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 Three-month period ended March 31, 2000
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 Outstanding
Common Stock ( $1.00 par value) 5,205,492 Shares Outstanding May 11, 2000
1
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 2000 and
December 31, 1999 Page 3
Consolidated Statement of Income - Three Months Ended
March 31, 2000 and March 31, 1999 Page 4
Consolidated Statement of Cash Flows - Three Months Ended
March 31, 2000 and March 31, 1999 Page 5
Notes to Consolidated Financial Statements Pages 6 and 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations Pages 8 through 17
Item 3. Information About Market Risk Pages 18 And 19
Part II. Other Information Page 20
Signatures Page 21
2
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Cash & Due From Banks $11,295 $15,337
Interest Bearing Deposits 2,409 2,726
Available-for-Sale Securities:
U.S. Treasury Securities 2,484 2,498
Securities of Other U.S. Government Agencies 121,965 116,691
Mortgage Backed Securities 104,647 107,816
Obligations of States and Municipal Subdivisions 78,633 76,748
Other Securities 52,766 55,176
-----------------------------------
Total Available-for-Sale Securities 360,495 358,929
Held-to-Maturity Securities:
U.S. Treasury Securities 615 617
Securities of Other U.S. Government Agencies 1,045 949
Mortgage Backed Securities 303 314
-----------------------------------
Total Held-to-Maturity Securities 1,963 1,880
Loans:
Loans to Political Subdivisions 11,943 12,466
Other Loans 300,094 298,455
-----------------------------------
Total Loans 312,037 310,921
Less - Allowance for Possible Loan Losses (5,146) (5,131)
Unearned Income (27) (29)
-----------------------------------
Loans, Net 306,864 305,761
Bank Premises and Equipment 8,442 7,992
Other Real Estate 389 310
Accrued Interest on Bonds and Loans 4,732 5,066
Other Assets 7,562 7,897
-----------------------------------
TOTAL ASSETS $704,151 $705,898
===================================
LIABILITIES
Deposits:
Demand $63,615 $67,200
Interest Checking 35,762 39,077
Money Market 128,752 126,994
Savings 46,131 45,420
Other Time 222,628 221,783
-----------------------------------
Total Deposits 496,888 500,474
Dividends Payable 1,249 1,237
Short - Term Borrowings 99,124 89,036
Long - Term Borrowings 25,620 35,025
Other Liabilities 4,030 3,503
-----------------------------------
TOTAL LIABILITIES 626,911 629,275
===================================
SHAREHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share
Authorized 10,000,000; Issued 5,324,962 5,325 5,272
and 5,272,239 in 2000 and 1999, respectively
Stock Dividend Distributable 1,437
Paid in Capital 18,891 17,355
Retained Earnings 63,768 62,886
-----------------------------------
Total 87,984 86,950
-----------------------------------
Accumulated Other Comprehensive Income (Loss) (9,304) (8,884)
Less: Treasury Stock at Cost
119,470 shares at March 31, 2000 (1,440)
118,510 shares at December 31,1999 (1,443)
-----------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,240 76,623
-----------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $704,151 $705,898
===================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all the information and
notes required by generally accepted accounting principles for complete
financial statements.
3
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Financial Statements (Continued)
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)
<TABLE>
<CAPTION>
3 Months Ended
March 31, March 31,
2000 1999
--------- ---------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $6,508 $6,313
Interest on Balances with Depository Institutions 25 5
Interest on Loans to Political Subdivisions 163 117
Interest on Federal Funds Sold 6 5
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 4,679 3,494
Tax Exempt 1,114 1,114
Dividends 362 267
-------------------------------
Total Interest and Dividend Income 12,857 11,315
INTEREST EXPENSE
Interest on Deposits 5,413 4,529
Interest on Short-Term Borrowings 1,060 79
Interest on Long-Term Borrowings 672 789
-------------------------------
Total Interest Expense 7,145 5,397
-------------------------------
Interest Margin 5,712 5,918
Provision for Possible Loan Losses 226 225
-------------------------------
Interest Margin After Provision for Possible Loan Losses 5,486 5,693
OTHER INCOME
Service Charges on Deposit Accounts 268 270
Service Charges and Fees 51 69
Trust Department Income 401 370
Insurance Commissions, Fees and Premiums 80 133
Fees Related to Credit Card Operation 465 665
Other Operating Income 93 28
-------------------------------
Total Other Income Before Realized Gains on Securities, Net 1,358 1,535
Realized Gains on Securities, Net 15 490
-------------------------------
Total Other Income 1,373 2,025
OTHER EXPENSES
Salaries and Wages 1,829 1,561
Pensions and Other Employee Benefits 487 471
Occupancy Expense, Net 253 233
Furniture and Equipment Expense 253 209
Expenses Related to Credit Card Operation 191 576
Pennsylvania Shares Tax 181 181
Other Operating Expense 1,015 1,022
-------------------------------
Total Other Expenses 4,209 4,253
-------------------------------
Income Before Income Tax Provision 2,650 3,465
Income Tax Provision 501 789
-------------------------------
NET INCOME $2,149 $2,676
===============================
PER SHARE DATA:
Net Income - Basic $0.41 $0.51
Net Income - Diluted $0.41 $0.51
-------------------------------
Dividend Per Share $0.24 $0.22
-------------------------------
Number Shares Used in Computation - Basic 5,205,314 5,204,919
Number Shares Used in Computation - Diluted 5,207,547 5,212,264
Number Shares Issued 5,324,962 5,272,239
Number Shares Authorized 10,000,000 10,000,000
-------------------------------
Dividends Actually Paid $0.24 $0.22
-------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Financial Statements (Continued)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended
(In Thousands) (Unaudited) March 31, 2000 March 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $2,149 $2,676
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Provision for Possible Loan Losses 226 225
Realized Gain on Securities, Net (15) (490)
Realized Gain on Sale of Foreclosed Assets (34) -
Provision for Depreciation 263 215
Accretion and Amortization (592) (385)
Deferred Income Tax 28 (151)
(Decrease) Increase in Accrued Interest
Receivable and Other Assets 668 (678)
Increase in Accrued Interest Payable and
Other Liabilities 726 1,963
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,419 3,375
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 12 282
Purchase of Held-to-Maturity Securities (96) (254)
Proceeds from Sales of Available-for-Sale Securities 864 3,639
Proceeds from Maturities of Available-for-Sale Securities 3,112 16,770
Purchase of Available-for-Sale Securities (5,435) (40,109)
Net Increase in Loans (1,643) (2,636)
Purchase of Premises and Equipment (713) (340)
Proceeds from the Sale of Foreclosed Assets 269 62
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (3,630) (22,586)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (3,586) 2,812
Increase in Short-Term Borrowings 10,088 17,853
Repayments of Long-Term Borrowings (9,405) (5)
Proceeds from the Sale of Treasury Stock 4 14
Dividends Declared (1,249) (1,134)
- ----------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (4,148) 19,540
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,359) 329
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $18,063 $16,128
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $13,704 $16,457
============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $5,810 $4,412
============================================================================================================================
Income Taxes Paid $475 $796
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 1. Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
1. BASIS OF INTERIM PRESENTATION.
The financial information included herein, with the exception of the
Consolidated Balance Sheet dated December 31, 1999, 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 cash flows for
the interim periods. Certain 1999 amounts have been reclassified to conform to
the 2000 presentation.
Results reported for the three-month period ended March 31, 2000 might not be
indicative of the results for the year ended December 31, 2000.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. 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 for all periods presented. 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- Earnings
Net Average Per
Income Common Shares Share
------ ------------- --------
<S> <C> <C> <C>
Quarter Ended March 31, 2000
Earnings per share - basic $2,149,000 5,205,314 $0.41
Dilutive effect of stock options 2,233
-----------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $2,149,000 5,207,547 $0.41
=================================================================================================================
Quarter Ended March 31, 1999
Earnings per share - basic $2,676,000 5,204,919 $0.51
Dilutive effect of stock options 7,345
-----------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $2,676,000 5,212,264 $0.51
=================================================================================================================
</TABLE>
3. 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.
Comprehensive income is calculated as follows:
<TABLE>
<CAPTION>
(In Thousands) Quarters Ended March 31,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Net Income $2,149 $2,676
Other Comprehensive Income :
Unrealized holding gains (losses) on available-for-sale securities
Losses arising during the period (623) (3,927)
Reclassification adjustment (15) (490)
--------------------------------
Other comprehensive loss before income tax (638) (4,417)
Income tax related to other comprehensive loss 217 1,501
--------------------------------
Other comprehensive loss (421) (2,916)
--------------------------------
Comprehensive Income (loss) $1,728 ($240)
================================
</TABLE>
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This report contains certain forward-looking statements. The Corporation intends
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, business objectives and future expectations of the
Corporation, are generally identifiable by the use of words such as, "believe",
"expect", "intend", "anticipate", "estimate", "project", and similar
expressions. The Corporation's ability to predict results or the actual effect
of future plans or occurrences is inherently uncertain. Factors which could have
a material adverse affect on the operations and future prospects of the
Corporation and the subsidiaries include, but are not limited to, changes in :
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U. S. government, including policies of the
U. S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Corporation's market area, our
implementation of new technologies, our ability to develop and maintain secure
and reliable electronic systems and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
EARNINGS OVERVIEW
Net after-tax income for the three-month period ended March 31, 2000 amounted to
$2,149,000 or $.41 per share (on a basic and diluted basis). This compares to
$2,676,000 or $.51 per share (on a basic and diluted basis) for the same period
in 1999. Net income for the three month period ended December 31, 1999 amounted
to $3,096,000 or $.59 per share (on a basic and diluted basis). Total assets at
March 31, 2000, December 31, 1999 and March 31, 1999, respectively, totaled
$704,151,000, $705,898,000 and $665,909,000.
Earnings, excluding investment security gains, net of tax for the three-month
periods ended March 31, 2000, December 31, 1999 and March 31, 1999, per common
share (basic and diluted) would have amounted to $.41, $.44 and $.45,
respectively.
Results for the first three months of 2000, were slightly less than budgeted
expectations. This was due primarily to the lack of realized gains on equity
investments. Management and the Board of Directors decided that it would not be
prudent to sell equity investments under current market conditions, especially
those in the financial sector. There will be continued pressure on the net
interest margin as the Fed continues to raise short-term interest rates and it
will probably impact earnings for the remainder of 2000. It should be emphasized
that although earnings will be slightly lower they will still be substantial and
are being compared to prior periods that were exceptional under much better
interest rate structures.
NET INTEREST MARGIN
Net interest margin or net interest income is the dollar amount of difference
between all interest income received and interest expense paid. The net interest
spread or interest margin is the difference, stated as a percentage, between the
average rate received on all interest-earning assets and the average rate paid
on all interest-bearing liabilities. The net interest margin as reflected in the
income statement has not been adjusted for federal income taxes.
Management's discussion of the net interest margin includes references to 4th
quarter 1999 information that is not presented in this Form 10-Q. Summarized
financial data for the 4th quarter 1999 is included in the 1999 Annual Report,
which was incorporated by reference into the 1999 Form 10-K.
THREE-MONTH PERIODS ENDED MARCH 31, 2000, DECEMBER 31, 1999 AND MARCH 31, 1999.
Net interest income for the three-month period ended March 31, 2000 decreased
$206,000 or 3.5 percent when compared to the same period in 1999 and $155,000 or
2.6 percent compared to the quarter ended December 31, 1999. Respectively, gross
interest income for the periods ended March 31, 2000 and December 31, 1999 and
March 31, 1999 amounted to $12,857,000, $12,713,000, and $11,315,000. Gross
interest expense for the same respective periods amounted to $7,145,000 and
$6,846,000, and $5,397,000. The interest rate spread, as presented in Table I
for the current three-month period was 2.46 percent; the interest rate spread
for the same period last year was 3.18 percent. The interest rate spread for the
quarter ended December 31, 1999 was approximately 2.56 percent.
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)
Average assets did increase appreciably between the comparable periods. Average
assets for the current three-month period were $703,234,000 and $643,726,000 for
the three-month period ended March 31, 1999. The growth between the periods was
due primarily to an increase in average deposits of $24,533,000 or 5.2 percent.
Also contributing to the growth was an increase in average borrowed funds,
including Customer Repo accounts, of $49,232,000. Average total assets for the
quarter ended December 31, 1999 were $690,332,000.
The volume of average interest-bearing assets increased from $605,863,000 for
the quarter ended March 31, 1999 to $689,116,000 for the current quarter, an
increase of 13.7 percent. Average interest-bearing liabilities amounted to
$499,138,000 for the quarter ended March 31, 1999 and $570,729,000 for the
current quarter, an increase of 14.3 percent. Average interest-bearing assets
and liabilities did not change significantly between the quarter ended December
31, 1999 and March 31, 2000.
The increase in earning assets was primarily in the investment portfolio, which
increased 20.1 percent or $63,188,000, with the largest increase in U. S.
Government Agency issues. Average total loans increased $20,065,000 or 6.9
percent. Loan categories that increased were mortgage loans and municipal loans.
Mortgage loans increased $16,930,000 and municipal loans increased $4,056,000.
Other loan categories remained relatively flat.
The increase in interest-bearing liabilities was primarily the more expensive
deposit categories: Money Market accounts, Certificates of Deposit and borrowed
funds. Money Market accounts increased $16,692,000 or 13.2 percent and
Certificates of Deposit increased $5,179,000 or 3.7 percent. Borrowed funds
increased $49,232,000.
The average rate earned on interest-bearing assets for the quarter ended March
31, 2000 was 7.50 percent; this compares to 7.57 percent for the same period in
1999. The quarter ended December 31, 1999 approximated that of the first quarter
of 2000. The small change in rates between the periods is reflective of the
amount of time it takes cash flows from maturing assets to reprice. This is due
primarily to the slow down in prepayment speeds of mortgages in the loan
portfolio and mortgage-backed securities in the investment portfolio.
On the liability side of the balance sheet interest-bearing liabilities mature
and are repriced at a much faster rate. The average rate paid on
interest-bearing liabilities for the quarter ended March 31, 2000 was 5.04
percent. This compares to an average rate of 4.39 percent for the same period in
1999. The average rate for the 4th quarter of 1999 was about 4.84 percent. The
average rate paid on Money Market Accounts during the 1st quarter of 2000 was
5.08 percent, during the same period in 1999 the rate paid 4.14 percent. This
represents an increase of 94 basis points. The average rate paid on borrowed
funds also increased substantially between the quarters being compared. During
the 1st quarter of 2000 the average rate paid was 5.65 percent. This compares to
an average rate of 4.73 percent for the same period in 1999. Rates paid on the
balance of interest-bearing liabilities did not increase significantly.
The difference in the period of time it takes assets and liabilities to reprice
causes the net interest margin and the corresponding earnings in a rising rate
environment to be depressed for a period of time. The amount of time it takes
for the net interest margin and net spread to align themselves is approximately
18 months assuming no change in the short-term rate structure.
Management expects a further decline in the net interest spread and net interest
income in the short run as the Federal Reserve Open Market Committee is expected
to again increase interest rates at its May meeting.
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 BALANCES AND RATES
<TABLE>
<CAPTION>
Rate of Rate of Rate of
(In Thousands) Return/ Return/ Return/
Cost of Year Cost of Cost of
Funds Ended Funds funds
EARNING ASSETS 03/31/00 % 12/31/99 % 03/31/99 %
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Available-for-Sale Securities:
U. S. Treasury Securities $ 2,514 6.40 $ 2,510 5.90 $ 2,511 6.14
Securities of Other U.S. Government Agencies and
Corporations 131,628 7.07 101,205 6.92 65,682 6.82
Mortgage Backed Securities 110,283 6.82 117,902 6.61 126,346 6.53
Obligations of States and Political Subdivisions 80,967 5.53 80,970 5.58 78,449 5.76
Stock 26,299 5.54 22,288 5.42 21,601 5.01
Other Securities 21,205 8.06 20,948 6.47 16,825 6.92
- ----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 372,896 6.61 345,823 6.37 311,414 6.31
- -----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 635 5.70 615 5.53 600 5.41
Securities of Other U. S. Government Agencies and 1,026 6.66 895 6.48 799 7.11
Corporations
Mortgage Backed Securities 306 7.89 368 7.34 416 7.80
- ----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,967 6.54 1,878 6.34 1,815 6.70
- -----------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 2,323 4.33 566 5.30 794 2.55
Federal Funds Sold 438 5.51 866 4.85 413 4.91
Loans:
Real Estate Loans 248,822 8.54 240,951 8.56 231,892 8.75
Consumer 28,688 10.61 28,982 10.94 29,885 11.32
Agricultural 1,986 9.52 1,961 9.89 1,975 10.88
Commercial/Industrial 18,687 8.63 19,271 8.25 18,548 8.83
Other 859 7.96 714 7.70 743 7.64
Political Subdivisions 12,258 5.35 9,499 5.70 8,202 5.79
Leases 192 4.19 206 6.31 182 6.68
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 311,492 8.61 301,584 8.68 291,427 8.95
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 689,116 7.50 650,717 7.44 605,863 7.57
- ----------------------------------------------------------------------------------------------------------------------------------
Cash 10,077 14,028 12,699
Securities Valuation Reserve (12,858) 7,865 17,307
Allowance for Possible Loan Losses (5,097) (5,083) (4,894)
Other Assets 13,725 5,509 5,220
Bank Premises & Equipment 8,271 7,828 7,531
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets 703,234 680,864 643,726
==================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 36,594 2.70 37,248 2.27 36,414 2.15
Money Market 142,328 5.08 131,741 4.34 125,636 4.14
Savings 45,516 2.49 46,643 2.48 46,161 2.48
Certificates of Deposit 144,179 5.35 139,916 5.24 139,000 5.32
Individual Retirement Accounts 77,311 6.02 75,882 5.21 76,433 4.97
Other Time Deposits 1,449 3.33 1,641 2.68 1,374 2.95
Federal Funds Purchased 3,926 5.53 6,085 4.91 6,322 4.94
Other Borrowed Funds 119,426 5.65 97,585 5.35 67,798 4.73
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 570,729 5.04 536,741 4.58 499,138 4.39
Demand Deposits 50,340 50,787 48,166
Other Liabilities 5,313 6,193 6,090
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 626,382 593,721 553,394
Stockholders' Equity 85,013 81,767 78,909
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve (8,161) 5,376 11,423
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $ 703,234 $ 680,864 $ 643,726
==================================================================================================================================
Interest Rate Spread 2.46 2.86 3.18
==================================================================================================================================
</TABLE>
9
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 ON INTEREST INCOME
AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Three-month Periods Ended March 31, 2000/1999
---------------------------------------------
(In Thousands) Change in Change in Total
Volume Rate Change
--------- --------- ------
<S> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities $ - $ 2 $ 2
Securities of Other U.S. Government Agencies and Corporations 1,157 51 1,208
Mortgage Backed Securities (282) 117 (165)
Obligations of States and Political Subdivisions - - -
Stock 62 33 95
Other Securities 83 55 138
- -------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 1,020 258 1,278
- -------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U. S. Treasury Securities - 1 1
Securities of Other U.S. Government Agencies and Corporations 4 (1) 3
Mortgage Backed Securities (2) - (2)
- -------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 2 - 2
- -------------------------------------------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 15 5 20
Federal Funds Sold - 1 1
Loans:
Real Estate Loans 358 (79) 279
Consumer (33) (44) (77)
Agricultural - (6) (6)
Commercial/Industrial 3 (6) (3)
Other 2 1 3
Political Subdivisions 53 (7) 46
Leases - (1) (1)
- -------------------------------------------------------------------------------------------------------------------------------
Total Loans 383 (142) 241
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 1,420 122 1,542
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Checking 1 52 53
Money Market 185 330 515
Savings - - -
Certificates of Deposit 69 26 95
Individual Retirement Accounts 11 209 220
Other Time Deposits 1 1 2
Federal Funds Purchased (35) 12 (23)
Other Borrowed Funds 699 187 886
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 930 818 1,748
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 490 $ (696) $ (206)
===============================================================================================================================
</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 amount
of the change in each.
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)
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Allowance for Possible Loan Losses is an allowance established by management
and the Board of Directors, which they believe will absorb existing 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 all of the known risk elements in the portfolio; namely,
the "Watch List" (a collection of loans that have had a history of delinquency),
past due reports, non-performing loans and historical information related to
charge-offs and recoveries by loan category.
The allowance for loan losses is evaluated based on an assessment of the losses
inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated.
The allocated portion of the allowance balance reflects expected losses
resulting from the analysis of individual loans, developed through specific
credit allocations for individual loans and historical experience for each loan
category. The specific credit allocations are based on a regular analysis of all
loans and commitments on the Corporation's "Watch List". Also, the historical
loan loss element is determined based on a ratio of net charge-offs to average
loan balances over a five-year period for each significant type of loans.
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the Corporation's market area. This determination inherently involves a
higher degree of uncertainty and considers current risk factors that may not
have manifested themselves in the Corporation's historical loss factors used to
determine the allocated component of the allowance and it recognizes that
knowledge of the portfolio may be incomplete. It should be noted that the
unallocated portion of the allowance has increased from $1,020,000 at
December 31, 1999 to $1,738,000 at March 31, 2000. The increase is attributable
to an improvement in the quality of the commercial portion of the portfolio.
Total substandard or "Watch List" loans decreased from $13,226,000 at December
31, 1999 to $12,057,000 at March 31, 2000. If in management's judgement this is
a sustainable trend and the unallocated portion of the allowance is high
relative to the overall quality of the portfolio, future charges to earnings for
loan loss provisions may be reduced accordingly.
The following tables present current and historical information on the loan
portfolio and the Allowance for Possible Loan Losses.
TABLE III - ALLOWANCE FOR POSSIBLE LOAN LOSSES RECONCILIATION
<TABLE>
<CAPTION>
Quarter
Ended Years Ended
Mar. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of Year $5,131 $4,820 $4,913 $4,776 $4,579 $4,229
Charge-offs
Real Estate Loans 126 81 257 246 157 38
Installment Loans 31 138 144 230 240 236
Credit Cards and Related Plans 61 192 264 305 201 184
Commercial and Other Loans 6 219 301 3 74 116
- ----------------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 224 630 966 784 672 574
Recoveries
Real Estate Loans 81 12 21 22 0
Installment Loans 6 60 43 64 53 60
Credit Card and Related Plans 5 30 40 30 38 41
Commercial and Other Loans 2 10 15 9 55 86
- ----------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 13 181 110 124 168 187
Net Charge-offs 211 449 856 660 504 387
Additions Charged to Operations 226 760 763 797 701 737
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at End of Period $5,146 $5,131 $4,820 $4,913 $4,776 $4,579
==================================================================================================================================
</TABLE>
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 IV - ALLOWANCE FOR POSSIBLE LOAN LOSSES ALLOCATION
<TABLE>
<CAPTION>
Mar. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(In Thousands) 2000 1999 1998 1997 1996 1995 1994
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage 771 834 97 350 58 38 35
Consumer 523 437 702 375 303 286 241
Commercial 1,185 2,081 650 625 630 604 443
Impaired Loans 796 609 290 274 113 228 -
All Other Commitments 133 150 202 343 369 374 386
Unallocated 1,738 1,020 2,879 2,946 3,303 3,049 3,124
- ------------------------------------------------------------------------------------------------------
Total Allowance 5,146 5,131 4,820 4,913 4,776 4,579 4,229
======================================================================================================
</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 V - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Three-Month Periods Ended
March 31, March 31, December 31,
2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Service Charges on Deposit Accounts $ 268 $ 270 $ 286
Service Charges and Fees 51 69 68
Trust Department Income 401 370 360
Insurance Commissions, Fees and Premiums 80 133 120
Fees Related to Credit Card Operation 465 665 736
Other Operating Income 93 28 28
- ---------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized
Gains on Securities, Net 1,358 1,535 1,598
Realized Gains on Securities, Net 15 490 1,196
- ---------------------------------------------------------------------------------------------------
Total Other Income $1,373 $2,025 $2,794
===================================================================================================
</TABLE>
Other Operating Income Before Realized Gains on Securities decreased 11.5
percent or $177,000 during the three-month period ended March 31, 2000 when
compared to the three-month period ended March 31, 1999. The decrease was caused
by a sharp decline in Fees Related to the Credit Card Operation. Those fees were
down sharply due to the loss of two large agent banks because of mergers and the
discontinuance of annual fees on the cards due to increased competition.
Insurance Commissions, Fees and Premiums provided by Bucktail Life Insurance
Company also declined sharply due to a decline in consumer loan production that
lends itself to the sale of the insurance products. Loan growth was centered in
larger commercial products that are insured by other insurance sources. Bucktail
Life Insurance Company, a subsidiary of Citizens & Northern Corporation,
provides credit life and accident and health insurance for Citizens & Northern
Bank.
Trust Department Income increased 8.4 percent as trust assets continue to post
substantial increases. Trust Department Income is expected to become a
substantial provider of noninterest income in the future as the Corporation
places more emphasis on becoming a full financial service provider with an
expanding range of financial products as demonstrated with the addition of three
financial service professionals in 1999.
The Corporation is also very proud of and has made a substantial commitment in
terms of dollars and personnel in its internet banking product, which currently
provides a wide range of services including bill paying. Future use of this
product, including loan generation, deposit relationships and connections to
other businesses in our market area is limitless and can be provided at a much
lower cost than traditional banking as more and more consumers become owners of
personal computers.
Other Income, excluding Realized Securities Gains, generated during the 4th
quarter of 1999 totaled $1,598,000 compared to $1,358,000 during the current
three month period. The difference is primarily in Fees Related to Credit Card
Operation for reasons previously described. Other categories of noninterest
income did not change significantly between the periods being compared.
Other Income, excluding Realized Gains on Securities, historically adds between
$1,350,000 and $1,650,000 to the bottom line on a quarterly basis. The
Corporation, going forward, is committed to increasing the importance of Other
Income to the profitability of the Company. At January 1, 2000, a new
subsidiary, Citizens & Northern Financial Services Corporation, was added. The
new subsidiary is licensed as an insurance agency and will provide a full range
of insurance products. The net loss of the subsidiary for the quarter ended
March 31, 2000 was $16,000, as payroll and some other start-up costs were
incurred, with no revenues generated during the quarter.
Realized Gains on Securities normally provide additional Other Income as
selected equity investments are sold at gains to enhance their value to the
portfolio. Equity investments in financial institutions historically produce a
very low rate of return that will not cover the cost of funds provided to
purchase them and from time to time certain equities that have market
appreciation are sold to provide gains. However, during recent periods stocks of
financial service providers have fallen out of favor in the market for a number
of illogical reasons. The Corporation, therefore, felt it would be imprudent to
sell these investments at this time due to current market conditions.
13
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Continued)
TABLE VI- COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Three-Month Periods Ended
Other Operating Expense March 31, March 31, December 31,
(In thousands) 2000 1999 1999
--------- --------- ------------
<S> <C> <C> <C>
Salaries and Wages $ 1,829 $ 1,561 $ 1,911
Pensions and Other Employee Benefits 487 471 480
Occupancy Expense, Net 253 233 217
Furniture and Equipment Expense 253 209 294
Expenses Related to Credit Card Operation 191 576 559
Pennsylvania Shares Tax 181 181 181
Other Operating Expense 1,015 1,022 872
- ---------------------------------------------------------------------------------------------------
Total Other Expense $ 4,209 $ 4,253 $ 4,514
===================================================================================================
</TABLE>
Salaries and Wages increased 17.2 percent or $268,000 during the three-month
period ended March 31, 2000 when compared to the three-month period ended March
31, 1999. The increase is the result of annual merit raises of approximately 4.5
percent and the addition of 9 full time equivalent employees between the
comparable periods. The additional employees were needed to staff the internet
banking product, the Trust and Financial Services Division and the growing MIS
department. The number of full time equivalent employees employed during the 1st
quarter of 1999 was 209. Salaries and wages for the 4th quarter of 1999 amounted
to $1,911,000, slightly higher than the current quarter because of year-end
retirements.
Pensions and Other Employee Benefits consists primarily of social security
taxes, group life and health insurance, contributions to the 401 (k) plan and
pension expense. The cost of Pensions and Other Employee Benefits did not change
significantly when comparing the respective three-month periods ended March 31,
2000, March 31, 1999 and December 31, 1999. Totals for those periods
respectively, were $487,000, $471,000 and $480,000.
Occupancy Expense, consisting of insurance, maintenance, real estate taxes,
depreciation and other utilities, increased 8.6 percent or $20,000 when
comparing the three-month periods ended March 31, 2000 and March 31, 1999. The
increase was due to maintenance costs and the purchase of an additional facility
in Wellsboro Pa. The new facility will be used to house the credit card
operation. When compared to the 4th quarter of 1999 occupancy costs were up
$37,000, again the result of maintenance costs.
Furniture and Equipment Expense increased $44,000 or 21.0 percent when comparing
the three-month periods ended March 31, 2000 and March 31, 1999. The increase is
due to the internet banking system and the associated hardware and software
costs and depreciation. To support the system thin clients (personal computers
without memory) had to be installed in all branch locations. Servers (memory and
operating systems) had to be installed in the operations centers to run the thin
clients. Total Furniture and Fixtures costs for the 4th quarter of 1999 amounted
to $294,000, an increase of $41,000 over the current quarter. The increase in
the 4th quarter was related to software and hardware replacement related to Y2K.
Credit card expense for the respective periods ended March 31, 2000, March 31,
1999 and December 31, 1999 amounted to $191,000, $576,000 and $559,000. The
significant decrease during the 1st quarter of 2000 is related to the loss of
two large agent banks and merchant processing costs.
Pennsylvania Shares Tax did not change significantly between the comparable
periods.
Other Operating Expense did not change significantly between the quarters ended
March 31, 2000 and March 31, 1999. When compared to the 4th quarter of 1999
Other Operating Expense for the 1st quarter of 2000 increased $143,000 or 16.4
percent. The increase was caused in part to a write-down of other real estate
during the current quarter, the cost of schools and educational seminars and
costs related to the startup of Citizens & Northern Financial Services
Corporation.
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)
BALANCE SHEET: THREE-MONTH PERIOD ENDED MARCH 31, 2000/1999 -- THREE-MONTH
PERIOD ENDED DECEMBER 31, 1999
Average total assets of the Corporation were $703,234,000 and $643,726,000,
respectively, for the periods ended March 31, 2000 and March 31, 1999 and
$706,897,000 for the three-month period ended December 31, 1999. The average
asset growth of $59,508,000 which occurred between March 31, 1999 and March 31,
2000 was primarily from increases in deposits and borrowing.
The increase in available funds was used to increase the investment portfolio,
specifically U. S. Agency securities of the Federal Home Loan Mortgage
Corporation and the Federal Home Loan Bank. A portion of the available funds was
used to fund average loan growth of approximately $9,908,000. The increase in
loans was mainly real estate secured commercial loans. Municipal loans also
increased significantly with the financing of elderly housing projects in the
Corporation's market area.
Average Interest-bearing Due from Banks increased approximately $1,800,000. This
increase occurred as balances held by Citizens & Northern Investment Corporation
were transferred from a money market account held at the Bank to a money market
account maintained by a fiduciary in Delaware.
The average outstanding balance in Bank Premises and Equipment also increased
nearly 10 percent. This increase can be attributed to the purchase of a building
located in Wellsboro, Pa. to house the credit card operation, a lot for the new
Muncy branch, an additional lot in Athens, Pa. and the purchase of new
profitability analysis software.
The Corporation also created a new Pennsylvania subsidiary under Citizens &
Northern Bank. The new subsidiary has been licensed to sell a variety of
insurance products in our market area. The subsidiary is headed by a newly hired
insurance professional and several Bank officers are in the process of obtaining
the required licenses to sell insurance products.
The increase in short-term interest rates caused by the Federal Reserve
Open-Market Committee has caused a decline in the market value of the investment
portfolio. Average portfolio depreciation for the quarter ended March 31, 2000
was ($12,858,000). The average appreciation for the quarter ended March 31, 1999
was $17,307,000. It should be emphasized that the decline is unrealized and does
not affect earnings unless the underlying investments are sold. The rate of
return is still adequate to support the underlying liabilities. It is hoped that
short-term rates will peak in the second quarter of this year.
On the liability side of the balance sheet the growth of average
interest-bearing deposits amounted to $24,533,000 between March 31, 1999 and
March 31, 2000. Categories that posted the largest increases were Money Market
accounts and Certificates of Deposit. The reason for the increase was an
aggressive advertising campaign and a very competitive rate structure. The
Corporation also offered a new product to the municipal depositors, including
school districts in the market area. The product carries a slightly higher rate
and was designed to keep municipal deposits in their respective communities.
Merger activity and the sale of several competing branches also enhanced deposit
growth.
Average borrowed funds increased just over $49,000,000 as a result of leveraging
opportunities that were available late in the 1st quarter and the 2nd quarter of
1999. The spread afforded by the leveraged products at inception was about 180
basis points. Rising short-term rates has caused the spread on those instruments
to decline to about 85 basis points.
Management expects that 2000 will bring continued competition for deposits from
credit unions, brokerage houses and other nonbank competitors and it will
continue to look for innovative deposit products to hold current customers and
attract new business.
15
<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 permits the Corporation to pay creditors, compensate
for unforeseen deposit fluctuations and fund unexpected loan demand.
The major source of funding for loans and investing activities has been deposit
growth, Federal Home Loan Bank advances, repayment of loans and cash flows
generated from the investment portfolio. Excess funds from deposit growth are
used primarily for fund loan growth. When deposit growth exceeds loan demand the
excess is invested in securities or to repay Federal Home Loan Bank advances
when due.
The Corporation's liquidity position can be easily analyzed by reviewing the
cash flow statement presented in this report. 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.
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 March 31,
2000, March 31, 1999 and December 31, 1999 were 23.66 percent, 24.56 percent and
23.60 percent, respectively.
The primary source of capital growth for the Corporation is earnings. Capital
growth for the three-month periods ended March 31, 2000 and March 31, 1999 on an
annualized basis was 8.6 percent and 7.9 percent, respectively; capital growth
for the year ended December 31, 1999 was 8.7 percent. Dividend payments as a
percentage of net income amounted to 58.5 percent for the three months ended
March 31, 2000 and 44.1 percent for the same period in 1999. The dividend as a
percentage of net income for the 4th quarter of 1999 was 40.7 percent.
Total capital of the Corporation (excluding unrealized gains or losses on
available-for-sale securities) at March 31, 2000, March 31, 1999 and
December 31, 1999 was $86,544,000, $80,201,000 and $85,507,000, respectively.
The leverage ratio (capital divided by total liabilities), excluding unrealized
gains on available-for-sale securities, at March 31, 2000, March 31,1999 and
December 31, 1999, was 13.8 percent, 13.9 percent and 13.6 percent,
respectively.
Planned capital expenditures during the next 12 months are not expected to
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, also has an impact on the cost of goods,
such as supplies, services and labor. Inflation, with the exception of energy
products, does not appear to be a problem in the near-term and should not impact
the results of operations for the balance of 2000.
16
<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 Management
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.
Projecting earnings out one year through March 31, 2001 assuming a 200 basis
point rate shock produces a decline in net interest income of 21.76 percent.
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 parallel 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 Management Committee and
Board of Directors has established a market loss limit of 30 percent at a 200
basis point rate shock. At March 31, 2000 the estimated loss of market value
amounted to $31,818 or 36.77 percent. The Board of Directors is aware of and
continually monitors the results of the rate shock, but does not feel that it
would be appropriate to restructure the portfolio at this time even though the
results are outside of established guidelines.
The model utilized to create Table VII makes estimates, at each level of
interest rate change, regarding cash flows from principal repayments on loans
and mortgage-backed securities and call activity on other investment securities.
Actual results could vary significantly from these estimates which could result
in significant differences in the calculation of projected changes in net
interest margin and market value of portfolio equity. Also, the model does not
make estimates related to changes in the composition of the deposit portfolio
that could occur due to rate competition and the table does not necessarily
reflect changes that management would make to realign the portfolio as a result
of changes in interest rates.
<TABLE>
<CAPTION>
TABLE VI I -EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
NIM = Net Interest Margin
MVPE= Market Value of Portfolio Equity Plus 2% Plus 2 % Minus 2% Minus 2%
Estimated Estimated Estimated Estimated
Year Ended March 31, 2001 (In Thousands) Expected Change in Change in Change in Change in
NIM NIM NIM NIM NIM
$ $ % $ %
-------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME
Investment Securities 25,111 25,901 3.15 22,200 (11.59)
Interest-bearing Due From Banks 516 680 31.78 340 (34.11)
Loan Income 28,079 29,275 4.26 24,849 (11.50)
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 53,706 55,856 4.00 47,389 (11.76)
====================================================================================================================
INTEREST EXPENSE
Now Accounts and Regular Savings 2,417 3,227 33.51 1,734 (28.26)
Money Market Accounts 8,195 11,088 35.30 3,962 (51.65)
All Other Deposits 12,482 14,419 15.52 9,693 (22.34)
- --------------------------------------------------------------------------------------------------------------------
Total Deposits 23,094 28,734 24.42 15,389 (33.36)
Borrowed Funds 7,433 8,986 20.89 5,338 (28.19)
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 30,527 37,720 23.56 20,727 (32.10)
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 23,179 18,136 -21.76 26,662 15.03
- --------------------------------------------------------------------------------------------------------------------
Market Value of Portfolio Equity at March 31, 2000 64,013 40,694 -36.43 81,523 27.35
====================================================================================================================
</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 securities held as of March 31, 2000 and December 31, 1999 are presented
in Table X.
TABLE X - EQUITY SECURITIES
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % Decline 20 % Decline
In in
(In Thousands) Fair Market Market
Cost Value Value value
---- ----- ------------ ------------
<S> <C> <C> <C> <C>
At March 31, 2000
Banks and Bank Holding Companies $19,017 $23,759 ($2,376) ($4,752)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
- -------------------------------------------------------------------------------------------------------------
Total $26,265 $31,007 ($3,101) ($6,202)
=============================================================================================================
(In Thousands)
At March 31, 1999
Banks and Bank Holding Companies $18,482 $26,221 $(2,622) $(5,244)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
- -------------------------------------------------------------------------------------------------------------
Total $25,730 $33,469 $(3,347) $(6,694)
=============================================================================================================
</TABLE>
18
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part II - Other Information
Item 1. Legal Proceedings
There are currently no pending lawsuits against Citizens &
Northern Corporation.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Events
a. None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits
27. Financial Data Schedule
b. On January 13, 2000 a Current Report on Form 8 - K was filed
to report the filing of a 10-QA for the nine-month period
ended September 30, 1999.
19
<PAGE>
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Signature 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
MAY 11, 2000 By: /s/ CRAIG G. LITCHFIELD
- ------------ -------------------------------------------
Date President and Chief Executive Officer
MAY 11, 2000 By: /s/ JAMES W. SEIPLER
- ----------- -------------------------------------------
Date Executive Vice President and Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 11,295
<INT-BEARING-DEPOSITS> 2,409
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 361,083
<INVESTMENTS-CARRYING> 1,963
<INVESTMENTS-MARKET> 0
<LOANS> 312,037
<ALLOWANCE> 5,146
<TOTAL-ASSETS> 704,956
<DEPOSITS> 496,888
<SHORT-TERM> 99,124
<LIABILITIES-OTHER> 5,279
<LONG-TERM> 25,620
0
0
<COMMON> 5,325
<OTHER-SE> 72,720
<TOTAL-LIABILITIES-AND-EQUITY> 704,956
<INTEREST-LOAN> 6,671
<INTEREST-INVEST> 6,155
<INTEREST-OTHER> 31
<INTEREST-TOTAL> 12,857
<INTEREST-DEPOSIT> 5,413
<INTEREST-EXPENSE> 7,145
<INTEREST-INCOME-NET> 5,712
<LOAN-LOSSES> 226
<SECURITIES-GAINS> 15
<EXPENSE-OTHER> 4,209
<INCOME-PRETAX> 2,650
<INCOME-PRE-EXTRAORDINARY> 2,650
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,149
<EPS-BASIC> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.50
<LOANS-NON> 1,824
<LOANS-PAST> 1,018
<LOANS-TROUBLED> 141
<LOANS-PROBLEM> 1,824
<ALLOWANCE-OPEN> 5,131
<CHARGE-OFFS> 224
<RECOVERIES> 13
<ALLOWANCE-CLOSE> 5,146
<ALLOWANCE-DOMESTIC> 3,408
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,738
</TABLE>
