<PAGE>
AMENDMENT
FORM 10-QA
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 as Amended
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
January 21, 2000 were 5,205,267
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
<TABLE>
<S> <C>
Part I. Financial Information - Amended
Item 1. Financial Statements - Amended
Consolidated Statement of Condition - September 30, 1999 - Amended and
December 31, 1998 Page 3
Consolidated Statement of Income - Three Months and Fiscal Year to date Ended
September 30, 1999 - Amended and September 30, 1998 Page 4
Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 1999-Amended and September 30, 1998 Page 5
Notes to Consolidated Financial Statements-Amended Page 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Amended Pages 7 through 15
Item 3. Information About Market Risk-Amended Pages 16 through 18
Item 4. Year 2000 Compliance - Omitted
Part II. Other Information Page 19
Item 1. Legal Proceedings - Omitted
Items 2 and 3 have been omitted as they are not applicable Page 19
to registrant
Item 6. Exhibits and Reports on Form 8-K Page 19
Signatures Page 20
</TABLE>
2
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - QA
Amended
Part I. Financial Information - Amended
Item 1. Financial Statements - Amended
CONSOLIDATED BALANCE SHEET (Amended)
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Unaudited Audited
(In Thousands) September 30, December 31,
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 62,464 57,477
-------------------------------
Total 85,091 80,096
Accumulated Other Comprehensive Income, Net (2,075) 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 - 10QA
Amended
Part I. Financial Information (continued)
Item 1. Financial Statements (continued)
CONSOLIDATED STATEMENT OF INCOME (Amended)
(In Thousands Except Per Share Data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Fiscal Year To Date
September 30, September 30,
1999 1998 1999 1998
INTEREST INCOME (Prior (Prior
(Current) Year) (Current) Year)
<S> <C> <C> <C> <C>
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) 789 235 1,847 2,849
--------------------------------------------------------
Total Other Income 2,446 1,852 6,693 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 3,878 3,299 10,882 11,529
Income Tax Provision 954 785 2,494 2,872
--------------------------------------------------------
NET INCOME $2,924 $2,514 $8,388 $8,657
========================================================
PER SHARE DATA:
Net Income - Basic $0.57 $0.49 $1.63 $1.68
Net Income - Diluted $0.57 $0.49 $1.63 $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 $2,924 $2,514 $8,388 $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 (789) (235) (1,847) (2,849)
--------------------------------------------------------
Other comprehensive income (loss) before income tax (7,615) (2,802) (21,208) (1,611)
Income tax related to other comprehensive income 2,589 953 7,211 548
--------------------------------------------------------
Other comprehensive income (loss) (5,026) (1,849) (13,997) (1,063)
--------------------------------------------------------
Comprehensive Income (Loss) ($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-QA
Amended
Part I - Financial Information (continued) - Amended
Item 1. Financial statements (continued) - Amended
CONSOLIDATED STATEMENT OF CASH FLOWS (Amended) Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, 1999 Sept. 30, 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income $8,388 $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 (1,847) (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 Accrued Interest Payable and
Other Liabilities 7,773 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) Decrease 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-QA
Amended
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
cash flows for the interim periods. The unaudited consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions of Form
10-Q and Rule 10-10 of Regulation S-X. These interim consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes contained in the Corporation's 1998 Annual Report
on Form 10-K.
Results reported for the three and nine-month period ended September 30, 1999
are being amended to reflect adjustments discovered during the fourth quarter
of 1999 during the annual audit by our independent accounting firm.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
6
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Amended
CHANGES REQUIRING AMENDMENT
During the annual audit of the Corporation's financial statements our
independent accounting firm made us aware of the need to restate earnings for
the third quarter of 1999. The Corporation held an investment in stock of a
company that was party to a merger in August 1999. Prior to the merger, the
Corporation had recorded the excess of the market value of the stock over the
original cost basis (net of tax) as "Accumulated Other Comprehensive Income."
Accordingly, the excess of market value over cost was reflected in the financial
statements as an increase in stockholders' equity, but not recorded as income.
After the merger, we continued to carry the difference between our original cost
and the market value of the acquiring company's stock as "Accumulated Other
Comprehensive Income", with fluctuations in market value (net of tax) recorded
as an adjustment to stockholders' equity. However, based on Emerging Issues Task
Force Bulletin 91-5, "Nonmonetary Exchange of Cost Method Investments", we are
required to recognize a realized gain for the difference between our original
cost basis in the acquired company's stock and the market value of the acquiring
company's stock that we received. The resulting increase in income for the three
and nine-month period ended September 30, 1999 was $421,000 (net of tax). Net
income for the nine-month period ended September 30, 1999 was originally
reported as $7,967,000. The corrected net income for the nine-month period is
$8,388,000. Income originally reported for the three-month period ended
September 30, 1999 was $2,503,000 and the corrected net income for the
three-month period is $2,924,000. This adjustment has no net effect on
stockholders' equity.
The gain was recognized for book purposes only and has no immediate effect on
federal income taxes. Taxes are deferred for federal income tax purposes until
the stock is sold.
EARNINGS OVERVIEW
Net income after tax amounted to $8,388,000 for the nine-month period ended
September 30, 1999 and $2,924,000 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 $7,594,000
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.
7
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (continued)
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
$284,325,000 or an increase of 4.6 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 $285,276,000.
The growth in average deposits was also used to fund an increase in the average
balance of the investment portfolio from $298,370,000 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.
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-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (continued)
Table I - Analysis of Average Daily Balances and Rates
(In Thousands)
<TABLE>
<CAPTION>
Rate of Rate of Rate of
Return/ Return/ Return/
Cost of Cost of Cost of
Funds Funds Funds
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS 09/30/99 % 12/31/98 % 09/30/98 %
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-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (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 930 (63) 867
Corporations
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-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (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 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 Internal
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 0.05 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.
CITIZENS & NORTHERN CORPORATION - FORM 10-QA
11
<PAGE>
Amended
Part I -Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (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
<TABLE>
<CAPTION>
5 YEAR HISTORY OF LOAN LOSSES Projected
(In Thousands) 1999 1998 1997 1996 1995 1994 AVERAGE
<S> <C> <C> <C> <C> <C> <C> <C>
Gross 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 5,120 4,820 4,912 4,776 4,579 4,229 4,739
Balance
Provision for Loan Losses Charged 700 763 797 701 737 737 739
to Earnings
Earnings 10,500 11,077 10,107 9,255 7,866 7,494 9,383
Earnings Coverage of Net Charge 25.3 x 12.9 x 26.2 x 18.4 x 20.3 X 23.0 x 21 x
offs
Allowance Coverage of Net Charge 12.8 x 5.6 x 12.7 x 9.5 x 11.8 X 13.0 x 11 x
offs
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 57.1% 112.2% % 48.4 % 71.9 % 52.5 % 44.2 % 64.5 %
the Provision
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 % 1.68 %
Peer Group (2) 1.55% 1.59% % 1.43 % 1.50 % 1.61 % 1.65 % 1.56 %
</TABLE>
* Gross Loans less Unearned
Discount
(1) Projected December 31, 1999
(2) At June 30, 1999
TABLE - V
Reserve Allocation-Historical (In Thousands)
<TABLE>
<CAPTION>
Est.
LOAN CLASSIFICATION 1999 1998 1997 1996 1995 1994 Average
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, Agriculture, 33,165 34,255 25,751 30,054 26,481 22,794 28,750 0.00408 X 33,165 = 235
Municipal & Other
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 378,300 344,334 342,019 328,492 309,331 306,502 332,914 5,120
Reserve Balance
==================================================================================================================================
</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-QA Amended
Part I -Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (continued)
TABLE - VII COMPARISON OF NONINTEREST INCOME
(In Thousands)
<TABLE>
<CAPTION>
Nine-Month Periods Ended September 30,
$ %
1999 1998 Change Change
<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 1,847 2,849 (1,002) (35.17)
- --------------------------------------------------------------------------------------------------------------------
Total Other Income $6,693 $7,394 ($701) (9.48)
====================================================================================================================
</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 Accounts 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 this Transaction, realized gains would have increased $713,000 over
last year.
The Corporation held stock in First Western Bancorp that was party to a merger
with Sky Financial Group effective August 1, 1999. Accordingly, the Corporation
must realize a gain on the difference between the original cost basis of First
Western Bancorp and the market value of the new shares of Sky Financial Group as
of the date of the announced merger.
The recognition of this gain is based on the Emerging Issues Task Force Bulletin
91-5. On the filing date of the original 10-Q the Corporation had erroneously
overlooked the effects of EITF Bulletin 91-5 and was not made aware of the error
until January 10, 2000. The net after tax gain amounted to $421,000.
Accordingly, results for the Three-month and nine-month periods ended September
30, 1999 as originally reported were understated by $421,000.
TABLE VIII - COMPARISON OF NONINTEREST EXPENSE
(In Thousands)
<TABLE>
<CAPTION>
Nine-Month Periods Ended September 30,
$ %
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.
13
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (continued)
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.
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.
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 ($2,075,000), net of tax, and at December
31, 1998 the net of tax amount was $11,922,000.
14
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10-QA Amended
Part I - Financial Information Amended - (continued)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Amended - (continued)
The Retained Earnings and Accumulated Other Comprehensive Income were originally
reported as $62,043,000 and ($1,654,000), respectively. After the application of
EITF 91-5 the restated Retained Earnings and Accumulated Other Comprehensive
Income were $62,464,000 and ($2,075,000), respectively.
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 Accumulated Comprehensive
Income) at September 30, 1999, September 30, 1998 and December 31, 1998 was
$83,227,000, restated, $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 - QA
Amended
Part I - Financial Information Amended - (continued)
Item 3. Interest Rate Risk and Market Risk Amended
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 and 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 - QA Amended
Part I - Financial Information Amended - (continued)
Item 3. Interest Rate Risk and Market Risk Amended - (continued)
<TABLE>
<CAPTION>
Period Ended September 30, 2000
TABLE IX -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%
(In Thousands) Estimated Estimated Estimated Estimated
Change in Change in Change in Change in
Expected
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
(In Thousands)
<TABLE>
<CAPTION>
Plus 2% Plus 2 % Minus 2% Minus 2%
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 - QA Amended
Part I - Financial Information Amended - (continued)
Item 3. Interest Rate Risk and Market Risk Amended - (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
Amended
<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 September 30, 1999
Banks and Bank Holding Companies 18,501 29,304 (2,930) (5,861)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
- -----------------------------------------------------------------------------------------------------------------------------
Total 25,749 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>
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
19
<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
JANUARY 21, 2000 By:
- ---------------- -------------------------------------------------
Date Craig G. Litchfield, Chairman, President and CEO
JANUARY 21, 2000 By:
- ---------------- -------------------------------------------------------
Date James W. Seipler, Executive Vice President and Treasurer
20
