SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Six -month period ended June 30, 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 August 10, 2000
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 2000 and
December 31, 1999 Page3
Consolidated Statement of Income - Three Months and
Six Months Ended June 30, 2000 and June 30, 1999 Page 4
Consolidated Statement of Cash Flows - Six Months Ended
June 30, 2000 and June 30, 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 Pages 20 And 21
Signatures Page 22
2
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS (unaudited) (Note)
Cash & Due From Banks $ 12,134 $ 15,337
Interest Bearing Deposits 2,326 2,726
Available-for-Sale Securities:
U.S. Treasury Securities 2,492 2,498
Securities of Other U.S. Government Agencies 122,431 116,691
Mortgage Backed Securities 94,948 107,816
Obligations of States and Municipal Subdivisions 78,854 76,748
Other Securities 49,663 55,176
------------------------
Total Available-for-Sale Securities 348,388 358,929
Held-to-Maturity Securities:
U.S. Treasury Securities 612 617
Securities of Other U.S. Government Agencies 1,046 949
Mortgage Backed Securities 283 314
------------------------
Total Held-to-Maturity Securities 1,941 1,880
Loans:
Loans to Political Subdivisions 11,962 12,466
Other Loans 307,280 298,455
-----------------------
Total Loans 319,242 310,921
Less - Allowance for Possible Loan Losses (5,232) (5,131)
Unearned Income (18) (29)
------------------------
Loans, Net 313,992 305,761
Bank Premises and Equipment 8,485 7,992
Other Real Estate 219 310
Accrued Interest on Bonds and Loans 4,957 5,066
Other Assets 7,820 7,897
------------------------
TOTAL ASSETS $ 700,262 $ 705,898
========================
LIABILITIES
Deposits:
Demand $ 64,698 $ 67,200
Interest Checking 36,085 39,077
Money Market 132,650 126,994
Savings 46,506 45,420
Other Time 219,012 221,783
------------------------
Total Deposits 498,951 500,474
Dividends Payable 1,249 1,237
Short - Term Borrowings 91,780 89,036
Long - Term Borrowings 25,615 35,025
Other Liabilities 5,195 3,503
-----------------------
TOTAL LIABILITIES 622,790 629,275
-----------------------
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 18,741 17,355
Retained Earnings 64,748 62,886
-----------------------
Total 88,814 86,950
------------------------
Accumulated Other Comprehensive Loss (9,902) (8,884)
Less: Treasury Stock at Cost
119,470 shares at June 30, 2000 (1,440)
118,510 shares at December 31,1999 (1,443)
---------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,472 76,623
------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY
$ 700,262 $ 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>
Three Months Ended Year to Date
June 30, June 30, Six Months Ended June 30,
2000 1999 2000 1999
(Current) (Prior Year) (Current) (Prior Year)
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Interest and Fees on Loans $ 6,686 $ 6,365 $ 13,194 $ 12,678
Interest on Balances with Depository Institutions 31 9 56 14
Interest on Loans to Political Subdivisions 156 103 319 220
Interest on Federal Funds Sold 7 32 13 37
Income from Available-for-Sale and Held-to-Maturity Securities:
Taxable 4,609 3,910 9,288 7,404
Tax Exempt 1,117 1,147 2,231 2,261
Dividends 343 285 705 552
-----------------------------------------------------
Total Interest and Dividend Income 12,949 11,851 25,806 23,166
INTEREST EXPENSE
Interest on Deposits 5,668 4,610 11,081 9,139
Interest on Short-Term Borrowings 1,410 502 2,470 581
Interest on Long-Term Borrowings 318 796 990 1,585
----------------------------------------------------
Total Interest Expense 7,396 5,908 14,541 11,305
----------------------------------------------------
Interest Margin 5,553 5,943 11,265 11,861
Provision for Loan Losses 150 225 376 450
-----------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 5,403 5,718 10,889 11,411
OTHER INCOME
Service Charges on Deposit Accounts 287 280 555 550
Service Charges and Fees 68 68 119 137
Trust Department Income 424 401 825 771
Insurance Commissions, Fees and Premiums 94 113 174 246
Fees Related to Credit Card Operation 149 760 614 1,425
Other Operating Income 28 32 121 60
----------------------------------------------------
Total Other Income Before Realized Gains on Securities, Net 1,050 1,654 2,408 3,189
Realized Gains on Securities, (Net) 322 568 337 1,058
-----------------------------------------------------
Total Other Income 1,372 2,222 2,745 4,247
OTHER EXPENSES
Salaries and Wages 1,848 1,706 3,677 3,267
Pensions and Other Employee Benefits 449 437 936 908
Occupancy Expense, Net 206 221 459 454
Furniture and Equipment Expense 304 259 557 468
Expenses Related to Credit Card Operation 93 720 284 1,296
Pennsylvania Shares Tax 199 181 380 362
Other Operating Expense 1,017 877 2,032 1,899
----------------------------------------------------
Total Other Expenses 4,116 4,401 8,325 8,654
----------------------------------------------------
Income Before Income Tax Provision 2,659 3,539 5,309 7,004
Income Tax Provision 446 751 947 1,540
----------------------------------------------------
NET INCOME $ 2,213 $ 2,788 $ 4,362 $ 5,464
====================================================
PER SHARE DATA:
Net Income - Basic $ 0.43 $ 0.54 $ 0.84 $ 1.05
Net Income - Diluted $ 0.43 $ 0.53 $ 0.84 $ 1.05
----------------------------------------------------
Dividend Per Share $ 0.24 $ 0.22 $ 0.48 $ 0.44
----------------------------------------------------
Number Shares Used in Computation - Basic 5,205,492 5,205,167 5,205,403 5 ,205,044
Number Shares Used in Computation - Diluted 5,206,822 5,211,222 5,207,130 5,211,580
Number Shares Issued 5,324,962 5,272,239 5,324,962 5,272,239
Number Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000
-----------------------------------------------------
Dividends Actually Paid $ 0.24 $ 0.22 $ 0.48 $ 0.44
----------------------------------------------------
</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
(In Thousands) Six-Month periods Ended
(unaudited) June 30, June 30,
2000 1991
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 4,362 $ 5,464
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 376 450
Realized Gain on Securities, Net (337) (1,058)
Realized (Gain) Loss on the Sale of Foreclosed Assets (51) 18
Provision for Depreciation 537 450
Accretion and Amortization (1,205) (798)
Deferred Income Tax (59) (75)
Decrease (Increase) in Accrued Interest
Receivable and Other Assets 770 (2,249)
Increase in Accrued Interest Payable and
Other Liabilities 1,703 3,924
--------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,096 6,126
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 32 312
Purchase of Held-to-Maturity Securities (96) (354)
Proceeds from Sales of Available-for-Sale Securities 13,413 10,934
Proceeds from Maturities of Available-for-Sale Securities 6,598 26,946
Purchase of Available-for-Sale Securities (9,467) (77,922)
Net Increase in Loans (8,926) (11,974)
Purchase of Premises and Equipment (1,030) (1,022)
Proceeds from the Sale of Foreclosed Assets 461 100
--------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 985 (52,980)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase (Decrease) in Deposits (1,523) 5,270
Increase in Short-Term Borrowings 2,744 41,492
Repayments of Long-Term Borrowings (9,410) (10)
Proceeds from the Sale of Treasury Stock 5 14
Dividends Declared (2,500) (2,268)
--------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (10,684) 44,498
DECREASE IN CASH AND CASH EQUIVALENTS (3,603) (2,356)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,063 16,128
---------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,460 $13,772
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $ 12,051 $ 9,405
================================================================================
Income Taxes Paid $ 842 $ 1,338
================================================================================
</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 six-month period ended June 30, 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 reflects 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
Average Earnings
Net Common Per
Income Shares Share
<S> <C> <C> <C>
Six-Month Period Ended June 30, 2000
Earnings per share - basic $4,362,000 5,205,403 $ 0.84
Dilutive effect of stock options 1,727
--------------------------------------------------------------------------------
Earnings per share - diluted $4,362,000 5,207,130 $ 0.84
================================================================================
Six-Month Period Ended June 30, 1999
Earnings per share - basic $5,964,000 5,205,044 $ 1.05
Dilutive effect of stock options 6,536
--------------------------------------------------------------------------------
Earnings per share - diluted $5,464,000 5,211,580 $ 1.05
================================================================================
Quarter Ended June 30, 2000
Earnings per share - basic $2,213,000 5,205,492 $ 0.43
Dilutive effect of stock options 1,330
--------------------------------------------------------------------------------
Earnings per share - diluted $2,213,00 5,206,822 $ 0.43
================================================================================
Quarter Ended June 30, 1999
Earnings per share - basic $2,788,000 5,205,167 $ 0.54
Dilutive effect of stock options 6,055
-------------------------------------------------------------------------------
Earnings per share - diluted $2,788,000 5,211,222 $ 0.53
================================================================================
</TABLE>
6
<PAGE>
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:
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Year to Date
June 30, June 30, Six Months Ended June 30,
2000 1999 2000 1999
----------- ------------ ----------- ------------
(Current) (Prior Year) (Current) (Prior Year)
<S> <C> <C> <C> <C>
Net Income $ 2,213 2,788 $ 4,362 $ 5,464
Other Comprehensive Income (Loss):
Unrealized holding losses on available-for-sale
securities
Losses arising during the period (583) (8,608) (1,207) (12,534)
Reclassification adjustment (322) (568) (337) (1,058)
--------------------------------------------------
Other comprehensive loss before income tax (905) (9,176) (1,544) (13,592)
Income tax related to other comprehensive loss 308 3,120 526 4,621
--------------------------------------------------
Other comprehensive (loss) (597) (6,056) (1,018) (8,971)
--------------------------------------------------
Comprehensive Income (Loss) $ 1,616 ($ 3,268) $ 3,344 ($ 3,507)
==================================================
</TABLE>
4. PENDING MERGER
On June 22, 2000, Citizens & Northern Corporation and Peoples LTD., the holding
company of Peoples State Bank of Wyalusing, jointly announced that a definitive
merger agreement was entered into between the two companies. Approximately
990,640 shares, a 2.5 for 1 ratio, of Citizens & Northern common stock will be
issued in exchange for the outstanding shares of Peoples LTD. The transaction
will be accounted for as a pooling-of-interests and is expected to be a tax-free
exchange for Peoples LTD shareholders. The transaction is subject to various
bank regulatory approvals, registration with the Securities and Exchange
Commission of the Corporation's common stock to be used in the exchange and the
approval of Peoples LTD shareholders.
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
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 effect 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 six-month period ended June 30, 2000 amounted to
$4,362,000 or $.84 per share (on a basic and diluted basis). This compares to
$5,464,000 or $1.05 per share (on a basic and diluted basis) for the same
six-month period in 1999.
Earnings, excluding investment security gains, net of tax for the six-month
periods ended June 30, 2000, and June 30, 1999, per common share (basic and
diluted) would have amounted to $.80, and $.92, respectively.
Results for the first six months of 2000 were slightly less than budgeted
expectations. In addition to lower realized gains on securities, the net
interest margin narrowed because of increases in short-term interest rates.
During 1999 and the first six months of 2000 the Federal Reserve Open Market
Committee raised the overnight Federal funds rate 6 times or 175 basis points
(1.75 percent). These increases have negatively impacted earnings. Annual
earnings for 2000, assuming no additional rate increases by the Federal Open
Market Committee, will probably provide a return on average assets of between
1.15 and 1.20 percent. It should be emphasized that although earnings
expectations for the balance of 2000 will be somewhat lower than past periods,
they will still be substantial and are being compared to prior periods that were
exceptional under a much different interest rate environment.
NET INTEREST MARGIN
Net interest margin or net interest income is the dollar amount of difference
between all interest income earned and interest expense incurred. 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.
SIX-MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999.
Net interest income for the six-month period ended June 30, 2000 decreased
$596,000 or 5.0 percent when compared to the related period in 1999.
Respectively, gross interest income for the six-month periods ended June 30,
2000 and June 30, 1999 amounted to $25,806,000 and $23,166,000. Gross interest
expense for the same respective periods amounted to $14,541,000 and $11,305,000.
The interest rate spread, as presented in Table I for the current six-month
period was 2.37 percent; the interest rate spread for the same period last year
was 3.04 percent.
The cause for the decline in the Net Interest Margin was the abnormal increase
in the cost of funds incurred during the first six months of 2000, especially
during the second quarter of the year. The Corporation has historically been
liability sensitive to changes in interest rates, (i.e. the rates paid on
interest-bearing liabilities rise faster than the income earned and rates
associated with interest-bearing assets). The Corporation maintains some
variable rate loans that will reprice more quickly, but most of the
Corporation's asset base is fixed-rate and does not reprice quickly.
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)
Average assets increased appreciably between the comparable periods. Average
assets for the current six-month period were $704,082,000 and $658,184,000 for
the six-month period ended June 30, 1999. The growth between the periods was due
primarily to increases in average deposits of $20,466,000 and average borrowed
funds of $36,968,000.
The volume of average interest-bearing assets increased from $623,460,000 for
the six-month period ended June 30, 1999 to $690,627,000 for the six months
ended June 30, 2000, an increase of 10.8 percent. Average interest-bearing
liabilities amounted to $512,152,000 for the six months ended June 30, 1999 and
$568,747,000 for the current six-month period, an increase of 11.1 percent.
The increase in interest-bearing liabilities was used to fund increases in the
investment and loan portfolios. The average balance of the investment portfolio
increased from $325,054,000 for the six-month period June 30, 1999 to
$372,615,000 for the current six-month period, an increase of 14.6 percent. The
average balance of the loan portfolio increased 6.4 percent or $18,920,000
between the comparable six-month periods. The increase in the investment
portfolio was primarily U. S. Government Agency issues. The increase in average
loans was mainly real estate secured; however tax free loans increased slightly
due to the financing of local senior citizens housing projects.
The increase in deposits was primarily the more expensive deposit categories
-Money Market accounts and Certificates of Deposit. Average balances of Money
Market accounts increased $15,941,000 or 12.6 percent and Certificates of
Deposit increased $4,193,000 or 3.0 percent. Other deposit categories did not
change significantly.
The average balance of borrowed funds, which represent borrowings primarily from
the Federal Home Loan Bank and customer repurchase agreements, increased
$36,968,000. The increased borrowings were used to fund an increase in U. S.
Agency investments.
The average rate earned on interest-bearing assets for the six months ended June
30, 2000 was 7.51 percent; this compares to 7.49 percent for the same period in
1999. 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 during
periods of rising interest rates.
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 six months ended June 30, 2000 was 5.14
percent. This compares to an average rate of 4.45 percent for the same period in
1999. The average rate paid on Money Market Accounts during this six-month
period in 2000 was 5.21 percent; during the same period in 1999 the rate paid
was 4.17 percent. The average rate paid on borrowed funds also increased
substantially between the periods being compared. During the current six-month
period the average rate paid was 5.7 percent. This compares to an average rate
of 5.19 percent for the same period in 1999.
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 depends on the
maturity schedule of the investment and loan portfolio.
Management expects a further decline in the net interest spread and net interest
income in the short run until the Federal Reserve Open Market Committee is
satisfied that inflation is no longer a threat and foregoes additional interest
rate hikes.
9
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
TABLE I - ANALYSIS OF AVERAGE BALANCES AND RATES
(In Thousands)
<TABLE>
<CAPTION>
Rate of Rate of Rate of
Six Return/ Return/ Six Return/
Months Cost of Year Cost of Months Cost of
Ended funds Ended funds Ended funds
06/30/00 % 12/31/99 % 06/30/99 %
--------- -------- --------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities $ 2,513 6.32 $ 2,510 5.90 $ 2,510 6,03
Securities of Other U.S. Government Agencies and 132,287 7.07 101,205 6.92 79,677 6.83
Corporations
Mortgage Backed Securities 107,236 6.82 117,902 6.61 122,397 6.55
Obligations of States and Political Subdivisions 81,229 5.52 80,970 5.58 80,155 5.69
Stock 26,096 5.43 22,288 5.42 22,564 4.93
Other Securities 23,254 7.42 20,948 6.47 17,751 6.74
------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 372,615 6.56 345,823 6.37 325,054 6.30
------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 635 5.38 615 5.53 625 5.49
Securities of Other U. S. Government Agencies and 1,036 6.60 895 6.48 698 8.09
Corporations
Mortgage Backed Securities 297 7.45 368 7.34 485 6.24
------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,968 6.34 1,878 6.34 1,808 6.69
------------------------------------------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 2,473 4.55 566 5.30 818 3.20
Federal Funds Sold 441 5.93 866 4.85 1,570 4.75
Loans:
Real Estate Loans 249,646 8.60 240,951 8.56 235,371 8.65
Consumer 27,971 10.94 28,982 10.94 29,431 11.21
Agricultural 1,962 9.63 1,961 9.89 1,965 10.26
Commercial/Industrial 20,528 8.42 19,271 8.25 18,689 8.75
Other 845 7.85 714 7.70 726 7.78
Political Subdivisions 12,001 5.35 9,499 5.70 7,841 5.66
Leases 177 12.50 206 6.31 187 3.24
Total Loans 313,130 8.68 301,584 8.68 294,210 8.84
------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 690,627 7.51 650,717 7.44 623,460 7.49
------------------------------------------------------------------------------------------------------------------------------
Cash 10,335 14,028 13,439
Securities Valuation Reserve (13,472) 7,865 13,388
Allowance for Possible Loan Losses (5,152) (5,083) (4,968)
Other Assets 13,356 5,509 5,197
Bank Premises & Equipment 8,388 7,828 7,668
------------------------------------------------------------------------------------------------------------------------------
Total Assets 704,082 680,864 658,184
==============================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 36,423 2.76 37,248 2.27 36,970 2.15
Money Market 142,416 5.21 131,741 4.34 126,475 4.17
Savings 45,968 2.49 46,643 2.48 46,632 2.48
Certificates of Deposit 143,678 5.45 139,916 5.24 139,485 5.27
Individual Retirement Accounts 77,057 6.27 75,882 5.21 76,446 4.98
Other Time Deposits 1,663 2.90 1,641 2.68 1,570 2.44
Federal Funds Purchased 6,097 6.17 6,085 4.91 4,732 4.73
Other Borrowed Funds 115,445 5.70 97,585 5.35 79,842 5.19
-----------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 568,747 5.14 536,741 4.58 512,152 4.45
Demand Deposits 51,163 50,787 50,324
Other Liabilities 5,411 6,193 6,827
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 625,321 593,721 569,303
Stockholders' Equity 87,439 81,767 81,728
-----------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve (8,678) 5,376 7,153
-----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders'
Equity $704,082 $680,864 $658,184
==============================================================================================================================
Interest Rate Spread 2 37 2 86 3.04
==============================================================================================================================
</TABLE>
10
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
TABLE II - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME
AND INTEREST EXPENSE
<TABLE>
<CAPTION>
Six-month Periods
Ended June 30, 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 $ -- $ 4 $ 4
Securities of Other U.S. Government Agencies and Corporations 1,847 108 1,955
Mortgage Backed Securities (525) 182 (343)
Obligations of States and Political Subdivisions 31 (61) (30)
Stock 92 61 153
Other Securities 198 67 265
----------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 1,643 361 2,004
----------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities -- -- --
Securities of Other U.S. Government Agencies and Corporations 10 (4) 6
Mortgage Backed Securities (8) 4 (4)
----------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 2 -- 2
----------------------------------------------------------------------------------------------
Interest-bearing Due from Banks 36 7 43
Federal Funds Sold (37) 13 (24)
Loans:
Real Estate Loans 610 (35) 575
Consumer (80) (35) (115)
Agricultural -- (6) (6)
Commercial/Industrial 76 (27) 49
Other 5 -- 5
Political Subdivisions 110 (11) 99
Leases -- 8 8
----------------------------------------------------------------------------------------------
Total Loans 721 (106) 615
----------------------------------------------------------------------------------------------
Total Interest Income 2,365 275 2,640
----------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Checking (6) 111 105
Money Market 358 718 1,076
Savings (8) 4 (4)
Certificates of Deposit 111 132 243
Individual Retirement Accounts 15 502 517
Other Time Deposits 1 4 5
Federal Funds Purchased 37 39 76
Other Borrowed Funds 992 226 1,218
----------------------------------------------------------------------------------------------
Total Interest Expense 1,500 1,736 3,236
----------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 865 $(1,461) $ (596)
==============================================================================================
</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.
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)
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 possible 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 and it is 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 loan.
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 $2,275,000 at June 30, 2000. The increase is attributable to an
improvement in the quality of the commercial portion of the portfolio.
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>
Six-months
Ended Years Ended
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 5-Year
-----------------------------------------------------------------------------------------------------------------------
(In Thousands) 2000 1999 1998 1997 1996 1995 Average
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <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 149 81 257 246 157 38 156
Installment Loans 42 138 144 230 240 236 198
Credit Cards and Related Plans 126 192 264 305 201 184 229
Commercial and Other Loans 7 219 301 3 74 116 143
----------------------------------------------------------------------------------------------------------------------
Total Charge-offs 324 630 966 784 672 574 725
Recoveries
Real Estate Loans 4 81 12 21 22 0 27
Installment Loans 10 60 43 64 53 60 56
Credit Card and Related Plans 13 30 40 30 38 41 36
Commercial and Other Loans 22 10 15 9 55 86 35
----------------------------------------------------------------------------------------------------------------------
Total Recoveries 49 181 110 124 168 187 154
Net Charge-offs 275 449 856 660 504 387 571
Additions Charged to Operations 376 760 763 797 701 737 752
----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $5,232 $5,131 $4,820 $4,913 $4,776 $4,579
</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 IV - ALLOWANCE FOR POSSIBLE LOAN LOSSES ALLOCATION
<TABLE>
<CAPTION>
June 30, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec.31,
(In Thousands) 2000 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Mortgage $ 883 $ 834 $ 97 $ 350 $ 58 $ 38
Consumer 345 437 702 375 303 286
Commercial 1,192 2,081 650 625 630 604
Impaired Loans 469 609 290 274 113 228
All Other Commitments 68 150 202 343 369 374
Unallocated 2,275 1,020 2,879 2,946 3,303 3,049
-------------------------------------------------------------------------------------------------------
Total Allowance $5,232 $5,131 $4,820 $4,913 $4,776 $4,579
=======================================================================================================
</TABLE>
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 V - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Six-Month Periods Ended
(IN THOUSANDS) June 30, June 30,
2000 1999
-------- -------
<S> <C> <C>
Service Charges on Deposit Accounts $ 555 $ 550
Service Charges and Fees 119 137
Trust Department Income 825 771
Insurance Commissions, Fees and Premiums 174 246
Fees Related to Credit Card Operation 614 1,425
Other operating income 121 60
----------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized Gains on Securities, Net 2,408 3,189
Realized Gains on Securities, Net 337 1,058
----------------------------------------------------------------------------------------------------
Total Other Income $2,745 $4,247
====================================================================================================
</TABLE>
Other Operating Income Before Realized Gains on Securities decreased 27.8
percent or $888,000 during the six-month period ended June 30, 2000 when
compared to the six-month period ended June 30, 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 sale of the merchant processing program and the loss of
two large agent banks due to mergers. Annual fees for cards were also
discontinued because of increased competition and replaced with other fees such
as over limit fees, cash advance fees, etc.
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 customers of Citizens
& Northern Bank.
Trust Department Income increased 7.0 percent as trust assets continue to post
substantial increases. Trust assets under management at June 30, 2000 and June
30, 1999 amounted to $324,479,000 and $305,442,000, respectively. 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, going forward, is committed to increasing the importance of
Other Income to the profitability of the Company. In January 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 six-month period
ended June 30, 2000 was $31,000, as payroll and some other start-up costs were
incurred, with no revenues generated for that period.
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. Management believes
that future use of this product, including loan generation, deposit
relationships and connections to other businesses in our market area will be
substantial and can be provided at a much lower cost than traditional banking as
more and more consumers become owners of personal computers.
Realized Gains on Securities consists of gross realized gains of $998,000 and
gross realized losses of $661,000. The losses were primarily from the sale of a
FNMA mortgage-backed pool with a cost basis of $7,578,000. This pool was sold to
help fund the repayment of a related borrowing for which the interest spread had
shrunk to an unacceptable level. The recorded gains were generated by the sale
of several equity investments.
Other operating income increased $61,000 over the comparable 1999 period. The
increase was profit received from the sale of Other Real Estate. Normally other
operating income will average $8,000 to $10,000 monthly.
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)
TABLE VI - COMPARISON OF NONINTEREST EXPENSE
Six-Month Periods Ended
<TABLE>
<CAPTION>
June 30, June 30,
(In Thousands) 2000 1999
<S> <C> <C>
Salaries and Wages $ 3,677 $ 3,267
Pensions and Other Employee Benefits 936 908
Occupancy Expense, Net 459 454
Furniture and Equipment Expense 557 468
Expenses Related to Credit Card Operation 284 1,296
Pennsylvania Shares Tax 380 362
Other Operating Expense 2,032 1,899
------------------------------------------------------------------------------
Total Other Expense $ 8,325 $ 8,654
==============================================================================
</TABLE>
Salaries and Wages increased 12.5 percent or $410,000 during the six-month
period ended June 30, 2000 when compared to the six-month period ended June 30,
1999. The increase is the result of annual merit raises of approximately 4.5
percent and the addition of 7 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 at the end of
the second quarter of 1999 was 211 and at the end of the current six-month
period that number was 218.
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 increased
slightly between the comparable periods as a result of benefit payments
associated with the increase in full time equivalent employees.
Occupancy Expense, consisting of insurance, maintenance, real estate taxes,
depreciation and other utilities increased marginally when comparing the
six-month periods ended June 30, 2000 and June 30, 1999. It is expected that
occupancy expenses will rise significantly in the future with the opening of a
new office in Muncy, Pennsylvania and expenses associated with the purchase of
an additional facility in Wellsboro, Pennsylvania to house the credit card
operation.
Furniture and Equipment Expense increased $89,000 or 19.0 percent when comparing
the six-month periods ended June 30, 2000 and June 30, 1999. The increase is due
to the internet banking system and the associated hardware and software costs
and depreciation. To support the internet banking system, "thin clients" (i.e.,
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. Also contributing to the increase was the cost
of furnishing of the new credit card facility.
Credit card expense for the respective periods ended June 30, 2000 and June 30,
1999 amounted to $284,000 and $1,296,000. The significant decrease during the
first six months of 2000 was 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 increased 7.0 percent between the comparable periods.
The increase was caused in part by a write-down of other real estate, the cost
of schools and educational seminars and costs related to the startup of Citizens
& Northern Financial Services Corporation.
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)
BALANCE SHEET: SIX-MONTH PERIOD ENDED JUNE 30, 2000/1999
Average total assets of the Corporation were $704,082,000 and $658,184,000,
respectively, for the six-month periods ended June 30, 2000 and June 30, 1999.
The average asset growth of $45,898,000 which occurred between June 30, 1999 and
June 30, 2000 can be attributed to increases in deposits and borrowing.
The increase in available funds was used to increase the size of 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 $18,920,000. 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.
The average outstanding balance in Bank Premises and Equipment also increased
9.4 percent. This increase can be attributed to the purchase of a building
located in Wellsboro to house the credit card operation, a lot for the new Muncy
branch, an additional lot in Athens, Pennsylvania and the purchase of new
profitability analysis and risk management 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 have obtained 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. As of June 30, 2000, the fair value of available-for sale investment
securities was lower than cost by $15,003,000. As of June 30, 1999, the fair
value of available-for-sale securities was $4,471,000 higher than cost. 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 have
peaked during the current quarter and will begin a gradual decline as inflation
does not seem to be a problem.
On the liability side of the balance sheet, the growth of average
interest-bearing deposits amounted to $19,627,000 between June 30, 1999 and June
30, 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 began offering a new product to the municipal depositors,
including school districts in the market area. The product carries a slightly
higher rate and is designed to keep municipal deposits in their respective
communities. Merger activity and the sale of several competing branches in the
market area served by the Corporation also contributed to deposit growth.
Average borrowed funds increased $36,968,000 as a result of leveraging
opportunities that were available late in the 1st quarter and the 2nd quarter of
1999 and again in the 1st quarter of 2000. The spread afforded by the leveraged
products at inception was about 180 basis points. However, the rising cost of
short-term funding has caused the spread to narrow significantly.
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.
16
<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 sources of funding for loans and investing activities have been
deposit growth, Federal Home Loan Bank advances and repayment of loans and cash
flows generated from the investment portfolio. Excess funds from deposit growth
are used primarily for loan growth. When deposit growth exceeds loan demand the
excess is invested in securities or used 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. The following table presents
capital ratios for the six-month periods being presented and minimum and "well
capitalized" regulatory standards.
Table VII - Capital Ratios
(In thousands)
<TABLE>
<CAPTION>
Citizens & Northern Corporation Regulatory Standards
June 30, June 30, Well minimum
2000 1999 Capitalized Standard
----------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C>
Tier 1 Leverage Ratio 11.06% 12.35% 5.00% 4.00%
Tier 1 Risk-Based Capital Ratio 20.00% 21.57% 6.00% 4.00%
Total Risk-Based Capital Ratio 21.71% 24.33% 10.00% 8.00%
</TABLE>
The primary source of capital growth for the Corporation is earnings. Capital
growth (excluding unrealized gains or losses on available-for-sale securities)
for the six-month periods ended June 30, 2000 and June 30, 1999 amounted to
$1,868,000 and $3,210,000, respectively. Dividend payments as a percentage of
net income amounted to 57.3 percent for the six months ended June 30, 2000 and
41.5 percent for the same period in 1999.
Total capital of the Corporation (excluding unrealized gains or losses on
available-for-sale securities) at June 30, 2000 and June 30, 1999 was
$87,375,000 and $81,855,000, 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 is not expected
to impact the Corporations results of operations for the balance of 2000.
17
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 3. Interest Rate Risk and Market Risk
MARKET RISK
The Corporation's two major categories of market risk are interest rate risk and
risks related to investments in equity securities.
INTEREST RATE 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 twofold:
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 June 30, 2001, assuming a 200 basis
point rate shock, produces a decline in net interest income of 25.56 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 have established a market loss limit of 30 percent at a 200
basis point rate shock. At June 30, 2000 the estimated loss of market value
amounted to $24,559,000 or 37.15 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 Tables VIII and IX is impacted by 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 - VIII -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 June 30, 2001 (In Thousands) Expected Change in Change in Change in Change in
NIM NIM NIM NIM NIM
INTEREST INCOME $ $ % $ %
<S> <C> <C> <C> <C> <C>
Investment Securities 25,124 26,113 3.94 24,098 (4.08)
Interest-bearing Due From Banks 605 784 29.59 428 (29.26)
Loan Income 28,824 30,016 4.14 26,784 (7.08)
-----------------------------------------------------------------------------------------------------------------
Total Interest Income 54,553 56,913 4.33 51,310 (5.94)
INTEREST EXPENSE
Now Accounts and Regular Savings 2,454 3,281 33.70 1,626 (33.74)
Money Market Accounts 8,458 11,399 34.77 5,517 (34.77)
All Other Deposits 14,290 16,277 13.90 12,303 (13.90)
----------------------------------------------------------------------------------------------------------------
Total Deposits 25,202 30,957 22.84 19,446 (22.84)
Borrowed Funds 8,065 10,111 25.37 6,105 (24.30)
----------------------------------------------------------------------------------------------------------------
Total Interest Expense 33,267 41,068 23.45 25,551 (23.19)
----------------------------------------------------------------------------------------------------------------
Net Interest Income 21,286 15,845 -25.56 25,759 21.01
================================================================================================================
</TABLE>
18
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 3. Interest Rate Risk and Market Risk (Continued)
<TABLE>
<CAPTION>
Table IX - Effect of Hypothetical Changes in
Market
Value of Portfolio Equity Plus 2% Plus 2% Minus 2% Minus 2%
Estimated Estimated Estimated Estimated
Change in Change in Change in Change in
June 30, 2000 (In Thousands) MVPE MVPE MVPE MVPE MVPE
$ $ % $ %
<S> <C> <C> <C> <C> <C>
Investment Portfolio 339,069 314,866 (7.14) 364,183 7.41
Total Loans 314,090 300,486 (4.33) 321,407 2.33
Other Assets 29,250 29,250 29,250
----------------------------------------------------------------------------------------------------------------
Total Assets 682,409 644,602 (5.54) 714,840 4.75
Deposits 499,047 486,846 (2.44) 512,657 2.73
Borrowed Funds 116,806 115,759 (0.90) 117,931 0.96
Other Liabilities 444 444 444
----------------------------------------------------------------------------------------------------------------
Total Liabilities 616,297 603,049 (2.15) 631,032 2.39
----------------------------------------------------------------------------------------------------------------
Net Change in Portfolio Equity 66,112 41,553 (37.15) 83,808 26.77
================================================================================================================
</TABLE>
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 stocks 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 Commonwealth's economy.
Equity securities held as of June 30, 2000 and June 30, 1999 are presented in
Table X.
TABLE X - EQUITY SECURITIES
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10% Decline 20% Decline
in in
Fair Market Market
(In Thousands) Cost Value value value
<S> <C> <C> <C> <C>
Banks and Bank Holding Companies 17,782 21,655 (2,166) (4,331)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
--------------------------------------------------------------------------------------------------------------------
25,030 28,903 (2,890) (5,782)
At June 30, 1999
Banks and Bank Holding Companies 17,849 31,093 (3,109) (6,219)
Federal Home Loan Bank and Other Restricted Securities 5,275 5,275 (528) (1,055)
--------------------------------------------------------------------------------------------------------------------
Total 23,124 36,368 (3,637) (7,274)
====================================================================================================================
</TABLE>
19
<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 and no lawsuits were terminated during the second quarter of
the current year.
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
The Annual Meeting of Shareholders of Citizens & Northern Corporation was
held on Tuesday, April 18, 2000. The Board of Directors fixed the close of
business on February 28, 2000 as the record date for the determination of
stockholders entitled to notice of and to vote at the Annual Meeting and at any
adjournment thereof. On this record date, there were outstanding and entitled to
vote 5,205,267 shares of Common Stock.
The total number of votes cast was 3,957,822. All were voted by proxy for
the following purposes and with the following results.
1. The election of the following as Class I Directors to serve for a term
of three years:
R. Robert DeCamp F. David Pennypacker
Votes in favor - 3,905,975 Votes in favor - 3,912,803
Edward H. Owlett, III James E. Towner
Votes in favor - 3,928,979 Votes in favor - 3,864,871
Directors in Classes II and III whose terms are not expiring include:
Dennis F. Beardslee J. Robert Bower
R. Bruce Haner Susan E. Hartley
Karl W. Kroeck Edward L. Learn
Lawrence F. Mass Leonard Simpson
Donald Treat
2. The ratification of the action of the Board of Directors in the
appointment of the firm of Parente Randolph, PC as independent
auditors of the Corporation.
Total Votes in Favor 3,905,720
Total Votes Against 36,299
Total Votes Abstained 15,803
20
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CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part II - Other Information (continued)
Item 5. Other Events
None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits
27. Financial Data Schedule
b. On June 27, 2000 a Current Report on Form 8 - K was filed to report the
signing of a definitive merger agreement between the Corporation and Peoples
LTD. The agreement was signed on June 22, 2000.
21
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CITIZENS & 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
August 10, 2000 By: /s/ Craig G. Litchfield
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Date President and Chief Executive Officer
August 10,2000 By: /s/ James W. Seipler
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Date Executive Vice President and Treasurer
