
1997 Change 1996 Change 1995
<S> <C> <C> <C> <C> <C>
Salaries and Wages $ 5,975 1.49 $ 5,887 9.32 $ 5,385
Pensions and Other Employee Benefits 1,691 (1.05) 1,709 5.62 1,618
Occupancy Expense, Net 726 0.69 721 3.30 698
Furniture and Equipment Expense 723 (0.41) 726 7.56 675
Other Operating Expense 5,980 5.97 5,643 (1.05) 5,703
- ----------------------------------------------------------------------------------------------------------------------
Total Other Expense $15,095 2.78 $14,686 4.31 $14,079
======================================================================================================================
</TABLE>
INCOME TAXES
The Corporation's Income Tax Provision reflected as a per share cost to
stockholders, amounted to $.62, $.62 and $.49, respectively, for 1997, 1996 and
1995. The amount of income tax payable per common share for those years was
$.62, $.66 and $.51, respectively. The per share tax payable for 1997 is a
reasonable estimate as the return has not been prepared as of the date of this
analysis.
38
<PAGE>
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 12 of the "Notes to the Consolidated Financial
Statements" for a more complete analysis of income tax expense.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of a contract with the Corporation. Management's
responsibility for maintaining an adequate allowance for loan losses is clearly
identified by the banking regulatory agencies in the Interagency Policy
Statement on the Allowance for Loan and Lease Losses ( the Interagency Policy)
and in generally accepted accounting principles (GAAP). The Interagency Policy
states; "Federally insured depository institutions must maintain an Allowance
for Loan Losses at a level that is adequate to absorb estimated credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend."
The assessment of the allowance balance is performed by management and reviewed
by the Board of Directors quarterly. The Board of Directors also reviews the
Corporation's "Watch List" monthly. The "Watch List" is a collection of loans
that have a history of delinquency, collateral deficiency, cash flow problems,
etc. Total "Watch List" loans at December 31, 1997 were approximately
$10,625,000, All of the watch list loans have the potential of becoming
significant credit risks; however, a substantial portion of the loans are
current as to principal and interest. After reviewing charge-offs posted in
December 1997, the Board of Directors decided to increase the monthly charge to
earnings for December by $70,000. The increase was necessitated by an increase
in credit card charge-offs and the Board's desire to maintain a balance in the
allowance, as a percentage of total loans, that slightlt exceeds that of its
peer group.
The quarterly assessment is performed by a loan quality committee which consists
of the President, Treasurer, Executive vice-presidents in charge of loans and
branch administration and in a review capacity, the Corporation's internal
auditor. The committee reviews all of the risk elements in the loan portfolio;
namely, the "Watch List", past due reports, nonperforming loans, Other Real
Estate and historical information related to charge-offs and recoveries by loan
categories.
In the event that a loan becomes 90 to 120 days or more past due, the loan is
reviewed by the loan quality committee and if necessary is classified as an
impaired or nonperforming loan. At the time the loan is classified as impaired,
all accrued interest is written off against earnings or the allowance for loan
losses, whichever is applicable. The collateral value is compared to the
carrying value and any deficiency become a specific allocation of the Reserve
for Possible Loan Losses as required by SFAS No. 114 ", Accounting by a Creditor
for Impairment of a Loan". Specific allocations for impaired loans at December
31, 1997 and 1996 amounted to $274,000 and $113,000, respectively.
The balance of the Reserve for Possible Loan Losses is then allocated across the
balance of the portfolio. Two methods of allocation are used: the first, an
historic method using the history of charge-offs and recoveries during the
previous five years, 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 portion of
the reserve to be allocated. This allocation method was changed as it was
applied in 1997. It was felt that the 1997 charge-offs were not representative
of the prior period averages. Therefore, the allocation applied to mortgage,
consumer and credit card loans was increased substantially. The second method,
called the "Regulatory Method" extracts loans by a quality rating system. The
committee categorizes all "Watch List" loans as "Substandard", "Doubtful", or
"Loss". Using regulatory guidelines of 15 percent of substandard, 50 percent of
doubtful and 100 percent of loss, the reserve is then allocated under regulatory
guidelines.
39
<PAGE>
The following regulatory allocation was performed at December 31, 1997.
<TABLE>
<CAPTION>
(In Thousands) Total Regulatory
Classified Allocation
<S> <C> <C>
Substandard Loans @ 15 percent $ 7,262 $1,089
Doubtful Loans @ 50 percent 1,859 930
Loss Loans @100 Percent 93 93
Impaired Loans, Collateral Value 1,412 274
- -------------------------------------------------------------------------------------------------
Total Allocation $10,626 2,386
Unallocated Portion 2,588
=================================================================================================
Total Reserve Balance $4,974
=================================================================================================
</TABLE>
The Corporation also engages a consulting firm to perform an independent credit
review. Their review is performed annually on loans of $175,000 and higher. The
most recent review was at the close of business June 13, 1997 and the
consultants' report lists substandard loans at $7,878,483, doubtful loans at
$357,809 and loss loans at $3,205. The reserve allocation based upon these
classifications would amount to $1,363,882 as of June 13, 1997.
The Corporation was examined by the Pennsylvania Department of Banking during
March and April of 1997 as of December 31, 1996. The Corporation charges off
loans that are recommended by the examiners unless there are underlying
circumstances that management feels will make the debt collectible. The
Corporation also has a policy of charging off loans, based on management's
analysis and The Board of Directors' approval, at the end of each quarter.
Tables VI, VII, and VIII present an analysis of the loan portfolio, the
allowance for loan losses and the allocation of the allowance.
Table VI - Six Year History of Loan Losses
(In Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 Average
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loans * $ 285,426 $ 278,639 $ 264,182 $ 258,472 $ 238,755 $ 225,475 $ 258,492
Net Charge-offs 660 504 387 326 247 518 440
Allowance for Possible Loan Losses
Balance 4,913 4,776 4,579 4,229 3,817 3,356 4,278
Provision for Loan Losses Charged to 797 701 737 737 708 1,326 834
Earnings
Earnings 10,107 9,255 7,866 7,494 8,127 7,290 8,357
Earnings Coverage of Net Charge-offs 15.3 x 18.4 x 20.3 x 23.0 x 32.9 x 14.1 x 19 x
Allowance Coverage of Net Charge-offs 7.4 x 9.5 x 11.8 x 13.0 x 15.5 x 6.5 x 9.7 x
Loans Ninety Days or More Past Due and
Still Accruing 1,986 2,994 2,915 2,743 2,899 2,532 2,678
Net Charge-offs as a Percent of the 82.8 % 71.9 % 52.5 % 44.2 % 34.9 % 39.1 % 52.8 %
Provision
Year-End Nonperforming Loans 1,412 864 279 624 843 1,351 896
Allowance as a Percentage of Gross
Loans:*
Citizens & Northern Corp. (1) 1.72 % 1.71 % 1.73 % 1.64 % 1.60 % 1.49 % 1.65 %
Peer Group (2) 1.43 % 1.50 % 1.61 % 1.65 % 1.82 % 1.60 % 1.60 %
</TABLE>
* Gross Loans less Unearned Discount
(1) At December 31, 1997
(2) At September 30, 1997
40
<PAGE>
TABLE VII - ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $4,776 $4,579 $4,229 $3,817 $3,356
Charge-offs
Real Estate Loans 246 157 38 ---- 95
Installment Loans 230 240 236 266 195
Credit Card and Related Plans 305 201 184 144 183
Commercial and Other Loans 3 74 116 109 105
- ----------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 784 672 574 519 578
- ----------------------------------------------------------------------------------------------------------------------------
Recoveries
Real Estate Loans 21 22 4
Installment Loans 64 53 60 68 84
Credit Card and Related Plans 30 38 41 42 41
Commercial and Other Loans 9 55 86 80 206
- ----------------------------------------------------------------------------------------------------------------------------
Total Recoveries 124 168 187 194 331
- ----------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 660 504 387 325 247
Additions Charged to Operations 797 701 737 737 708
- ----------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $4,913 $4,776 $4,579 $4,229 $3,817
============================================================================================================================
</TABLE>
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES BY TYPE
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Mortgage $ 350 $ 58 $ 38 $ 35 $ 35
Consumer 375 303 286 241 205
Commercial 625 630 604 443 583
Impaired Loans 274 113 228
All Other Commitments 142 369 374 386 411
- ----------------------------------------------------------------------------------------------------------------------------
Total Allocated 1,766 1,473 1,530 1,105 1,234
Unallocated 3,147 3,303 3,049 3,124 2,583
- ----------------------------------------------------------------------------------------------------------------------------
Total Allowance $4,913 $4,776 $4,579 $4,229 $3,817
============================================================================================================================
</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.
41
<PAGE>
TABLE IX - FIVE YEAR SUMMARY OF LOANS BY TYPE
<TABLE>
<CAPTION>
1997 % 1996 % 1995 % 1994 % 1993 %
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate-Construction $ 406 0.14 $ 1,166 0.42 $ 1,284 0.49 $ 2,539 0.98 $ 2,224 0.93
Real Estate-Mortgage 219,952 77.05 213,957 76.79 200,066 75.72 193,095 74.72 176,518 73.92
Consumer 33,094 11.59 33,420 11.99 36,351 13.76 37,531 14.52 37,713 15.79
Agricultural 2,424 0.85 2,603 0.93 2,815 1.07 3,154 1.22 3,207 1.36
Commercial 17,176 6.02 15,751 5.65 14,445 5.47 13,625 5.27 13,046 5.46
Other 6,260 2.19 5,014 1.80 2,512 0.95 2,459 0.95 1,782 0.75
Political Subdivisions 5,895 2.07 6,464 2.32 6,546 2.48 5,870 2.27 4,114 1.72
Lease Receivables 256 0.09 264 0.09 189 0.07 168 0.07 176 0.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total 285,463 100.00 278,639 100.00 264,208 100.00 258,441 100.00 238,780 100.00
Less Unearned Discount (37) (42) (26) (23) (25)
- -----------------------------------------------------------------------------------------------------------------------------------
285,426 278,597 264,182 258,418 238,755
Less Allowance for Possible
Loan Losses (4,913) (4,776) (4,579) (4,229) (3,817)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease
Financing Receivables $280,513 $273,821 $259,603 $254,189 $234,938
===================================================================================================================================
</TABLE>
BALANCE SHEET
Average Total Assets of the Corporation for the year ended December 31, 1997
were $608,277,000. This compares to average total assets for the years ended
December 31, 1996 and December 31, 1995 of $604,408,000 and $566,030,000,
respectively.
Assets of the Corporation consist of earning and nonearning assets. Earning
assets include investments, loans and certain interest-bearing deposits held at
the Federal Home Loan Bank of Pittsburgh and other correspondent banks.
The average balance of the investment portfolio during 1997 amounted to
$289,140,000 or 50 percent of total earning assets. This compares to average
investment portfolio balances in 1996 and 1995 of $305,125,000 and $288,397,000,
respectively. The investment portfolio amounted to 52.8 percent of earning
assets in 1996 and 52.5 percent in 1995. Investments are purchased when the
Corporation has deposits in excess of its loan demand, or when leverage
opportunities exist and funds are borrowed. Investing borrowed funds allows the
Corporation to leverage its strong capital position. Normally the leveraged
borrowing will produce a spread of about 150 basis points (1.5 percent).
The investment portfolio consists of U. S. Treasury securities, U. S. agency
securities, municipal bonds, other bonds and equity securities. U. S. Treasury
notes normally make up about 1 percent of the total portfolio and traditionally
carry a lower after tax return than the other investments and are used as
collateral for U. S. Government and state deposits. U. S. agency investments
during 1997, 1996 and 1995 averaged 14.6 percent, 10.0 percent and 3.7 percent
of the portfolio, respectively. Included in the portfolio of U. S. agency
investments are instruments issued by the Federal National Mortgage Association,
the Federal Home Loan Bank, and the Federal Home Loan Mortgage Corporation. The
Corporation also holds a large portion of state and municipal bonds in the
portfolio. The municipal bonds carry a lower rate of interest; however, a large
portion of the interest is tax exempt, which effectively increases the rate of
return. A portion of the interest paid on deposits used to purchase these bonds,
however, is nondeductible. During 1997, 1996 and 1995 average balances carried
in municipal bonds made up 20.6 percent, 16.3 percent and 14.5 percent of the
investment portfolio, respectively. Mortgage-backed securities make up the
largest part of the portfolio averaging 56.9 percent, 65.0 percent and 72.6
percent for the years ended 1997, 1996, 1995, respectively. Mortgage-backed
investments are issued by the Federal National Mortgage Association, the
Government National Mortgage Association and the Federal Home Loan Mortgage
Corporation. The investments represent a share of a pool of mortgages or a bond
secured by a pool of mortgages. The rate of return on the pool depends on the
weighted average coupon or mortgage rate of the individual mortgages in the pool
and whether the pool was purchased at a discount or premium. The pools are used
for liquidity purposes as they provide a monthly cash flow of $2,000,000 to
$3,000,000. The pools carry a risk of accelerated prepayment during periods of
falling interest rates. The funds then must be reinvested at somewhat lower
rates, and if the securities were purchased at a premium, they are subject to
larger monthly
42
<PAGE>
amortization charges, effectively lowering the rate of return. The balance of
the investment portfolio consists of Federal Home Loan Bank of Pittsburgh stock
and stocks in other banks and bank holding companies primarily in Pennsylvania,
and other bonds of highly rated corporations.
The available-for-sale investment portfolio must be reported at market value, so
at the end of each quarterly reporting period the entire portfolio is repriced
to the current market value. The difference between cost and market value
represents unrealized gain or loss and is recorded, net of tax as an increase or
decrease in capital of the Corporation. The net adjustment to capital as of
December 31, 1997, 1996 and 1995 was $13,335,000, $5,767,000 and $6,952,000,
respectively.
Average total loans for the years ended December 31, 1997, 1996 and 1995
amounted to $282,580,000, $271,618,000 and $259,143,000, respectively. As a
percentage of average earning assets for those years they were 48.8 percent,
47.0 percent and 47.1 percent, respectively.
Historically, real estate secured loans have made up 70 to 80 percent of the
dollars in the loan portfolio, including a significant amount of mortgages
secured by 1-4 family dwellings which have had a very low default rate. The
mortgage portfolio carries with it the same risk of prepayment as the
mortgage-backed investments in a falling interest rate environment.
Approximately 32.8 percent of the amount of loans outstanding are to commercial
and other business enterprises; the remaining amount, 67.2 percent are consumer
loans including credit cards. The dollar amount of loans by business type at
December 31, 1997 are as follows: agriculture-related, 3.9 percent (403 loans)
of total commercial loans; to retail trade, 5.9 percent (322 loans); real estate
brokers and insurance companies, 4.4 percent (256 loans); the service industry,
consisting of hotels, motels, restaurants, doctors, dentists, etc., 7.2 percent
(383 loans); forestry, mining and construction, 2.0 percent (190 loans);
manufacturing, e.g., saw mills, hardwood veneer, and logging, 4.4 percent (162
loans). The balance of the portfolio consists of loans to municipalities,
transportation related businesses, wholesale businesses, etc. and they make up
4.8 percent of the portfolio (572 loans). The consumer portion of the portfolio
amounts to approximately 10,331 loans to individuals for home mortgages and
other personal expenditures such as home furnishings and automobiles.
The structure and nature of the loan portfolio is not expected to change
significantly in the coming years and loan growth for 1998 will probably be in
the 2 to 4 percent range as there is increasing competition from mortgage
brokers outside of our market area. The Corporation did introduce a new home
equity line of credit during 1997 that has enjoyed a certain amount of success
because of the price, ease and speed with which it is set up.
Approximately 4.9 percent of the Corporation's average assets for 1997 were
invested in land, buildings, furniture and fixtures and noninterest-bearing
cash. The Corporation has 15 banking offices in Tioga, Bradford, Sullivan and
Lycoming counties. All of the offices are modern banking facilities. The
Corporation has purchased several ATMs and has several more on order. The ATMs
will be placed at strategic locations within the Corporation's market area. The
expenditure for the ATMs is expected to be between $400,000 and $500,000.
Additional capital expenditures in 1998 are estimated to be approximately
$500,000.
The liability side of the balance sheet is made up of three basic components:
deposits, borrowed funds and capital.
The deposit base is primarily interest-bearing and has remained relatively
stable and unchanged during the past three years. Interest-bearing deposit
categories include Interest Checking accounts, Money Market accounts, Regular
Savings (passbook and statement), Certificates of Deposit, Individual Retirement
Accounts and other time deposits(Christmas clubs, Vacation clubs and Golden
Passbook accounts).
Certificates of Deposit provide the major portion of the deposit base for the
Corporation. Average balances, respectively, for the years ended December 31,
1997, 1996 and 1995 amounted to $119,226,000, $117,956,000 and $112,493,000,
representing 27 percent of the deposit base in each of the three years.
Competition is also very stiff for Certificates of Deposit. At December 31, 1997
the Corporation had approximately 9,700 accounts.
The Corporation's Super Money Fund (Money Market) accounts provide the second
largest source of deposits, averaging between 22 and 25 percent of the deposit
base during the past 3 years and numbering 3,252 accounts at December 31, 1997.
The accounts are required to carry a higher minimum balance and are paid a
higher rate of interest than Interest Checking and Savings accounts. The
interest rate is determined utilizing the 91-day treasury bill rate as an
indicator. Monthly activity is restricted by regulation. The Corporation has
been successful in recent years in attracting Super Money Fund accounts by
paying a slightly higher rate than other institutions in our market area.
43
<PAGE>
Interest Checking accounts have carried average balances of $38,000,000 to
$42,000,000 during the past three years, amounting to 8 to 10 percent of the
deposit base and numbering 2,453 accounts at December 31, 1997. This type of
account allows unlimited transaction activity and earns a rate of interest
slightly higher than Regular Savings, provided the balance is $2,500 or higher;
when the balance falls below $2,500 the rate paid is less than Regular Savings.
The average balance has dropped off about 2 percent since 1995 as the rate was
lowered on November 1, 1995 from 79 percent of the treasury indicator to 50
percent of the same indicator. The indicator used to price this account is the
91-day treasury bill auction 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 average balance
for this type of account has experienced some erosion during the past three
years. Average balances during 1995 amounted to approximately $48,261,000 and in
1996 the average declined to $46,751,000. For the year ended December 31, 1997
the average balance was $46,338,000. The probable cause for the decline in
balances is movement to higher rate instruments and alternative investments,
especially mutual funds. At December 31, 1997, the Corporation had 18,324
Regular Savings and Statement Savings accounts.
Demand deposit average balances have remained stable during the past three
years, averaging between $39,000,000 and $43,000,000. The Corporation offers a
variety of checking account types to meet the needs of our market area. The
total number of checking accounts being serviced at December 31, 1997 was
approximately 20,800.
Individual Retirement Accounts during the past three years have carried average
balances in the $78,000,000 to $79,000,000 range and make up just over 18
percent of the deposit base for 1997. The corporation has aggressively marketed
Individual Retirement Accounts by paying a higher than market rate. During the
past three years increased competition from mutual funds and the Corporation's
Trust department have slowed deposit growth. The number of accounts was 3,980 at
December 31, 1997.
The balance of the deposit base is made up of Christmas Club, Vacation Club and
Golden Passbook accounts. Balances in those accounts have averaged approximately
$2,000,000 during the past three years.
The remaining component of interest-bearing liabilities is borrowed funds.
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 borrowings covered by the floating-lien agreement for the years ended
December 31, 1997, 1996 and 1995 averaged $51,068,000, $59,600,000 and
$45,000,000, respectively. Repurchase agreements for the same periods totaled,
respectively, $37,480,000, $45,000,000 and $40,000,000. Average balances for
Federal Funds Purchased for each of the three years, respectively, amounted to
$663,000, $967,000, and $4,774,000.
The terms for fixed rate borrowings and Repurchase Agreements range from 3
months to 5 years. Also included in the borrowings are two loans totaling
$25,000,000 with rates tied to LIBOR. The loans have a five-year maturity and
the interest rate changes quarterly. The Corporation has the option to repay the
credit at the repricing date if the interest rate increases.
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 the Federal Home Loan Bank of
Pittsburgh, Solomon Brothers or Morgan Stanley.
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
44
<PAGE>
to $6,000,000 and new loan advances, net of loan repayments, average less than
$100,000 daily. During 1997 and 1996, occasionally there were 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.
MARKET RISK
The Corporation's two major categories of market risk, interest rate and equity
securities risk, are discussed in the following sections.
INTEREST RATE RISK
Business risk that exists and arises from changes in interest rates is an
inherent factor in operating a bank. The Corporation's 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, with interest rates that can
change frequently, are used to fund long-term assets, with rates that change
much less frequently, there is an inherent interest rate and market value risk.
Interest rate fluctuations impact the book values of the Corporation's
investments which are carried as available-for-sale securities and marked to the
current market values 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 not
available for sale and therefore, market value fluctuations are not recorded.
Two methods used to measure Interest Rate Risk are the impact on net interest
income and the impact on the market value of the Corporation's portfolio equity.
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 of portfolio equity.
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.
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.
45
<PAGE>
Table X was prepared using the Sendero model described above. The estimated
change in the net interest margin was calculated based on the difference between
the Corporation's estimated interest margin for 1998 based on current interest
rates as of December 31, 1997 of $22,951,000, and the hypothetical interest
margin that would result from the changes in interest rates presented. The
market value of portfolio equity represents the difference between incoming and
outgoing cash flows, discounted to present value, from assets, liabilities and
off-balance sheet contracts. The results presented in Table X indicate that the
Corporation was operating within its internal tolerable interest rate risk
guidelines as of December 31, 1997; however, if interest rates were to rise 300
basis points, management would be required to take action to restructure its
assets and liabilities.
The model utilized to create Table X 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 calculations 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.
TABLE X - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
Period Ending December 31, 1998 At December 31, 1997
(In Thousands) Estimated Estimated Estimated Estimated
Change in Estimated Change in Change in Estimated Change in Change in
Interest Rates NIM (1) NIM (1) NIM (1) MVPE (2) MVPE (2) MVPE (2)
(Basis Points) $ $ % $ $ %
<S> <C> <C> <C> <C> <C> <C>
+ 300 $21,710 $(1,241) -5.41 $61,086 $(26,614) -30.35
+ 200 22,090 (861) -3.75 65,935 (21,765) -24.82
+ 100 22,338 (613) -2.67 70,498 (17,202) -19.61
Flat 22,951 87,700
- 100 24,292 1,341 5.84 87,702 2 0.00
- 200 25,503 2,552 11.12 97,431 9,732 11.10
- 300 26,712 3,761 16.39 108,287 20,587 23.47
</TABLE>
(1) Net Interest Margin
(2) Market Value of Portfolio Equity
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 stocks of other banks and bank holding companies, mainly based 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 (decline in value on an other than
temporary basis) 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 that factors affecting the
banking industry generally, including competition from non-bank entities, credit
risk, interest rate risk and other factors, could result in a decline in market
prices. Also, losses could occur in individual stocks held by the Corporation
because of specific circumstances related to each bank. Further, because of the
concentration of its holdings in Pennsylvania banks, these investments could
decline in value if there were a downturn in the state's economy.
The Corporation's management monitors its risk associated with its equity
securities holdings by reviewing its holdings on a detailed, individual security
basis, at least monthly, considering all of the factors described above.
46
<PAGE>
Equity securities held as of December 31, 1997, 1996, and 1995 are as
follows:
(In Thousands)
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % 20 %
Decline in Decline in
At December 31, 1997 Cost Fair Value Market Value Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks & Bank Holding Companies $12,035 $27,909 ($2,791) ($5,582)
Federal Home Loan Bank and Other Restricted Stocks 4,114 4,114 (411) (822)
- ----------------------------------------------------------------------------------------------------------------------------
Total $16,149 $32,023 ($3,202) ($6,404)
============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % 20 %
Decline in Decline in
At December 31, 1996 Cost Fair Value Market Value Market Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks & Bank Holding Companies $12,122 $20,692 ($2,069) ($4,138)
Federal Home Loan Bank and Other Restricted Stocks 3,950 3,950 (395) (790)
- ---------------------------------------------------------------------------------------------------------------------------
Total $16,072 $24,642 ($2,464) ($4,928)
===========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % 20 %
Decline in Decline in
At December 31, 1995 Cost Fair Value Market Value Market Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks & Bank Holding Companies $11,329 $17,364 ($1,736) ($3,473)
Federal Home Loan Bank and Other Restricted Stocks 3,341 3,341 (334) (668)
- ----------------------------------------------------------------------------------------------------------------------------
Total $14,670 $20,705 ($2,071) ($4,141)
============================================================================================================================
</TABLE>
47
<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 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 I; the
remainder may be tier II. The total (tier I and tier II) risk-based capital
ratios as December 31, 1997 and 1996 were 22.99 percent and 22.04 percent ,
respectively.
The primary source of capital growth for Citizens and Northern Corporation is
earnings. The growth of capital, excluding unrealized gains on
available-for-sale securities, attributable to earnings, (net of dividends), for
the years ended December 31, 1997, 1996 and 1995 was 9.7 percent, 9.7 percent
and 8.4 percent, respectively.
The total capital of the Corporation at December 31, 1997, excluding net
unrealized gains on Available-for-Sale Securities, amounted to $72,200,000. This
compares to total capital of $65,826,000 and $60,025,000 at December 31, 1996
and 1995, respectively.
Total capital of the Corporation at December 31, 1997, 1996, and 1995,
respectively, including the adjustment for unrealized gains and losses on
Available-for-Sale Securities, amounted to $85,535,000, $71,593,000 and
$66,977,000. The adjustment is caused by the required implementation of
Statement of Financial Accounting Standards (SFAS) No. 115. This pronouncement
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, be included in shareholders' equity.
The leverage ratio (capital divided by total liabilities), excluding the
adjustment for unrealized gains and losses on available-for-sale securities, at
December 31, 1997 and 1996 was 13.6 percent and 12.2 percent , respectively. The
capital to deposits ratio at the same dates was 16.3 percent and 15.3 percent,
respectively.
There are no planned capital expenditures which would have a detrimental effect
on the capital ratios or the results of operations.
YEAR 2000 COMPLIANCE
The "Year 2000" problem is a computer problem that began when computers became
available 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. 1997 as 97. When the date rolls
forward to 2000, most computers will look at the date as 1900. This could have a
major impact on interest calculations, expiration dates, etc.
Citizens & Northern Corporation began working on the problem in 1996 and is well
on the way toward compliance. The Corporation has a Year 2000 Committee and a
policy statement that was adopted by the Board of Directors. The Year 2000
Committee reports its progress to the Board on a quarterly basis.
Work on the Year 2000 problem is well in excess of 50 percent complete with
testing of main frame programs scheduled to begin in June 1998. The
Corporation's vice-president in charge of the commercial lending function is
currently developing a strategy to make our business customers aware of the
problem.
Putting a price tag on the Year 2000 problem for your Corporation cannot be
determined as we have a full-time, dedicated programming staff and none of the
work is being done by consultants. The work has been integrated into the daily
workload of the staff since 1996 so the cost is being spread over a three-year
period. It is estimated, however, that it will cost about $50,000 to replace
personal computers and personal computer software, most of which has already
been done. Letters have been sent to all vendors who supply products and
services to the Corporation and nearly all have responded positively.
Nationwide, the estimated cost of fixing the problem has been put at $250,000
per billion dollars of assets. This will not be the case for your Corporation.
In summary, your Corporation will be Year 2000 compliant by January 1, 1999.
48
<PAGE>
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.
Growth in the U. S. is at a 2 to 2 1/2 percent level which is considered to be
noninflationary by the Fed and because of this the Fed did not tighten monetary
policy at its December 97 meeting. The yield curve at this time is very flat,
with the difference in spread between 2-year and 10-year maturities at
approximately 5 basis points (.005 percent).
The Asian crisis still looms and could impact our economy. Locally, several of
the manufacturing facilities and some of the lumber producers sell to the Asian
markets and as the dollar becomes stronger our products become more expensive.
This coupled with a weaker Asian economy could slow growth locally.
NEW FINANCIAL ACCOUNTING STANDARD - REPORTING COMPREHENSIVE INCOME
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Statement No. 130 requires that all items that are
required to be recognized as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. This Statement does not require a specific format for that
financial statement, but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. The impact of this Statement on the Corporation will result
in additional disclosures in the Corporation's financial statements.
49
<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 1997, 1996 and 1995 as furnished by brokers and other
sources considered by the Corporation to be reliable.
<TABLE>
<CAPTION>
1997 1996 1995
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 $26.50 $24.00 $0.18 $22.50 $20.50 $0.17 $20.25 $18.50 $0.16
Second Quarter 29.25 27.25 0.18 22.75 21.00 0.17 20.25 18.75 0.16
Third Quarter 32.25 29.50 0.18 23.25 21.50 0.17 20.00 19.50 0.16
Fourth Quarter 33.50 30.75 0.20 25.50 22.50 0.18 20.25 19.75 0.17
plus plus plus
1 % stock 1 % stock 1 % stock
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK AND PER SHARE DATA 1997 1996 1995 1994 1993
- ------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income - Basic $1.98 $1.81 $1.54 $1.47 $1,59
Net Income - Diluted $1.97 $1.81 $1.54 $1.47 $1.59
Cash Dividends Declared $0.73 $0.68 $0.63 $0.59 $0.53
Cash Dividends Declared on an Historical Basis $0.74 $0.69 $0.65 $0.615 $0.56
Stock Dividend 1 % 1 % 1 % 1 % 1 %
Number of Shares Outstanding(excluding shares held in
treasury) 5,063,043 5,012,332 4,962,456 4,913,322 4,864,674
Weighted Average Number of Shares Outstanding - Basic 5,113,218 5,113,079 5,113,079 5,113,079 5,113,079
Weighted Average Number of Shares Outstanding - Diluted 5,118,645 5,114,303 5,113,079 5,113,079 5,113,079
Number of Shares Issued 5,168,354 5,117,182 5,066,516 5,016,352 4,966,684
Number of Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Stockholders' Equity Per Share (a) 16.73 14.00 13.10 9.15 11.05
Stockholders' Equity Per Share (*) (a) 14.12 12.87 11.74 10.83 9.96
Number of stockholders at Year End 2,182 2,119 2,027 1,901 1,819
</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.
50
<PAGE>
Known "market makers" who handle Citizens & Northern Corporation stock
transactions are:
<TABLE>
<S> <C> <C>
F. J. MORRISSEY & CO., INC. HOPPER SOLIDAY & COMPANY RYAN, BECK & COMPANY
1700 Market Street, Suite 1420 1703 Oregon Pike 3 Parkway
Philadelphia, PA 19103-3913 Lancaster, PA 17601-6401 Philadelphia, PA 19102
(215) 563-8500 (800) 526-6371 (800) 342-2325
FERRIS, BAKER WATTS, INC. MERRILL LYNCH, PIERCE, SANDLER O'NEILL & PARTNERS, LP
6 Bird Cage Walk FENNER & SMITH, INC. Two World Trade Center, 104th Floor
Holidaysburg, PA 16648 One West Third Street New York, NY 10048
(800) 343-5149 Williamsport, PA 17701 (800) 635-6851
(800) 937-0769
INVESTOR INFORMATION INDEPENDENT AUDITORS
ANNUAL MEETING OF General shareholder inquiries PARENTE, RANDOLPH, ORLANDO
SHAREHOLDERS should be sent to: CAREY & ASSOCIATES
400 Market Street
The Annual Meeting of Shareholders CITIZENS & NORTHERN Williamsport, PA 17701
will be held in Wellsboro, PA, at CORPORATION
2:00 p.m., Tuesday, April 21, 1998. 90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
STOCK TRANSFER AGENT
Citizens & Northern Bank
90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
(800) 487-8784
</TABLE>
51
<PAGE>
FIVE YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
(IN THOUSANDS)
NICOME STATEMENT 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest Income $48,269 $47,922 $45,181 $42,309 $39,122
Interest Expense 23,312 23,451 24,477 20,805 18,396
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Margin 24,957 24,471 20,704 21,504 20,726
Provision for Possible Loan Losses 797 701 737 737 708
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 24,160 23,770 19,967 20,767 20,018
Other Income 3,207 2,847 2,796 2,882 2,706
Securities Gains (Losses) 1,001 475 1,675 (219) 646
Other Expenses 15,095 14,686 14,079 13,597 12,919
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 13,273 12,406 10,359 9,833 10,451
Income Tax Provision 3,166 3,151 2,493 2,339 2,557
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Change 10,107 9,255 7,866 7,494 7,894
Cumulative Effect of Change in Accounting for Income
Taxes (Benefit) (233)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $10,107 $9,255 $7,866 $7,494 $8,127
===================================================================================================================================
<CAPTION>
BALANCE SHEET AT YEAR END
<S> <C> <C> <C> <C> <C>
Total Securities (1) $308,988 $310,077 $301,743 $261,820 $302,096
Loans (Excluding Unearned Discount) 285,426 278,597 264,182 258,472 238,755
Total Assets 615,353 610,192 585,987 546,478 560,055
Total Deposits 442,256 430,311 429,552 399,263 391,639
Stockholders' Equity Before Adjustment for Unrealized
Gain or Loss on Available-for-Sale Securities 72,200 65,826 60,025 55,385 50,913
Stockholders' Equity 85,535 71,593 66,977 46,796 56,505
AVERAGE BALANCE SHEET
Total Securities (Amortized Cost) (1) $296,067 $306,680 $290,694 $292,080 $258,874
Loans (Excluding Unearned Discount) 282,580 271,618 259,143 243,147 227,683
Earning Assets 578,647 578,298 549,837 535,227 489,121
Total Assets 608,277 604,408 566,030 554,658 508,400
Total Assets Excluding Market Value Adjustment for
Unrealized Gain or
Loss on Available-for-Sale Securities 598,370 598,813 568,700 555,475 N/A
Total Deposits 435,190 429,036 414,958 395,512 381,396
Stockholders' Equity Before Adjustment for Unrealized
Gain or Loss on
Available-for-Sale Securities 69,440 62,797 55,961 52,629 N/A
Stockholders' Equity 76,005 66,490 53,727 52,090 46,693
FINANCIAL RATIOS
Return on Stockholders' Equity (3) 14.56% 14.74% 14.06% 14.24% N/A
Return on Stockholders' Equity (2) 13.30% 13.92% 14.51% 14.40% 17.4%
Return on Assets (2) 1.66% 1.53% 1.39% 1.35% 1.60%
Stockholders' Equity to Assets (3) 11.60% 10.49% 9.84% 9.49% N/A
Stockholders' Equity to Assets (2) 12.50% 11.00% 9.58% 9.39% 9.18%
Stockholders' Equity to Loans (2) 26.90% 24.48% 20.91% 21.42% 20.50%
Net Income to:
Total Interest Income 20.94% 19.31% 17.41% 17.70% 20.80%
Interest Margin 40.50% 37.82% 37.99% 34.80% 39.20%
Dividend as a % of Net Income 37.04% 37.36% 41.01% 40.30% 33.50%
</TABLE>
(1) Includes Interest-bearing Due from Banks and Federal Funds Sold
(2) Average Balance Sheet, Including Valuation Reserve
(3) Average Balance Sheet, Excluding Valuation Reserve
52
<PAGE>
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 1997 and
1996 (In Thousands, Except Per Share Data).
<TABLE>
<CAPTION>
1997 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
<S> <C> <C> <C> <C>
Interest Income $11,859 $11,945 $12,146 $12,319
Interest Expense 5,737 5,846 5,886 5,843
- -------------------------------------------------------------------------------------------------------------------------------
Interest Margin 6,122 6,099 6,260 6,476
Provision for Possible Loan Losses 181 181 181 254
- -------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 5,941 5,918 6,079 6,222
Other Income 739 1,038 744 686
Securities Gains 787 20 62 132
Other Expense 3,803 3,749 3,722 3,821
- -------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,664 3,227 3,163 3,219
Income Tax Provision 901 743 724 798
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $2,763 $2,484 $2,439 $2,421
===============================================================================================================================
Net Income Per Share - Basic $0.54 $0.49 $0.48 $0.47
===============================================================================================================================
Net Income Per Share - Diluted $0.54 $0.48 $0.48 $0.47
===============================================================================================================================
</TABLE>
<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 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 - Basic $0.43 $0.49 $0.46 $0.43
==============================================================================================================================
Net Income Per Share - Diluted $0.43 $0.49 $0.46 $0.43
==============================================================================================================================
</TABLE>
53
<PAGE>
TRUST DEPARTMENT
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Assets $230,149 $222,541 $181,351 $146,178 $147,804
Earnings $1,004 $ 852 $ 726 $ 582 $ 476
</TABLE>
The composition of trust assets and liabilities for the years ending 1997, 1996
and 1995 are shown in the following table:
<TABLE>
<CAPTION>
(In Thousands) 1997 1996 1995
INVESTMENTS
<S> <C> <C> <C>
Bonds $ 70,413 $ 77,977 $ 75,363
Stock 77,356 79,815 69,520
Savings and Money Market Funds 14,835 28,389 12,512
Mutual Funds 65,331 34,173 22,207
Mortgages 425 506 115
Real Estate 1,156 852 889
Miscellaneous 633 829 745
============================================================================================================
Total $230,149 $222,541 $181,351
============================================================================================================
ACCOUNTS
Estates 3,537 872 2,124
Trusts 62,280 54,458 41,297
Guardianships 1,893 1,716 1,437
Pension/Profit Sharing 86,506 93,451 76,605
Investment Management 75,933 72,044 59,888
============================================================================================================
Total $230,149 $222,541 $181,351
============================================================================================================
</TABLE>
STOCKHOLDER INQUIRIES
A copy of the Corporation's Annual Report for the year ended December 31, 1997,
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 the 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.
54
<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, 1997 the Bank had total assets of $615,353,000, total deposits of
$442,256,000 and total loans outstanding of $285,463,000.
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, 1997, 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.
55
<PAGE>
CITIZENS & NORTHERN CORPORATION
AND
CITIZENS & NORTHERN BANK
<TABLE>
BOARD OF DIRECTORS
<S> <C> <C> <C>
J. Robert Bower Karl W. Kroeck Robert J. Murphy DIRECTORS EMERITI
Pharmacist Farmer Retired, formerly Attorney
in law firm of Davis, Murphy, Laurence R. Kingsley
R. Robert DeCamp Edward L. Learn Niemiec & Smith Retired, formerly owner
President, Owner, Learn Hardware & of L. R. Kingsley Lumber
Patterson Lumber Co., Inc. Building Supply Edward H. Owlett, III
Attorney in law firm of Howard W. Skinner
R. James Dunham Craig G. Litchfield Owlett, Lewis & Ginn, P.C. Retired, formerly
President, President and Chief Executive Senior Vice President
R. J. Dunham, Inc. Officer F. David Pennypacker
Department Store CPA in firm of
John H. Macafee Pennypacker & Zeigler, P.C.
Adelbert E. Eldridge Operator, Mapoval Farms, Inc.
Retired Regional Director of Leonard Simpson
Susquehanna Region of Lawrence F. Mase Attorney at Law
Pennsylvania Electric Co. Retired, formerly
President of Mase's Inc. Donald E. Treat
William K. Francis Self-employed, former owner
Chairman of the Board of Treat Hardware
ADVISORY BOARDS
ATHENS & SAYRE ELKLAND RALSTON TROY
Terry R. Depew Scott A. Keck Daniel P. Clark Mark C. Griffis
Stephan W. Bowen Eric L. Beard George E. Bittner Dennis F. Beardslee
R. Bruce Haner John C. Kenyon William W. Brooks, III Roy W. Cummings, Jr.
Susan E. Hartley Edward L. Learn Willard S. Kuser J. Robert Garrison
George D. Howell Gregory W. Powers
Wayne E. Lowery KNOXVILLE TIOGA
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C> <C>
John H. Macafee Mary Rose Sacks Lois C. Wood WELLSBORO
Laurance A. Reagan, Jr. Clyde E. Beard Joseph R. Borden, Jr. Richard L. Wilkinson
David Rosenbloom Gerald L. Bliss John E. Brackley Donald R. Abplanalp
Howard W. Skinner Grant Gehman Leisa L. LaVancher J. Robert Bower
Karl W. Kroeck Donald E. Treat R. Robert DeCamp
DUSHORE Jean L. Ward R. James Dunham
Wayne E. Gavitt LAPORTE Edward H. Owlett, III
Ronald A. Gutosky Randy R. Meckes TOWANDA & MONROETON F. David Pennypacker
P. Dean Homer Kenneth F. Fry James E. Parks
Dennis K. McCarty Marvin L. Higley Jeffery E. Aeppli WYSOX
Kerry A. Meehan Walter B. Neidig Allen M. Alper Debra S. Kithcart
Leslie W. Miller, Jr. Leonard Simpson James A. Bowen Lucille P. Donovan
Adelbert E. Eldridge Robert L. Fulmer
EAST SMITHFIELD LIBERTY Robert J. Murphy Walter E. Warburton, Jr.
Peggy A. Brown Ann L. Yuscavage Jeffrey A. Smith
Roy L. Beardslee Lyle R. Brion James E. Towner
Laurence R. Kingsley Gary Dinnison Deborah J. Weisbrod
Liston D. Pepper Lawrence F. Mase
Bennett R. Young Ray E. Wheeland
</TABLE>
57
<PAGE>
<TABLE>
CITIZENS & NORTHERN
BANK OFFICERS
<S> <C> <C> <C>
William K. Francis Kim L. Miller Rhonda J. Litchfield Linda M. Etzel
Chairman of the Vice President Trust Investment Officer Assistant Cashier
Board
Craig G. Litchfield James E. Parks Jeffrey B. Osgood Kathy L. Griffis
President and Vice President Assistant Vice President Assistant Cashier
Chief Executive and Personnel Officer
Officer
Deborah E. Scott Roberta C. Heck
Robert W. Anderson Vice President and Mary Rose Sacks Assistant Cashier
Executive Vice Trust Officer Assistant Vice President
President - MIS William Holmes
Richard L. Wilkinson Shawn M. Schreck Assistant Cashier
Thomas L. Briggs Vice President Assistant Vice President
Executive Vice and Compliance Officer Joan F. Johnson
President Assistant Cashier
and Senior Trust Ann L. Yuscavage
Officer Vice President David S. Schucker
Brian L. Canfield Assistant Vice President Karen L. Keck
Executive Vice Kathleen M. Osgood Bookkeeping Manager
President Corporate Secretary
and Branch System James H. Shelmire
Administrator Senior Systems Analyst Matthew Lundgren
Jeffery E. Aeppli Assistant Trust Officer
Matthew P. Prosseda Assistant Vice President Gerald W. Smith
Executive Vice Trust Officer Glenda R. Marzo
President Assistant Auditor
and Commercial Loan Klas G. Anderson
Coordinator Assistant Vice President Joseph A. Snell
Assistant Controller Sandra J. McNeal
James W. Seipler Robert E. Bolt Assistant Cashier
Executive Vice Assistant Vice President Jan L. Southworth
President Assistant Vice President
and Treasurer Leonard Mitchell, III
Stephan W. Bowen Assistant Cashier
Russell H. Bauman Assistant Vice President Nancy L. Tubbs
Vice President & Assistant Vice President Janet R. Ordway
Auditor Assistant Cashier
Peggy A. Brown
Terry R. Depew Assistant Vice President Lois C. Wood
Vice President Assistant Vice President Sandra A. Parulas
Rick J. Cisco Training Officer
Keith E. Ferguson Senior Systems Analyst Mary J. Wood
Vice President Trust Officer Karen B. Peterson
Daniel P. Clark Assistant Cashier
Wayne E. Gavitt Assistant Vice President Sandra G. Andrews
Vice President Assistant Cashier Eileen K. Ranck
Helen W. Ferris Bankcard Manager
Mark C. Griffis Assistant Vice President Bonnie L. Bennett
Vice President Assistant Cashier Virginia L. Reap
Rita Y. Fisk Assistant Cashier
Nicholas Helf, Jr. Assistant Vice President Joan M. Blackwell
Employee Benefit Assistant Cashier Twila G. Starr
Officer Assistant Cashier
Joan L. Grenell
Scott A. Keck Assistant Vice President Marcella Chaykosky
Vice President Assistant Cashier Charmaine H. Stempel
Harold F. Hoose, III Assistant Cashier and
Linda L. Kriner Assistant Vice President Jerome Coleman Security Officer
Vice President and Assistant Cashier
Trust Officer Elaine F. Johnston Barbara J. Walters
Assistant Vice President Raechelle Curry Assistant Cashier
Randy R. Meckes Assistant Cashier
Vice President Debra S. Kithcart Eric E. Wertz
Assistant Vice President Diane B. Elvidge Assistant Bankcard
Assistant Cashier Manager
CITIZENS & NORTHERN
CORPORATION OFFICERS
William K. Francis Craig G. Litchfield James W. Seipler Kathleen M. Osgood
Chairman of the President and Chief Treasurer Corporate Secretary
Board Executive Officer
</TABLE>
58
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OR
STATE OF
NAME INCORPORATION
- -------------------------------------------------------------------------------------------- --------------------
<S> <C>
Citizens & Northern Bank.................................................................... Pennsylvania
Bucktail Life Insurance Company............................................................. Arizona
</TABLE>
<PAGE>
EXHIBIT 23.1
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, 1997
and 1996, 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, 1997. 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, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Parente, Randolph, Orlando, Carey & Associates
Williamsport, Pennsylvania
February 3, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000810958
<NAME> C & N CORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,449
<INT-BEARING-DEPOSITS> 804
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 306,587
<INVESTMENTS-CARRYING> 1,597
<INVESTMENTS-MARKET> 1,663
<LOANS> 285,463
<ALLOWANCE> 4,913
<TOTAL-ASSETS> 615,353
<DEPOSITS> 442,256
<SHORT-TERM> 39,800
<LIABILITIES-OTHER> 6,088
<LONG-TERM> 40,661
0
0
<COMMON> 5,168
<OTHER-SE> 80,367
<TOTAL-LIABILITIES-AND-EQUITY> 615,353
<INTEREST-LOAN> 28,660
<INTEREST-INVEST> 18,830
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 48,269
<INTEREST-DEPOSIT> 18,292
<INTEREST-EXPENSE> 23,312
<INTEREST-INCOME-NET> 24,957
<LOAN-LOSSES> 797
<SECURITIES-GAINS> 1,001
<EXPENSE-OTHER> 15,095
<INCOME-PRETAX> 13,273
<INCOME-PRE-EXTRAORDINARY> 13,273
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,107
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<YIELD-ACTUAL> 8.29
<LOANS-NON> 1,412
<LOANS-PAST> 1,986
<LOANS-TROUBLED> 182
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,776
<CHARGE-OFFS> 784
<RECOVERIES> 124
<ALLOWANCE-CLOSE> 4,913
<ALLOWANCE-DOMESTIC> 1,622
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,291
</TABLE>
