<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
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)
570-724-3411
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court. Yes ____ No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date.
Title Common Stock $1.00 Par value Shares Outstanding at
November 5, 1999 were 5,153,729
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Condition -
September 30, 1999 and December 31, 1998 Page 3
Consolidated Statement of Income - Nine Months Ended
September 30, 1999 and September 30, 1998 Page 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 1999 and September 30, 1998 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations Pages 7 through 15
Item 3. Information About Market Risk Pages 16 through 18
Item 4. Year 2000 Compliance Pages 19 through 21
Part II. Other Information Page 21
Item 1. Legal Proceedings Page 21
Items 2 and 3 have been omitted as they are not
applicable to registrant. Page 21
Item 6. Exhibits and Reports on Form 8-K Page 21
Signatures Page 22
2
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Unaudited Audited
September 30, December 31,
(In Thousands) 1999 1998
-------------------------------
<S> <C> <C>
ASSETS
Cash & Due From Banks $ 14,828 $ 15,428
Interest Bearing Deposits 732 700
Available-for-Sale Securities:
U.S. Treasury Securities 2,516 2,556
Securities of Other U.S. Government Agencies 118,074 61,840
Mortgage Backed Securities 112,870 131,046
Obligations of States and Municipal Subdivisions 78,462 81,423
Other Securities 57,687 52,410
-------------------------------
Total Available-for-Sale Securities 369,609 329,275
Held-to-Maturity Securities:
U.S. Treasury Securities 619 622
Securities of Other U.S. Government Agencies 949 849
Mortgage Backed Securities 336 437
-------------------------------
Total Held-to-Maturity Securities 1,904 1,908
Loans:
Loans to Political Subdivisions 12,384 8,078
Other Loans 298,989 282,954
-------------------------------
Total Loans 311,373 291,032
Less - Allowance for Loan Losses (5,140) (4,820)
Unearned Income (29) (29)
-------------------------------
Loans, Net 306,204 286,183
Bank Premises and Equipment 7,928 7,416
Other Real Estate 558 652
Accrued Interest on Bonds and Loans 4,692 4,109
Other Assets 4,823 627
-------------------------------
TOTAL ASSETS $711,278 $646,298
===============================
LIABILITIES
Deposits:
Demand 61,047 57,871
Interest Checking 36,892 36,751
Money Market 122,839 121,082
Savings 46,435 45,301
Other Time 219,589 215,513
-------------------------------
Total Deposits 486,802 476,518
Dividends Payable 1,134 1,123
Short - Term Borrowings 75,294 12,080
Long - Term Borrowings 60,030 60,044
Other Liabilities 6,445 5,966
-------------------------------
TOTAL LIABILITIES 629,705 555,731
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,272 5,220
Authorized 10,000,000; Issued 5,272,239
and 5,220,038 in 1999 and 1998, respectively
Stock Dividend Distributable 1,931
Paid in Capital 17,355 15,468
Retained Earnings 62,043 57,477
-------------------------------
Total 84,670 80,096
Accumulated Other Comprehensive Income, Net (1,654) 11,922
Less: Treasury Stock at Cost
118,510 Shares at September 30, 1999 (1,443)
118,010 Shares at December 31, 1998 (1,451)
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 81,573 90,567
-------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $711,278 $646,298
===============================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
CITIZENS & NORTHERN CORPORATION FORM - 10Q
Part I. Financial Information (continued)
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENT OF INCOME
(In Thousands Except Per Share Data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year To Date
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME (Current) (Prior Year) (Current) (Prior Year)
Interest and Fees on Loans $6,479 $6,561 $19,157 $19,377
Interest on Balances with Depository Institutions 7 9 21 29
Interest on Loans to Political Subdivisions 153 93 373 278
Interest on Federal Funds Sold 2 51 39 215
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 4,390 3,612 11,794 10,584
Tax Exempt 1,180 1,005 3,441 2,918
Dividends 325 230 877 681
--------------------------------------------------
Total Interest and Dividend Income 12,536 11,561 35,702 34,082
INTEREST EXPENSE
Interest on Deposits 4,811 4,691 13,950 13,697
Interest on Short-Term Borrowings 805 213 1,386 640
Interest on Long-Term Borrowings 804 865 2,389 2,857
--------------------------------------------------
Total Interest Expense 6,420 5,769 17,725 17,194
--------------------------------------------------
Interest Margin 6,116 5,792 17,977 16,888
Provision for Possible Loan Losses 120 191 570 573
--------------------------------------------------
Interest Margin After Provision for Possible Loan
Losses 5,996 5,601 17,407 16,315
OTHER INCOME
Service Charges on Deposit Accounts 277 261 827 775
Service Charges and Fees 69 73 206 212
Trust Department Income 325 307 1,096 952
Insurance Commissions, Fees and Premiums 72 126 318 323
Fees Related to Credit Card Operation 903 834 2,328 2,208
Other Operating Income 11 16 71 75
--------------------------------------------------
Total Other Income Before Realized Gains on
Securities, Net 1,657 1,617 4,846 4,545
Realized Gains on Securities, (Net) 151 235 1,209 2,849
--------------------------------------------------
Total Other Income 1,808 1,852 6,055 7,394
OTHER EXPENSES
Salaries and Wages 1,748 1,618 5,015 4,813
Pensions and Other Employee Benefits 443 424 1,351 1,295
Occupancy Expense, Net 225 203 679 617
Furniture and Equipment Expense 316 207 784 599
Expenses Related to Credit Card Operation 742 777 2,038 2,057
Pennsylvania Shares Tax 180 164 542 492
Other Operating Expense 910 761 2,809 2,307
--------------------------------------------------
Total Other Expenses 4,564 4,154 13,218 12,180
--------------------------------------------------
Income Before Income Tax Provision 3,240 3,299 10,244 11,529
Income Tax Provision 737 785 2,277 2,872
--------------------------------------------------
NET INCOME $2,503 $2,514 $ 7,967 $ 8,657
==================================================
PER SHARE DATA:
Net Income - Basic $0.49 $0.49 $1.55 $1.68
Net Income - Diluted $0.49 $0.49 $1.54 $1.67
--------------------------------------------------
Dividend Per Share $0.22 $0.20 $0.66 $0.59
--------------------------------------------------
Number Shares Used in Computation - Basic 5,153,662 5,153,049 5,153,559 5,159,805
Number Shares Used in Computation - Diluted 5,159,552 5,163,913 5,159,990 5,169,711
Number Shares Issued 5,272,239 5,220,038 5,272,239 5,220,038
Number Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000
--------------------------------------------------
Dividends Actually Paid $0.22 $0.20 $0.66 $0.60
--------------------------------------------------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net Income $2,503 $2,514 $7,967 $8,657
Other Comprehensive Income :
Unrealized holding gains (losses) on
available-for-sale securities
Gains (Losses) arising during the period (6,826) (2,567) (19,361) 1,238
Reclassification adjustment (151) (235) (1,209) (2,849)
--------------------------------------------------
Other comprehensive income (loss) before income tax (6,977) (2,802) (20,570) (1,611)
Income tax related to other comprehensive income 2,372 953 6,994 548
--------------------------------------------------
Other comprehensive income (loss) (4,605) (1,849) (13,576) (1,063)
--------------------------------------------------
Comprehensive Income ($2,102) $665 ($ 5,609) $ 7,594
==================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 1. Financial statements (continued)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
(In Thousands) Sept. 30,1999 Sept. 30, 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $7,967 $8,657
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 570 573
Realized (Gain), on Available-for-Sale and
Held-to-Maturity Securities, Net (1,209) (2,849)
Provision for Depreciation 715 592
Accretion and Amortization (1,314) (164)
Deferred Income Tax (72) 110
(Increase) Decrease in Accrued Interest
Receivable and Other Assets (4,779) 473
Increase in Accrued Interest Payable and
Other Liabilities 7,556 4,150
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,434 11,542
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 351 140
Purchase of Held-to-Maturity Securities (354) (348)
Proceeds from Sales of Available-for-Sale Securities 22,446 73,411
Proceeds from Maturities of Available-for-Sale Securities 29,627 107,404
Purchase of Available-for-Sale Securities (110,448) (196,363)
Net Increase in Loans (20,591) (2,468)
Purchase of Premises and Equipment (1,227) (1,035)
Sale of Foreclosed Assets 258 224
Purchase of Other Real Estate (165) (600)
- -------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (80,103) (19,635)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 10,284 13,102
Increase (Decrease) in Short-Term Borrowings 63,214 (13,400)
Proceeds from (Repayment of) Long-Term Borrowings (14) 9,990
Sale of Treasury Stock 16 24
Purchase of Treasury Stock (468)
Dividends Declared (3,401) (3,064)
- -------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 70,099 6,184
INCREASE IN CASH AND CASH EQUIVALENTS (570) (1,909)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $16,128 $14,253
- -------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $15,558 $12,344
=================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $12,775 $13,942
=================================================================================================
Income Taxes Paid $ 2,156 $ 2,678
=================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q
Notes to Consolidated Financial Statements
1. The financial information included herein, with the exception of the
Consolidated Balance Sheet dated December 31, 1998, is unaudited; however,
such information reflects all adjustments (consisting solely of normal
recurring adjustments) that are, in the opinion of management, necessary to a
fair presentation of the financial position, results of operations and
changes in financial position for the interim periods.
Results reported for the nine-month period ended September 30, 1999 may not
be indicative of the results for the year ended December 31, 1999.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. New Statement of Financial Accounting Standards
SFAS No. 132 "Employers' Disclosure About Pensions and Other Post Retirement
Benefits" was adopted in January 1998. SFAS No. 132 revises current note
disclosure requirements for employers' pensions and other retiree benefits.
It does not address recognition or measurement issues. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS No. 132 will not have a material effect on Citizens and Northern's
financial condition or results of operations.
6
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
EARNINGS OVERVIEW
Net income after tax for the nine-month period ended September 30, 1999
amounted to $7,967,000 and $2,503,000 for the third quarter of 1999. The
comparable earnings for the same periods last year were respectively,
$8,657,000 and $2,514,000.
The nine-month earnings for 1998 included a one time after tax gain in excess
of $1,132,000 on the sale of a stock taken as collateral on a defaulted loan
in 1919. The stock was carried on the books of the Corporation at $1.00.
Excluding all realized securities gains from income for the reported periods
would reflect an increase in income in 1999 from operations of $392,000 over
the nine-month period in 1998.
Earnings to date in 1999 from operations are slightly ahead of budget
projections and earnings for the balance of 1999 barring any unforeseen
events should mirror those of the first nine months.
Comprehensive Income, which includes the change in equity during the period
arising from market value changes in the investment portfolio, amounted to
($5,609,000) for the nine-month period ended September 30, 1999 and
$7,587,000 for the nine months ended September 30, 1998. The decrease in
market value of the Available-for-Sale Securities is the result of market
conditions caused by an increase in interest rates. Both will be discussed
later.
NET INTEREST MARGIN
Net interest margin or net interest income is the difference between interest
income earned on all interest-bearing assets and the interest expense paid on
all interest-bearing liabilities.
The net interest margin increased $1,089,000 when comparing the nine-month
periods ended September 30, 1999 and 1998. The increase is attributable to an
increase in the average volume of interest-bearing assets funded by strong
core deposit growth. Average total deposits, including Demand Deposits, for
the nine-month period totaled $480,830,000 compared to average total deposits
of $438,486,000 for the first three quarters of 1998, an increase of 9.7
percent. For the year ended December 31, 1998 average deposits amounted to
$448,601,000. Also, in the fourth quarter of 1998 the Bank offered uninsured
Repo accounts to its business customers. These accounts have proven to be
very popular and carry approximately $4,000,000 on an average daily basis.
The net interest margin for the three-month period ended September 30, 1999
exceeded that of the same period last year by $324,000, an increase of nearly
6 percent. Again the increase can be attributed to an increase in the volume
of interest-bearing assets.
The strong deposit growth was accompanied by a heavy loan demand during the
nine-month period. Average total loans for the respective nine-month periods
ended September 30, 1999 and September 30, 1998 were $298,153,000 and
$283,303,000 or an increase of 5.2 percent. For the comparable three-month
periods ended September 30, 1999 and 1998 respectively, average total loans
amounted to $305,912,000 and $286,332,000. For the year ended December 31,
1998 average total loans amounted to $285,786,000.
The growth in average deposits was also used to fund an increase in the
average balance of the investment portfolio from $296,519,000 during the
first nine months of 1998 to $339,860,000 during the same period in 1999.
Average total investments for the quarterly periods were $362,234,000 and
$297,840,000 in 1999 and 1998, respectively.
Average borrowed funds, including customer repo accounts, increased from an
average of $85,518,000 during the nine-month period in 1998 to an average of
$98,416,000 for the same period in 1999. Average borrowed funds accounted for
about 18 percent of interest-bearing liabilities during each of the
reportable periods.
Gross interest income for the nine months ended September 30, 1999 amounted
to $35,702,000, while gross interest income for the same period in 1998 was
$34,082,000, an increase of $1,620,000 during 1999. Gross interest expense,
respectively, for the comparable periods was $17,725,000 and $17,194,000, an
increase during 1999 of $531,000. The difference of $1,089,000 was the
resulting increase in net interest income between the comparable periods.
7
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
For the three months ended September 30, 1999 and September 30, 1998 gross
interest income totaled $12,536,000 and $11,561,000. Total interest expense
of the same periods amounted to $6,420,000 and $5,769,000 resulting in a net
interest margin of $6,116,000 for the 1999 quarter and $5,792,000 for the
same period in 1998.
8
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Table I - Analysis of Average Daily Balances and Rates
<TABLE>
<CAPTION>
Rate of Rate of Rate of
(In Thousands) Return/ Return/ Return/
Cost of Cost of Cost of
Funds funds funds
09/30/99 % 12/31/98 % 09/30/98 %
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities 2,509 6.02 2,516 6.00 2,517 6.01
Securities of Other U.S. Government Agencies
and Corporations 92,727 6.88 68,512 7.07 73,357 7.22
Mortgage Backed Securities 119,309 6.58 121,466 6.58 117,156 6.52
Obligations of States and Political 80,952 5.68 68,942 5.78 66,742 5.87
Subdivisions
Stock 22,459 5.22 18,725 5.07 18,044 5.27
Other Securities 18,312 6.87 13,960 6.88 12,975 7.04
- -------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 336,268 6.37 294,121 6.42 290,791 6.50
Held-to-Maturity Securities:
U. S. Treasury Securities 614 5.66 626 5.91 627 6.10
Securities of Other U. S. Government Agencies
and Corporations 877 6.56 629 6.52 572 6.75
Mortgage Backed Securities 384 7.31 507 7.50 527 7.73
- -------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,875 6.42 1,762 6.58 1,726 6.83
Interest-bearing Due from Banks 643 4.37 671 5.66 702 5.07
Federal Funds Sold 1,074 4.73 4,139 5.53 5,151 5.59
Loans:
Real Estate Loans 238,707 8.59 227,845 8.94 226,995 8.99
Consumer 29,006 11.08 30,366 11.62 30,503 11.62
Agricultural 1,957 9.97 2,219 10.05 2,308 10.15
Commercial/Industrial 19,076 8.52 17,698 9.16 17,503 9.31
Other 698 7.66 707 7.78 705 7.69
Political Subdivisions 8,509 5.86 6,227 6.10 6,092 6.07
Leases 200 8.69 214 9.35 219 9.29
Total Loans 298,153 8.76 285,276 9.18 284,325 9.25
- -------------------------------------------------------------------------------------------------------
Total Earning Assets 638,013 7.48 585,969 7.76 582,695 7.83
Cash 14,034 12,694 12,498
Securities Valuation Reserve 11,753 19,939 20,443
Allowance for Possible Loan Losses (5,043) (4,822) (4,825)
Other Assets 5,580 5,337 5,378
Bank Premises & Equipment 7,767 6,985 6,858
- -------------------------------------------------------------------------------------------------------
Total Assets 672,104 626,102 623,047
=======================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 37,053 2.20 36,556 2.33 36,582 2.45
Money Market 129,009 4.23 115,143 4.42 112,996 4.56
Savings 46,751 2.48 45,207 2.48 45,290 2.48
Certificates of Deposit 139,123 5.24 126,902 5.50 123,569 5.53
Individual Retirement Accounts 76,272 5.10 76,557 5.42 77,324 5.55
Other Time Deposits 1,868 2.43 1,900 2.58 2,150 2.14
Federal Funds Purchased 6,405 5.01 2,801 4.75 1,555 6.83
Other Borrowed Funds 90,011 5.25 76,040 5.67 80,647 5.67
- -------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 526,492 4.50 481,106 4.72 480,113 4.80
Demand Deposits 50,754 46,336 45,416
Other Liabilities 6,752 10,663 9,758
- -------------------------------------------------------------------------------------------------------
Total Liabilities 583,998 538,105 535,287
Stockholders' Equity 80,361 74,810 74,231
Securities Valuation Reserve 7,745 13,187 13,529
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity 672,104 626,102 623,047
=======================================================================================================
Interest Rate Spread 2.98 3.04 3.03
</TABLE>
9
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
TABLE II - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES
IN INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Periods Ended Sept. 30, 1999/1998
(In Thousands) Change in Change in Total
Volume Rate Change
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities - - -
Securities of Other U.S. Government Agencies and
Corporations 930 (63) 867
Mortgage Backed Securities 148 (76) 72
Obligations of States and Political Subdivisions 643 (120) 523
Stock 203 (7) 196
Other Securities 328 (60) 268
- --------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 2,252 (326) 1,926
Held-to-Maturity Securities:
U. S. Treasury Securities (1) (1) (2)
Securities of Other U.S. Government Agencies and
Corporations 17 (3) 14
Mortgage Backed Securities (9) - (9)
- --------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 7 (4) 3
Interest-bearing Due from Banks (3) (5) (8)
Federal Funds Sold (171) (6) (177)
Loans:
Real Estate Loans 619 (522) 97
Consumer (165) (114) (279)
Agricultural (35) 7 (28)
Commercial/Industrial (284) 278 (6)
Other (1) - (1)
Political Subdivisions 103 (8) 95
Leases (1) (1) (2)
- --------------------------------------------------------------------------------------------
Total Loans 236 (360) (124)
- --------------------------------------------------------------------------------------------
Total Interest Income 2,321 (701) 1,620
INTEREST BEARING LIABILITIES
Interest Checking 5 (56) (51)
Money Market 519 (286) 233
Savings 25 1 26
Certificates of Deposit 651 (302) 349
Individual Retirement Accounts (82) (218) (300)
Other Time Deposits (4) (0) (4)
Federal Funds Purchased 163 (9) 154
Other Borrowed Funds 246 (122) 124
- --------------------------------------------------------------------------------------------
Total Interest Expense 1,523 (992) 531
- --------------------------------------------------------------------------------------------
NET INTEREST INCOME 798 291 1,089
============================================================================================
</TABLE>
10
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
RESERVE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Losses is a reserve established by management
and the Board of Directors, which they believe will absorb future loan
losses, based on management's assessment of the quality and volume of the
loan portfolio. The assessment is performed on an ongoing basis and reviewed
by the Board of Directors quarterly.
The quarterly review process is performed by a loan quality committee
consisting of the President, Chief Financial Officer, Executive
Vice-Presidents in charge of loans and branch administration and monitored by
the Corporation's Auditor. The committee reviews the "Watch List" (a
collection of loans that have had a history of delinquency, cash flow
problems, etc.), past due reports, non-performing loans and historical
information related to charge-offs and recoveries by loan category. The
reserve balance is then allocated across the various loan categories to
determine the unallocated or excess reserve balance. The allocation is
performed using two different methods.
The first method, an historical method based on five years of information,
calculates the ratio of average losses by type to the average outstanding
balance by type. The ratio is then applied to the current outstanding balance
of the various loan categories to determine the amount of reserve to be
allocated to the loan category. In addition to the historical calculated
amount, at times the committee will add amounts to the calculated total if it
is aware of a particular problem or if the five-year average is not
representative of current conditions. The historical method is used only to
observe past trends and is not relied on to predict the future because as we
know, the last five years have been part of a stable economic climate with
very low unemployment.
The second allocation method extracts loans by a quality rating system. The
ratings are substandard, doubtful and loss. Regulatory guidelines are then
applied: 15 percent of the substandard category, 50 percent of the doubtful
category and 100 percent of the loss category loans. Since the allocation
only encompasses about 4.0 percent of total loans and ignores the balance of
the loan portfolio, management applies .005 percent to the remainder of the
portfolio. Management feels that the additional allocation will provide added
protection in an economic downturn with a resulting increase in unemployment.
Other factors used to measure the level of the reserve are loan growth,
economic conditions of the market area and peer group comparisons.
The Corporation also retains the services of an independent loan appraiser
who reviews all credit relationships in excess of $175,000 and loans of
$100,000 or more in offices where there is perceived to be excess
delinquency. The latest review was started on June 14, 1999 and concluded
July 1, 1999. The results of that evaluation concluded that total criticized
loans have declined 9.5 percent since the previous review. Total criticized
loans amounted to $9,723,000 and required a reserve allocation of $3,150,000.
Also, each year the Board of Directors invites all branch managers to the
meeting to perform a comprehensive review of all loans that equal or exceed
$400,000.
At September 30, 1999 the Reserve for Possible Loan Losses as a percentage of
gross loans was 1.65 percent. For the months of July through October 1999 the
monthly charge to earnings was lowered from $75,000 to $40,000 as management
felt net charge-offs for the current year would be somewhat lower than
projected. However, after the 3rd quarter review of Watch List loans the
committee decided to increase the provision back to $75,000 for November and
review loss projections before setting the December provision. The reason for
the increase was the decision to charge-off one or two larger loans that may
push net charge-offs $100,000 to $150,000 higher than the projected $400,000.
At year-end 1999 an assessment of the reserve balance will be made after a
definite determination of actual losses for the year can be ascertained. The
Board of Directors desires a reserve to gross loans ratio in the range of
1.63 to 1.65 percent.
11
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
TABLE - III
Reserve for Possible Loan Losses
<TABLE>
<CAPTION>
Projected Actual Actual Actual Actual Actual Actual
Dec. 31, Sept. 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec 31,
1999 1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning Balance January 1, $4,820,323 $4,820,323 $4,913,334 $4,775,960 $4,579,210 $4,228,741 $3,816,982
Provision Charged to Earnings 700,000 570,156 763,400 797,032 700,500 736,500 737,496
Year-to-Date Recoveries 200,000 157,980 110,077 124,407 167,926 187,473 194,312
Year-to-Date Charge-offs (600,000) (408,081) (966,488) (784,065) (671,676) (573,504) (520,049)
Ending Balance $5,120,323 $5,140,378 $4,820,323 $4,913,334 $4,775,960 $4,579,210 $4,228,741
</TABLE>
TABLE - IV
6 YEAR HISTORY OF LOAN LOSSES
<TABLE>
<CAPTION>
Projected
(In Thousands) 1999 1998 1997 1996 1995 1994 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C>
Net Loans * 315,000 291,032 285,463 278,597 264,182 258,418 282,115
Net Charge offs 400 856 386 504 387 326 477
Allowance for Possible Loan Losses
Balance 5,120 4,820 4,912 4,776 4,579 4,229 4,739
Provision for Loan Losses Charged
to Earnings 700 763 797 701 737 737 739
Earnings 10,500 11,077 10,107 9,255 7,866 7,494 9,383
Earnings Coverage of Net Charge
offs 26.3 x 12.9 x 26.2 x 18.4 x 20.3 X 23.0 x 21 x
Allowance Coverage of Net Charge
offs 12.8 x 5.6 x 12.7 x 9.5 x 11.8 X 13.0 x 11 x
Loans Ninety Days or More Past Due
and Still Accruing 1,241 1,628 1,986 2,994 2,915 2,743 2,362
Net Charge offs as a Percent of
the Provision 57.1% 112.2 % 48.4 % 71.9 % 52.5 % 44.2 % 36 %
Year-End Nonperforming Loans** 1,130 1,130 1,412 864 279 624 907
Allowance as a Percentage of Gross
Loans: *
Bank (1) 1.63% 1.66 % 1.72 % 1.71 % 1.73 % 1.64 % 1 %
Peer Group (2) 1.55% 1.59 % 1.43 % 1.50 % 1.61 % 1.65 % 1 %
</TABLE>
* Gross Loans less Unearned
Discount
(1) Projected December 31, 1999
(2) At June 30, 1999
TABLE - V
Reserve Allocation-Historical
<TABLE>
<CAPTION>
(In Thousands) Est.
LOAN CLASSIFICATION 1999 1998 1997 1996 1995 1994 Average
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Agriculture,
Municipal & Other 33,165 34,255 25,751 30,054 26,481 22,794 28,750 0.00408 X 33,165 = 235
Real Estate Loans 248,122 225,853 220,358 215,123 201,350 195,634 217,740 0.00075 X 248,122= 286
Credit Card & Related Plans 9,023 8,523 9,084 8,902 9,934 9,896 9,268 0.02244 X 9,023 = 253
All Other Loans to Individuals 24,690 22,402 30,270 24,518 26,417 30,094 26,740 0.00758 X 24,690 = 237
- --------------------------------------------------------------------------------------------------------------------------------
Total Loans 315,000 291,033 285,463 278,597 264,182 258,418 282,498 0.00237 X 315,000 1,011
Letter of Credit Commitments 5,500 5,400 5,012 5,106 2,633 4,415 4,513 0.00000 X 5,500 = 500
All Other Commitments
Consumer 32,000 14,768 27,728 28,049 24,811 24,202 23,912 0.00781 X 32,000 = 250
Mortgage 12,000 15,477 10,497 5,802 7,276 9,566 9,724 0.00064 X 12,000 = 8
Commercial 13,000 17,366 13,045 10,825 10,201 9,901 12,268 0.00479 X 13,000 = 62
Impaired Loans 800 290 274 113 228 800
Total allocated 2,631
Unallocated 2,489
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans and Commitments and
Reserve Balance 378,300 344,334 342,019 328,492 309,331 306,502 332,914 5,120
==================================================================================================================================
</TABLE>
TABLE - VI
Reserve Allocation
At September 30, 1999
<TABLE>
<CAPTION>
Allocation Total
Percentage Loans Allocation
<S> <C> <C> <C>
Substandard 15 8,996,967 1,349,545
Doubtful 50 2,102,894 1,051,447
Loss 100 29,996 29,996
Fasb 114 Loans (Nonperforming) Estimated 1,739,767 731,080
- ---------------------------------------------------------------------------------------------
Total Loans and Allocation 12,869,624 3,162,068
Remaining Loans 0.005 298,475,235 1,492,376
Unallocated 485,946
- ---------------------------------------------------------------------------------------------
Reserve Balance 311,344,859 5,140,390
=============================================================================================
</TABLE>
12
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
<TABLE>
<CAPTION>
Nine-Month Periods Ended September 30,
$ %
TABLE - VII COMPARISON OF NONINTEREST INCOME 1999 1998 Change Change
(In Thousands)
<S> <C> <C> <C> <C>
Service Charges on Deposit Accounts $ 827 $ 775 $ 52 6.71
Service Charges and Fees 206 212 (6) (2.83)
Trust Department Income 1,096 952 144 15.13
Insurance Commissions, Fees and Premiums 318 323 (5) (1.55)
Fees Related to Credit Card Operation 2,328 2,208 120 5.43
Other Operating Income 71 75 (4) (5.33)
- --------------------------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized
Gains on Securities, Net 4,846 4,545 301 6.62
Realized Gains on Securities, Net 1,209 2,849 (1,640) (57.56)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income $6,055 $7,394 ($1,339) (18.11)
====================================================================================================================
</TABLE>
Total Other Operating Income Before Realized Gains on Securities increased
$301,000 or 6.62 percent between the two periods. The two most significant
contributors to the increase in Other Operating Income were the Trust and
Credit Card Departments. Trust Department fees increased just over 15 percent
when comparing the two nine-month periods. The increase is attributed to the
growth in the number of trust accounts administered and the increase in
market value of those accounts. Service Charges on Deposit also increased
nearly 7 percent because of the strong deposit growth during the current
period.
The increase in credit card fees can be attributed to an increase in merchant
fees generated by higher card usage.
Realized Gains on Securities for the current nine-month period were lower
than those reported for the same period last year, however, the nine-month
period ended September 30, 1998 included a realized gain in excess of
$1,715,000 on the sale of a stock that had been held as collateral on a
defaulted loan in the early 1900's. The stock had been carried on the books
at a fair value of $1.00. Excluding the extraordinary gain, realized gains
would have increased $75,000 over last year.
TABLE VIII - COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Nine-Month Periods Ended September 30,
(In Thousands) $ %
1999 1998 Change Change
<S> <C> <C> <C> <C>
Salaries and Wages $ 5,015 $ 4,813 $ 202 4.20
Pensions and Other Employee Benefits 1,351 1,295 56 4.32
Occupancy Expense, Net 679 617 62 10.05
Furniture and Equipment Expense 784 599 185 30.88
Expenses Related to Credit Card Operation 2,038 2,057 (19) (0.92)
Pennsylvania Shares Tax 542 492 50 10.16
Other Operating Expense 2,809 2,307 502 21.76
- -------------------------------------------------------------------------------------------------------------
Total Other Expense $ 13,218 $ 12,180 $ 1,038 8.52
=============================================================================================================
</TABLE>
Noninterest Expense increased just over $1,000,000 during the comparable
periods. The biggest contributors to the increase were Furniture and
Equipment Expense and Other Operating Expense. Furniture and Fixture Expense
increased about $185,000, primarily because of ATM maintenance and the
installation of a thin client computer network in the branch system to
support the new internet banking system. The attendant depreciation costs and
maintenance for these systems amounted to roughly $180,000.
Other Operating Expense increased slightly more than $500,000 when compared
to the same period last year. The increase over the prior period was
generally related to advertising, increased education costs, professional
fees, etc. Also included in Other Operating Expense are expenses related to
Bucktail Life Insurance Co., which were approximately $62,000 higher than the
same period last year due to an increase in mortgage group life and credit
life losses.
13
<PAGE>
The Corporation also hired a consulting firm to review the supply of cash
carried daily and reserves maintained with the Federal Reserve system at a
cost of about $80,000. The savings that will accrue during the following year
should be approximately $150,000.
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
STATEMENT OF CONDITION
Average total assets of the Corporation for the nine-month periods ended
September 30, 1999 and September 30, 1998, respectively, totaled $672,104,000
and $623,047,000. For the year ended December 31, 1998 average assets totaled
$626,102,000. The increase in average total assets between the comparable
periods amounted to nearly 8 percent, the result of an increase in average
deposit totals and the introduction of the Money Management Repo Sweep
Account.
On the asset side of the balance sheet average total Available-for-Sale
investments increased just over 15 percent. The increase was primarily in U.
S. agency investments and municipal bonds. At year end 1998, investment
securities totaled $331,183,000, compared to $371,513,000 at September 30,
1999.
The composition of the loan portfolio has not changed during the comparable
periods. Average loan volume increased $13,829,000 almost entirely in real
estate secured. Loan growth was sluggish during 1998 and the first quarter of
1999 but the volume began to increase during the second quarter of 1999.
Presently total loans amount to about $312,000,000 and are expected to end
the year at about $316,000,000.
On the liability side of the balance sheet average deposits increased
$37,503,000 when comparing the current and prior year nine-month periods.
When compared to the year ended December 31, 1998 average deposits increased
$32,229,000. The growth in average deposit balances was in higher yielding
Money Market accounts and Certificates of Deposit. The increase in the Money
Market Accounts was the result of the introduction of a new Municipal Money
Market Account. The account targets local school districts and other
municipalities. The account is popular because of the competitive rates paid,
thus the municipalities no longer have to send funds out of the market area
to obtain higher rates. The Bank considers the Money Market Accounts core
deposits and has always paid a very competitive rate. Certificates of Deposit
have also shown significant growth during the past year also because of a
competitive rate structure and a successful marketing effort with the local
municipalities.
The Money Management Repo Sweep Account introduced in the fall of 1998
automatically sweeps funds above a predetermined level from a
noninterest-bearing account to an interest-bearing account on a daily basis.
The rate paid is based on the 91-day treasury bill and a tiered balance
approach. Currently, daily balances average between $4,000,000 and $5,000,000.
Average borrowed funds increased just over $14,000,000 between September 30,
1998 and September 30, 1999 due to purchases of Federal Home Loan Bank
instruments which provided a spread of about 200 basis points. The current
interest rate structure will probably not provide additional leveraging
opportunities during the balance of 1999.
Average Capital of the Corporation excluding Accumulated Other Comprehensive
Income increased from $74,231,000 to $80,361,000 between the comparable
nine-month periods, a growth rate of just over 8 percent. Accumulated Other
Comprehensive Income (unrealized securities gains) has declined from an
average of $13,529,000 for the nine months ended September 30, 1998 to an
average for the current nine-month period of $7,745,000. The sharp decline in
the market value of Available-for-Sale Securities is the result of rising
interest rates during the past twelve months. Long-term interest rates have
risen more than 150 basis points since the fall of 1998. At September 30,
1999 the market value of the Available-for-Sale Securities was ($1,654,000),
net of tax, and at December 31, 1998 the net of tax amount was $11,922,000.
The recent increase in interest rates has also had a negative impact on the
market value of the stock of the Corporation. The most recent price of the
stock was $27.25, a decline of $10.25 since September 30, 1998 and $8.25
since December 31, 1998. The depressed value of bank stocks has been most
noticeable among the super regional and regional bank shares even though your
bank and most of the other regional banks are posting record profits and loan
portfolio quality is very high.
14
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
LIQUIDITY
Liquidity is the ability to raise cash quickly and at a reasonable cost. An
adequate liquidity position allows the Corporation to pay creditors,
compensate for unforeseen deposit fluctuations and fund unexpected loan
demand. Daily deposit decreases normally do not exceed $5,000,000 to
$7,000,000 and new loan advances net of loan repayments have not been
significant.
In addition to the daily sources of cash, such as loan repayments,
amortization of mortgage-backed investments, maturing bonds and deposit
growth, the Corporation has several additional sources of liquidity: the sale
of assets (primarily available-for-sale investment securities), short-term or
long-term borrowing. Sources of borrowing include the Federal Home Loan Bank
of Pittsburgh and several correspondent bank relationships. The estimated
borrowing capacity available from the Federal Home Loan Bank and
correspondent relationships is approximately $274,000,000.
CAPITAL ADEQUACY
Under regulations published by the Federal Deposit Insurance Corporation and
other bank regulators, a bank's capital must be divided into two tiers. The
first tier or tier one capital consists primarily of common stock, retained
earnings, surplus and non-cumulative perpetual preferred stock. Tier two
includes the allowance for possible loan losses (limited to 1.25 percent of
risk-weighted assets), cumulative preferred stock, 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 one;
the remainder may be tier two. The total risk-based capital ratios at
September 30, 1999, September 30, 1998 and December 31, 1998 were 22.58
percent, 22.08 percent and 22.74 percent, respectively.
Total capital of the Corporation (excluding Other Comprehensive Income) at
September 30, 1999, September 30, 1998 and December 31, 1998 was $83,227,000,
$77,349,000 and $78,645,000, respectively.
The leverage ratio (capital divided by total liabilities), excluding
unrealized gains on available-for-sale securities, at September 30, 1999,
September 30, 1998 and December 31, 1998 was 13.2 percent, 14.2 percent and
14.1 percent, respectively.
Planned capital expenditures will include the construction of a new office in
Muncy, Pennsylvania, hopefully in the spring of 2000. The cost of the office
should not exceed $500,000. Additional expenditures in the coming year should
not exceed $1,000,000. These expenditures will not have a detrimental effect
on capital ratios or results of operations.
INFLATION
Inflation affects nearly every aspect of banking, primarily interest rates.
The effect of inflation, when it is high, has an impact on the cost of goods,
such as supplies, services and labor. Growth in the Consumer Price Index for
1999 is projected at about 2.8 percent, slightly higher than 1.6 percent
during 1998; however, it is not considered to be inflationary. In essence,
inflation does not appear to be a problem in the near-term and should not
impact the results of operations for the balance of 1999.
15
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 3. Interest Rate Risk and Market Risk
INTEREST RATE RISK AND MARKET RISK
The risk that arises from changes in interest rates is an inherent factor in
operating a bank. The risk associated with changes in interest rates is two
fold: the risk to earnings and the risk to the market values of assets and
liabilities.
From an earnings risk perspective, an asset sensitive institution (positive
gap) will normally benefit from rising rates and a liability sensitive
(negative gap) will benefit from falling interest rates. Citizens & Northern
Corporation uses a simulation model that calculates earnings under varying
interest rate shock scenarios, most commonly up 100, 200 and 300 basis points
and the same rate scenarios in a falling rate environment. The Asset and
Liability Committee and the Board of Directors have established a 20 percent
decrease in net interest income as a parameter at a 200 basis point (2
percent) increase in interest rates. The model is run monthly using the
current maturity schedule of the Corporation's assets and liabilities and
certain prepayment assumptions.
The risk associated with interest rate increases and decreases as they relate
to the market value of the assets and liabilities of the Corporation is also
calculated using the same model and the same rate shock of plus and minus
100, 200, and 300 basis point swings in rates. Market values are estimated by
applying present value calculations to the cash flow generated by the
Corporation's balance sheet. The Asset and Liability Committee and Board of
Directors have imposed a market loss limit of 30 percent at a 200 basis point
rate shock.
Since the fourth quarter of 1998 interest rates have risen in excess of 150
basis points, causing a negative impact on the market value of the investment
portfolio including equity investments. Market values have declined because
of the long weighted-average maturity of the portfolio and consequently the
length of time it takes to replace maturing investments with current market
rates. On the liability side of the balance sheet maturities are very short
and therefore reprice at higher interest rates much sooner.
At the most recent meeting of the Asset Liability Committee it was proposed
that new prepayment assumptions be used due to the rise in interest rates
during 1999. However, the new prepayment assumptions would probably drive the
unrealized market loss limit above the 30 percent limitation. The Board of
Directors was made aware of the possibility at the October 1999 meeting and
it was decided if the limit was going to be exceeded, no action should be
taken until a determination could be made on what direction the market will
take in the next few months.
The current market rate scenario is not taken lightly, however, management
and the Board of Directors do not see a cause for concern since both the
investment and loan portfolios are priced to provide a substantial rate of
return. The market value of the asset base would be of concern if there was a
need to sell assets, however, assets are normally purchased to provide
earnings and to be held until maturity.
The model utilized to create Table IX makes estimates, at each level of
interest rate change, regarding cash flows from principal repayments on loans
and mortgage-backed securities and call activity on other investment
securities. Actual results could vary significantly from these estimates
which could result in significant differences in the calculation of projected
changes in net interest margin and market value of portfolio equity. Also,
the model does not make estimates related to changes in the composition of
the deposit portfolio that could occur due to rate competition.
16
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 3. Interest Rate Risk and Market Risk (continued)
Period Ended September 30, 2000
TABLE IX -Effect of Hypothetical Changes in Interest Rates
NIM = Net Interest Margin
MVPE= Market Value of Portfolio Equity
<TABLE>
<CAPTION>
Plus 2% Plus 2 % Minus 2% Minus 2%
(In Thousands) Estimated Estimated Estimated Estimated
Expected Change in Change in Change in Change in
NIM NIM NIM NIM NIM
INTEREST INCOME $ $ % $ %
<S> <C> <C> <C> <C> <C>
Investment Securities 23,047 23,461 1.80 22,200 (3.68)
Interest-bearing Due From Banks 536 731 36.38 340 (36.57)
Loan Income 27,257 28,373 4.09 24,849 (8.83)
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income 50,840 52,565 3.39 47,389 (6.79)
================================================================================================================
INTEREST EXPENSE
Now Accounts and Regular Savings 2,121 2,507 18.20 1,734 (18.25)
Money Market Accounts 6,423 8,884 38.32 3,962 (38.32)
All Other Deposits 11,542 13,391 16.02 9,693 (16.02)
- ------------------------------------------------------------------------------------------------------------------
Total Deposits 20,086 24,782 23.38 15,389 (23.38)
Borrowed Funds 6,479 7,691 18.71 5,338 (17.61)
- ------------------------------------------------------------------------------------------------------------------
Total Interest Expense 26,565 32,473 22.24 20,727 (21.98)
- ------------------------------------------------------------------------------------------------------------------
Net Interest Income 24,275 20,092 -17.23 26,662 9.83
==================================================================================================================
</TABLE>
Effect of Hypothetical Changes in
Market Value of Portfolio Equity
<TABLE>
<CAPTION>
Plus 2% Plus 2 % Minus 2% Minus 2%
(In Thousands) Estimated Estimated Estimated Estimated
Change in Change in Change in Change in
MVPE MVPE MVPE MVPE MVPE
$ $ % $ %
<S> <C> <C> <C> <C> <C>
Investment Portfolio 366,690 342,532 (6.59) 389,331 6.17
Total Loans 304,733 294,032 (3.51) 309,777 1.66
Other Assets 32,562 32,562 32,562
- ----------------------------------------------------------------------------------------------------------------
Total Assets 703,985 669,126 (4.95) 731,670 3.93
Deposits 488,601 476,371 (2.50) 502,242 2.79
Borrowed Funds 134,759 133,055 (1.26) 136,556 1.33
Other Liabilities 5,572 5,572 5,572
- ----------------------------------------------------------------------------------------------------------------
Total Liabilities 628,932 614,998 (2.22) 644,370 2.45
- ----------------------------------------------------------------------------------------------------------------
Net Change in Portfolio Equity 75,053 54,128 (27.88) 87,300 16.32
================================================================================================================
</TABLE>
17
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 3. Interest Rate Risk and Market Risk (continued)
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists of restricted stock,
primarily of the Federal Home Loan Bank of Pittsburgh ("FHLB") and
investments in stock of banks and bank holding companies located mainly in
Pennsylvania.
FHLB stock can only be sold back to the FHLB or to another member institution
at par value. Accordingly, the Corporation's investment in FHLB stock is
carried at cost, which equals par value, and is evaluated for impairment.
Factors that might cause FHLB stock to become impaired are primarily
regulatory in nature and are related to potential problems in the residential
lending market; for example, the FHLB may be required to make dividend or
other payments to the Financing Corporation, the Resolution Funding
Corporation, or other entities, in amounts that could exceed the FHLB's total
equity.
Investments in bank stocks are subject to the risk factors that affect the
banking industry in general, including competition from nonbank entities,
credit risk, interest rate risk and other factors, which could result in a
decline in market prices. Also, losses could occur in individual stock held
by the Corporation because of specific circumstances related to each bank.
Further, since the stocks held are bank and bank holding companies
concentrated in Pennsylvania, these investments could decline in market value
if there is a downturn in the state's economy.
Equity Investments held as of September 30, 1999 and September 30, 1998 are
presented in Table X.
Table X - Equity Investments
<TABLE>
<CAPTION>
(In Thousands)
Hypothetical Hypothetical
10 % Decline 20 % Decline
in in
Fair Market Market
Cost Value value value
<S> <C> <C> <C> <C>
At September 30, 1999
Banks and Bank Holding Companies 17,863 29,304 (2,930) (5,861)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
- -----------------------------------------------------------------------------------------------------------------------
Total 25,111 36,552 (3,655) (7,311)
=======================================================================================================================
At September 30, 1998
Banks and Bank Holding Companies 15,642 28,648 (2,865) (5,730)
Federal Home Loan Bank and Other Restricted Securities 4,367 4,367 (437) (873)
- -----------------------------------------------------------------------------------------------------------------------
Total 20,009 33,015 (3,302) (6,603)
=======================================================================================================================
</TABLE>
18
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (Continued)
Item 4. Year 2000 Compliance
YEAR 2000 COMPLIANCE
The Year 2000, or Y2K problem as it is commonly referred to, is a computer
problem that originated when computers were first utilized to store and
process information and computer memory and storage space were very
expensive. To make efficient use of the memory and storage limitations, 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". 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, all of the Corporation's Y2K issues have been addressed. To date, the
corporation's progress is as follows:
o Mainframe software upgrades have been completed.
o All mission-critical applications have been tested by the MIS
department and were retested independently by our Audit and
Compliance departments.
o A contingency/business resumption plan is completed and approved by
the Board of Directors.
o Customer risk (both funds users and funds providers) has been assessed.
o Several steps have been taken to increase customer awareness, such
as statement stuffers, seminars and internet banking statement.
TESTING:
A Year 2000 readiness-testing plan was developed and used to guide the
testing process. This plan 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 performed the independent
testing and for mainframe mission-critical systems the majority of the
testing is complete.
MAINFRAME AND SOFTWARE TESTING:
Independent testing of software for Y2K compliance was done utilizing our HP
937 backup 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. All internally written
software has been revised and tested by the MIS staff.
KEY EXTERNAL THIRD PARTY SUPPLIERS:
o 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 has
been completed. Additionally, all other software and hardware in
the department have been identified and reviewed for Y2K
compliance.
o Electronic Funds Transfer - All software has been tested and is Y2K
compliant. (ACH and Wire Transfer).
o Check and Document Imaging - Our independent testing
is complete.
19
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 4. Year 2000 Compliance (continued)
o Credit Card - Internal testing has been performed. Third-party testing is
scheduled for the near future.
o ATM - All automated teller machines are compliant based on the
manufacturer's warranties. Third-party testing is completed.
o Postage machines are compliant.
o 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. Those
vendors not indicating year 2000 readiness will be replaced.
CONTINGENCY PLAN/BUSINESS RESUMPTION:
A contingency plan for the Year 2000 is complete. 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 with plans developed
to use in case of Y2K related issues. Plans were 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 backup generator (which could be used in case of any loss of
power, not just Y2K) were analyzed.
CUSTOMER RISK AND AWARENESS:
To date, the following efforts have been made to inform our customers of the Y2K
problem:
o Y2K letter sent to commercial loan customers.
o Y2K press release in all newspapers in market area.
o Y2K Seminars were held in June 1998 and March 1999 for all commercial
customers.
o Bankcard Services sent Y2K updates to all member banks.
o Y2K informational brochures were distributed to all offices for customers
inquiring into the Y2K problem.
o Y2K informational flyers were distributed in the C&N 1999 calendars that
were made available to customers, free of charge, at all branches. Also
several Y2K press conferences were held to discuss the Bank's readiness.
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, was utilized for all commercial
loan customers with aggregate balances over $150,000. Loan officers met
independently with all commercial loan customers with borrowing
availability totaling $150,000 or more to review and assess the customer's
Y2K readiness. Deposit customers with aggregate balances over $100,000 were
selected for review. Letters were sent to these customers with follow-up
phone calls to be made on a selected basis.
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 in excess of $250,000. The telephone
banking system installed in 1997 was not Y2K compliant and was replaced with
a Y2K compliant Internet and Telephone Banking System during the second
quarter of 1999. The Internet and Telephone Banking System has been installed
and became operational in June of this year. The approximate cost was
$250,000, which includes thin client computer stations for all offices,
servers and software. Item-processing software has been updated at a cost of
$32,000. The cost of PC replacements for Y2K and normal replacements during
1998 and to date in 1999 was approximately $150,000. Upgraded software for
desk top PCs and notebooks has amounted to approximately $30,000. The main
frame computer network has been upgraded for Y2K and non-Y2K reasons at a
cost of $218,000. The Corporation has installed a natural gas generator for
the operations center in Wellsboro. The price of the generator was about
$85,000. The primary purpose of the generator is to provide a back-up
electricity source for our MIS department and the main office in the event of
power interruptions caused by weather or other non-Y2K related unforeseen
situations.
20
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Part I - Financial Information (continued)
Item 4. Year 2000 Compliance (continued)
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 its 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 developed contingency plans to allow the Corporation to function
satisfactorily in the unlikely event that such failure should 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 an enormous amount of time and effort to solve the problem and
deal with unforeseen problems should they occur.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is currently no pending legal litigation against Citizens & Northern
Corporation.
ITEM 2. CHANGES IN SECURITIES
No disclosure required.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
No disclosure required.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No disclosure required.
ITEM 5. OTHER INFORMATION
No disclosure required.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1. None
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Citizens & Northern Corporation
NOVEMBER 8, 1999 By:___________________________________________
- ---------------- Craig G. Litchfield, Chairman, President
Date and CEO
NOVEMBER 8, 1999 By:___________________________________________
- ---------------- James W. Seipler, Executive Vice President
Date and Treasurer
22
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