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 Nine-month period ended September 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 November 13, 2000
1
<PAGE>
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2000
and December 31, 1999 Page 3
Consolidated Statement of Income - Three Months
and Nine Months Ended
September 30, 2000 and September 30, 1999 Page 4
Consolidated Statement of Cash
Flows - Nine Months Ended September 30, 2000 and
September 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 17 and 18
Part II. Other Information Page 19
Signatures Page 20
2
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited) (Note)
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Noninterest-bearing $ 10,276 $ 15,337
Interest-bearing 888 2,726
-------------------------------
Total cash and cash equivalents 11,164 18,063
-------------------------------
Available-for-sale securities 350,698 358,929
Held-to-maturity securities 2,026 1,880
Loans, net 319,164 305,761
Bank premises and equipment 9,091 7,992
Accrued interest receivable 5,319 5,066
Other assets 6,589 8,207
-------------------------------
TOTAL ASSETS $ 704,051 $ 705,898
===============================
LIABILITIES
Deposits:
Noninterest-bearing $ 63,536 $ 67,200
Interest-bearing 438,747 433,274
-------------------------------
Total deposits 502,283 500,474
-------------------------------
Dividends payable 1,249 1,237
Short - term borrowings 97,288 89,036
Long - term borrowings 15,610 35,025
Accrued interest and other liabilities 6,166 3,503
-------------------------------
TOTAL LIABILITIES 622,596 629,275
-------------------------------
SHAREHOLDERS' EQUITY
Common stock, par value $ 1.00 per share;
Authorized 10,000,000; issued 5,324,962
And 5,272,239 in 2000 and 1999, respectively 5,325 5,272
Stock dividend distributable - 1,437
Paid in capital 18,741 17,355
Retained earnings 65,333 62,886
-------------------------------
Total 89,399 86,950
-------------------------------
Accumulated other comprehensive loss (6,504) (8,884)
Less: Treasury stock at cost
119,470 shares at September 30, 2000 (1,440)
118,510 shares at December 31,1999 (1,443)
-------------------------------
TOTAL SHAREHOLDERS' EQUITY 81,455 76,623
-------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 704,051 $ 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) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
2000 1999 2000 1999
---------- ----------- --------- ------------
(Current) (Prior Year) (Current) (Prior Year)
<S> <C> <C> <C> <C>
INTEREST INCOME)
Interest and fees on loans $ 6,859 $ 6,479 $ 20,053 $ 19,157
Interest on balances with depository institutions 39 7 95 21
Interest on loans to political subdivisions 162 153 481 373
Interest on federal funds sold 22 2 35 39
Income from available-for-sale and
held-to-maturity securities:
Taxable 4,571 4,390 13,859 11,794
Tax-exempt 1,082 1,180 3,313 3,441
Dividends 390 325 1,095 877
----------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 13,125 12,536 38,931 35,702
----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 5,903 4,811 16,984 13,950
Interest on short-term borrowings 1,692 805 4,462 1,386
Interest on long-term borrowings 195 804 885 2,389
----------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,790 6,420 22,331 17,725
----------------------------------------------------------------------------------------------------------------------------
Interest margin 5,335 6,116 16,600 17,977
Provision for loan losses 150 120 526 570
----------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 5,185 5,996 16,074 17,407
----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 291 277 846 827
Service charges and fees 56 69 175 186
Trust department income 387 325 1,212 1,096
Insurance commissions, fees and premiums 93 72 267 318
Fees related to credit card operation 123 903 737 2,348
Other operating income 13 11 134 71
----------------------------------------------------------------------------------------------------------------------------
Total other income before realized gains on 963 1,657 3,371 4,846
securities, net
Realized gains on securities, net 230 789 567 1,847
----------------------------------------------------------------------------------------------------------------------------
Total other income 1,193 2,446 3,938 6,693
----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and wages 1,907 1,748 5,584 5,015
Pensions and other employee benefits 474 443 1,410 1,351
Occupancy expense, net 214 225 673 679
Furniture and equipment expense 316 316 873 784
Expenses related to credit card operation 52 742 336 2,038
Pennsylvania Shares Tax 188 180 568 542
Other operating expense 1,020 910 3,052 2,809
----------------------------------------------------------------------------------------------------------------------------
Total other expenses 4,171 4,564 12,496 13,218
----------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 2,207 3,878 7,516 10,882
Income tax provision 374 954 1,321 2,494
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,833 $ 2,924 $ 6,195 $ 8,388
=================================================================
PER SHARE DATA:
Net Income - Basic $ 0.35 $ 0.56 $ 1.19 $ 1.61
Net Income - Diluted $ 0.35 $ 0.56 $ 1.19 $ 1.61
-----------------------------------------------------------------
Dividends Per Share $ 0.24 $ 0.22 $ 0.72 $ 0.65
-----------------------------------------------------------------
Number Shares Used in Computation - Basic 5,205,492 5,205,202 5,205,433 5,205,097
Number Shares Used in Computation - Diluted 5,206,777 5,210,729 5,207,017 5,211,202
</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)
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,195 $ 8,388
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 526 570
Realized gain on securities, net (567) (1,847)
Realized (gain) loss on sale of foreclosed assets (57) 9
Provision for depreciation 815 715
Accretion and amortization, net (1,843) (1,314)
Deferred income tax (89) (72)
Decrease (increase) in accrued interest
Receivable and other assets 825 (4,779)
Increase in accrued interest payable and
other liabilities 2,663 7,773
----------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,468 9,443
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 44 351
Purchase of held-to-maturity securities (196) (354)
Proceeds from sales of available-for-sale securities 15,407 22,446
Proceeds from maturities of available-for-sale securities 10,003 29,627
Purchase of available-for-sale securities (11,155) (110,448)
Net increase in loans (14,276) (20,756)
Purchase of premises and equipment (1,914) (1,227)
Proceeds from sale of foreclosed assets 502 249
Purchase of investment in limited partnership (697) -
----------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,282) (80,112)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 1,809 10,284
Net increase in short-term borrowings 8,252 63,214
Repayments of long-term borrowings (19,415) (14)
Proceeds from sale of treasury stock 5 16
Dividends paid (3,736) (3,401)
---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (13,085) 70,099
---------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (6,899) (570)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 18,063 16,128
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,164 $ 15,558
=====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest Paid $ 18,903 $ 13,868
=====================================================================================================================
Income Taxes Paid $1,259 $2,156
=====================================================================================================================
</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 nine-month period ended September 30, 2000 may not be
indicative of the results for the year ending 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>
Nine-month period ended September 30, 2000
Earnings per share - basic $6,195,000 5,205,433 $1.19
Dilutive effect of stock options 1,584
-------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $6,195,000 5,207,017 $1.19
=============================================================================================================
Nine-month period ended September 30, 1999
Earnings per share - basic $8,388,000 5,205,097 $1.61
Dilutive effect of stock options 6,105
-------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $8,388,000 5,211,202 $1.61
==============================================================================================================
Quarter ended September 30, 2000
Earnings per share - basic $1,833,000 5,205,492 $0.35
Dilutive effect of stock options 1,285
-------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $1,833,000 5,206,777 $0.35
=============================================================================================================
Quarter ended September 30, 1999
Earnings per share - basic $2,924,000 5,205,202 $0.56
Dilutive effect of stock options 5,527
-------------------------------------------------------------------------------------------------------------
Earnings per share - diluted $2,924,000 5,210,729 $0.56
=============================================================================================================
</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
------------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(Current) (Prior Year) (Current) (Prior Year)
<S> <C> <C> <C> <C>
Net Income $ 1,833 $ 2,924 $ 6,195 $ 8,388
Other Comprehensive Income :
Unrealized holding gains (losses) on
available-for-sale securities
Gains (losses) arising during the period 5,378 (6,826) 4,173 (19,361)
Reclassification adjustment (230) (789) (567) (1,847)
-------------------------------------------------------------
Other comprehensive income (loss) before income tax 5,148 (7,615) 3,606 (21,208)
Income tax related to other comprehensive income (1,750) 2,589 (1,226) 7,211
-------------------------------------------------------------
Other comprehensive income (loss) 3,398 (5,026) 2,380 (13,997)
-------------------------------------------------------------
Comprehensive Income (Loss) $ 5,231 ($2,102) $ 8,575 ($5,609)
=============================================================
</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. The merger
agreement provides for approximately 990,640 shares of Citizens & Northern
Corporation common stock to be issued in exchange for the outstanding shares of
Peoples Ltd. The transaction is expected to 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 the approvals of Peoples Ltd.
shareholders and various bank regulatory agencies.
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. Citizens & Northern
Corporation and its wholly-owned subsidiaries (collectively, the Corporation)
intend 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 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 income for the nine months ended September 30, 2000 amounted to $6,195,000,
or $1.19 per share (on a basic and diluted basis). For the first nine months of
1999, net income was $8,388,000, or $1.61 per share. Net income for the third
quarter 2000 was $1,833,000, or $.35 per share, and $2,924,000, or $.56 per
share, for the third quarter 1999.
The major reasons for the decrease in net income were (1) lower realized gains
from sales of securities, (2) a lower net interest margin and (3) higher
operating expenses, excluding credit card operations. Realized securities gains
were lower because there were fewer opportunities to sell bank stocks at optimal
prices in 2000. Also, interest costs on deposits and borrowed funds increased
due to increases in short-term market interest rates, and personnel and
technology costs increased due to efforts to expand future noninterest revenue
opportunities.
REFERENCES TO 2000 AND 1999
Unless otherwise noted, all references to "2000" in the following discussion of
operating results are intended to mean the nine months ended September 30, 2000,
and similarly, references to "1999" are intended to mean the first nine months
of 1999. Operating results for the third quarter 2000, including comparisons to
third quarter 1999, are generally consistent with the results and comparisons
discussed in Management's Discussion and Analysis for the nine months ended
September 30, 2000 and 1999.
NET INTEREST MARGIN
The net interest margin is the difference between interest income earned and
interest expense incurred. The interest rate spread is the difference, stated as
a percentage, between the average rate earned on all interest-earning assets and
the average rate incurred on all interest-bearing liabilities. The net interest
margin as reflected in the income statement, and the net interest spread as
reflected in Table I of Management's Discussion and Analysis, have not been
adjusted for federal income taxes.
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)
The net interest margin for 2000 decreased $1,377,000, or 7.7%, compared to
1999. The Corporation is "liability sensitive," which means that rates on its
interest-bearing liabilities - deposits and borrowed funds - change more rapidly
than rates on its interest-earning assets. The Corporation earns a positive
"spread" by investing in long-term assets, such as residential mortgages and
other loans secured by real estate and long-term debt securities. In 2000,
short-term rates have risen significantly, and accordingly, the Corporation has
raised most of its deposit rates and has borrowed funds at higher rates than in
1999. Overall, the Corporation's average rate incurred on interest-bearing
liabilities increased from 4.50% in 1999 to 5.26% in 2000, and the interest rate
spread shrunk from 2.98% to 2.27% for the corresponding time periods. Average
balances and rates are presented in Table I.
Issues related to management of interest rate risk, including the net interest
margin, are discussed in the "Market Risk" section of Form 10-Q.
Average assets increased to $703,769,000 in 2000 compared to $672,104,000 in
1999. Asset growth was funded primarily by increases in average borrowed funds
of $22,478,000 and interest-bearing deposits of $18,107,000. As depicted in
Table I, the most significant increases in interest-earning assets were in
available-for-sale securities, which increased $33,149,000 and loans, which
increased $17,963,000, or 6%. The largest categories of loan growth were loans
secured by real estate and tax-exempt loans to political subdivisions. The
largest category of average deposit growth was money market accounts, which
increased 11.6%. The increase in the average balance of borrowed funds consisted
primarily of borrowings from the Federal Home Loan Bank and customer repurchase
agreements. Borrowings from the Federal Home Loan Bank were used to fund
purchases of certain U.S. Government Agency investments.
Table II presents an analysis of the effect of volume and rate changes on the
net interest margin.
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
Return/ Return/ Return/
Nine Cost Cost Nine Cost
Months of Year of Months of
Ended Funds Ended Funds Ended Funds
09/30/00 % 12/31/99 % 09/30/99 %
---------- ----- --------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Available-for-Sale Securities:
U. S. Treasury Securities $ 2,512 6.17 $ 2,510 5.90 $ 2,509 6.02
Securities of Other U.S. Government Agencies and 132,730 7.07 101,205 6.92 92,727 6.88
Corporations
Mortgage Backed Securities 103,690 6.81 117,902 6.61 119,309 6.58
Obligations of States and Political Subdivisions 81,351 5.51 80,970 5.58 80,952 5.68
Stock 25,791 5.67 22,288 5.42 22,459 5.22
Other Securities 23,343 7.39 20,948 6.47 18,312 6.87
-----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 369,417 6.57 345,823 6.37 336,268 6.37
-----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 669 5.39 615 5.53 614 5.66
Securities of Other U. S. Government Agencies and 1,031 6.61 895 6.48 877 6.56
Corporations
Mortgage Backed Securities 290 7.37 368 7.34 384 7.31
-----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,990 6.31 1,878 6.34 1,875 6.42
-----------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 2,214 5.79 566 5.30 643 4.37
Federal Funds Sold 758 6.17 866 4.85 1,074 4.73
Loans:
Real Estate Loans 252,211 8.59 240,951 8.56 238,707 8.59
Consumer 27,739 11.05 28,982 10.94 29,006 11.08
Agricultural 1,964 9.66 1,961 9.89 1,957 9.97
Commercial/Industrial 21,150 8.39 19,271 8.25 19,076 8.52
Other 877 7.92 714 7.70 698 7.66
Political Subdivisions 11,981 5.36 9,499 5.70 8,509 5.86
Leases 194 11.71 206 6.31 200 8.69
------------------------------------------------------------------------------------------------------------------------------------
Total Loans 316,116 8.68 301,584 8.68 298,153 8.76
------------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 690,495 7.53 650,717 7.44 638,013 7.48
------------------------------------------------------------------------------------------------------------------------------------
Cash 10,636 14,028 14,034
Unrealized Gain/Loss on Securities (13,818) 7,865 11,753
Allowance for Loan Losses (5,197) (5,083) (5,043)
Bank Premises and Equipment 8,500 7,828 7,767
Other Assets 13,153 5,509 5,580
------------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 703,769 $ 680,864 $672,104
====================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest-bearing Deposits:
Interest Checking $ 35,952 2.84 $ 37,248 2.27 $ 37,053 2.20
Money Market 144,000 5.30 131,741 4.34 129,009 4.23
Savings 46,055 2.49 46,643 2.48 46,751 2.48
Certificates of Deposit 143,491 5.55 139,916 5.24 139,123 5.24
Individual Retirement Accounts 76,714 6.37 75,882 5.21 76,272 5.10
Other Time Deposits 1,971 2.17 1,641 2.68 1,868 2.43
------------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 448,183 5.06 433,071 4.40 430,076 4.33
------------------------------------------------------------------------------------------------------------------------------------
Borrowed Funds:
Federal Funds Purchased 6,273 6.35 6,085 4.91 6,405 5.01
Other Borrowed Funds 112,621 5.99 97,585 5.35 90,011 5.25
------------------------------------------------------------------------------------------------------------------------------------
Total Borrowed Funds 118,894 6.01 103,670 5.32 96,416 5.23
------------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 567,077 5.26 536,741 4.58 526,492 4.50
------------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 51,746 50,787 50,754
Other Liabilities 6,311 6,193 6,752
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 625,134 593,721 583,998
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity, Excluding Other Comprehensive 87,613 81,767 80,361
Income/Loss
Other Comprehensive Income/Loss (8,978) 5,376 7,745
------------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 78,635 87,143 88,106
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 703,769 $ 680,864 $672,104
====================================================================================================================================
Interest Rate Spread 2.27 2.86 2.98
====================================================================================================================================
</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>
Nine-month Periods Ended
September 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 $ - $ 3 $ 3
Securities of Other U.S. Government Agencies and Corporations 2,115 140 2,255
Mortgage Backed Securities (791) 203 (588)
Obligations of States and Political Subdivisions 17 (105) (88)
Stock 137 81 218
Other Securities 274 76 350
----------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 1,752 398 2,150
----------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U. S. Treasury Securities 2 (1) 1
Securities of Other U.S. Government Agencies and Corporations 8 - 8
Mortgage Backed Securities (5) 1 (4)
----------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 5 - 5
----------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 65 9 74
Federal Funds Sold (13) 9 (4)
Loans:
Real Estate Loans 869 11 880
Consumer (105) (4) (109)
Agricultural 1 (5) (4)
Commercial/Industrial 130 (17) 113
Other 11 1 12
Political Subdivisions 141 (33) 108
Leases - 4 4
----------------------------------------------------------------------------------------------------------
Total Loans 1,047 (43) 1,004
----------------------------------------------------------------------------------------------------------
Total Interest Income 2,856 373 3,229
----------------------------------------------------------------------------------------------------------
INTEREST - BEARING LIABILITIES
Interest Checking (18) 172 154
Money Market 512 1,123 1,635
Savings (13) 4 (9)
Certificates of Deposit 174 332 506
Individual Retirement Accounts 17 733 750
Other Time Deposits 2 (4) (2)
Federal Funds Purchased (5) 62 57
Other Borrowed Funds 969 546 1,515
----------------------------------------------------------------------------------------------------------
Total Interest Expense 1,638 2,968 4,606
----------------------------------------------------------------------------------------------------------
NET INTEREST MARGIN $ 1,218 $ (2,595) $ (1,377)
============================================================================================================
</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)
TABLE III - COMPARISON OF NONINTEREST INCOME
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
(In Thousands) Sept. 30, Sept. 30,
2000 1999
--------- ---------
<S> <C> <C>
Service Charges on Deposit Accounts $ 846 $ 827
Service Charges and Fees 175 186
Trust Department Income 1,212 1,096
Insurance Commissions, Fees and Premiums 267 318
Fees Related to Credit Card Operation 737 2,348
Other Operating Income 134 71
-------------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized Gains on Securities, Net 3,371 4,846
Realized Gains on Securities, Net 567 1,847
-------------------------------------------------------------------------------------------------------
Total Other Income $ 3,938 $ 6,693
=======================================================================================================
</TABLE>
Other operating income before realized gains on securities decreased 30.4% in
2000 compared to 1999. The main reason for the decrease was a sharp decline in
fees related to the credit card operation. Credit card fees decreased due to the
sale of the merchant processing program in late 1999 and the loss of two large
agent banks due to mergers. As shown in Table IV, the reduction in these fees
was accompanied by a reduction in related expenses. The net effect of the
reductions in fees and expenses was an increase in pre-tax income of $91,000
between years.
Trust department income increased 10.6% because trust assets under management
have increased substantially. Trust assets under management at September 30,
2000 amounted to $330 million compared to $300 million at September 30, 1999.
The growth in trust assets under management and income reflects management's
emphasis on offering an expanding range of financial services.
In 2000, realized gains on securities, net, totaled $567,000 compared to
$1,847,000 in 1999. In 1999, a significant portion of the securities gains
resulted from sales or exchanges of bank stocks. In the first nine months of
2000, there were fewer opportunities for sales of bank stocks at prices deemed
by management to be optimal. As described in Table X, the fair value of bank
stocks held as of September 30, 2000 exceeded cost by $5,470,000, and in October
2000, sales of securities resulted in realized gains (pre-tax) of $630,000.
TABLE IV - COMPARISON OF NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Nine Months Ended
----------------------
Sept. 30, Sept. 30,
(In Thousands) 2000 1999
--------- ---------
<S> <C> <C>
Salaries and Wages $ 5,584 $ 5,015
Pensions and Other Employee Benefits 1,410 1,351
Occupancy Expense, Net 673 679
Furniture and Equipment Expense 873 784
Expenses Related to Credit Card Operation 336 2,038
Pennsylvania Shares Tax 568 542
Other Operating Expense 3,052 2,809
-------------------------------------------------------------------------------------------------------
Total Other Expense $12,496 $13,218
=======================================================================================================
</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)
Total noninterest expense decreased 5.5% in 2000 compared to 1999. The decrease
was caused mainly by a decline in costs related to credit card processing.
Credit card expenses decreased because of the termination of the merchant
processing program, which resulted in elimination of interchange fees and other
costs.
Salaries and wages increased 11.3% in 2000 compared to 1999. The increase is the
result of annual merit raises of approximately 4.5 percent and an increase in
number of employees. New employees were added in several areas, including
internet banking, trust and financial services and management information
systems, as well as the Muncy, PA, branch, which opened in October 2000. The
number of full-time equivalent employees increased from 213 at September 30,
1999 to 228 at September 30, 2000.
Furniture and equipment expense increased 11.4% for 2000 compared to 1999. The
increase is due to higher depreciation expense, mainly related to the internet
banking system and a new credit card facility.
Other operating expense increased 8.7% between the comparable periods.
Professional fees related to the pending merger with Peoples Ltd. of $151,000
were incurred in 2000. Telephone expense increased $100,000, primarily because
of costs associated with data connections among branches. Schools and
educational seminars expense increased $66,000, and supply costs increased
$58,000. Also, other operating expense includes costs related to the start-up of
C&N Financial Services Corporation. This subsidiary, a licensed insurance
agency, was formed in January 2000 to provide a variety of insurance products to
individuals and businesses. C&N Financial Services Corporation generated its
first revenues in July 2000, and has recorded a loss of $50,000 through
September 30, 2000.
COMPREHENSIVE INCOME (LOSS)
As presented in Note 3 to the consolidated financial statements, comprehensive
income increased substantially in 2000 compared to 1999. Comprehensive income
includes traditional net income from the income statement, adjusted by the
change in net unrealized gains or losses on available-for-sale securities. The
amount of unrealized gains or losses on available-for-sale securities may vary
widely from period-to-period, depending on the impact of changing interest rates
on the fair values of long-term bonds and other securities. In the second half
of 1999, changes in interest rates caused the fair value of the Corporation's
securities to fall, while in 2000, total fair value increased relative to
historical cost (although the fair value of available-for-sale securities, in
the aggregate, remained lower than cost at September 30, 2000).
BALANCE SHEET: SEPTEMBER 30, 2000 / DECEMBER 31, 1999
Total assets changed very little from December 31, 1999 to September 30, 2000.
Overall, because of the "inverted yield curve" (short-term interest rates as
high as, or higher than, long-term rates) throughout much of 2000, there were
limited opportunities to invest borrowed funds at a profit. Accordingly, the
Corporation reduced its total borrowed funds balances from $124,061,000 at
December 31, 1999 to $112,898,000 at September 30, 2000, and reduced
available-for-sale securities (at cost) from $372,391,000 to $360,552,000.
Loans, net, increased $13,403,000, or 4.4%, at September 30, 2000, compared to
December 31, 1999. Loan growth was funded primarily from earnings, an increase
in deposits of $1,809,000 and decreases in other types of assets.
Within the available-for-sale portfolio, the Corporation increased its
concentration in U.S. Government agency securities, and reduced its
concentration in mortgage-backed securities through ongoing repayments of
principal, because of changes in market yields. The excess of cost over fair
value of the portfolio recovered somewhat over the period, as decreases in
long-term interest rates created increases in the fair values of long-term debt
securities. The composition of the available-for-sale securities portfolio is
presented in Table V.
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 - AVAILABLE-FOR-SALE SECURITIES
(In Thousands)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
----------------------- -----------------------
Fair Fair
Cost Value Cost Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Obligations of the U.S. Treasury $ 2,510 $ 2,508 $ 2,514 $ 2,498
Obligations of other U.S. Government agencies 134,031 124,501 128,494 116,691
Obligations of states and political subdivisions 81,689 79,524 81,219 76,748
Other securities 22,332 20,691 22,829 21,707
Mortgage-backed securities 94,872 92,886 111,605 107,816
--------------------------------------------------------------------------------------------------------------
Total debt securities 335,434 320,110 346,661 325,460
Equity securities 25,118 30,588 25,730 33,469
--------------------------------------------------------------------------------------------------------------
Total $ 360,552 $ 350,698 $ 372,391 $ 358,929
==============================================================================================================
</TABLE>
The increase in loans at September 30, 2000, consisted mainly of new loans
secured by real estate. The composition of loans, net, is shown in Table VI.
TABLE VI- LOANS
(In Thousands)
<TABLE>
<CAPTION>
Sept. 30, % of Dec. 31, % of
2000 Total 1999 Total
-------- ------ --------- ------
<S> <C> <C> <C> <C>
Real estate $260,226 80.2% $ 248,253 79.9%
Consumer 27,947 8.6% 29,140 9.3%
Commercial 20,989 6.5% 18,050 5.8%
Political subdivisions 11,997 3.7% 12,332 4.0%
Other 3,311 1.0% 3,117 1.0%
-------------------------------------------------------------------------------------------
Total 324,470 100.0% 310,892 100.0%
====== ======
Less: allowance for loan losses (5,306) (5,131)
--------------------------------------------------- ---------
Loans, net $319,164 $ 305,761
=================================================== =========
</TABLE>
Bank premises and equipment increased substantially from December 31, 1999 to
September 30, 2000. Total purchases of capital items for 2000 amounted to
$1,914,000. There were several major capital programs either completed or in
progress during this time frame. Total costs of land, building and equipment
related to the new Muncy branch amounted to $685,000 as of September 30, 2000.
To provide room for expansion, the Corporation purchased properties near the
Wellsboro headquarters facility at a cost of $286,000, and moved the credit card
operations to another property in Wellsboro at a cost of $219,000. Also,
facility renovation and equipment purchases for the addition of C&N Financial
Services Corporation and other trust department projects totaled $200,000.
Other assets decreased from December 31, 1999, mainly because the net deferred
tax asset related to the unrealized loss in available-for-sale securities was
reduced from $4,577,000 to $3,350,000.
Accrued interest and other liabilities increased primarily because the September
30, 2000 balance includes $3,590,000 of accrued interest on Individual
Retirement Accounts, while at December 31, 1999, all of the corresponding
interest was "paid" (credited to the applicable deposit accounts).
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)
ALLOWANCE FOR LOAN LOSSES
The allowance for 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 Internal
Auditors. The committee reviews all of the known risk elements in the portfolio;
namely, the "Watch List" (a collection of loans with a history of delinquency or
other problems known to management), past due reports, nonperforming loans and
historical information related to charge-offs and recoveries by loan category.
Also, in evaluating the allowance for loan losses at September 30, 2000, the
loan quality committee considered information contained in the most recent loan
review report prepared by an independent consulting firm. This report was
received in August 2000, and was based on loan balances and other data as of May
22, 2000.
The allowance for loan losses is evaluated based on an assessment of the losses
inherent in the loan portfolio. This assessment results in an allowance
consisting of two components, allocated and unallocated.
The allocated portion of the allowance reflects expected losses resulting from
the analysis of individual loans, and 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 historical loss factors used to determine the
allocated component of the allowance and it recognizes that knowledge of the
portfolio may be incomplete. The unallocated portion of the allowance has
increased from $1,020,000 at December 31, 1999 to $1,962,000 at September 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 loan losses.
15
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
TABLE VII - ALLOWANCE FOR LOAN LOSSES RECONCILIATION
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended
----------- --------------------------------------------------------------
Sept. 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 186 81 257 246 157 38 156
Installment Loans 75 138 144 230 240 236 198
Credit Cards and Related Plans 167 192 264 305 201 184 229
Commercial and Other Loans 7 219 301 3 74 116 143
----------------------------------------------------------------------------------------------------------------------
Total Charge-offs 435 630 966 784 672 574 726
Recoveries
Real Estate Loans 18 81 12 21 22 - 27
Installment Loans 21 60 43 64 53 60 56
Credit Card and Related Plans 23 30 40 30 38 41 36
Commercial and Other Loans 22 10 15 9 55 86 35
----------------------------------------------------------------------------------------------------------------------
Total Recoveries 84 181 110 124 168 187 154
Net Charge-offs 351 449 856 660 504 387 572
Additions Charged to Operations 526 760 763 797 701 737 752
----------------------------------------------------------------------------------------------------------------------
Balance at End of Period $5,306 $5,131 $4,820 $4,913 $4,776 $4,579
======================================================================================================================
</TABLE>
TABLE VIII - ALLOWANCE FOR LOAN LOSSES ALLOCATION
<TABLE>
<CAPTION>
Sept. 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 $ 704 $ 834 $ 97 $ 350 $ 58 $ 38
Consumer 435 437 702 375 303 286
Commercial 1,279 2,081 650 625 630 604
Impaired Loans 785 609 290 274 113 228
All Other Commitments 141 150 202 343 369 374
Unallocated 1,962 1,020 2,879 2,946 3,303 3,049
-------------------------------------------------------------------------------------------------------
Total Allowance $5,306 $5,131 $4,820 $4,913 $4,776 $4,579
=======================================================================================================
</TABLE>
LIQUIDITY AND CASH FLOWS
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
Corporation maintains overnight borrowing facilities with several correspondent
banks that provide a source of day-to-day liquidity. Borrowings on such
facilities are known as federal funds purchased. Also, when there is excess
cash, the Corporation enters into overnight investing transactions with other
financial institutions. These types of overnight investments are known as
federal funds sold.
The major sources of funding for lending and investing activities are operating
income, deposit growth, Federal Home Loan Bank advances, repayment of loans and
cash flows generated from the investment portfolio. Excess funds from deposit
growth are used primarily for loan growth. As reflected in the consolidated
statement of cash flows, the Corporation has reduced its net borrowings in 2000,
and the volume of security purchases and sales is lower than in 1999. These
changes are reflective of management decisions based on rising short-term
interest rates in 2000.
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)
CAPITAL ADEQUACY
The Corporation (on a consolidated basis) and Citizens & Northern Bank are
subject to regulatory capital (equity) requirements administered by the federal
banking agencies. For purposes of these requirements, capital is divided into
two tiers. Tier one capital consists of total shareholders' equity, excluding
other comprehensive income (loss). Total capital consists of tier one capital,
plus the allowance for possible loan losses (limited to 1.25 percent of
risk-weighted assets) and 45 percent of unrealized gains on equity securities.
Risk weightings are assigned to assets held and to off-balance sheet commitments
such as loan commitments, unused lines of lines of credit and letters of credit,
to determine risk-based capital ratios.
The following table presents consolidated capital ratios:
TABLE IX - CAPITAL RATIOS
<TABLE>
<CAPTION>
Citizens & Northern
Corporation Regulatory Standards
Sept. 30, Dec. 31, Well Minimum
2000 1999 Capitalized Standard
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital to average total assets 12.5% 14.5% 5.0% 4.0%
Tier 1 capital to risk-weighted assets 22.0% 21.4% 6.0% 4.0%
Total capital to risk-weighted assets 23.8% 23.6% 10.0% 8.0%
</TABLE>
Management expects the Corporation and the Bank to maintain capital levels that
exceed the regulatory standards for well-capitalized institutions for the next
12 months and for the foreseeable future. Planned capital expenditures during
the next 12 months are not expected to have a detrimental effect on capital
ratios or results of operations.
INFLATION
The Federal Reserve's policies and actions regarding interest rates are affected
very significantly by their efforts to control inflation. There is a concern in
the financial markets that recent increases in oil-related energy prices may
lead to increases in the prices of other goods and services. If this were to
occur, the Federal Reserve would be expected to take actions that would increase
interest rates. However, most recent economic reports have not shown evidence of
significant inflation in sectors other than energy. Accordingly, management does
not expect inflation to have a significant impact on the Corporation's results
of operations for the remainder of 2000.
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 Corporation uses a sophisticated computer simulation model to calculate the
potential effect of interest rate risk on earnings and the fair value of
financial instruments. Each month, the Corporation uses the simulation model to
run "base most likely" and "what if" scenarios, including "interest rate shock"
calculations of the effect on earnings and fair values of an immediate 100, 200
and 300 basis point increase or decrease in rates. The Asset/Liability Committee
(ALCO) reviews reports based on these calculations, and makes recommendations to
the Board of Directors for portfolio restructuring, if deemed appropriate.
The Corporation's Board of Directors has established parameters for acceptable
levels of interest rate risk. Because of the Corporation's liability
sensitivity, the major concern is the impact of rising rates, and the thresholds
have been established based on the potential impact of a 200 basis point
increase. The acceptable limit for fluctuation in net interest margin has been
set at negative 20% from the base most likely amount for the next 12 months, and
the acceptable fluctuation in fair value of financial instruments has been set
at negative 30% of current fair value.
17
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part I - Financial Information (Continued)
Item 3. Interest Rate Risk and Market Risk (Continued)
Throughout 2000, the Corporation's interest rate risk positions have been
outside these established thresholds. As of September 30, 2000, management
calculated that a 200 basis point increase (shock) would lower the net interest
margin 22% from the base most likely amount and would lower the fair value of
financial instruments 33% from the base most likely amount. Management has
considered various alternatives that would bring the interest rate risk
thresholds within policy guidelines, including sales and purchases of certain
investment securities and hedging transactions, but has concluded that the best
course of action was to wait and see if favorable changes in market interest
rates occur. A key to this approach has been lack of opportunities to purchase
investment securities (of comparable credit risk) with better yields than the
securities currently held in the portfolio. Management and ALCO will continue to
monitor the Corporation's interest rate risk status and consider possible
actions, with the goal of maximizing long-term profitability.
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 September 30, 2000 and December 31, 1999 are
presented in Table X.
TABLE X - EQUITY SECURITIES
<TABLE>
<CAPTION>
Hypothetical Hypothetical
10 % 20 %
Decline Decline
in in
(In Thousands) Fair Fair Fair
Cost Value Value Value
------- ------- ------------ ------------
<S> <C> <C> <C> <C>
At September 30, 2000
Banks and Bank Holding Companies $17,870 $23,340 $(2,334) $(4,668)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
------------------------------------------------------------------------------------------------------------------
Total $25,118 $30,588 $(3,059) $(6,118)
==================================================================================================================
At December 31, 1999
Banks and Bank Holding Companies $18,482 $26,221 $(2,622) $(5,244)
Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450)
------------------------------------------------------------------------------------------------------------------
Total $25,730 $33,469 $(3,347) $(6,694)
==================================================================================================================
</TABLE>
18
<PAGE>
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Part II - Other Information
Item 1. Legal Proceedings
There are currently no pending lawsuits against Citizens &
Northern Corporation and no lawsuits were terminated during the
third quarter of 2000.
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
None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits
27. Financial Data Schedule
b. There were no reports on Form 8 - K filed during the third
quarter 2000.
19
<PAGE>
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
NOVEMBER 13, 2000 By: /S/ CRAIG G. LITCHFIELD
----------------- -----------------------
Date President and Chief Executive Officer
NOVEMBER 13, 2000 By: /S/ JAMES W. SEIPLER
----------------- --------------------
Date Executive Vice President and Treasurer
20
