<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number: 0-16084
------------------ -------------------------------
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2451943
- ------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
(Registrant's telephone number including area code) 570-265-6171
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No ____
Indicate by check mark if 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 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. [ ]
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
Common Stock $1.00 par value 5,153,629 shares March 1, 1999
The aggregate market value of the registrant's common stock held by
non-affiliates at
March 1 1999: $181,377,015. (a date within 60 days of the date hereof
1
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DOCUMENTS INCORPORATED BY REFERENCE
Excerpts from the Registrants 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 to be held on April 20, 1999 is incorporated herein by reference in
partial response to Part III.
<TABLE>
<CAPTION>
Location in Form 10-K Incorporated Information
- --------------------- ------------------------
<S> <C>
PART II
Item 5. Market for Registrant's Common Page 46 of the Annual Report
Stock and Related Stockholder Matters
Item 6. Selected Financial Data Pages 47 and 48 of the Annual Report
Item 7. Management's Discussion and Analysis Pages 29 through 46 of the Annual Report
of the Financial Condition and Results
Operations.
Item 7a. Quantitative and Qualitative Disclosures Pages 41 through 43 of the Annual Report
About Market Risk
Item 8. Financial Statements and Pages 8 through 11 and 47 through 48 of the
Supplementary Data Annual Report
PART III
Item 10. Directors and Executive Officers Pages 2 through 6 of the Proxy Statement
of the Registrant
Item 11. Executive Compensation Pages 6 through 9 of the Proxy Statement
Item 12. Security Ownership of certain Pages 2 through 6 of the Proxy statement
Beneficial Owners and Management
Item 13. Certain Relationships and Related Page 24 of the Annual Report
Transactions Page 11 of the Proxy Statement
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
The information appearing in the Annual Report under the caption
"Description of Business" on page 49 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
YEAR 2000 COMPLIANCE
Information relating to the Corporation's Year 2000 readiness and
compliance may be found in the Company's Annual Report under the caption
"Management's Discussion and Analysis of the Financial Condition and Results of
Operations" on pages 44 and 45, and is herein incorporated by reference.
ITEM 2. PROPERTIES
Information relating to the location of banking offices is located on
page 49 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.
3
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information appearing in the Annual Report under the caption
"Quarterly Share Data" on page 46 and the "Summary of Quarterly Financial Data"
on page 48 is herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Five Year Summary of Operations" on page 47 of the Annual Report
is herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 29 through 46, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing in the Company's Annual Report under the
caption "Management's Discussion and Analysis of the Financial Condition and
Results of Operations" on pages 41 through 43, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
the Financial Statements and Notes to Consolidated Financial Statements on pages
8 through 27 and to the Quarterly Financial Data on page 48 of the Company's
Annual Report to Shareholders for the year ended December 31, 1998.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
4
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information appearing under the
caption "Election of Directors" on pages 1 through 3 of the Corporation's Proxy
Statement dated March 22, 1999, 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 22, 1999, is herein
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the caption "Executive Compensation" on
page 7 and 8 of the Corporation's Proxy Statement dated March 22, 1999, 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 1 through 3 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 RELATED TRANSACTIONS
Information appearing in footnote 13 to the Consolidated Financial
Statements included on page 24 in the Annual Report is herein incorporated by
reference.
Information appearing under the caption "Certain Transactions" on page
11 of the Corporation's Proxy Statement is herein incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1). The following consolidated financial statements and reports are set
forth in Item 8.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 27
Financial Statements:
Consolidated Balance Sheet - December 31, 1998 and 1997 8
Consolidated Statement of Income - Years Ended
December 31, 1998, 1997 and 1996 9
Consolidated Statement of Changes in Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996 10
</TABLE>
5
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<TABLE>
<S> <C>
Consolidated Statement of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996 11
Notes to Consolidated Financial statements 12-26
</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>
<S> <C>
2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession Not applicable
3. (i) Articles of Incorporation *
3. (ii) Bylaws of the Registrant *
4. Articles of Incorporation of the Registrant as Currently
in effect *
9. Voting Trust Agreement Not applicable
10. Material Contracts Not applicable
11. Statement re Computation of Per Share Earnings Not applicable
12. Statements re Computation of Ratios Not applicable
13. Annual Report to Shareholders Page 11
16. Letter re Change in Certifying Accountant Not applicable
18. Letter re Change in Accounting Principles Not applicable
21. List of Subsidiaries Page 10
22. Published Report Regarding Matters Submitted to
Vote of Security Holders Not applicable
23. Consent of Independent Auditors Page 12
24. Power of Attorney Not applicable
27. Financial Data Schedules None
28. Information from Reports Furnished to State
Insurance Regulatory Authorities Not applicable
99. Additional Exhibits
* Omitted in the interest of brevity
</TABLE>
(b) No reports on Form 8-K were filed during the quarter ended
December 31, 1998.
6
<PAGE>
(c) Exhibits - the required exhibits are included under 14 (a) (3) of
Form 10 - K.
(d) Financial Statement schedules are omitted because the required information
is not applicable or is included elsewhere herein.
7
<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.
March 19, 1999 By: /s/ Craig G. Litchfield
- -------------- ---------------------------------------
Date Craig G. Litchfield
President and Chief Executive Officer
March 19, 1999 By: /s/ James W. Seipler
- -------------- ---------------------------------------
Date James W. Seipler
Treasurer
8
<PAGE>
BOARD OF DIRECTORS
J. ROBERT BOWER /s/ CRAIG G. LITCHFIELD /s/
- ----------------------------------- --------------------------------------
J. Robert Bower Craig G. Litchfield
R. ROBERT DECAMP /s/ LAWRENCE F. MASE /s/
- ----------------------------------- --------------------------------------
R. Robert DeCamp Lawrence F. Mase
ADELBERT E. ELDRIDGE /s/ ROBERT J. MURPHY /s/
- ----------------------------------- --------------------------------------
Adelbert E. Eldridge Robert J. Murphy
WILLIAM K. FRANCIS /s/ EDWARD H. OWLETT, III /s/
- ----------------------------------- --------------------------------------
William K. Francis Edward H. Owlett, III
R. BRUCE HANER /s/ F. DAVID PENNYPACKER /s/
- ----------------------------------- --------------------------------------
R. Bruce Haner F, David Pennypacker
SUSAN E. HARTLEY /s/ LEONARD SIMPSON /s/
- ----------------------------------- --------------------------------------
Susan E. Hartley Leonard Simpson
KARL W. KROECK /s/ DONALD E. TREAT /s/
- ----------------------------------- --------------------------------------
Karl W. Kroeck Donald E. Treat
EDWARD L. LEARN /s/
- -----------------------------------
Edward L. Learn
9
<PAGE>
EXHIBIT INDEX
3.(i) Articles of Incorporation of the Registrant as currently in effect are
herein incorporated by reference to Exhibit D to Registrant's Form S-4,
Registration Statement dated March 27, 1987.
3.(ii) Bylaws of the Registrant as currently in effect are herein
incorporated by reference to Exhibit E to Registrant's Form S-4,
Registration Statement dated March 27, 1987
4. Articles of Incorporation of the Registrant as currently in effect are
herein incorporated by reference to Exhibit D to Registrant's Form S-4,
Registration Statement dated March 27, 1987.
10. Page 29 of Registrant's Form S-4, Registration Statement dated March 27,
1987, is herein incorporated by reference.
13. Annual Report to Shareholders
21. List of Subsidiaries
23. Consent of Parente, Randolph, Orlando, Carey & Associates, Independent
Auditors.
10
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Exhibit 13
1998 ANNUAL REPORT CEO LETTER TO SHAREHOLDERS
TO OUR SHAREHOLDERS
Citizens & Northern through its commitment to customers and local communities
achieved another year of exceptional earnings and strong growth in an
ever-increasing competitive environment. The devotion and loyalty of our
employees and directors continue to generate customer satisfaction and
shareholder value. We believe our vision for Citizens & Northern, which follows,
focuses our attention on changes and processes that shall promote long-term
growth and profitability.
OUR VISION
Citizens & Northern Bank strives to be the premier bank in the communities we
are privileged to serve. Our top priority is the customer. We will achieve our
vision by focusing on their needs, and providing financial products and services
with personal attention that best satisfies those needs. Citizens & Northern
Bank means quality, value and security to our customers, communities, employees
and shareholders.
1998 FINANCIAL HIGHLIGHTS
As has been reported to you throughout the year, 1998's financial results were
exceptional. Net Income increased compared to 1997 by nearly 9.6% to over $11
million, the highest ever. This increased basic earnings per share to $2.15 for
the year, versus $1.96 for 1997. Return on shareholder equity was over 14.8% for
the year. During the year income was affected by a significant gain realized
from the sale of shares of stock that were acquired in 1919 due to a defaulted
loan. The net gain after-tax from the sale of that stock was approximately $ 1.2
million.
Over the one-year period from December 31st, 1997 through December 31st, 1998,
Assets grew 5%, or nearly $31 million. Deposits grew nearly 7.8%, or
approximately $34 million. Loans increased $5.7 million, or about 2% for the
year.
Dividends paid to shareholders for the 1998-year increased nearly 11%. The last
trade price for a share of our stock in 1998 was $35.50, about a 6% increase in
share value as compared to the last trade in 1997.
For a more detailed narrative description of our financial performance, please
read the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS found later in this annual report.
TRUST AND FINANCIAL SERVICES
The assets under management in the Trust and Financial Services Department
increased by over 23% during 1998. Department gross income increased over 28%
from the previous year. Excellent sales and business development, plus good
investment returns are responsible for the growth. The department is continuing
to emphasize its strengths in estate and retirement planning, employee benefit
retirement accounts, investment management, and trusts. The department is also
responsible for the bank-wide marketing and sales of mutual funds. We invite
every shareholder to contact our Trust and Financial Services Department for a
free consultation to discuss your personal financial or trust needs. Call
1-800-4 TRUST-4.
EXCITING CHANGES: PAST AND FUTURE
NEW MANSFIELD OFFICE
On October 1st, we opened a new full-service office in Mansfield, Pennsylvania.
This is our 16th office. The office positions us to offer Citizens & Northern's
relationship, community banking to the people of Mansfield, Covington and
Blossburg. The challenge of growing and developing a new presence in the
Mansfield market is exciting and
<PAGE>
worthy of our talented staff.
FIRST ATMS
Citizens & Northern Bank's installed its first ATMs in 1998. Twelve (12)
strategically placed ATMs can be found throughout our market area. The new ATM
network and C&Now Telephone Banking system that was installed in 1997 now
provides our customers with access to their accounts 7-days-a-week and 24 hours
a day.
NEW PRODUCTS AND SERVICES
SECONDARY MARKET MORTGAGES
During 1998 we began offering our customers access to secondary market
mortgages. This new product produces fee revenue and keeps us competitive with
the low rate providers, while still enabling us to provide our own mortgage
products. We have found that by providing access to secondary market financing,
we are able to develop relationships with and cross-sell other financial
services to customers, who may have gone elsewhere.
MONEY MANAGEMENT SWEEP CREDIT AND REPO SWEEP CASH MANAGEMENT SERVICE
In the third quarter, we expanded our Money Management Sweep Account to include
a Repo Sweep of customers' excess funds to a non-FDIC insured investment
deposit. Now we offer our commercial customers a complete, automated cash
management service. The service will automatically sweep funds to and from a
revolving line of credit, when the customer is borrowing for working capital
purposes; and to and from the Repo Sweep account when the customer has
investable excess funds. The service reduces borrowing costs and increases
investment returns automatically.
C&NOW VISA(C) CHECK CARD
Within the first half of 1999, we plan to begin offering our own C&NOW VISA(C)
CHECK CARD. The card will provide our customers with access to their checking
account funds anywhere that the Visa(C) Credit Card is accepted, including ATMs,
point-of-sale terminals and credit card merchants.
C&NOW INTERNET BANKING
During the second quarter of 1999, we will be installing a fully interactive and
transactional Internet world-wide-web site. This new service, when coupled with
our branch system, ATM network and telephone banking system, will provide our
existing and new customers with greater control of and access to their financial
resources than ever before.
With the C&NOW INTERNET BANKING system consumers can access account balances,
transaction histories, account statements, (information can be downloaded into
Quicken, MSMoney or PC spreadsheet formats), and digital images of checks. They
can pay bills, transfer funds between C&N accounts, apply for loans and credit
cards, open accounts and purchase CDs, order checks, buy US Savings Bonds, use
financial calculators, maintain a discount brokerage account and access online
life, auto, and home insurance quotes. Business customers will have access to
the same features available to consumers and they will have cash management
features such as access to a Direct Deposit Payroll feature, Automated Clearing
House (ACH) debit and credit origination, electronic funds transfer payments of
federal tax obligations and much more. We hope to have the system fully
operational by no later than the middle of 1999.
MARKETING
Two significant changes have occurred in your corporation's marketing program.
First, in March, we established our first ever full-time marketing position. We
believe that it is absolutely essential to maintain a marketing focus on
everything we do. The new marketing coordinator, Michelle "Shelley" Karas, is
responsible for leading the development and implementation of the bank's
marketing strategy. That strategy includes the second significant
2
<PAGE>
change in our approach to marketing: the implementation of an organization-wide
sales culture through training and emphasis on identifying and satisfying our
customers needs.
C&N's management staff, also, received training in business development and
officer calling. The calling program is focused on attracting new customers to
Citizens & Northern Bank, retaining existing customers and increasing products
and services used by both.
TECHNOLOGY
In addition to meeting the challenges presented by the Year 2000, our Management
Information Systems Department has installed and connected all of our offices
with a new state-of-the art digital communications network. The digital network
will enable us to simultaneously transmit online main frame data, provide
Internet and email access bank-wide, network PC's and ATMs, and permit voice
communications between offices, as well. Strategically, this new communications
network will improve our ability to better serve the customers needs with the
newest technologies.
Y2K
Much is being said about the computer-based Year 2000 problems. Unfortunately,
many pundits in the media are distorting and over-dramatizing the potential
problems. We have taken all necessary steps to assure that C&N's customers will
not experience any changes in our service delivery. Beginning in 1996, Citizens
& Northern Bank began development and implementation of a plan to correct and
address any software or system that would be affected when the Year 2000
arrives. The Board of Directors and management of Citizens & Northern Bank have
committed all necessary resources to assure that our customer services will not
be disrupted. We firmly believe that our Y2K initiative is comprehensive and
complete. For a more detailed narrative about our Y2K program, please read the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS section found later in this annual report.
RETIREMENTS
At the end of June, Gerald Smith retired from his position as Trust Officer in
our Towanda office. Jerry served us well in that capacity for over 12 years.
At the end of 1998, two long time employees from our Dushore office retired:
Wayne Gavitt, with over 25 years of service, and Beverly Kann, with over 27
years of service. As the Sullivan County Regional Manager and the Dushore branch
manager Wayne made significant contributions to our loan and deposit growth in
that market. Replacing Wayne as the Dushore branch manager is Helen Ferris.
Helen has over 17 years experience in banking and is committed to providing
C&N's superior customer service. Beverly Kann was a loan clerk and IRA
specialist.
We wish Jerry, Wayne and Beverly long and fulfilling retirements.
CONCLUSION
Citizens & Northern will continue to be the premier financial service provider
in its market. With our excellent employees and management and the support,
business development and oversight provided by our Board of Directors and
Advisory boards, your corporation shall continue to out perform its peers.
3
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CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
Cash & Due From Banks
Noninterest-Bearing $ 15,428 $ 13,449
Interest-Bearing 700 804
- --------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 16,128 14,253
Available-for-Sale Securities 329,275 306,587
Held-to-Maturity Securities
(Estimated fair value of $1,931 and $1,623 in 1998 and 1997, respectively) 1,908 1,597
Loans, Net 286,183 280,513
Bank Premises and Equipment, Net 7,416 6,720
Foreclosed Assets Held for Sale 652 230
Accrued Interest Receivable 4,109 4,808
Other Assets 627 645
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 646,298 $ 615,353
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-Bearing $ 57,871 $ 46,916
Interest-Bearing 418,647 395,340
- --------------------------------------------------------------------------------------------------------------------------
Total Deposits 476,518 442,256
Dividends Payable 1,123 1,013
Short-Term Borrowings 12,080 15,000
Long-Term Borrowings 60,044 65,461
Accrued Interest and Other Liabilities 5,966 6,088
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 555,731 529,818
STOCKHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,220 5,168
Authorized 10,000,000; Issued 5,220,038 and 5,168,354 in 1998 and 1997, respectively
Stock Dividend Distributable 1,931 1,706
Paid in Capital 15,468 13,799
Retained Earnings 57,477 52,519
- --------------------------------------------------------------------------------------------------------------------------
Total 80,096 73,192
Accumulated Other Comprehensive Income 11,922 13,335
Less: Treasury Stock at Cost
118,010 shares at December 31, 1998 (1,451)
105,311 shares at December 31, 1997 (992)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 90,567 85,535
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 646,298 $ 615,353
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $28,788 $28,660 $27,574
Interest on Balances with Depository Institutions 37 54 37
Interest on Loans to Political Subdivisions 380 391 424
Interest on Federal Funds Sold 229 334 60
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 14,062 14,361 15,943
Tax Exempt 3,982 3,595 3,012
Dividends 950 874 872
- -----------------------------------------------------------------------------------------------
Total Interest and Dividend Income 48,428 48,269 47,922
- -----------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 18,252 18,292 17,775
Interest on Short-Term Borrowings 824 755 2,992
Interest on Long-Term Borrowings 3,617 4,265 2,684
- -----------------------------------------------------------------------------------------------
Total Interest Expense 22,693 23,312 23,451
- -----------------------------------------------------------------------------------------------
Interest Margin 25,735 24,957 24,471
Provision for Possible Loan Losses 763 797 701
- -----------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 24,972 24,160 23,770
- -----------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 1,039 1,076 1,124
Service Charges and Fees 288 281 269
Trust Department Income 1,288 1,004 852
Insurance Commissions, Fees and Premiums 405 462 555
Other Operating Income 94 384 47
- -----------------------------------------------------------------------------------------------
Total Other Income before Realized Gains on Securities, Net 3,114 3,207 2,847
Realized Gains on Securities, Net 3,001 1,001 475
- -----------------------------------------------------------------------------------------------
Total Other Income 6,115 4,208 3,322
- -----------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and Wages 6,621 5,975 5,887
Pensions and Other Employee Benefits 1,760 1,691 1,709
Occupancy Expense, Net 827 726 721
Furniture and Equipment Expense 792 723 726
Expenses Related to Credit Card Operations 2,732 2,395 2,173
Pennsylvania Shares Tax 656 596 544
Other Operating Expense 3,095 2,989 2,926
- -----------------------------------------------------------------------------------------------
Total Other Expenses 16,483 15,095 14,686
- -----------------------------------------------------------------------------------------------
Income Before Income Tax Provision 14,604 13,273 12,406
Income Tax Provision 3,527 3,166 3,151
- -----------------------------------------------------------------------------------------------
NET INCOME $11,077 $10,107 $ 9,255
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE - BASIC $ 2.15 $ 1.96 $ 1.79
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET INCOME PER SHARE - DILUTED $ 2.14 $ 1.96 $ 1.79
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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Consolidated Statement of Changes in Stockholders' Equity
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
Stock Dividend Paid In Retained Comprehensive Treasury
Shares Amount Distributable Capital Earnings Income Stock Total
------ ------ ------------- ------- -------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 5,067 $ 5,067 $ 1,013 $ 11,575 $ 43,370 $ 6,952 ($ 1,000) $ 66,977
--------
Comprehensive Income:
Net Income 9,255 9,255
Unrealized Loss on Securities, Net of
Reclassification Adjustment and Tax Effects (1,185) (1,185)
--------
Total Comprehensive Income 8,070
--------
Stock Dividend Issued 50 50 (1,013) 963
Cash Dividends Declared $.67 Per Share (3,458) (3,458)
Stock Dividend Declared, 1% 1,305 (1,305)
Shares Issued from Treasury Related to
Exercise of Stock Options 1 3 4
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 5,117 5,117 1,305 12,539 47,862 5,767 (997) 71,593
--------
Comprehensive Income:
Net Income 10,107 10,107
Unrealized Gain on Securities, Net of
Reclassification Adjustment and Tax Effects 7,568 7,568
--------
Total Comprehensive Income 17,675
--------
Stock Dividend Issued 51 51 (1,305) 1,254
Cash Dividends Declared $.72 Per Share (3,744) (3,744)
Stock Dividend Declared, 1% 1,706 (1,706)
Shares Issued from Treasury Related to
Exercise of Stock Options 6 5 11
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 5,168 5,168 1,706 13,799 52,519 13,335 (992) 85,535
--------
Comprehensive Income:
Net Income 11,077 11,077
Unrealized Loss on Securities, Net of
Reclassification Adjustment and Tax Effects (1,413) (1,413)
--------
Total Comprehensive Income 9,664
--------
Stock Dividend Issued 52 52 (1,706) 1,654
Cash Dividends Declared $.81 Per Share (4,188) (4,188)
Stock Dividend Declared, 1% 1,931 (1,931)
Shares Issued from Treasury Related to
Exercise of Stock Options 15 9 24
Shares Purchased for Treasury (468) (468)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1998 5,220 $ 5,220 $ 1,931 $ 15,468 $ 57,477 $ 11,922 ($ 1,451) $ 90,567
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,077 $ 10,107 $ 9,255
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 763 797 701
Realized Gain on Securities, Net (3,001) (1,001) (475)
Loss (Gain) on Sale of Foreclosed Assets, Net (26) 97 70
Provision for Depreciation 806 723 764
Accretion and Amortization (455) 773 827
Deferred Income Tax 63 10 (215)
Decrease (Increase) in Accrued Interest
Receivable and Other Assets 717 163 (332)
(Decrease) Increase in Accrued Interest Payable and
Other Liabilities 653 (848) 405
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,597 10,821 11,000
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 178 755 138
Purchase of Held-to-Maturity Securities (498) (781) (199)
Proceeds from Sales of Available-for-Sale Securities 83,888 134,157 13,002
Proceeds from Maturities of Available-for-Sale Securities 127,670 64,768 35,468
Purchase of Available-for-Sale Securities (232,922) (186,798) (58,881)
Net Increase in Loans (7,231) (7,652) (15,428)
Purchase of Premises and Equipment (1,502) (834) (582)
Sale of Foreclosed Assets 402 419 312
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (30,015) 4,034 (26,170)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 34,262 11,945 759
Net Repayment of Short-Term Borrowings (2,920) (13,850) (16,150)
Proceeds from Long-Term Borrowings 34,400 10,074 45,400
Repayments of Long-Term Borrowings (39,817) (20,013) (10,000)
Proceeds from the Sale of Treasury Stock 24 11 4
Purchase of Treasury Stock (468) -- --
Dividends Declared (4,188) (3,744) (3,458)
- ------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 21,293 (15,577) 16,555
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,875 (722) 1,385
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,253 14,975 13,590
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,128 $ 14,253 $ 14,975
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $ 22,615 $ 22,380 $ 23,474
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Income Taxes Paid $ 3,172 $ 3,512 $ 3,449
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of Citizens and Northern Corporation ("Corporation"), and its
subsidiaries, Citizens & 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 also offers
non-insured reposweep accounts and originates secondary market consumer
mortgages.
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 securities not classified as
held-to-maturity and both restricted and unrestricted equity securities. Such
securities except for restricted equity securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported, net of
deferred income taxes, as a separate component of stockholders' equity. The
restricted equity securities consist primarily of Federal Home Loan Bank stock,
which are carried at cost and evaluated for impairment. 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.
Realized gains and losses on the sale of available-for-sale securities are
computed on the basis of specific identification of the adjusted cost of each
security.
The fair values of the majority of the Corporation's investments are estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued. The carrying values of restricted equity securities
approximate fair values.
8
<PAGE>
LOANS AND LEASE FINANCE RECEIVABLES ("LOANS") - Loans are stated at unpaid
principal balances, less the allowance for loan losses and net deferred loan
fees and unearned discounts.
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, 1998 and December 31, 1997 was $652,000 and $230,000,
respectively. Foreclosed assets held for sale amounting to $798,000, $163,000
and $510,000 were acquired from the foreclosure of real estate loans during
1998, 1997 and 1996, respectively.
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.
RECLASSIFICATION - Certain 1997 and 1996 amounts have been reclassified to
conform to the 1998 presentation.
9
<PAGE>
2. COMPREHENSIVE INCOME
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
Comprehensive Income." Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or stockholders' equity. As required by SFAS No.
130, the consolidated financial statements for 1997 and 1996 have been
reclassified to reflect application of this pronouncement.
The components of other comprehensive income and the related tax effects are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands)
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains (losses) on
available-for-sale securities $ 860 $ 12,468 $(1,321)
Less: Reclassification adjustment for
gains realized in income (3,001) (1,001) (475)
- -----------------------------------------------------------------------
Net unrealized gains (losses) (2,141) 11,467 (1,796)
Tax effect 728 (3,899) 611
- -----------------------------------------------------------------------
Net-of-tax amount $(1,413) $ 7,568 $(1,185)
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
3. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common
stock outstanding. 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. The dilutive effect of stock options is computed as the
weighted-average common shares available from the exercise of all dilutive stock
options, less the number of shares that could be repurchased with the proceeds
of stock option exercises based on the average share price of the Corporation's
common stock during the period.
<TABLE>
<CAPTION>
Weighted-
Average Earnings
Net Common Per
Income Shares Share
-----------------------------------
<S> <C> <C> <C>
1998
Earnings per share - basic $11,077,000 5,158,102 $ 2.15
--------
--------
Dilutive effect of stock options 9,805
- ----------------------------------------------------------
Earnings per share - diluted $11,077,000 5,167,907 $ 2.14
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1997
Earnings per share - basic $10,107,000 5,164,238 $ 1.96
--------
--------
Dilutive effect of stock options 4,850
- ----------------------------------------------------------
Earnings per share - diluted $10,107,000 5,169,088 $ 1.96
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
1996
Earnings per share - basic $ 9,255,000 5,164,099 $ 1.79
--------
--------
Dilutive effect of stock options 1,086
- ----------------------------------------------------------
Earnings per share - diluted $ 9,255,000 5,165,185 $ 1.79
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
10
<PAGE>
4. 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 1998 ranged from $4,467,000 to $5,679,000. For 1997, these balances ranged
from $4,580,000 to $5,446,000. Average daily cash balances with the Federal
Reserve Bank required to cover services provided to the Bank amounted to
$425,000 throughout 1998 and 1997. Total balances restricted at December 31,
1998 and December 31, 1997 were $5,744,000 and $5,827,000, 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.
5. SECURITIES
Amortized cost and the fair value of securities at December 31, 1998, 1997 and
1996 are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,512 $ 44 $ -- $ 2,556
Obligations of Other U.S. Government Agencies 61,998 237 (394) 61,841
Obligations of States and Political Subdivisions 78,434 3,167 (178) 81,423
Other Securities 16,713 92 (338) 16,467
Mortgage-backed Securities 130,189 1,043 (186) 131,046
- ----------------------------------------------------------------------------------------------------------------
Total Debt Securities 289,846 4,583 (1,096) 293,333
Marketable Equity Securities 21,365 14,788 (211) 35,942
- ----------------------------------------------------------------------------------------------------------------
Total $311,211 $19,371 $(1,307) $329,275
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 630 $ 4 $ -- $ 634
Obligations of Other U.S. Government Agencies 849 4 (1) 852
Mortgage-backed Securities 429 19 (3) 445
- ----------------------------------------------------------------------------------------------------------------
Total $ 1,908 $ 27 $ (4) $ 1,931
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
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
Other Securities 3,851 29 (107) 3,773
Mortgage-backed Securities 127,664 1,585 (59) 129,190
- ----------------------------------------------------------------------------------------------------------------
Total Debt Securities 270,232 4,550 (218) 274,564
Marketable 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>
11
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,505 $ -- $ (30) $ 2,475
Obligations of Other U.S. Government Agencies 36,212 169 (40) 36,341
Obligations of States and Political Subdivisions 54,501 1,611 (169) 55,943
Other Securities 4,962 7 0 4,969
Mortgage-backed Securities 184,864 1,507 (2,888) 183,483
- ----------------------------------------------------------------------------------------------------------------
Total Debt Securities 283,044 3,294 (3,127) 283,211
Marketable Equity Securities 16,072 8,671 (101) 24,642
- ----------------------------------------------------------------------------------------------------------------
Total $299,116 $11,965 $(3,228) $307,853
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 699 $ 3 $ (3) $ 699
Obligations of Other U.S. Government Agencies 100 2 102
Mortgage-backed Securities 770 22 (14) 778
- ----------------------------------------------------------------------------------------------------------------
Total $ 1,569 $ 27 $ (17) $ 1,579
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of investment debt securities at December 31,
1998 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, 1998
(In Thousands) Amortized Fair
Cost Value
<S> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Due in one year or less $ 3,203 $ 3,271
Due after one year through five years 18,270 18,883
Due after five through ten years 12,150 12,696
Due after ten years 256,223 258,483
- --------------------------------------------------------------------------------
Total $289,846 $293,333
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Due in one year or less $ 100 $ 100
Due after one year through five years 993 1,002
Due after five through ten years 544 561
Due after ten years 271 268
- --------------------------------------------------------------------------------
Total $ 1,908 $ 1,931
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1998:
<TABLE>
<CAPTION>
Within One - Five Five - Ten After Ten
(In Thousands) One Year Yield Years Yield Years Yield Years Yield Total Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $2,512 6.01 $ 2,512 6.01
Obligations of Other U.S.
Government Agencies $4,982 6.66 $57,016 6.82 61,998 6.81
Obligations of States and
Political Subdivisions $3,203 6.10 9,178 6.37 5,899 6.25 60,154 5.51 78,434 5.69
Other Securities 1,018 8.25 550 8.75 15,145 6.69 16,713 6.85
Mortgage-Backed Securities 5,562 7.48 719 8.01 123,908 6.45 130,189 6.50
- ----------------------------------------------------------------------------------------------------------------------------------
Total $3,203 6.10 $18,270 6.76 $ 12,150 6.64 $256,223 6.32 $289,846 6.36
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 100 5.00 $ 530 7.14 $ 630 6.80
Obligations of Other U.S.
Government Agencies 449 6.31 $ 250 6.52 $ 150 7.05 849 6.50
Mortgage-Backed Securities 14 8.71 294 7.29 121 7.31 429 7.34
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 100 5.00 $ 993 6.79 $ 544 6.94 $ 271 7.17 $ 1,908 6.79
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Investment securities carried at approximately $57,424,000 and $31,942,000 at
December 31, 1998 and 1997, respectively, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law.
In 1998, gross realized gains from the sale of available-for-sale securities
were $3,422,000 and gross realized losses were $421,000. Gross realized gains
from the sale of available-for-sale securities in 1997 were $2,883,000, while
gross realized losses for that year were $1,882,000. In 1996, realized gains
from the sale of available-for-sale securities amounted to $475,000.
12
<PAGE>
6. 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
1998 Total 1997 Total
<S> <C> <C> <C> <C>
Real Estate - Construction $ 1,004 0.35% $ 406 0.14%
Real Estate - Mortgage 224,849 77.26% 219,952 77.05%
Consumer 30,924 10.63% 33,094 11.59%
Agricultural 1,930 0.66% 2,424 0.85%
Commercial 17,630 6.06% 17,176 6.02%
Other 7,028 2.41% 6,260 2.19%
Political Subdivisions 7,449 2.56% 5,895 2.07%
Lease Receivables 218 0.07% 256 0.09%
- ----------------------------------------------------------------------------------------------------------
Total 291,032 100.00% 285,463 100.00%
Less Unearned Discount (29) (37)
- ----------------------------------------------------------------------------------------------------------
291,003 285,426
Less Allowance for Possible Loan Losses (4,820) (4,913)
- ----------------------------------------------------------------------------------------------------------
Net Loans and Lease Finance Receivables $ 286,183 $280,513
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, net unamortized loan fees and costs of $1,875,000
and $1,932,000, respectively, have been offset against the carrying value of
loans.
There is no concentration of loans to borrowers engaged in similar businesses or
activities that exceeds 10% of total loans at December 31, 1998.
The Corporation grants commercial, residential and personal loans to customers
primarily in Tioga, Bradford, Sullivan and Lycoming counties. Although the
Corporation has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contracts is dependent on the local economic
conditions within the region.
Loan Maturity Distribution
<TABLE>
<CAPTION>
December 31, 1998
(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 $ 1,004 $ -- $ -- $ 1,004
Real Estate - Mortgage 67,307 60,717 96,825 224,849
Consumer 10,943 11,783 8,198 30,924
Agricultural 926 820 184 1,930
Commercial 3,397 5,403 8,830 17,630
Other 345 221 6,462 7,028
Political Subdivisions 1,076 2,151 4,222 7,449
Lease Receivables 20 82 116 218
- ----------------------------------------------------------------------------------------
Total $85,018 $81,177 $124,837 $291,032
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
</TABLE>
Loans in the preceding table with maturities over one year but less than five
years and over five years are all fixed rate loans. All loans due on demand or
at a variable rate are shown as one year or less.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,135,000 at December 31, 1998 and $1,412,000 at December 31, 1997. Interest
income on such loans is recorded only as received.
Loans on which the original terms have been restructured totaled $156,000 and
$174,000 at December 31, 1998 and December 31, 1997, respectively. None of the
loans on which the original terms were changed were past due at December 31,
1998.
Loans which were more than 90 days past due and still accruing interest at
December 31, 1998 and December 31, 1997 totaled $1,628,000 and $1,986,000,
respectively.
Transactions in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Balance at Beginning of Year $ 4,913 $ 4,776 $ 4,579
Provision Charged to Operations 763 797 701
Loans Charged Off (966) (784) (672)
Recoveries 110 124 168
- -----------------------------------------------------------------------------------
Balance at End of Year $ 4,820 $ 4,913 $ 4,776
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
</TABLE>
Information related to impaired loans as of December 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
<S> <C> <C>
Balance of impaired loans $1,135 $1,412
----------------------------------
----------------------------------
Balance of impaired loans
for which there is a
related, specific allowance
for loan losses $1,065 $974
----------------------------------
----------------------------------
Specific allowance for loan
losses related to impaired
Loans $290 $274
----------------------------------
----------------------------------
</TABLE>
The average balance of impaired loans amounted to $1,397,000, $1,208,000 and
$1,548,000 for 1998, 1997 and 1996, respectively.
The following is a summary of cash receipts on impaired loans and how they were
applied.
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
Cash receipts applied to reduce principal balance $154 $ 79 $ 56
Cash receipts recognized as interest income 67 86 116
- -------------------------------------------------------------------------------------
Total cash receipts $221 $165 $172
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(In Thousands) 1998 1997
<S> <C> <C>
Land $ 497 $ 432
Buildings and Improvements 9,300 8,472
Furniture and Equipment 5,430 4,889
- ------------------------------------------------------------
Total 15,227 13,793
Less Accumulated Depreciation 7,811 7,073
- ------------------------------------------------------------
Net $ 7,416 $ 6,720
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprised of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
Buildings and Improvements $340 $296 $304
Furniture and Equipment 466 427 460
- --------------------------------------------------------------
Total $806 $723 $764
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
8. DEPOSITS
The following table reflects time deposits included in total deposits and their
remaining maturities.
<TABLE>
<CAPTION>
December, 31, 1998
(In Thousands) 1999 2000 2001 2002 2003 Thereafter Total
<S> <C> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $80,445 $33,422 $12,240 $6,369 $4,983 $16 $137,475
Yield 5.17% 5.76% 5.82% 5.88% 5.67% 4.90% 5.42%
Individual Retirement Accounts 51,000 25,977 -- -- -- -- 76,977
Yield 5.00% 5.00% -- -- -- -- 5.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Total time deposits $131,445 $59,399 $12,240 $6,369 $4,983 $16 $214,452
Yield 5.10% 5.43% 5.82% 5.88% 5.67% 4.90% 5.27%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
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% 5.85% 6.24% 5.97% 6.06% 5.57% 5.71%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
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, 1998
(In Thousands) 1999 2000 2001 2002 2003 Total
<S> <C> <C> <C> <C> <C> <C>
Certificates of Deposit $13,141 $11,390 $1,228 $1,066 $852 $27,677
Yield 5.32% 5.70% 5.96% 6.13% 5.75% 5.55%
Individual Retirement Accounts 5,634 3,902 -- -- -- 9,536
Yield 5.00% 5.00% -- -- -- 5.00%
- -------------------------------------------------------------------------------------------------------------------------
Total $18,775 $15,292 $1,228 $1,066 $852 $37,213
Yield 5.22% 5.52% 5.96% 6.13% 5.75% 5.41%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1997
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% -- -- -- 5.90%
- -------------------------------------------------------------------------------------------------------------------------
Total $19,761 $2,779 $920 $781 $894 $25,135
Yield 5.68% 6.00% 6.47% 6.12% 6.22% 5.78%
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The interest paid on deposits of $100,000 or more amounted to $1,047,000,
$898,000 and $958,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
15
<PAGE>
9. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings include the following:
<TABLE>
<CAPTION>
(In Thousands) At December 31,
1998 1997
<S> <C> <C>
Federal Funds Purchased (a) $ -- $ --
Flexline (b) -- 10,000
Federal Home Loan Bank Borrowings (c) 10,000 5,000
Repurchase Agreements (d) 2,080 --
- -------------------------------------------------------------
Total Short-Term Borrowings $12,080 $15,000
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>
(a) Federal Funds Purchased generally represent overnight federal funds
borrowings from correspondent banks. The maximum month-end amount of such
borrowing in 1998, 1997 and 1996 was $2,000,000, $10,000,000 and $8,500,000,
respectively. The average amount of such borrowings was $2,801,000, $663,000 and
$967,000 in 1998, 1997 and 1996, respectively, and the weighted average interest
rates were 4.75% in 1998, 4.98% in 1997 and 5.96% in 1996.
(b) Flexline is a line of credit with the Federal Home Loan Bank of Pittsburgh
used overnight. The line was discontinued on December 31, 1998. The weighted
average interest rate for 1998, 1997 and 1996 was 4.75%, 4.98% and 5.96%,
respectively. The maximum outstanding balance was $16,500,000 in 1998,
$20,000,000 in 1997 and $6,000,000 in 1996.
(c) Federal Home Loan Bank loans included in Short-Term Borrowings are as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
<S> <C> <C>
Fixed rate at 5.86%, matured February 5, 1998 $ -- $5,000
Variable rate Open Repo Plus maturing overnight 10,000 --
- ----------------------------------------------------------------------
$10,000 $5,000
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
Collateral for Federal Home Loan Bank loans is described below under long-term
borrowings.
d) Repurchase agreements included in Short-Term Borrowings amounted to
$2,080,000 as of December 31, 1998. These repurchase agreements mature
overnight, and are collateralized by securities with a carrying value of
$4,988,000 at December 31, 1998.
LONG-TERM BORROWINGS
Long-term borrowings are as follows:
<TABLE>
<CAPTION>
(In Thousands) At December 31,
1998 1997
<S> <C> <C>
Federal Home Loan Bank Borrowings (e) $35,644 $35,661
Repurchase Agreements (f) 24,400 29,800
- -------------------------------------------------------------
Total Long-Term Borrowings $60,044 $65,461
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>
(e) Federal Home Loan Bank Loans included in Long-Term Borrowings are as
follows:
<TABLE>
<CAPTION>
(In Thousands) At December 31,
1998 1997
<S> <C> <C>
Fixed rate at 5.28%, matured January 22, 1998 $ -- $10,000
Variable rate at 4.74%, maturing October 26, 2000 5,000 --
Variable rate at 5.75%, scheduled to mature -- --
December 11, 2001, but repaid in 1998 -- 15,000
Variable rate at 5.60%, maturing July 11, 2002 10,000 10,000
Variable rate at 5.19%, maturing July 22, 2003 10,000 --
Variable rate at 4.32%, maturing October 20, 2003 10,000 --
Fixed rate at 6.86%, maturing December 30, 2016 571 587
Fixed rate at 6.83%, maturing June 5, 2017 73 74
- -------------------------------------------------------------------------
Total Federal Home Loan Bank borrowings $35,644 $35,661
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
All Federal Home Loan Bank loans are collateralized by Federal Home Loan Bank
Stock, mortgage-backed securities and first mortgage loans with a book value
totaling $285,490,000 at December 31, 1998.
(f) Repurchase Agreements included in Long-Term Borrowings are as follows:
<TABLE>
<CAPTION>
(In Thousands) At December 31,
1998 1997
<S> <C> <C>
Salomon Brothers fixed rate at 5.10%, matured February 27, 1998 $ -- $4,800
Salomon Brothers fixed rate at 6.00%, matured June 15, 1998 -- 10,000
Morgan Stanley fixed rate at 5.68%, maturing January 30, 2000 9,400 --
Morgan Stanley fixed rate at 5.57%, maturing December 18, 2001 15,000 15,000
- ---------------------------------------------------------------------------------------
Total Repurchase Agreements $24,400 $29,800
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
Securities sold under repurchase agreements were delivered to the broker-dealers
who arrange the transactions. The broker-dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
their operations, and have agreed to resell to the Corporation substantially
identical securities at the maturities of the agreements.
16
<PAGE>
The respective carrying value of the underlying securities at December 31, 1998
and 1997 was $25,967,000 and $33,742,000. Average daily repurchase agreement
borrowings for the years ended December 31, 1998, 1997, and 1996 amounted to
$28,967,000, $37,481,000 and $37,650,000, respectively. The weighted average
interest rate on repurchase agreements for 1998, 1997 and 1996 was 5.40%, 5.77%
and 5.96% , respectively. During 1998, 1997 and 1996 the maximum outstanding
borrowings were $39,200,000, $44,650,000 and $44,650,000.
10. 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.
17
<PAGE>
The following tables present information on loans.
<TABLE>
<CAPTION>
December 31, 1998
(In Thousands) Book Current Discount Fair
Value Yield Rate (1) Value
<S> <C> <C> <C> <C>
Real Estate:
Real Estate Fixed $176,206 8.58 7.69 $179,542
Real Estate Variable 48,539 8.01 7.18 48,558
- ----------------------------------------------------------------------------------------------------------------
Total Real Estate 224,745 8.46 228,100
- ----------------------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 21,853 9.14 8.77 21,930
Consumer Variable 548 8.50 8.27 548
Credit Cards 7,863 14.90 14.90 7,863
Key Loans 660 18.00 18.00 660
- ----------------------------------------------------------------------------------------------------------------
Total Consumer 30,924 31,001
- ----------------------------------------------------------------------------------------------------------------
Agriculture 1,903 10.00 8.75 1,928
- ----------------------------------------------------------------------------------------------------------------
Commercial:
Commercial Fixed 10,106 9.06 8.75 10,150
Commercial Variable 7,524 8.59 8.75 7,505
- ----------------------------------------------------------------------------------------------------------------
Total Commercial 17,630 17,655
- ----------------------------------------------------------------------------------------------------------------
Other Loans 7,028 7.81 7.75 7,047
Political Subdivisions 7,449 6.05 5.00 7,616
Leases 218 7.93 8.00 207
Nonperforming 1,135 1,135
- ----------------------------------------------------------------------------------------------------------------
Total Loans $291,032 $294,689
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Book Current Discount Fair
Value Yield Rate(1) Value
<S> <C> <C> <C> <C>
Real Estate:
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
- ----------------------------------------------------------------------------------------------------------------
Agriculture 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>
(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.
18
<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, 1998 and
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, 1998
Book Market
(In Thousands) Value Value
<S> <C> <C>
Noninterest-bearing Demand Deposits $ 57,871 $ 57,871
Interest-bearing Deposits:
Money Market 121,082 121,082
Interest Checking 36,751 36,751
Savings 45,301 45,301
Certificates of Deposit 137,475 142,673
Other Time 78,038 78,040
- ---------------------------------------------------------------
Total Interest-bearing Deposits 418,647 423,847
- ---------------------------------------------------------------
Total Deposits $476,518 $481,718
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
(In Thousands) Book Fair
Value 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>
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.
<TABLE>
<CAPTION>
December 31, 1998
(In Thousands) Book Fair
Value Value
<S> <C> <C>
Borrowings
Short -Term $ 12,080 $ 12,071
Long -Term 60,044 59,999
- ---------------------------------------------------------------
Total Borrowings $ 72,124 $ 72,070
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
Book Fair
Value Value
<S> <C> <C>
Borrowings
Short -Term $ 15,000 $ 14,807
Long -Term 65,461 64,619
- ---------------------------------------------------------------
Total Borrowings $ 80,461 $ 79,426
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
19
<PAGE>
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 $54,010,000 at December 31, 1998 and
$51,270,000 at December 31, 1997 and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
11. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS
DEFINED BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension 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.
Also 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. This plan contains a cost-sharing
feature, which causes participants to pay for all future increases in costs
related to benefit coverage. Accordingly, actuarial assumptions related to
health care cost trend rates do not affect the liability balance at December 31,
1998 and will not affect the Corporation's future expenses.
The following tables show the funded status and components of net periodic
benefit cost from these defined benefit plans:
<TABLE>
<CAPTION>
(In Thousands)
Postretirement
Pension Benefits Benefits
CHANGE IN BENEFIT 1998 1997 1998 1997
OBLIGATION:
<S> <C> <C> <C> <C>
Benefit obligation at beginning of year $ 6,059 $ 5,418 $ 715 $ 668
Service cost 267 234 25 19
Interest cost 424 400 42 48
Plan participants' contributions -- -- 54 31
Actuarial loss 384 249 -- 35
Benefits paid (264) (242) (104) (86)
- ---------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 6,870 $ 6,059 $ 732 $ 715
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
Beginning of year $ 7,628 $ 6,701 $-- $--
Actual return on plan assets 1,014 1,099 -- --
Employer contribution -- 70 50 55
Plan participants' contributions -- -- 54 31
Benefits paid (264) (242) (104) (86)
- ---------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 8,378 $ 7,628 $-- $--
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Funded status $ 1,508 $ 1,569 $(732) $(715)
Unrecognized net actuarial (gain) loss (790) (800) (111) (113)
Unrecognized transition obligation (asset) (274) (297) 511 547
- ---------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 444 $ 472 $(332) $(281)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Benefits
(In Thousands) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
WEIGHTED- AVERAGE
ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate 6.75% 7.00% 6.75% 7.00%
Expected return on plan assets 8.50% 8.50% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
(In Thousands)
1998 1997 1996 1998 1997 1996
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Service cost $ 267 $ 234 $ 238 $ 25 $ 19 19
Interest cost 424 400 370 42 48 47
Expected return on plan assets (640) (550) (491) -- -- --
Amortization of transition (asset) obligation (23) (23) (23) 36 36 36
Recognized net actuarial (gain) loss -- -- -- (2) (7) (7)
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 28 $ 61 $ 94 $ 101 $ 96 95
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the 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 1998, 1997 and 1996 were $477,000, $436,000 and $413,000, respectively.
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1998, 1997 and 1996 amounted to $42,000, $35,000 and
$118,000, respectively.
STOCK OPTION PLANS
The Corporation established a Stock Incentive Plan for a selected group of
senior officers. Approximately 60,000 shares of common stock may be issued under
the Stock Incentive Plan. The recipients' rights to exercise these options vest
ratably over a 5-year period and each option has a contractual expiration of 10
years. Also, the Corporation established an Independent Directors Stock Option
Plan which allows the issuance of approximately 25,000 shares of common stock to
non-employee directors. The recipients' rights to exercise these options expire
10 years from the date of grant. The exercise prices of all stock options
awarded under the plans are equal to fair market value as of the date of the
grant
The Corporation applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
expense has been recognized for the stock options. Had compensation cost for the
stock options been determined based on the fair value at the grant dates for
awards consistent with the method of SFAS No. 123, the effect on the
Corporations' net income and earnings per share for 1998, 1997 and 1996 would
have been adjusted to the pro forma amounts indicated below.
21
<PAGE>
<TABLE>
<CAPTION>
(Net Income in Thousands)
1998 1997 1996
<S> <C> <C> <C>
Net income
As reported $11,077 $10,107 $9,255
Pro forma $11,048 $10,096 $9,250
Earnings per share-basic
As reported $2.15 $1.96 $1.79
Pro forma $2.14 $1.95 $1.79
</TABLE>
For purposes of the calculations of 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>
1998 1997 1996
<S> <C> <C> <C>
Volatility 18% 19% 11%
Expected option lives 6 Years 6 Years 6 Years
Risk-free interest rate 5.05% 5.78% 6.25%
Dividend yield 3.78% 4.05% 4.61%
</TABLE>
A summary of the status of the Corporation's stock option plans as of December
31, 1998, 1997, and 1996, and changes during the years then ended, is presented
below:
<TABLE>
<CAPTION>
1998 1997 1996
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 36,560 $27.09 22,850 $22.65 12,100 $20.00
Granted 17,700 36.38 15,000 33.25 11,000 25.50
Exercised (810) 20.95 (590) 20.00 (250) 20.00
Forfeited -- -- (700) 20.00 -- --
--------------------------------------------------------------------------
Outstanding, end of year 53,450 $30.26 36,560 $27.09 22,850 $22.65
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Options exercisable at year-end 12,590 $25.02 5,920 $22.04 2,170 $20.00
Fair value of options granted
during the year $5.85 $5.88 $2.95
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
Number Number
Outstanding Exercisable
At Remaining At
December 31, Contractual December 31,
1998 Life in Years 1998
<S> <C> <C> <C>
Exercise
Prices
$20.00 9,890 7 5,330
$25.50 10,860 8 4,260
$33.25 15,000 9 3,000
$36.38 17,700 10 --
-----------------------------------------------------
53,450 12,590
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
22
<PAGE>
12. INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability
at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(In Thousands)
1998 1997
<S> <C> <C>
Deferred Tax Liabilities:
Bond Accretion $23 $14
Depreciation 148 124
Pension Expense 153 166
Unrealized Holding Gains on Available-for Sale Securities 6,142 6,870
- -----------------------------------------------------------------------------------------
Total 6,466 7,174
- -----------------------------------------------------------------------------------------
Deferred Tax Assets:
Loan Fees and Costs (199) (281)
SERP Plan (92) (55)
Postretirement and Sick Benefits (129) (101)
Allowance for Loan Losses (1,687) (1,720)
Write down of Other Real Estate Owned (7) --
- -----------------------------------------------------------------------------------------
Total (2,114) (2,157)
- -----------------------------------------------------------------------------------------
Deferred Tax Liability, Net $4,352 $5,017
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
The federal income tax provision is comprised of the following components:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
Currently Payable $3,464 $3,156 $3,366
Deferred Provision (Benefit) 63 10 (215)
- ------------------------------------------------------------------
Total Provision $3,527 $3,166 $3,151
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</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,
1998 1997 1996
(In Thousands) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Expected Provision $5,111 35.0 $4,646 35.0 $4,342 35.0
Nontaxable Bond Interest (1,375) (9.4) (1,249) (9.4) (1,054) (8.5)
Nontaxable Loan Interest (133) (0.9) (137) (1.0) (148) (1.2)
Nondeductible Interest Expense 192 1.3 167 1.3 149 1.2
Dividends Received Deduction (165) (1.1) (161) (1.2) (156) (1.3)
Surtax (108) (0.7) (112) (0.8) (138) (1.1)
Exemption
Other, Net 5 -- 12 -- 156 1.3
- ---------------------------------------------------------------------------------------------------------
Effective Income Tax and Rates $3,527 24.2 $3,166 23.9 $3,151 25.4
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE>
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:
<TABLE>
<CAPTION>
(In Thousands)
Beginning New Other Ending
Name of Borrower Balance Loans Repayments Changes Balance
<S> <C> <C> <C> <C> <C>
15 Directors, 5 Executive Officers 1998 $5,578 $1,487 $(1,647) $(709) $4,709
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
</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 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
<S> <C> <C>
Commitments to extend credit $48,610 $46,258
Standby letters of credit $5,400 $5,012
</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.
24
<PAGE>
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, 1998, 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,
(In Thousands) 1998 1997
<S> <C> <C>
Tier I Capital $ 78,645 $ 72,200
Tier II Supplemental Capital (1) 11,096 11,390
- ------------------------------------------------------------
Total Capital $ 89,741 $ 83,590
- ------------------------------------------------------------
- ------------------------------------------------------------
Average Assets (2) $614,598 $595,215
Risk Weighted Assets:
Balance Sheet $333,783 $313,008
Off-Balance Sheet 29,054 26,769
- ------------------------------------------------------------
Total Risk Weighted Assets $362,837 $339,777
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Minimum Well
Actual Requirements Capitalized
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
As of December 31, 1998
Total Capital to Risk Weighted Assets 24.73% greater than or equal to 8% greater than or equal to 10%
Tier I Capital to Risk Weighted Assets 21.68% greater than or equal to 4% greater than or equal to 6%
Tier I to Average Assets (2) 12.80% greater than or equal to 4% greater than or equal to 5%
As of December 31, 1997
Total Capital to Risk Weighted Assets 24.60% greater than or equal to 8% greater than or equal to 10%
Tier I Capital to Risk Weighted Assets 21.25% greater than or equal to 4% greater than or equal to 6%
Tier I to Average Assets (2) 12.13% greater than or equal to 4% greater than or equal to 5%
</TABLE>
(1) Inclusion of the allowance for possible loan losses is allowed up to 1.25%
of "Risk Adjusted Assets" and 45 percent of the unrealized gain on unrestricted
equity securities is allowed. (2) Includes 45 percent of the unrealized gain or
loss on equity securities. Otherwise, unrealized gains or (losses) on
available-for-sale securities are excluded.
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 approval of the Federal Reserve Board. Accordingly,
Company dividends in 1999 may not exceed $13,252,000, plus Company net income
for 1999. 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 $61,974,000 at December 31, 1998, 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 $7,200,000 at
December 31, 1998.
25
<PAGE>
16. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern
Corporation.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
(In Thousands)
1998 1997
<S> <C> <C>
ASSETS
Cash $ 89 $ 3
Available-for-Sale Securities 9,270 9,101
Subsidiary Investments
Citizens & Northern Bank 81,000 76,405
Bucktail Life Insurance Company 1,796 1,616
- --------------------------------------------------------------------------------
Total Subsidiary Investments 82,796 78,021
Dividend Receivable 1,300 1,100
- --------------------------------------------------------------------------------
TOTAL ASSETS $93,455 $88,225
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other Liabilities $ 1,765 $ 1,677
Dividends Payable 1,123 1,013
Stockholders' Equity 90,567 85,535
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $93,455 $88,225
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
CONDENSED INCOME STATEMENT
<TABLE>
<CAPTION>
(In Thousands) Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Dividends from Subsidiary $ 5,500 $ 3,980 $ 4,183
Other Dividend Income 218 186 142
Available-for-Sale Securities Gains 822 74 217
Expenses (356) (77) (118)
- ---------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Earnings of Subsidiaries 6,184 4,163 4,424
Equity in Undistributed Earnings of Subsidiaries 4,893 5,944 4,831
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 11,077 $ 10,107 $ 9,255
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,077 $ 10,107 $ 9,255
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Noncash Dividends Received -- -- (578)
Equity Securities Gains (822) (74) (217)
Equity in Undistributed Net Income of Subsidiaries (4,893) (5,944) (4,831)
Increase in Other Assets (200) (150) (80)
Increase in Other Liabilities 372 111 51
- -------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,534 4,050 3,600
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Available-for-Sale Securities (2,257) (602) (486)
Proceeds from Sale of Available-for-Sale Securities 1,441 187 425
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (816) (415) (61)
- -------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Treasury Stock 24 11 4
Purchase of Treasury Stock (468) -- --
Dividends Declared (4,188) (3,744) (3,458)
- -------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (4,632) (3,733) (3,454)
- -------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 86 (98) 85
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3 101 16
- -------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 89 $ 3 $ 101
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
26
<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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
PARENTE, RANDOLPH, ORLANDO, CAREY & ASSOCIATES
WILLIAMSPORT, PENNSYLVANIA
FEBRUARY 5, 1999
27
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
February 3, 1999
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
28
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
29
<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, A CALCULATED PORTION OF THE
ALLOWANCE FOR LOAN LOSSES AND 45 PERCENT OF UNREALIZED GAINS ON
UNRESTRICTED EQUITY SECURITIES.
G. TOTAL CAPITAL - SUM OF TIER I AND TIER II CAPITAL
COMPREHENSIVE INCOME - THE CHANGE IN EQUITY DURING A PERIOD FROM TRANSACTIONS
AND OTHER EVENTS AND CIRCUMSTANCES FROM NONOWNER SOURCES. IT INCLUDES ALL
CHANGES IN EQUITY DURING A PERIOD EXCEPT THOSE RESULTING FROM INVESTMENTS BY
OWNERS AND DISTRIBUTIONS TO OWNERS. FOR THE CORPORATION IT MEANS NET INCOME AND
UNREALIZED GAINS AND LOSSES ON AVAILABLE-FOR-SALE SECURITIES.
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 LIABILITIES ARE 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 DEBTOR.
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.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1998 PERFORMANCE REVIEW
Citizens and Northern Corporation ("Corporation") and its major subsidiary,
Citizens and Northern Bank ("Bank"), recorded basic per share earnings of $2.15,
$1.96 and $1.79, respectively, for the years ended December 31, 1998, 1997 and
1996. Diluted earnings per share amounted to $2.14, $1.96 and $1.79 for the
years ended December 31, 1998, 1997 and 1996, respectively. Return on the
Corporation's equity, excluding the net unrealized gain or loss on
available-for-sale securities, for the years ended 1998, 1997 and 1996 amounted
to 14.81 percent, 14.56 percent and 14.74 percent, respectively.
Net income for the years ended 1998, 1997 and 1996 amounted to $11,077,00,
$10,107,000 and $9,255,000, respectively. Securities gains included in net
income for the same periods respectively, amounted to $3,001,000, $1,001,000 and
$475,000. During 1998 the Corporation recorded an unusual security gain. Stock
that had been acquired as the result of a defaulted loan in 1919 and carried on
the Corporation books at $1.00 was sold for an approximate gain of $1,766,000.
Net income exclusive of securities gains net of tax for the years ended December
31, 1998, 1997 and 1996 amounted to $9,097,000, $9,446,000 and $8,941,000,
respectively. The slightly lower income recorded during 1998 when compared to
1997 reflects the additional cost of a new branch which opened during 1998 and
the installation of 12 automated teller machines.
1998 was a busy and exciting year for your Corporation. A new branch in
Mansfield Pennsylvania was added, 12 automated teller machines were placed at
strategic market locations in the branch network, a marketing department was
established, telephone banking was introduced and a cash management "Repo Sweep"
account was added. Also during 1998 year 2000 program changes and testing were
being finalized.
OUTLOOK FOR 1999
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, capable personnel, a well established and managed branch
network, an increasingly large deposit base and a package of services designed
to accommodate an increasingly sophisticated customer base.
Given the same rate environment for 1999 as we experienced during 1998,
operating earnings will probably mirror those of 1998. However, if rates
suddenly change substantially in either direction (300 basis points), earnings
could be pushed somewhat lower. It should also be noted that earnings derived
from investment security gains are expected to be lower in 1999 when compared to
1998.
Other Corporation endeavors for 1999 will include the implementation of a
transactional internet banking application, a Visa check card and the
development of a transfer pricing system that will provide management with a
tool for more detailed department, branch and product profitability analysis.
Additionally, management is currently considering the opening of a full service
office in Lycoming County. At the top of the list for 1999 will be the
completion of the year 2000 project.
The prime focus of the Corporation in 1999 will be to remain a strong
independent community bank serving the people, the businesses and the
communities of its market area.
NET INTEREST MARGIN
1998/1997/1996
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.
31
<PAGE>
INTEREST INCOME
Interest income generated by the Corporation comes primarily from two earning
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 $1,762,000 held by the Corporation's insurance subsidiary,
Bucktail Life Insurance Company. The investment portfolio is funded primarily by
deposits and borrowed funds.
The average balance of the available-for-sale investment portfolio during 1998,
1997 and 1996 amounted to $294,121,000, $287,553,000 and $303,548,000,
respectively. The portfolio consists of U. S. Treasury securities, U. S. Agency
securities, municipal bonds, pools of mortgage-backed instruments and equity
investments of banks and bank holding companies located primarily in
Pennsylvania.
The rate of return on the investment portfolio has remained relatively constant
during 1998, 1997 and 1996 at 6.42 percent, 6.51 percent and 6.50 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 times the Corporation may sell
selected securities from the available-for-sale category.
During 1998 declining interest rates caused the mix of portfolio assets to
change. The lower interest rates increased the amount of monthly payments
received on mortgage-backed instruments as consumers exercised their option to
refinance mortgages. Also in 1998 government agencies refinanced debt held by
the Corporation amounting to about $74,000,000. The increased cash flow of debt
refinancing was reinvested in U. S. Agency issues; primarily Federal National
Mortgage Association and Federal Home Loan Bank zero coupon bonds. The slightly
higher return on U. S. Agency bonds is reflected in the increase in average
balances carried in U. S. agency securities and a decrease in average balances
carried in mortgage-backed pools during 1998. Average balances carried in
mortgage-backed pools during 1998 amounted to $121,466,000. Average balances
respectively, for the years ended 1997 and 1996 were $163,942,000 and
$197,581,000. The average balance of U. S. Agencies for the respective
three-year periods was $68,512,000, $41,968,000 and $30,914,000.
Also during 1998 municipal bonds, because of their nontaxable income and the
Corporation's tax position, provided respectable yields. The average balance of
municipal securities in 1998 increased to $68,942,000; this compares to
$59,554,000 for 1997 and $49,700,000 for 1996. Also during 1998 several of the
higher yielding municipal bonds were called, again due to lower rates.
Additional equity securities purchased during 1998 increased the average
balances carried to $18,725,000. Average balances carried during 1997 and 1996
were $15,039,000 and $16,342,000, respectively. Nine equity investments were
sold for a before tax profit of $1,581,000. This profit is exclusive of the gain
on the stock that was carried as a result of a defaulted loan mentioned earlier.
The equity portfolio is monitored continuously for stocks that management feels
are fully valued. It is the practice of the Corporation to sell certain stocks
each year and realize gains, which comprise a substantial portion of the overall
yield of equity investments. Traditionally equity securities average an annual
return of between 2 to 4 percent. Approximately 21 percent of the portfolio
consists of Federal Home Loan Bank stock which carries a substantially higher
return than the rest of the portfolio. During the last 3 years the Federal Home
Loan Bank stock has carried an annual return of about 6.60 percent. Membership
in The Federal Home Loan Bank requires stock ownership and the amount of stock
varies according to the amount of outstanding loans made to the Corporation.
The average balance of other securities increased by nearly $10,000,000 when
compared to the years ended 1997 and 1996 as a portion of the prepayments on
mortgage-backed securities was invested in a collateralized mortgage obligation.
The portion of the investment portfolio that is funded by borrowed funds
declined in 1998 and 1997 as the spread between the interest rates on borrowed
funds and the return on investments remained very narrow during both years.
Average borrowed funds for the years ended December 31, 1998, 1997 and 1996
amounted to $78,841,000, $89,211,000 and $102,088,000, respectively.
The loan portfolio makes up the balance of the earning asset base and is the
largest contributor to total interest income. The Corporation's market area
consists 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 80 percent, 79 percent and 77 percent of the loan portfolio
for 1998, 1997 and 1996, respectively. Respectively, they contributed 70
percent, 70 percent and 69 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, 1998, 1997 and 1996 amounted to 10.22
percent, 10.28 percent and 10.31 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.
32
<PAGE>
INTEREST EXPENSE
The liability and equity 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. Average total deposits, including demand
deposits, increased 3.2 percent during 1998. This compares to growth rates of
1.4 percent and 3.4 percent for 1997 and 1996, respectively. Competition for
deposits has become increasingly intense as new products and new competitors
come on the scene. Competition for deposits comes primarily from banks and
nonbank sources, including credit unions, mutual funds and brokerage houses.
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, 1998, 1997 and 1996 were $126,902,000, $119,226,000 and
$117,596,000, respectively. The average rate paid for those deposits for the
same periods, respectively, was 5.50 percent, 5.49 percent and 5.47 percent.
During the third quarter of 1998 the Corporation successfully attracted local
school district deposits, and as a result of the effort, average Certificate of
Deposit balances increased 6.4 percent over 1997. At year-end 1998 total
Certificates of Deposit amounted to approximately $137,475,000. 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 and competition from the Corporation's Trust Department for the
balances carried in Individual Retirement Accounts we have witnessed a small
decline during the past three years. Average balances and rates paid on
Individual Retirement Accounts during the years ended December 31, 1998, 1997
and 1996 were, respectively, $76,557,000 at 5.42 percent, $78,662,000 at 5.99
percent and $79,076,000 at 5.77 percent.
Short term deposits (deposits that reprice more frequently) consist of 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, 1998, 1997 and 1996,
respectively, were $115,143,000, $107,287,000 and $100,618,000. Average rates
paid for those same periods were, respectively, 4.42 percent, 4.55 percent and
4.53 percent. During 1998 the Corporation introduced a new Municipal Money
Market Account that carried a rate tied to the over-night Federal Funds rate.
The rate is tiered according to the balances carried. The account has been
popular with local school districts and other municipal depositors. It allows
the municipalities to maintain funds locally as opposed to sending the funds out
of the market area. The Interest Checking accounts allow normal checking
activity but earn a lesser rate of interest. Average balances and rates paid on
these accounts for the years ended December 31, 1998, 1997 and 1996 were,
respectively, $36,556,000 at 2.33 percent, $38,334,000 at 2.46 percent and
$40,558,000 at 2.46 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. Average balances for the years ended December
31, 1998, 1997 and 1996 were $45,207,000, $46,338,000 and $46,751,000,
respectively. The rate paid for each of the three years was approximately 2.50
percent.
During the fourth quarter of 1998 the Corporation introduced a new type of
account called the "RepoSweep". Although linked to deposit activity, "RepoSweep"
balances are classified as Short-term Borrowings on the Corporation's balance
sheet. The accounts are monitored each day and excess funds above a
predetermined level are swept to an interest-bearing account. The rate paid is
indexed to the 91-day Treasury Bill rate. Though the FDIC does not insure the
accounts, they are secured by investment securities pledged specifically for
them and held at a correspondent bank. Balances in the accounts have ranged from
$1.5 million to $3 million on a daily basis.
The Corporation also carries noninterest-bearing Demand Deposits; average
balances for the past three years, respectively, were $46,336,000, $42,780,000
and $42,500,000. The increase in average balances during 1998 is due to an
increase in the number of municipal accounts, a new branch and other factors.
The final type of interest-bearing liability found on the Corporation balance
sheet is borrowed funds, 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 having an original maturity of overnight to one year.
Long-term borrowed funds have a maturity of one year or more.
Average balances carried as short and long-term borrowing for the years ended
December 31, 1998, 1997 and 1996 amounted to $78,841,000, $89,211,000 and
$102,088,000, respectively. Average rates for the same periods, respectively,
were 5.63 percent, 5.63 percent and 5.56 percent. Because of declining interest
rates in 1998 the Corporation repaid borrowings amounting to $15,000,000 and
refinanced an additional $15,000,000. The remaining $15,000,000 was refinanced
at a more favorable rate resulting in a savings of 50 basis points.
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 decline. Rates remained relatively stable during 1998, 1997 and 1996
and produced a net spread of 3.54 percent in 1998, 3.50 percent for 1997 and
3.49 percent during 1996. The concern for 1999 appears to be the Asian and South
American economies. Those economies will not have a direct impact on the
earnings of your Corporation unless interest rates are affected. At this writing
it appears that interest rates will remain stable during 1999 and produce
operating earnings comparable to 1998.
33
<PAGE>
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
Change
(In Thousands) Years Ended December 31, Increase (Decrease)
1998 1997 1996 98/97 97/96
<S> <C> <C> <C> <C> <C>
INTEREST INCOME Available-for-Sale Securities:
U S Treasury Securities $ 151 $ 139 $ 128 $ 12 $ 11
Securities of Other U S Government Agencies and Corporations 4,842 3,002 2,124 1,840 878
Mortgage Backed Securities 7,992 11,060 13,113 (3,068) (2,053)
Obligations of States and Political Subdivisions 3,982 3,595 3,012 387 583
Stock 950 874 872 76 2
Other Securities 961 52 472 909 (420)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 18,878 18,722 19,721 156 (999)
- ------------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U S Treasury Securities 37 34 42 3 (8)
Securities of Other U S Government Agencies and Corporations 41 22 4 19 18
Mortgage Backed Securities 38 52 59 (14) (7)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 116 108 105 8 3
- ------------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 37 54 37 (17) 17
Federal Funds Sold 229 334 60 (105) 274
Loans:
Real Estate Loans 20,371 20,218 19,277 153 941
Consumer 6,498 6,484 6,402 14 82
Agricultural 223 272 278 (49) (6)
Commercial/Industrial 1,621 1,606 1,577 15 29
Other 55 62 25 (7) 37
Political Subdivisions 380 391 424 (11) (33)
Leases 20 18 16 2 2
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loan Income 29,168 29,051 27,999 117 1,052
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income $48,428 $48,269 $47,922 $ 159 $ 347
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest Checking $ 853 $ 945 $ 998 $ (92) $ (53)
Money Market 5,093 4,879 4,556 214 323
Savings 1,121 1,150 1,169 (29) (19)
Certificates of Deposit 6,984 6,549 6,431 435 118
Individual Retirement Accounts 4,152 4,713 4,563 (561) 150
Other Time Deposits 49 56 58 (7) (2)
Federal Funds Purchased 133 33 55 100 (22)
Other Borrowed Funds 4,308 4,987 5,621 (679) (634)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense $22,693 $23,312 $23,451 $ (619) $ (139)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $25,735 $24,957 $24,471 $ 778 $ 486
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net interest income, if reflected on a fully tax equivalent basis, would
have amounted to $27,621,000, $26,773,000, and $25,963,000 for 1998, 1997, and
1996, respectively.
(2) Fees on loans are included with interest on loans and amounted to $710,000,
$612,000 and $701,000 for the years ended 1998, 1997 and 1996, respectively.
34
<PAGE>
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
<TABLE>
<CAPTION>
Rate of Rate of
(In Thousands) Return/ Return/
Cost of Cost of
Funds funds
EARNING ASSETS 12/31/98 12/31/97 % 12/31/96
<S> <C> <C> <C> <C> <C>
Available-for-Sale Securities(*) :
U. S. Treasury Securities $ 2,516 6.00 $ 2,514 5.53 $ 2,506
Securities of Other U.S. Government Agencies and Corporations 68,512 7.07 41,968 7.15 30,514
Mortgage Backed Securities 121,466 6.58 163,942 6.75 197,581
Obligations of States and Political Subdivisions 68,942 5.78 59,554 6.04 49,700
Stock 18,725 5.07 15,039 5.81 16,342
Other Securities 13,960 6.88 4,536 1.15 6,905
- ----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 294,121 6.42 287,553 6.51 303,548
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 626 5.91 601 5.66 698
Securities of Other U. S. Government Agencies and Corporations 629 6.52 297 7.41 50
Mortgage Backed Securities 507 7.50 689 7.55 829
- ----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,762 6.58 1,587 6.81 1,577
- ----------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 671 5.66 795 6.79 455
Federal Funds Sold 4,139 5.53 6,132 5.45 1,100
Loans(**) :
Real Estate Loans 227,845 8.94 223,510 9.05 210,289
Consumer 30,366 21.40 32,293 20.08 35,305
Agricultural 2,219 10.05 2,689 10.12 2,750
Commercial/Industrial 17,698 9.16 16,743 9.59 16,207
Other 707 7.78 754 8.22 237
Political Subdivisions 6,227 6.10 6,355 6.15 6,629
Leases 214 9.35 236 7.63 201
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 285,276 10.22 282,580 10.28 271,618
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 585,969 8.26 578,647 8.34 578,298
Cash 12,694 12,228 11,502
Securities Valuation Reserve 19,939 9,907 5,924
Allowance for Possible Loan Losses (4,822) (4,844) (4,726)
Other Assets 5,337 5,745 6,617
Bank Premises & Equipment 6,985 6,594 6,793
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets 626,102 608,277 604,408
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest Checking 36,556 2.33 38,334 2.47 40,558
Money Market 115,143 4.42 107,287 4.55 100,618
Savings 45,207 2.48 46,338 2.48 46,751
Certificates of Deposit 126,902 5.50 119,226 5.49 117,596
Individual Retirement Accounts 76,557 5.42 78,662 5.99 79,076
Other Time Deposits 1,900 2.58 2,223 2.52 1,937
Federal Funds Purchased 2,801 4.75 663 4.98 967
Other Borrowed Funds 76,040 5.67 88,548 5.63 101,121
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 481,106 4.72 481,281 4.84 488,624
Demand Deposits 46,336 42,780 42,500
Other Liabilities 10,663 8,211 6,794
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 538,105 532,272 537,918
Stockholders' Equity 74,810 69,440 62,797
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve 13,187 6,565 3,693
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 626,102 $ 608,277 $ 604,408
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Rate Spread 3.54 3.50
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(*) Average balances do not include unrealized gains and losses on
Available-for-Sale Securities.
(**) Nonaccrual loans have been included with loans for the purpose of
analyzing net interest earnings.
35
<PAGE>
TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST
INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31, 1998/1997
(In Thousands) Change in Change in Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities $ -- $ 12 $ 12
Securities of Other U.S. Government Agencies and Corporations 1,876 (36) 1,840
Mortgage Backed Securities (2,801) (267) (3,068)
Obligations of States and Political Subdivisions 533 (146) 387
Stock 158 (82) 76
Other Securities 267 642 909
- -------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 33 123 156
- -------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 1 2 3
Securities of Other U.S. Government Agencies and Corporations 19 19
Mortgage Backed Securities (14) (14)
- -------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 6 2 8
- -------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks (9) (8) (17)
Federal Funds Sold (110) 5 (105)
Loans:
Real Estate Loans 382 (229) 153
Consumer (137) 151 14
Agricultural (47) (2) (49)
Commercial/Industrial 72 (57) 15
Other (4) (3) (7)
Political Subdivisions (8) (3) (11)
Leases (1) 3 2
- -------------------------------------------------------------------------------------------------------
Total Loans 257 (140) 117
- -------------------------------------------------------------------------------------------------------
Total Interest Income 177 (18) 159
- -------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Checking (43) (49) (92)
Money Market 342 (128) 214
Savings (28) (1) (29)
Certificates of Deposit 422 13 435
Individual Retirement Accounts (123) (438) (561)
Other Time Deposits (8) 1 (7)
Federal Funds Purchased 101 (1) 100
Other Borrowed Funds (709) 30 (679)
- -------------------------------------------------------------------------------------------------------
Total Interest Expense (46) (573) (619)
- -------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 223 $ 555 $ 778
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, 1997/1996
(In Thousands) Change in Change in Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities $ -- $ 11 $ 11
Securities of Other U.S. Government Agencies and 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 274 274
Loans:
Real Estate Loans 1,192 (251) 941
Consumer (319) 401 82
Agricultural (6) (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.
37
<PAGE>
NONINTEREST INCOME
1998/1997/1996
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 on
Available-for-Sale Securities. The percentages cited below in the discussion of
the components of Noninterest Income are derived using Noninterest Income Before
Gains on Securities, Net. Overall, Noninterest Income decreased $93,000, or 2.9
percent, in 1998 compared to 1997; however, noninterest income for 1997 includes
a gain of $301,000 from the sale of a copyrighted logo. Exclusive of this gain,
other noninterest income would have increased 7.2 percent during 1998 when
compared to 1997. A comparison of noninterest income between the years ended
1997 and 1996 reflects an increase of 12.6 percent, primarily from the gain
described above.
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. For each of the three years presented service charges amounted to 55
percent of the total and the remainder were overdraft fees. Service Charges on
Deposit Accounts for the years ended December 31, 1998, 1997 and 1996 accounted
for 33 percent, 34 percent and 39 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.
Recorded Service Charges have declined slightly during 1998 and 1997 due in part
to the elimination of service charges on accounts using direct deposit that
began during 1997.
Other Service Charges and Fees are derived from debit card fees, credit card
annual fees, fees for bank customer data processing services and a variety of
other services such as check cashing for noncustomers, bank money orders,
cashier checks, traveler's checks, etc. Annually, Other Service Charges and Fees
contributed approximately 9 percent of the total Noninterest Income in each of
the three years presented.
Trust Department Income has become the largest source of noninterest income. For
the years ended December 31, 1998, 1997 and 1996, respectively, Trust Department
Income amounted to 41 percent, 35 percent (excluding the gain from sale of the
logo) and 30 percent of total noninterest income. Trust Department Income has
increased approximately 28 percent when comparing the years ended December 31,
1998 and 1997 and 18 percent when comparing 1997 to 1996. The increase can be
attributed to an increase in the number of trust accounts and the amount of
trust assets. Assets under management as of December 31, 1998, 1997 and 1996,
respectively, were $283,076,000, $230,149,000 and $222,541,000. The increase in
trust assets can be attributed to the highly qualified and technical staff
employed by the Trust Department and their sales efforts.
Insurance Commissions, Fees and Premiums generated by the Corporation's
subsidiary, Bucktail Life Insurance Company, accounted for 13 percent, 16
percent and 19 percent of Noninterest Income for the years ended December 31,
1998,1997 and 1996, 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.
Net realized gains on available-for-sale securities in 1998 amounted to
$3,001,000, including a gain of $1,766,000 on the sale of stock carried at $1.00
previously mentioned. Gross gains realized on the sale or early call of
investments amounted to $3,422,000 and gross losses realized amounted to
$421,000. Net realized gains 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. Realized gains during 1996 were
relatively small at $475,000. During recent years it has been the practice of
the Corporation's management and Board of Directors to sell certain equity
investments that it feels are overpriced and use the realized gains to increase
the return on the equity investment portion of the portfolio to a level
consistent with the remainder of the portfolio.
38
<PAGE>
TABLE IV - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
% %
(In Thousands) 1998 Change 1997 Change 1996
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts $1,039 (3.44) $1,076 (4.27) $1,124
Service Charges and Fees 288 2.49 281 4.46 269
Trust Department Income 1,288 28.29 1,004 17.84 852
Insurance Commissions, Fees and Premiums 405 (12.34) 462 (16.76) 555
Other Operating Income 94 (75.52) 384 717.02 47
- ----------------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized
Securities Gains, Net 3,114 (2.90) 3,207 12.64 2,847
Realized Gains on Securities, Net 3,001 199.80 1,001 110.74 475
Total Other Income $6,115 45.32 $4,208 26.67 $3,322
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
OTHER NONINTEREST EXPENSE
1998/1997/1996
Other Noninterest Expense is made up of Salaries and Wages, Pension and Other
Employee Benefit Expenses, Occupancy Expense, Furniture and Equipment Expense,
Expenses Related to Credit Card Operations, Pennsylvania Shares Tax and Other
Operating Expense. Other Noninterest Expense for the year ended December 31,
1998 increased 9.2 percent when compared to the year ended December 31, 1997 and
2.8 percent when comparing 1997 to the year 1996.
Salaries and Wages for the year ended December 31, 1998 when compared to 1997
increased $646,000. The increase is attributable to the addition of a marketing
department and the additional staff of a new branch. Merit raises of about 4.5
percent also contributed to the increase. A comparison of salary expense for the
years ended December 31, 1997 and 1996 reflects an increase of $88,000 or 1.49
percent. The relatively small increase was the result of several retirements,
including the retirement of the Corporation's former President.
Pension and Other Employee Benefits for the year ended December 31, 1998
increased about 4 percent when compared to 1997. The increase can be attributed
to the expense of funding the Corporation's 401 (k) Plan due to an increase in
employee contributions that were matched by the Corporation. The Corporation
matches dollar for dollar employee contributions up to 3 percent of an
employee's salary, and $.50 per dollar of contribution up to 5 percent of
salary. Also, during 1998 the Corporation recorded a higher sick pay accrual. A
comparison of benefit expense for 1997 and 1996 reflects a decline of 1.05
percent in 1997. 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 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.
Occupancy Expense increased 13.9 percent during 1998 when compared to 1997 and
varied only slightly when comparing the expense recorded in 1997 to that of
1996. The increase that occurred in 1998 can be attributed in part to the
expenses associated with the opening of the new office. Also, the janitors in
two of the larger offices were replaced with cleaning services which had the
effect of lowering salaries and wages and increasing occupancy expense. The
increase between the years ended December 31, 1997 and 1996 was minimal, less
than 1 percent.
A comparison of Furniture and Equipment Expense for the years 1998 and 1997
reflects an increase of 9.5 percent. A substantial portion of the increase is
related to the installation of several automated teller machines with the
associated depreciation and maintenance costs. Also contributing to the increase
was the depreciation and maintenance of several new pieces of data processing
equipment, including several new and replacement personal computers. Expenses
related to Furniture and Fixtures were about the same when comparing the years
1997 and 1996.
39
<PAGE>
Expenses Related to Credit Card Operations continue to increase. Those expenses
increased 14.1 percent during 1998 when compared to 1997. The increase is
directly related to interchange transaction fees (those are fees paid to
networks of which we are not a member) paid to process the growing number of
credit card transactions. The same holds true for the increase of 10.2 percent
during 1997 when compared to 1996. It should be noted that a portion of those
increased costs in 1997 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 $243,000 during 1998 and $250,000 in 1997 when
compared to the previous years.) The Corporation is a major credit card
processor for more than 50 banks in Pennsylvania.
Pennsylvania Shares Tax is also a substantial Noninterest Expense amounting to
$656,000, $596,000 and $544,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The tax is based on the Bank's capital excluding U. S.
Treasury and qualifying U. S. Government agency securities, at a rate of 1.25
percent.
Other Operating Expense, whose major components are supplies, directors' fees,
advertising, examination charges and legal fees, increased 3.6 percent in 1998
over 1997 and increased 2.2 percent in 1997 when compared to 1996. The increase
is spread across many expense categories and is not considered significant by
the Corporation.
TABLE V- COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) % %
1998 Change 1997 Change 1996
<S> <C> <C> <C> <C> <C>
Salaries and Wages $ 6,621 10.81 $ 5,975 1.49 $ 5,887
Pensions and Other Employee Benefits 1,760 4.08 1,691 (1.05) 1,709
Occupancy Expense, Net 827 13.91 726 0.69 721
Furniture and Equipment Expense 792 9.54 723 (0.41) 726
Expenses Related to Credit Card Operations 2,732 14.07 2,395 10.22 2,173
Pennsylvania Shares Tax 656 10.07 596 9.56 544
Other Operating Expense 3,095 3.55 2,989 2.15 2,926
- --------------------------------------------------------------------------------------------------------
Total Other Expense $16,483 9.20 $15,095 2.78 $14,686
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
INCOME TAXES
The Corporation's Income Tax Provision reflected as a per share cost to
stockholders amounted to $.68, $.61 and $.61, respectively, for 1998, 1997 and
1996. The amount of income tax payable per common share for those years was
$.67, $.61 and $.65, respectively. The per share tax payable for 1998 is a
reasonable estimate as the return has not been prepared as of the date of this
analysis.
The difference between the amount of income tax currently payable and the amount
reflected in the Corporation's income statement is caused by temporary
differences. Generally, temporary differences occur when an item of income or
expense is included in taxable income during different accounting periods for
financial statement and tax return purposes.
The most significant items creating temporary differences are accretion on
bonds, depreciation, loan loss expense, loan fees and expense and employee
benefit plans.
There are items included in the income statement that are not fully taxable,
including dividends received from certain domestic corporations and a portion of
interest received on municipal bonds and loans.
The reader should refer to Note 12 of the "Notes to the Consolidated Financial
Statements" for a more complete analysis of income tax expense.
40
<PAGE>
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, 1998 were approximately
$12,150,000. 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.
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 becomes a specific allocation of the Allowance
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, 1998 and 1997 amounted to $290,000 and $274,000, respectively.
The balance of the Allowance 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. 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 allowance is then allocated under regulatory guidelines.
The following regulatory allocation was performed using loan data as of October
31, 1998.
<TABLE>
<CAPTION>
(In Thousands) Total Regulatory
Classified Allocation
<S> <C> <C>
Substandard Loans @ 15 percent $ 8,236 $1,234
Doubtful Loans @ 50 percent 1,456 728
Loss Loans @100 Percent 51 51
Impaired Loans, Collateral Value 1,135 290
- -----------------------------------------------------------
Total Allocation $10,878 2,303
Unallocated Portion 2,517
- -----------------------------------------------------------
Total Allowance Balance $ 4,820
- -----------------------------------------------------------
- -----------------------------------------------------------
</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 May 15, 1998. The consultants'
report lists substandard loans at $7,959,000, doubtful loans at $1,060,000 and
loss loans at $13,000. The allowance allocation based upon these classifications
would amount to $2,737,000 as of May 15, 1998.
The Corporation was examined by the Federal Deposit Insurance Corporation as of
March 31, 1998. The Corporation charges off loans that are recommended by the
examiners unless there are underlying circumstances that management feel 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
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996 1995 1994 1993 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loans * $291,003 $285,426 $278,639 $264,182 $258,472 $238,755 $269,413
Net Charge offs 856 660 504 387 326 247 497
Allowance for Possible Loan Losses Balance 4,820 4,913 4,776 4,579 4,229 3,817 4,522
Provision for Loan Losses Charged to Earnings 763 797 701 737 737 708 740
Earnings 11,077 10,107 9,255 7,866 7,494 8,127 8,988
Earnings Coverage of Net Charge offs 12.9 x 15.3 x 18.4 X 20.3 x 23.0 x 32.9 x 18.1 X
Allowance Coverage of Net Charge offs 5.6 x 7.4 x 9.5 X 11.8 x 13.0 x 15.5 x 9.1 X
Loans Ninety Days or More Past Due and
Still Accruing 1,628 1,986 2,994 2,915 2,743 2,899 2,528
Net Charge offs as a Percent of the Provision 112.2% 82.8% 71.9% 52.5% 44.2% 34.9% 67.2%
Year-End Nonperforming Loans 1,135 1,412 864 279 624 843 860
Allowance as a Percentage of Gross Loans: *
Citizens & Northern Corporation (1) 1.66% 1.72% 1.71% 1.73% 1.64% 1.60% 1.68%
Peer Group (2) 1.53% 1.43% 1.50% 1.61% 1.65% 1.82% 1.59%
</TABLE>
* Gross Loans less Unearned Discount
(1) At December 31,
(2) At September 30,
41
<PAGE>
TABLE VII - ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year $4,913 $4,776 $4,579 $4,229 $3,817
Charge-offs
Real Estate Loans 257 246 157 38 --
Installment Loans 144 230 240 236 266
Credit Cards and Related Plans 264 305 201 184 144
Commercial and Other Loans 301 3 74 116 109
- ---------------------------------------------------------------------------------------------
Total Charge-offs 966 784 672 574 519
- ---------------------------------------------------------------------------------------------
Recoveries
Real Estate Loans 12 21 22 -- 4
Installment Loans 43 64 53 60 68
Credit Card and Related Plans 40 30 38 41 42
Commercial and Other Loans 15 9 55 86 80
- ---------------------------------------------------------------------------------------------
Total Recoveries 110 124 168 187 194
- ---------------------------------------------------------------------------------------------
Net Charge-offs 856 660 504 387 325
Additions Charged to Operations 763 797 701 737 737
- ---------------------------------------------------------------------------------------------
Balance at End of Year $4,820 $4,913 $4,776 $4,579 $4,229
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES BY TYPE
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Mortgage $ 97 $ 350 $ 58 $ 38 $ 35
Consumer 702 375 303 286 241
Commercial 650 625 630 604 443
Letters of Credit Commitments 6 201 -- 54 86
Impaired Loans 290 274 113 228 --
All Other Commitments 196 142 369 320 300
- ---------------------------------------------------------------------------------------------
Total Allocated 1,941 1,766 1,473 1,530 1,105
Unallocated 2,879 3,147 3,303 3,049 3,124
- ---------------------------------------------------------------------------------------------
Total Allowance $4,820 $4,913 $4,776 $4,579 $4,229
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</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.
TABLE IX - FIVE YEAR SUMMARY OF LOANS BY TYPE
<TABLE>
<CAPTION>
Years Ended December 31,
1998 % 1997 % 1996 %
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate-Construction $ 1,004 0.35 $ 406 0.14 $ 1,166 0.42
Real Estate-Mortgage 224,849 77.26 219,952 77.05 213,957 76.79
Consumer 30,924 10.63 33,094 11.59 33,420 11.99
Agricultural 1,930 0.66 2,424 0.85 2,603 0.93
Commercial 17,630 6.06 17,176 6.02 15,751 5.65
Other 7,028 2.41 6,260 2.19 5,014 1.80
Political Subdivisions 7,449 2.56 5,895 2.07 6,464 2.32
Lease Receivables 218 0.07 256 0.09 264 0.09
- ----------------------------------------------------------------------------------------------------------------------
Total 291,032 100.00 285,463 100.00 278,639 100.00
Less Unearned Discount (29) (37) (42)
- ----------------------------------------------------------------------------------------------------------------------
291,003 285,426 278,597
Less Allowance for Possible Loan Losses (4,820) (4,913) (4,776)
- ----------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Financing Receivables $ 286,183 $ 280,513 $ 273,821
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
(In Thousands) 1995 % 1994 %
<S> <C> <C> <C> <C>
Real Estate-Construction $ 1,284 0.49 $ 2,539 0.98
Real Estate-Mortgage 200,066 75.72 193,095 74.72
Consumer 36,351 13.76 37,531 14.52
Agricultural 2,815 1.07 3,154 1.22
Commercial 14,445 5.47 13,625 5.27
Other 2,512 0.95 2,459 0.95
Political Subdivisions 6,546 2.48 5,870 2.27
Lease Receivables 189 0.07 168 0.07
- -------------------------------------------------------------------------------------------
Total 264,208 100.00 258,441 100.00
Less Unearned Discount (26) (23)
- -------------------------------------------------------------------------------------------
264,182 258,418
Less Allowance for Possible Loan Losses (4,579) (4,229)
- -------------------------------------------------------------------------------------------
Net Loans and Lease Financing Receivables $ 259,603 $ 254,189
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
42
<PAGE>
BALANCE SHEET
Average Total Assets of the Corporation for the year ended December 31, 1998
were $626,102,000. This compares to average total assets for the years ended
December 31, 1997 and December 31, 1996 of $608,277,000 and $604,408,000,
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 1998 amounted to
$295,883,000, or 50 percent of average earning assets. This compares to average
investment portfolio balances in 1997 and 1996 of $289,140,000 and $305,125,000,
respectively. The investment portfolio amounted to 50.0 percent of earning
assets in 1997 and 52.8 percent in 1996. 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). During
the last two years interest rate spreads have narrowed to ranges that do not
allow leveraging, therefore, the portfolio balances have remained fairly
constant.
The investment portfolio consists of U. S. Treasury securities, U. S. agency
securities, municipal bonds, other bonds and equity securities. U. S. Treasury
issues normally make up a small percentage of the total portfolio and
traditionally carry a lower after tax return than the other investments. The
issues that are carried are required as collateral for U. S. Government and
state deposits.
U. S. agency investments during 1998, 1997 and 1996 averaged 23.4 percent, 14.6
percent and 10.0 percent of the portfolio, respectively. The prepayments or
calls of entire issues that were refinanced at lower rates plagued the portfolio
of U. S. agency issues. 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 increase in
agencies during 1998 was necessitated by the increased prepayments of
mortgage-backed investments. Falling interest rates that spurred mortgage
holders to refinance at lower rates caused the increase in prepayments. The
prepayments were invested primarily in zero-coupon agency issues.
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. Tax-exempt interest income from municipal bonds and
loans totaled $4,362,000 in 1998, $3,986,000 in 1997 and $3,436,000 in 1996
while the amount of nondeductible interest during each of the last three years
was $549,000 in 1998, $477,000 in 1997 and $426,000 in 1996. During 1998, 1997
and 1996 average balances carried in municipal bonds made up 23.3 percent, 20.6
percent and 16.3 percent of the investment portfolio, respectively. Average
balances carried during 1998 increased slightly because of attractive rates and
the tax position of the Corporation.
Mortgage-backed securities make up the largest part of the portfolio averaging
41.2 percent, 56.9 percent and 65.0 percent for 1998, 1997, 1996, respectively.
The decline in balances during 1998 and 1997 clearly underscores the prepayment
risk associated with the investments. Mortgage-backed investments are issued by
the Federal National Mortgage Association,
43
<PAGE>
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 normally provide a monthly cash flow of
$2,000,000 to $3,000,000; however, at times during 1998 and 1997 monthly
payments amounted to $4,000,000. In 1998 and 1997, the funds were reinvested at
current, lower rates and since many securities were purchased at a premium, they
are subject to accelerated monthly 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, 1998, 1997 and 1996 was $11,922,000, $13,335,000 and $5,767,000,
respectively.
Average total loans for the years ended December 31, 1998, 1997 and 1996
amounted to $285,276,000, $282,580,000 and $271,618,000, respectively. As a
percentage of average earning assets for those years they were 48.7 percent,
48.8 percent and 47.0 percent, respectively.
Historically, real estate secured loans have made up 70 to 80 percent of the
dollars in the loan portfolio. The mortgages are primarily 1-4 family dwellings
and commercial loans secured by real estate. The commercial side of the
portfolio is weighted heavily in forest and wood product loans because of the
abundance of hard woods natural to our geographic area. The mortgage portfolio
carries with it the same risk of prepayment as the mortgage-backed investments
in a falling interest rate environment. During 1998 the average rate of return
did decline slightly because of rewrites and increased competition from nonbank
sources and the large number of other banks in our market area all competing for
the same customers.
The structure and nature of the loan portfolio is not expected to change
significantly in the coming years and loan growth for 1999 will probably be
minimal because of the increased competition. 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 4.0 percent of the Corporation's average assets for 1998 were
invested in land, buildings, furniture and fixtures, noninterest-bearing cash
and other assets. The Corporation has 16 banking offices in Tioga, Bradford,
Sullivan and Lycoming counties. All of the offices are modern banking
facilities. The Corporation has also installed 12 automated teller machines
throughout its market area.
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 exhibited some growth
during 1998, particularly Certificates of Deposit and Money Market accounts.
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).
Certificates of Deposit provide the major portion of the deposit base for the
Corporation. Average balances, respectively, for the years ended December 31,
1998, 1997 and 1996 amounted to $126,902,000, $119,226,000 and $117,956,000,
making up nearly a third of the deposit base in each of the three years. At
December 31, 1998 the Corporation had approximately 10,000 accounts with a
weighted average interest rate of 5.39 percent.
The Corporation's Super Money Fund (Money Market) accounts provide the second
largest source of deposits, providing about 25 percent of deposit funds and
numbered 3,412 accounts at December 31, 1998. 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 index. 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. During 1998 a new Money Market Municipal
account was introduced. The account is paid a rate approximating the overnight
Federal Funds rate and is available to all municipal customers. The account has
been very popular and has had the effect of keeping municipal funds in the
market area. The rate paid is tiered depending on the balance.
44
<PAGE>
Interest Checking accounts make up approximately 9 percent of the deposit base
and numbered about 2,300 accounts at December 31, 1998. 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 declined 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, however average balances stabilized at about $45,000,000 during 1998. It
is expected that average balances will decline modestly in 1999 as funds are
moved to higher rate instruments and alternative investments, especially mutual
funds. At December 31, 1998, the Corporation had approximately 19,000 Regular
Savings and Statement Savings accounts.
Demand deposit average balances have remained stable during the past three
years, averaging about 10 percent of the deposit base. 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, 1998 was
approximately 21,700.
Individual Retirement Accounts are the third largest source of deposit funds for
the Corporation and during the past three years have made up about 19 to 20
percent of the deposit base. 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 about
3,800 at December 31, 1998.
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. The borrowings are
classified as either short-term or long-term depending on the original maturity.
Borrowings with an original maturity of one year or less are classified
short-term. Borrowings whose original maturity exceeds one year are classified
long-term. Borrowed funds have been reduced from an average of $102,088,000
during 1996 to an average balance during 1998 of $78,841,000. The reduction was
necessary because of narrowing interest margins. During the fourth quarter of
1998 $30,000,000 in borrowings with The Federal Home Loan Bank were paid or
refinanced prior to maturity. The terms for fixed rate borrowings and Repurchase
Agreements range from 3 months to 5 years. 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 to $6,000,000 and new loan advances, net of loan
repayments, average less than $100,000 daily.
To accommodate 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 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.
45
<PAGE>
During the fourth quarter of 1998 the Corporation introduced a new
interest-bearing noninsured account called the "Repo Sweep" secured by
investments deposited with a correspondent bank. The account is paid a rate that
is tiered and indexed to the Federal Funds rate. The account looks at checking
account balances during daily processing and transfers balances above a
predetermined level to the "Repo Sweep" account and during processing for the
next business day the balances are transferred back. The Corporation also has a
similar product available to business customers with credit lines. Credit lines
are accessed or paid down automatically depending on predetermined deposit
balances.
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 market 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 long-term and not
available for sale, therefore, market value fluctuations are not recorded.
Two important measurements of 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. Applying interest rate
increases and decreases of 100, 200 and 300 basis points to earning assets and
interest-bearing liabilities 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 parameters 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 variance 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.
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 1999 amounting to $24,018,000
based on current interest rates as of December 31, 1998, and the hypothetical
interest margin that would result from an increase or decrease in interest rates
of 200 basis points. 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, 1998. In
1998, updated prepayment tables were used which resulted in a greater negative
impact on net interest income in the rising rate scenario and a less favorable
impact on net interest income in the declining rate scenario
46
<PAGE>
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, 1999
December 31, 1998 Data Plus 200 Basis Points Minus 200 Basis Points
(In Thousands) Most Likely
Forecast % %
Interest Income: Amount Amount Change Amount Change
<S> <C> <C> <C> <C> <C>
Investments $ 18,753 $ 20,317 8.34 $ 18,520 (1.24)
Interest Bearing Due from Banks 395 279 (29.37) 114 (71.14)
Loans 26,822 27,311 1.82 23,483 (12.45)
Federal Funds Sold 54 44 (18.52) 19 (64.81)
- -------------------------------------------------------------------------------------------------------------
Total Interest Income 46,024 47,951 4.19 42,136 (8.45)
Interest Expense:
Interest on Deposits 18,415 22,197 20.54 13,693 (25.64)
Interest on Borrowed Funds 3,591 4,508 25.54 3,177 (11.53)
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 22,006 26,705 21.35 16,870 (23.34)
- -------------------------------------------------------------------------------------------------------------
Net Interest Income $ 24,018 $ 21,246 (11.54) $ 25,266 5.20
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Market Value of Portfolio Equity at
December 31, 1998 $ 88,235 $ 66,909 (24.17) $110,814 25.59
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Period Ending December 31, 1998
DECEMBER 31, 1997 DATA Plus 200 Basis Points Minus 200 Basis Points
(In Thousands) Most Likely
Forecast % %
Interest Income: Amount Amount Change Amount Change
<S> <C> <C> <C> <C> <C>
Investments $ 17,916 $ 21,124 17.91 $ 18,692 4.33
Interest Bearing Due from Banks 378 289 (23.54) 115 (69.58)
Loans 25,630 28,397 10.80 23,703 (7.52)
Federal Funds Sold 53 45 (15.09) 21 (60.38)
- -------------------------------------------------------------------------------------------------------------
Total Interest Income 43,977 49,855 13.37 42,531 (3.29)
Interest Expense:
Interest on Deposits 17,596 23,078 31.15 13,822 (21.45)
Interest on Borrowed Funds 3,432 4,687 36.57 3,206 (6.59)
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 21,028 27,765 32.04 17,028 (19.02)
- -------------------------------------------------------------------------------------------------------------
Net Interest Income $ 22,949 $ 22,090 (3.74) $ 25,503 11.13
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Market Value of Portfolio Equity
as of December 31, 1997 $ 87,131 $ 65,505 (24.82) $ 96,803 11.10
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
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 factors affecting the banking
industry generally, including competition from non-bank entities, credit risk,
interest rate risk and other factors that 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.
Equity securities held as of December 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
Hypothetical Hypothetical
(In Thousands) 10 % 20 %
Decline in Decline in
At December 31, 1998 Cost Fair Value Market Value Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Banks & Bank Holding Companies $16,791 $31,368 $(3,137) $(6,274)
Federal Home Loan Bank and Other Restricted Stocks 4,574 4,574 (457) (915)
- ------------------------------------------------------------------------------------------------------------------------------------
$21,365 $35,942 $(3,594) $(7,189)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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) (823)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $16,149 $32,023 $(3,202) $(6,405)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</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)
- ------------------------------------------------------------------------------------------------------------------------------------
$16,072 $24,642 $(2,464) $(4,928)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<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 and 45 percent of
unrealized gains on equity investments.
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 at December 31, 1998 and 1997 were 24.73 percent and 24.60 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, 1998, 1997 and 1996 was 9.5 percent, 9.7 percent
and 9.7 percent, respectively.
The total capital of the Corporation at December 31, 1998, excluding net
unrealized gains on Available-for-Sale Securities, amounted to $78,645,000. This
compares to total capital of $72,200,000 and $65,826,000 at December 31, 1997
and 1996, respectively.
Total capital of the Corporation at December 31, 1998, 1997, and 1996,
respectively, including the adjustment for unrealized gains and losses on
Available-for-Sale Securities, amounted to $90,567,000, $85,535,000 and
$71,593,000. 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, 1998 and 1997 was 14.2 percent and 13.6 percent, respectively. The
capital to deposits ratio at the same dates was 16.5 percent and 16.3 percent,
respectively.
Capital expenditures for 1999 are expected to between $500,000 and $750,000.
This will not have a detrimental effect on the capital ratios or the results of
operations.
COMPREHENSIVE INCOME
Comprehensive Income is a measure of all changes in the equity of a corporation,
excluding transactions with owners in their capacity as owners (such as proceeds
from issuances of stock and dividends). The difference between Net Income and
Comprehensive Income is termed "Other Comprehensive Income". For the
Corporation, Other Comprehensive Income consists of unrealized gains and losses
on available-for-sale securities, net of deferred income tax. Comprehensive
Income should not be construed to be a measure of net income. The effect of
Other Comprehensive Income would only be reflected in the income statement if
the entire portfolio of available-for-sale securities were sold on the statement
date. The amount of unrealized gains or losses reflected in Comprehensive Income
may vary widely at statement dates depending on the markets as a whole and how
the portfolio of available-for-sale securities is affected by interest rate
movements. Other Comprehensive Income (Loss) for the periods ended December 31,
1998, 1997, and 1996 were respectively, ($1,413,000), $7,568,000 and
($1,185,000).
YEAR 2000 COMPLIANCE
The Year 2000, or Y2K problem as it is commonly referred to, is a computer
problem that originated when computers first began to be utilized to store and
process information. When computers were first used, computer memory and storage
space was very expensive. To make efficient use of this memory and storage
limitation, the year was stored as a two-digit number. For example, the year
1998 was stored as 98. Without corrective action being taken, when the date
rolls forward to 2000, many computers would read the date as 00 or 1900. This
would have a major impact on many calculations if appropriate action was not
taken.
Citizens & Northern Corporation began working on the problem in 1996 with the
formation of a "Year 2000 Committee".
49
<PAGE>
This committee, consisting of various key people throughout the organization,
meets periodically and reports to the Board of Directors on a quarterly basis.
The Board of Directors has approved and implemented a formal Year 2000 Plan.
Overall, the Corporation has made substantial progress on Y2K issues. To date,
the corporation's progress is as follows:
- Mainframe software upgrades have been completed.
- All mission critical applications have been tested by the MIS
department and will be thoroughly retested independently by
our Audit and Compliance departments.
- A contingency/business plan is being developed and is well
underway.
- Customer risk (both funds users and funds providers) is being
assessed.
- Several steps have been taken to increase customer awareness.
TESTING:
A Year 2000 readiness-testing plan was developed to guide the testing process.
This program covers various areas of the Bank, such as mainframe computers,
personal computers, environmental systems, and various third parties.
Our current programming and systems analyst staff has written and developed the
majority of mission-critical software for the mainframe system. This software
processes most of the core banking systems. All critical in-house software has
been modified to be ready for the Year 2000 and tested by the Management
Information Systems (MIS) department. Those modified programs are being used for
our current day-to-day processing. In addition to the testing performed by the
MIS department, the plan calls for additional independent testing. The Audit and
Compliance departments are performing the independent testing. By the end of
March 1999 we expect that all of the mission-critical systems will have been
independently tested.
MAINFRAME AND SOFTWARE TESTING:
Independent testing of software for Y2K compliance is being done utilizing our
HP 937 back-up computer system. Through initial independent testing in July of
1998, it was discovered that new operating systems were required. Subsequently,
both the mainframe and backup computer systems were upgraded with new operating
systems certified to be compliant by the reliable vendor. All internally written
software has been revised and tested by the MIS staff. Using application
testing, the following systems have been independently tested, and any problems
located and corrected: general ledger, income & expense, regular savings,
individual retirement accounts, christmas clubs, fund clubs, safe deposit boxes,
savings bond redemption processing, payroll, and certificates of deposit. The
second and final round of independent testing of the demand deposit (checking)
system, loan system and the stockholder record system will be completed by the
end of March 1999.
After the completion of application testing, integration testing is planned to
determine that all applications will interface properly. This integration
testing is scheduled to be completed by the end of March 1999.
KEY EXTERNAL THIRD PARTY SUPPLIERS:
- Trust - The department's primary, mission-critical software
TrustRite, has been reviewed, modified and tested by the
vendor. The department has partnered with a TrustRite users
group, which has hired a third-party software specialist firm
to perform independent testing of the system. That independent
testing was completed in January 1999, and the report of the
results is forthcoming as of this writing. Additionally, all
other software and hardware in the department has been
identified and reviewed for Y2K compliance.
- Electronic Funds Transfer - Has been tested and is Y2K
compliant. (ACH and Wire Transfer)
- Check and Document Imaging - Software and hardware has been
upgraded and is certified compliant by the vendor. Our
independent testing will be completed by the second quarter.
- Credit Card - Internal testing has been performed. Third party
testing is scheduled for the near future.
- ATM - All automated teller machines are compliant based on
manufacturer's warranties. Third party testing is scheduled
for the near future.
- Postage machines are compliant.
- Various security systems, elevators, vaults, etc. were
determined to be Y2K compliant or are not date sensitive.
VENDORS:
To date, a few vendors have not yet responded concerning their Y2K readiness.
However, these vendors are not considered mission critical. All mission critical
vendors have responded stating that they will be able to support Y2K.
50
<PAGE>
CONTINGENCY PLAN/BUSINESS RESUMPTION:
A contingency plan for the Year 2000 is being developed. Key operational areas
have been identified such as Trust, Credit Card/ATM, Accounting, Fedwire/ACH and
the overall Management Information System and will be evaluated and plans
developed to use in case of Y2K related issues. Plans are being developed for
each of these areas using staff input to determine how processing could be
performed without computerization. Items such as paper forms necessary to
complete manual posting to the need for a back-up generator (which could be used
in case of any loss of power, not just Y2K) are being analyzed and plans will be
developed accordingly.
CUSTOMER RISK AND AWARENESS: To date, the following efforts have been made to
inform our customers of the Y2K problem:
- Y2K letter sent to commercial loan customers.
- Y2K press release in all newspapers in market area.
- Y2K Seminar was held in June 1998 for all commercial
customers.
- A second Y2K Seminar for all customers is scheduled for March
30th, 1999.
- Bankcard Services sent Y2K updates to all member banks.
- Y2K informational brochures were distributed to all offices
for customers inquiring into the Y2K problem.
- Y2K informational flyers were distributed in the C&N 1999
calendars that are made available to customers, free of charge
at all branches.
The bank developed a Y2K questionnaire for selected loan customers. This
questionnaire, based on Appendix A of the FFIEC Inter Agency Statement on
Y2K concerning the impact of customers, is for all commercial loan
customers with aggregate balances over $150,000. Deposit customers with
aggregate balances over $100,000 have been selected for review. The
results are being reviewed and appropriate action will be taken as deemed
necessary. Loan officers are meeting independently with all loan customers
with borrowing availability totaling $150,000 or more to review and assess
the customer's Y2K readiness.
COSTS:
Citizens & Northern Corporation employs a staff of system analysts and
programmers and it is difficult to estimate the total cost of compliance since
the work has been done in-house and was begun in 1996. A reasonable estimate
would put programming costs through December 31, 1998 in excess of $250,000. The
current telephone banking system installed in 1997, which is not Y2K compliant,
will be replaced with a Y2K compliant Internet and Telephone Banking System that
incorporates telephone banking with its installation to be completed during the
second quarter of 1999. The Internet and Telephone Banking System is expected to
cost approximately $100,000. Item-processing software has been updated at a cost
of $32,000. The cost of PC replacements is estimated to be between $50,000 and
$75,000; software upgrades will probably be equal to that. The main frame
computer network has been upgraded for Y2K and non-Y2K reasons at a cost of
$200,000. The Corporation is also in the process of purchasing a natural gas or
diesel generator for the operations center in Wellsboro. Estimates have ranged
from $30,000 to $80,000. The primary purpose of the generator is to provide a
back-up electricity source for our MIS department in the event of power
interruptions caused by weather or other non-Y2K related unforeseen situations.
The Corporation wishes to caution shareholders and customers that although it
believes all aspects of the year 2000 issue have been addressed (i.e., software,
hardware, customers, vendors, and facilities) internal problems (Y2K or
otherwise) may occur that could temporarily prevent the Corporation from
carrying on business-as-usual. Nevertheless, it is the judgment of management
and the Board of Directors that the Corporation has a highly qualified MIS
staff, which has proven their ability to quickly correct problems with minimal
disruption to business. If problems arise that are caused by external sources,
such as power outages, or vendor failure of certified Y2K-compliant equipment or
software, for which the Corporation must rely on the outside source, business
could be disrupted. Therefore, the Corporation has made significant progress in
developing contingency plans to allow the Corporation to function satisfactorily
in the unlikely event that such a failure were to occur.
No one can predict with certainty what will occur when the century date changes,
however your Corporation's Board of Directors and management team have expended
all reasonable time and effort to solve the problem and will deal with
unforeseen problems as they arise.
51
<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 impacts the purchase of goods, such as supplies, services and labor
used to provide banking products to our customers. Growth in the U. S. economy
is at a 3 to 3 1/2 percent level, which is considered to be noninflationary. The
Federal Reserve Open Market Committee did lower rates twice during 1998 in an
effort to ease the impact of the Asian crisis on the global economy. The yield
curve at this time is very flat, with the difference in spread between 2-year
and 10-year maturities at approximately 10 basis points.
The Asian crisis seems to have stabilized, although far from being over.
However, it appears at this writing that problems with the Brazilian economy may
have an effect on the economy of our country. Locally, several of the
manufacturing facilities and some of the lumber producers sell to the Asian
markets and with the recent weakening of the dollar their products may be more
saleable. Your Corporation does not have any foreign loans and is not as
affected as the money center banks when economies of foreign countries
experience downturns, even though we still have customers who are dependent on
foreign sales.
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 1998, 1997 and 1996 as furnished by brokers and other
sources considered by the Corporation to be reliable.
<TABLE>
<CAPTION>
1998 1997 1996
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 $36.75 $33.65 $0.20 $26.50 $24.00 $0.18 $22.50 $20.50 $0.17
Second Quarter 37.95 36.50 0.20 29.25 27.25 0.18 22.75 21.00 0.17
Third Quarter 38.50 37.00 0.20 32.25 29.50 0.18 23.25 21.50 0.17
Fourth Quarter 36.80 35.35 0.22 33.50 30.75 0.20 25.50 22.50 0.18
plus Plus plus
1 % stock 1 % stock 1 % stock
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK AND PER SHARE DATA
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Income - Basic $2.15 $1.96 $1.79 $1.54 $1.47
Net Income - Diluted $2.14 $1.96 $1.79 $1.54 $1.47
Cash Dividends Declared $0.81 $0.72 $0.67 $0.62 $0.59
Cash Dividends Declared on an Historical Basis $0.82 $0.74 $0.69 $0.65 $0.62
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 5,102,028
Number of Shares Used for Computation - Basic 5,158,102 5,164,238 5,164,099 5,164,099 5,164,099
Number of Shares Issued 5,220,038 5,168,354 5,117,182 5,066,516 5,016,352
Number of Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Stockholders' Equity Per Share (a) $17.58 $16.73 $14.00 $13.10 $9.15
Stockholders' Equity Per Share (*) (a) $15.26 $14.12 $12.87 $11.74 $10.83
Number of stockholders at Year End 2,300 2,182 2,119 2,027 1,901
</TABLE>
(*) Does not include unrealized holding gains or losses on available-for-sale
securities.
(a) For purposes of this computation, the number of shares outstanding,
excluding shares held in treasury has been increased for the effects
of the 1% stock dividend issued in January following each year-end.
Known "market makers" who handle Citizens & Northern Corporation stock
transactions are:
<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 CITIZENS & NORTHERN Williamsport, PA 17701
Shareholders will be held CORPORATION
in Wellsboro, PA, at 2:00 p.m., 90-92 Main Street, P.O. Box 58
Tuesday, April 20, 1999. Wellsboro, PA 16901
STOCK TRANSFER AGENT
Citizens & Northern Bank
90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
(800) 487-8784
</TABLE>
52
<PAGE>
FIVE YEAR SUMMARY OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
INCOME STATEMENT 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Interest Income $48,428 $48,269 $47,922 $45,181 $42,309
Interest Expense 22,693 23,312 23,451 24,477 20,805
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin 25,735 24,957 24,471 20,704 21,504
Provision for Possible Loan Losses 763 797 701 737 737
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loans Losses 24,972 24,160 23,770 19,967 20,767
Other Income 3,114 3,207 2,847 2,796 2,882
Securities Gains (Losses) 3,001 1,001 475 1,675 (219)
Other Expenses 16,483 15,095 14,686 14,079 13,597
- ----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 14,604 13,273 12,406 10,359 9,833
Income Tax Provision 3,527 3,166 3,151 2,493 2,339
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $11,077 $10,107 $9,255 $7,866 $7,494
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET AT YEAR END
Total Securities (1) $331,883 $308,988 $310,077 $301,743 $261,820
Loans (Excluding Unearned Discount) 291,003 285,426 278,597 264,182 258,472
Total Assets 646,298 615,353 610,192 585,987 546,478
Total Deposits 476,518 442,256 430,311 429,552 399,263
Stockholders' Equity Before Adjustment for Unrealized
Gain or Loss on Available-for-Sale Securities 78,645 72,200 65,826 60,025 55,385
Stockholders' Equity 90,567 85,535 71,593 66,977 46,796
AVERAGE BALANCE SHEET
Total Securities (Amortized Cost) (1) $300,693 $296,067 $306,680 $290,694 $292,080
Loans (Excluding Unearned Discount) 285,276 282,580 271,618 259,143 243,147
Earning Assets 585,969 578,647 578,298 549,837 535,227
Total Assets 626,102 608,277 604,408 566,030 554,658
Total Assets Excluding Market Value Adjustment for
Unrealized Gain or Loss on Available-for-Sale Securities 606,163 598,370 598,813 568,700 555,475
Total Deposits 448,601 435,190 429,036 414,958 395,512
Stockholders' Equity Before Adjustment for Unrealized Gain
or Loss on Available-for-Sale Securities 74,810 69,440 62,797 55,961 52,629
Stockholders' Equity 87,997 76,005 66,490 53,727 52,090
FINANCIAL RATIOS
Return on Stockholders' Equity (3) 14.81% 14.56% 14.74% 14.06% 14.24%
Return on Stockholders' Equity (2) 12.59% 13.30% 13.92% 14.51% 14.40%
Return on Assets (2) 1.77% 1.66% 1.53% 1.39% 1.35%
Stockholders' Equity to Assets (3) 12.34% 11.60% 10.49% 9.84% 9.49%
Stockholders' Equity to Assets (2) 14.05% 12.50% 11.00% 9.58% 9.39%
Stockholders' Equity to Loans (2) 30.85% 26.90% 24.48% 20.91% 21.42%
Net Income to:
Total Interest Income 22.87% 20.94% 19.31% 17.41% 17.70%
Interest Margin 43.04% 40.50% 37.82% 37.99% 34.80%
Cash Dividends as a % of Net Income 37.81% 37.04% 37.36% 41.01% 40.30%
</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
53
<PAGE>
SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 1998 and
1997 (In Thousands, Except Per Share Data).
<TABLE>
<CAPTION>
1998 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
<S> <C> <C> <C> <C>
Interest Income $11,873 $12,022 $12,395 $12,138
Interest Expense 5,724 5,701 5,769 5,499
- ---------------------------------------------------------------------------------------------------------
Interest Margin 6,149 6,321 6,626 6,639
Provision for Possible Loan Losses 191 191 191 190
- ---------------------------------------------------------------------------------------------------------
Interest Margin After Provision for
Possible Loan Losses 5,958 6,130 6,435 6,449
Other Income 766 788 783 777
Securities Gains 754 1,860 235 152
Other Expense 3,937 4,089 4,154 4,303
- ---------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,541 4,689 3,299 3,075
Income Tax Provision 860 1,227 785 655
- ---------------------------------------------------------------------------------------------------------
Net Income $2,681 $3,462 $2,514 $2,420
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Income Per Share - Basic $0.52 $0.67 $0.49 $0.47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted $0.52 $0.67 $0.49 $0.47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<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 $0.48 $0.47 $0.47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net Income Per Share - Diluted $0.54 $0.48 $0.47 $0.47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
TRUST DEPARTMENT
(In Thousands) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Assets $283,262 $230,149 $222,541 $181,351 $146,178
Earnings $1,288 $1,004 $852 $726 $582
</TABLE>
The composition of trust assets and liabilities as of December 31, 1998, 1997
and 1996 are shown in the following table:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
<S> <C> <C> <C>
INVESTMENTS
Bonds $ 78,442 $70,413 $ 77,977
Stock 100,479 77,356 79,815
Savings and Money Market Funds 19,150 14,835 28,389
Mutual Funds 80,361 65,331 34,173
Mortgages 1,066 425 506
Real Estate 3,061 1,156 852
Miscellaneous 703 633 829
- ---------------------------------------------------------------------------------------------------------------------------------
Total $283,262 $230,149 $222,541
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
ACCOUNTS
Estates $ 2,370 $ 3,537 $ 872
Trusts 86,079 62,280 54,458
Guardianships 1,972 1,893 1,716
Pension/Profit Sharing 113,110 86,506 93,451
Investment Management 79,731 75,933 72,044
- ---------------------------------------------------------------------------------------------------------------------------------
Total $283,262 $230,149 $222,541
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
STOCKHOLDER INQUIRIES
A copy of the Corporation's Annual Report for the year ended December 31, 1998,
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. The information is also available at the website of The
Securities and Exchange Commission at www.sec.gov.
This statement has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation.
55
<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, 1998 the Bank had total assets of $634,091,000, total deposits of
$476,518,000 and total loans outstanding of $291,003,000.
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 sixteen (16) banking offices; all located
in the Pennsylvania counties of Bradford, Lycoming, Sullivan and Tioga. The Bank
owns all such properties. There are no encumbrances against any of the Bank's
properties.
As of December 31, 1998, the Bank had a total of 209 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.
56
<PAGE>
CITIZENS & NORTHERN CORPORATION
AND
CITIZENS & NORTHERN BANK
<TABLE>
<CAPTION>
BOARD OF DIRECTORS DIRECTORS EMERITI
<S> <C> <C> <C>
J. Robert Bower Susan E. Hartley Robert J. Murphy R. James Dunham
Pharmacist Attorney at Law Retired, formerly Attorney President,
in law firm of Davis, Murphy, R. J. Dunham, Inc.
R. Robert DeCamp Karl W. Kroeck Niemiec & Smith Department Store
President, Farmer
Patterson Lumber Co., Inc. Edward H. Owlett, III Laurence R. Kingsley
Edward L. Learn Attorney in law firm of Retired, formerly owner
Adelbert E. Eldridge Owner, Learn Hardware & Owlett, Lewis & Ginn, P.C. of L. R. Kingsley Lumber
Retired Regional Director of Building Supply
Susquehanna Region of F. David Pennypacker John H. Macafee
Pennsylvania Electric Co. Craig G. Litchfield CPA in firm of Retired, formerly operator of
President and Chief Executive Pennypacker & Gooch, P.C. Mapoval Farms, Inc.
William K. Francis Officer
Chairman of the Board Leonard Simpson Howard W. Skinner
Lawrence F. Mase Attorney at Law Retired, formerly
R. Bruce Haner Retired, formerly Senior Vice President
Inventory Control Manager, President of Mase's Inc. Donald E. Treat
Williams Auto Group, Self-employed, former owner
Former owner of Haner's of Treat Hardware
Auto Sales
</TABLE>
ADVISORY BOARDS
<TABLE>
<S> <C> <C> <C>
ATHENS & SAYRE ELKLAND MANSFIELD TROY
Terry R. Depew Scott A. Keck Robin K. Carleton Mark C. Griffis
Stephan W. Bowen Eric L. Beard Gary Ray Butters Dennis F. Beardslee
Max P. Gannon John C. Kenyon David Kurzejewski Roy W. Cummings, Jr.
R. Bruce Haner Edward L. Learn John F. Wise, Jr. J. Robert Garrison
Susan E. Hartley Gregory W. Powers
George D. Howell KNOXVILLE RALSTON
Wayne E. Lowery Mary Rose Sacks Daniel P. Clark WELLSBORO
John H. Macafee Clyde E. Beard George E. Bittner Richard L. Wilkinson
Laurance A. Reagan, Jr. Gerald L. Bliss William W. Brooks, III Donald R. Abplanalp
David Rosenbloom Grant Gehman Richard T. Demitras J. Robert Bower
Howard W. Skinner Karl W. Kroeck R. Robert DeCamp
TIOGA R. James Dunham
DUSHORE LAPORTE Lois C. Wood Jan E. Fisher
Wayne E. Gavitt Randy R. Meckes John E. Brackley Edward H. Owlett, III
Ronald A. Gutosky Kenneth F. Fry Leisa L. LaVancher F. David Pennypacker
Robert P. Henderson, Jr. Marvin L. Higley Donald E. Treat
Leo F. Lambert Walter B. Neidig Jean L. Ward WYSOX
Dennis K. McCarty Leonard Simpson Debra S. Kithcart
Kerry A. Meehan TOWANDA & MONROETON Lucille P. Donovan
LIBERTY James E. Parks Robert L. Fulmer
EAST SMITHFIELD Ann L. Yuscavage Jeffery E. Aeppli Mark W. Smith
Peggy A. Brown Lyle R. Brion James A. Bowen Walter E. Warburton, Jr.
Roy L. Beardslee Gary Dinnison Adelbert E. Eldridge
Laurence R. Kingsley Lawrence F. Mase Robert J. Murphy
Liston D. Pepper Ray E. Wheeland Jeffrey A. Smith
Bennett R. Young James E. Towner
Deborah J. Weisbrod
</TABLE>
57
<PAGE>
CITIZENS & NORTHERN BANK OFFICERS
<TABLE>
<S> <C> <C> <C>
William K. Francis James E. Parks Rhonda J. Litchfield Diane B. Elvidge
Chairman of the Board Vice President Trust Investment Officer Assistant Cashier
Craig G. Litchfield Deborah E. Scott Jeffrey B. Osgood Linda M. Etzel
President and Vice President and Assistant Vice President Assistant Cashier
Chief Executive Officer Trust Officer and Personnel Officer
Kathy L. Griffis
Robert W. Anderson Richard L. Wilkinson Mary Rose Sacks Assistant Cashier
Executive Vice Vice President Assistant Vice President
President - MIS Roberta C. Heck
Ann L. Yuscavage Shawn M. Schreck Assistant Cashier
Thomas L. Briggs Vice President Assistant Vice President
Executive Vice President and Compliance Officer William Holmes
and Senior Trust Officer Kathleen M. Osgood Assistant Cashier
Corporate Secretary David S. Schucker
Brian L. Canfield Assistant Vice President Joan F. Johnson
Executive Vice President Jeffery E. Aeppli Assistant Cashier
and Branch System Assistant Vice President James H. Shelmire
Administrator Senior Systems Analyst Michelle M. Karas
Klas G. Anderson Marketing Coordinator
Matthew P. Prosseda Assistant Vice President Joseph A. Snell
Executive Vice President Assistant Controller Karen L. Keck
and Commercial Loan Robert E. Bolt Bookkeeping Manager
Coordinator Assistant Vice President Jan L. Southworth
Assistant Vice President Matthew Lundgren
James W. Seipler Stephan W. Bowen Assistant Trust Officer
Executive Vice President Assistant Vice President Nancy L. Tubbs
and Treasurer Assistant Vice President Glenda R. Marzo
Peggy A. Brown Assistant Auditor
Russell H. Bauman Assistant Vice President Lois C. Wood
Vice President and Auditor Assistant Vice President Sandra J. McNeal
Robin K. Carleton Assistant Cashier
Terry R. Depew Assistant Vice President Mary J. Wood
Vice President Trust Officer Leonard Mitchell, III
Rick J. Cisco Assistant Cashier
Keith E. Ferguson Senior Systems Analyst Sandra G. Andrews
Vice President Assistant Cashier Janet R. Ordway
Daniel P. Clark Assistant Cashier
Wayne E. Gavitt Assistant Vice President Bonnie L. Bennett
Vice President Assistant Cashier Sandra A. Parulas
Helen W. Ferris Training Officer
Mark C. Griffis Assistant Vice President Joan M. Blackwell
Vice President Assistant Cashier Eileen K. Ranck
Rita Y. Fisk Bankcard Manager
Nicholas Helf, Jr. Assistant Vice President Lynette M. Burrous
Vice President and Assistant Cashier Virginia L. Reap
Employee Benefit Officer Joan L. Grenell Assistant Cashier
Assistant Vice President Carl M. Chambers
Scott A. Keck Assistant Bankcard Charmaine H. Stempel
Vice President Harold F. Hoose, III Manager Assistant Cashier and
Assistant Vice President Security Officer
Linda L. Kriner Marcella Chaykosky
Vice President and Elaine F. Johnston Assistant Cashier Barbara J. Walters
Trust Officer Assistant Vice President Assistant Cashier
Jerome Coleman
Randy R. Meckes Valerie W. Kinney Assistant Cashier Brenda B. Whiteley
Vice President Assistant Vice President Assistant Cashier
Raechelle Curry
Kim L. Miller Debra S. Kithcart Assistant Cashier
Vice President Assistant Vice President
</TABLE>
58
<PAGE>
CITIZENS & NORTHERN CORPORATION OFFICERS
<TABLE>
<S> <C> <C> <C>
William K. Francis Craig G. Litchfield James W. Seipler Kathleen M. Osgood
Chairman of the Board President and Chief Treasurer Corporate Secretary
Executive Officer
</TABLE>
CITIZENS & CORPORATION
ATHENS/DUSHORE/EAST SMITHFIELD/ELKLAND/KNOXVILLE
LAPORTE/LIBERTY/MANSFIELD/MONROETON/RALSTON/SAYRE/TIOGA
TOWANDA/TROY/WELLSBORO/WYSOX/MEMBER FDIC
59
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
Jurisdiction or
Name State of Incorporation
- ---- ----------------------
<S> <C>
Citizens & Northern Bank Pennsylvania
Bucktail Life Insurance Company Arizona
</TABLE>
11
<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, 1998
and 1997, 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, 1998. 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, 1998 and 1997, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Parente, Randolph, Orlando, Carey & Associates
Williamsport, Pennsylvania
February 5, 1999
12
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this annual
report on Form 10-K of Citizens & Northern Corporation for the year ended
December 31, 1998 of our report dated February 5, 1999 which appears on page 27
of the annual report to shareholders for the year ended December 31, 1998.
Williamsport, Pennsylvania
March 22, 1999
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 15,428
<INT-BEARING-DEPOSITS> 700
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 329,275
<INVESTMENTS-CARRYING> 1,908
<INVESTMENTS-MARKET> 1,920
<LOANS> 291,003
<ALLOWANCE> 4,820
<TOTAL-ASSETS> 646,298
<DEPOSITS> 476,518
<SHORT-TERM> 32,080
<LIABILITIES-OTHER> 7,089
<LONG-TERM> 40,044
0
0
<COMMON> 5,220
<OTHER-SE> 85,347
<TOTAL-LIABILITIES-AND-EQUITY> 646,298
<INTEREST-LOAN> 29,168
<INTEREST-INVEST> 18,994
<INTEREST-OTHER> 266
<INTEREST-TOTAL> 48,428
<INTEREST-DEPOSIT> 18,252
<INTEREST-EXPENSE> 22,693
<INTEREST-INCOME-NET> 25,735
<LOAN-LOSSES> 763
<SECURITIES-GAINS> 3,001
<EXPENSE-OTHER> 16,483
<INCOME-PRETAX> 14,604
<INCOME-PRE-EXTRAORDINARY> 14,604
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,077
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.15
<YIELD-ACTUAL> 8.26
<LOANS-NON> 1,412
<LOANS-PAST> 1,628
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 290
<ALLOWANCE-OPEN> 4,913
<CHARGE-OFFS> 966
<RECOVERIES> 110
<ALLOWANCE-CLOSE> 4,820
<ALLOWANCE-DOMESTIC> 1,941
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,879
</TABLE>
