1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 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) Securities registered pursuant to Section 12(b) of the Act: None ---- Securities registered pursuant to section 12(g) of the Act: COMMON STOCK Par Value $1.00 ---------------------------- 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's common stock held by non-affiliates at March 1, 2001 was $105,719,000. The number of shares of common stock outstanding at March 1, 2001 was 5,253,118. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- Portions of the registrant's proxy statement for the annual meeting of its shareholders to be held April 17, 2001 are incorporated by reference into Parts III and IV of this report. 1
2 PART I ------ ITEM 1. BUSINESS - ----------------- Citizens & Northern Corporation ("Corporation") is a one-bank holding company whose principal subsidiary is Citizens & Northern Bank ("Bank"). The Corporation's principal office is located in Wellsboro, Pennsylvania. The Corporation's other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company ("Bucktail"). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail provides credit life and accident and health insurance on behalf of the Bank. The operations of Citizens & Northern Investment Corporation and Bucktail are insignificant in relation to the total business of the Corporation. The Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda on October 1, 1971. Subsequent mergers included: First National Bank of Ralston in May 1972; Sullivan County National Bank in October 1977; Farmers National Bank of Athens in January 1984; and First National Bank of East Smithfield in May 1990. The Bank has held its current name since May 6, 1975, at which time the Bank changed its charter from a National bank to a Pennsylvania bank. The Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust division that provides a wide range of financial services. In January 2000, The Bank formed a subsidiary, C&N Financial Services Corporation ("C&NFSC"). C&NFSC is a licensed insurance agency that provides insurance products to individuals and businesses. In 2000, C&NFSC's operations were not significant in relation to the total operations of the Bank. All phases of the Bank's business are competitive. The Bank primarily competes in Tioga and Bradford counties and portions of Lycoming and Sullivan counties. The Bank competes with local commercial banks headquartered in our market area as well as other commercial banks with branches in our market area. Some of the banks that have branches in the Bank's market area are larger in overall size than the Bank. The Bank, along with other commercial banks, competes with respect to its lending activities as well as in attracting deposits, with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds for deposits. The Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management and insurance services. The Bank is generally competitive with all financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base, and is not economically dependent on any small group of customers or on any individual industry. Although there have been no mergers or acquisitions within the last 5 years, the Bank has engaged in several ventures designed to improve customer service and generate financial growth. These ventures included the following major initiatives: - - expanded trust and financial services capabilities, including investment management, employee benefits and insurance services; - - installed automated teller machines, beginning in 1997; - - created the "customer repurchase agreement" cash management service for commercial customers in 1998; - - established internet banking services in 1999; and - - constructed and opened new branches in Mansfield (1998) and Muncy (2000). At December 31, 2000, the Bank had total assets of $702,631,000, total deposits of $529,251,000 and net loans outstanding of $323,014,000. At December 31, 2000, the Bank had a total of 240 full-time equivalent employees Most of the activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows: 2
3 - - The Corporation is a one-bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act. - - The Bank is a state-chartered, nonmember bank, supervised by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. - - C&NFSC is a Pennsylvania corporation that is subject to requirements of the Pennsylvania Department of Insurance. - - Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance. ITEM 2. PROPERTIES - ------------------- The Bank owns each of its properties, and all are in good condition. The building at One Brewery Lane, Wellsboro, was purchased in 2000, and is currently being used on a limited basis. This building will be renovated for additional operating purposes. The cost of renovating this building is not expected to be significant in relation to the Bank's financial condition. None of the properties are subject to encumbrance. A listing of properties is as follows: Main administrative office: 90-92 Main Street Wellsboro, PA 16901 Branch offices: 428 S. Main Street Main Street 41 Main Street Athens, PA 18810 Liberty, PA 16930 Tioga, PA 16946 111 Main Street 1085 S. Main Street 428 Main Street Dushore, PA 18614 Mansfield, PA 16933 Towanda, PA 18848 Main Street Route 220 Courthouse Square East Smithfield, PA 18817 Monroeton, PA 18832 Troy, PA 16947 104 Main Street 3461 Route 405 Highway 90-92 Main Street Elkland, PA 16920 Muncy, PA 17756 Wellsboro, PA 16901 102 E. Main Street Thompson Street Route 6 Knoxville, PA 16928 Ralston, PA 17763 Wysox, PA 18854 Main Street 503 N. Elmira Street Laporte, PA 18626 Sayre, PA 18840 Other offices: Bankcard Services Additional administrative RR7 Box 503 One Brewery Lane Wellsboro, PA 16901 Wellsboro, PA 16901 3
4 ITEM 3. LEGAL PROCEEDINGS - -------------------------- Neither the Corporation nor any of its subsidiaries is a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise. 4
5 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ QUARTERLY SHARE DATA Trades of the Corporation's stock are executed through various brokers who maintain a market in the Corporation's stock. Information regarding sales prices of the Corporation's stock is available through the OTC Bulletin Board (www.otcbb.com). The Corporation's stock is not listed or traded on Nasdaq or a national securities exchange. The following table sets forth the approximate high and low sales prices of the common stock during 2000 and 1999: <TABLE> <CAPTION> 2000 1999 Dividend Dividend Declared Declared Per per High Low Quarter High Low Quarter - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> First quarter $ 29.50 $ 24.75 $ 0.24 $ 35.50 $ 33.25 $ 0.22 Second quarter 26.25 21.50 0.24 33.25 31.25 0.22 Third quarter 23.75 22.00 0.24 32.50 31.00 0.22 Fourth quarter 22.88 19.50 0.26 30.25 27.00 0.24 plus 1% plus 1% stock dividend stock dividend </TABLE> Known "market makers" who handle Citizens & Northern Corporation stock transactions are: <TABLE> <S> <C> <C> F. J. MORRISSEY & CO., INC. TUCKER ANTHONY RYAN, BECK & COMPANY 1700 Market Street, Suite 1420 MID ATLANTIC DIVISION 3 Parkway Philadelphia, PA 19103-3913 1703 Oregon Pike Philadelphia, PA 19102 (215) 563-8500 Lancaster, PA 17601-6401 (800) 342-2325 (800) 526-6371 FERRIS, BAKER WATTS, INC. MERRILL LYNCH, PIERCE, SANDLER O'NEILL & PARTNERS, LP 6 Bird Cage Walk FENNER & SMITH, INC. Two World Trade Center, 104th Floor Holidaysburg, PA 16648 One West Third Street New York, NY 10048 (800) 343-5149 Williamsport, PA 17701 (800) 635-6851 (800) 937-0769 INVESTOR INFORMATION INDEPENDENT AUDITORS ANNUAL MEETING OF GENERAL SHAREHOLDER INQUIRIES PARENTE RANDOLPH, PC SHAREHOLDERS SHOULD BE SENT TO: 400 Market Street Williamsport, PA 17701 The Annual Meeting of Shareholders CITIZENS & NORTHERN will be held at the Arcadia Theatre in CORPORATION Wellsboro, PA, at 2:00 p.m. on Tuesday, 90-92 Main Street, P.O. Box 58 April 17, 2001. Wellsboro, PA 16901 STOCK TRANSFER AGENT Citizens & Northern Bank 90-92 Main Street, P.O. Box 58 Wellsboro, PA 16901 (800) 487-8784 </TABLE> 5
6 COMMON STOCK AND PER SHARE DATA <TABLE> <CAPTION> 2000 1999 1998 1997 1996 <S> <C> <C> <C> <C> <C> Net income per share - basic $ 1.61 $ 2.18 $ 2.11 $ 1.92 $ 1.76 Net income per share - diluted 1.61 2.18 2.10 1.92 1.76 Cash dividends declared per share 0.97 0.88 0.80 0.71 0.66 Cash dividends declared per share - historical basis 0.98 0.90 0.82 0.74 0.69 Stock dividend 1% 1% 1% 1% 1% Stockholders' equity per share (a) 16.92 14.57 17.23 16.23 13.59 Stockholders' equity per share, excluding accumulated other comprehensive income (loss) (a) 16.90 16.26 14.96 13.70 12.50 Weighted average shares outstanding - basic 5,257,555 5,257,191 5,261,736 5,267,933 5,267,897 Weighted average shares outstanding - diluted 5,258,786 5,262,547 5,271,436 5,272,831 5,269,005 Number of shares outstanding at year-end 5,207,244 5,153,729 5,102,028 5,063,043 5,012,332 Number of shares authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 </TABLE> (a) For purposes of this computation, the number of shares outstanding has been increased for the effects of 1% stock dividends issued in January following each year-end. 6
7 ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> INCOME STATEMENT 2000 1999 1998 1997 1996 <S> <C> <C> <C> <C> <C> Interest income $52,155 $48,415 $45,459 $45,642 $45,589 Interest expense 30,145 24,571 22,693 23,312 23,451 - ------------------------------------------------------------------------------------------------------------------------ Interest margin 22,010 23,844 22,766 22,330 22,138 Provision for loan losses 676 760 763 797 701 - ------------------------------------------------------------------------------------------------------------------------ Interest margin after provision for loan losses 21,334 23,084 22,003 21,533 21,437 Other income 4,490 6,444 6,083 5,834 5,180 Securities gains 1,377 3,043 3,001 1,001 475 Other expenses 16,906 17,732 16,483 15,095 14,686 - ------------------------------------------------------------------------------------------------------------------------ Income before income tax provision 10,295 14,839 14,604 13,273 12,406 Income tax provision 1,819 3,354 3,527 3,166 3,151 - ------------------------------------------------------------------------------------------------------------------------ Net income $ 8,476 $11,485 $11,077 $10,107 $ 9,255 ======================================================================================================================== BALANCE SHEET AT YEAR END Total securities (1) $350,844 $363,535 $331,883 $308,988 $310,077 Gross loans, excluding unearned discount 328,305 310,892 291,003 285,426 278,597 Total assets 719,335 705,898 646,298 615,353 610,172 Total deposits 528,967 500,474 476,518 442,256 430,311 Stockholders' equity, excluding accumulated other comprehensive income 88,887 85,507 78,645 72,200 65,826 Total stockholders' equity 88,969 76,623 90,567 85,535 71,593 AVERAGE BALANCE SHEET Total securities, at amortized cost (1) 371,360 349,133 300,692 296,067 306,680 Gross loans, excluding unearned discount 318,382 301,584 285,275 282,580 271,618 Earning assets 689,743 650,717 585,966 578,647 578,298 Total assets 704,221 680,864 626,102 608,277 604,408 Total assets, excluding unrealized gains/ losses 717,052 672,999 606,163 598,370 598,813 Total deposits 503,848 483,858 448,601 435,190 429,036 Stockholders' equity, excluding accumulated other comprehensive income 87,258 81,767 74,810 69,440 62,797 Stockholders' equity 78,792 87,143 87,997 76,005 66,490 FINANCIAL RATIOS Return on stockholders' equity, excluding accumulated other comprehensive income (2) 9.71% 14.05% 14.81% 14.56% 14.74% Return on stockholders' equity (2) 10.76% 13.18% 12.59% 13.30% 13.92% Return on assets (2) 1.20% 1.69% 1.77% 1.66% 1.53% Stockholders' equity to assets, excluding accumulated other comprehensive income (2) 12.17% 12.15% 12.34% 11.60% 10.49% Stockholders' equity to assets (2) 11.19% 12.80% 14.05% 12.50% 11.00% Stockholders' equity to loans (2) 24.75% 28.90% 30.85% 26.90% 24.48% Net income to: Total interest income 16.25% 23.72% 24.37% 22.14% 20.30% Interest margin 38.51% 48.17% 48.66% 45.26% 41.81% Dividends as a % of net income 60.19% 40.39% 37.81% 37.04% 37.36% </TABLE> (1) Includes available-for-sale and held-to-maturity securities, and interest-bearing cash and due from banks (2) Calculated based on average balance data 7
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Certain statements in this section and elsewhere in Form 10-K are 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. Forward-looking statements, which are based on certain assumptions and describe future plans, business objectives and expectations, 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, the following: - - changes in monetary and fiscal policies of the U.S. Treasury and the Federal Reserve Board, particularly related to changes in interest rates - - changes in general economic conditions - - legislative or regulatory changes - - downturn in demand for loan, deposit and other financial services in the Corporation's market area - - increased competition from other banks and non-bank providers of financial services - - technological changes and increased technology-related costs - - changes in accounting principles. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. EARNINGS OVERVIEW The Corporation's net income in 2000 was $8,476,000, or $1.61 per share (basic and diluted). In 1999, net income was $11,485,000, or $2.18 per share, and in 1998, net income was $11,077,000, or $2.11 per share (basic). The major reasons for the decrease in net income in 2000 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 amounted to $1,377,000 in 2000, $3,043,000 in 1999 and $3,001,000 in 1998. One of the reasons for lower realized securities gains in 2000 was fewer opportunities to sell bank stocks at optimal prices. Throughout much of 2000, market prices of most bank stocks languished compared to the previous two years. Also, in both 1999 and 1998, the Corporation had significant nonrecurring realized gains. In 1999, gains of $1,271,000 (pre-tax) were realized from stocks of banks that were acquired by other entities. In 1998, the Corporation had a pre-tax realized gain of $1,766,000 from the sale of its interest in a private company. This stock had been acquired from collateral on a loan default in 1919, and had been carried on the Corporation's books at a value of $1.00 prior to the sale. The net interest margin, on a tax-equivalent basis, was $24,134,000 in 2000, down from $26,010,000 in 1999 and $24,651,000 in 1998. 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. Traditionally, the Corporation earns a positive spread by investing in longer-term assets such as residential and other loans, bonds and mortgage-backed securities. In 2000, short-term interest rates rose significantly, and accordingly, the Corporation raised most of its deposit rates and borrowed funds at higher rates than in 1999 or 1998. As reflected in Table II of Management's Discussion and Analysis, net interest income as a percentage of earning assets was reduced to 3.50% in 2000 from 4.00% in 1999 and 4.21% in 1998. Other operating expenses, excluding credit card operations, increased 9% in 2000 over 1999, and 10% in 1999 over 1998. During this time period, the Corporation increased spending for personnel and technology related to initiatives intended to produce future growth opportunities. Significant costs have been incurred in the areas of trust and financial services and internet banking. In 2000, start-up costs were incurred related to establishing a new branch in Muncy, Pennsylvania. This branch opened in October 2000. Also, in 2000, the Corporation had expenses of $193,000 related to the proposed merger with Peoples Ltd. In November 2000, the vote by the stockholders of Peoples Ltd. did not result in the 75% affirmative count required to approve the deal. 8
9 OUTLOOK FOR 2001 In January 2001, the Federal Reserve Board lowered the Federal Funds Rate a total of 1%. The Federal Reserve Board lowered this short-term rate in response to economic reports that indicated an economic slowdown had begun in the 4th quarter 2000. Further, many financial analysts have forecasted that further reductions in interest rates will occur in 2001. If market short-term interest rates continue to decline in 2001, the Corporation's net interest margin would be expected to increase substantially in 2001 compared to 2000. Management will continue to look for opportunities to expand the Corporation's trust and financial service capabilities in 2001. These efforts may involve hiring additional people or making additional capital investments. Specifically, management expects to begin offering broker/dealer services in 2001. Other significant initiatives currently underway are development of an improved sales and service culture and the first full year of operation of the insurance agency (C&N Financial Services Corporation) and the Muncy branch. NET INTEREST MARGIN 2000/1999/1998 The Corporation's primary source of operating income is represented by the net interest margin. The net interest margin is equal to the difference between the amounts of interest income and interest expense. Tables I, II and III include information regarding the Corporation's net interest margin in 2000, 1999 and 1998. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest margin amounts presented in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the Tables. INTEREST INCOME AND EARNING ASSETS The Corporation's major categories of interest-bearing assets are available-for-sale investment securities and loans. As presented in Table I, total interest income increased $3,698,000, or 7.3%, in 2000 compared to 1999. Interest income from available-for-sale securities increased $2,012,000, or 8.4%, and interest income from loans increased $1,573,000, or 6.0%. In Table III, the growth in interest income is broken down between the impact of volume changes and the impact of interest rate changes. As you can see from Table III, most of the growth in interest income in 2000 - $2,944,000 - was caused by increases in the average volume of earning assets. Because most of the Corporation's interest-bearing assets are long-term, fixed rate assets, changes in interest rates did not have as much of an impact on interest income as on interest expense in 2000. In 1999, total interest income increased $3,237,000, or 6.8%, over 1998. The increase in average volume caused interest income to increase $4,845,000, while lower average rates had the effect of reducing interest income $1,608,000. Lower average rates recorded in 1999 were a reflection of decreases in rates that took place in 1998. The rate reductions in 1998 resulted in significant amounts of mortgages being refinanced. When this occurred, the Corporation reinvested the proceeds of residential mortgage loans and mortgage-backed securities at lower rates. As shown in Table II, the average balance of the available-for-sale investment portfolio (at amortized cost) was $366,513,000 in 2000, $345,823,000 in 1999 and $294,121,000 in 1998. The major components of the portfolio are U. S. Agency securities, mortgage-backed securities and obligations of state and political subdivisions (municipal bonds). Also, the Corporation holds equity securities, primarily stocks of banks and bank holding companies and the Federal Home Loan Bank of Pittsburgh, and other corporate debt securities. The rate of return on the available-for-sale investment portfolio increased slightly during 2000 when compared to the prior two years. The return for the 2000 was 7.09%, compared to 6.93% in 1999 and 7.00% in 1998. The portfolio is primarily a long-term investment vehicle and does not have a great deal of turnover, with the exception of mortgage-backed securities that provide a monthly flow of payments. However, management continuously monitors the portfolio for long-term profit maximization, especially during periods of interest rate volatility, and at such times the Corporation may sell selected securities from the available-for-sale category. Also, management attempts to sell bank stocks at optimal pricing points. 9
10 In 2000, short-term and intermediate-term market interest rates were high, and there were few opportunities to create growth in the available-for-sale securities portfolio utilizing borrowed funds to purchase securities. Accordingly, most of the growth in average balances in 2000 compared to 1999, and in 1999 compared to 1998, resulted from significant purchases made in 1998 and early 1999. Inclusion of these assets for the full year 2000, and for most of 1999, had the effect of increasing the average balance amounts presented in Table II. The major type of securities purchased in 1998 and early 1999 was U.S. Government agency securities, specifically zero coupon bonds. Also, in 1999, the Corporation increased its holdings of municipal bonds. On a tax-equivalent basis, municipal bonds are currently the Corporation's highest-yielding security. Management attempts to maintain the maximum amount of high-quality municipal bonds possible without incurring an alternative minimum tax liability. The loan portfolio makes up most of the balance of the earning asset base and is the largest contributor to total interest income. The Corporation's market area consists of small rural communities. Consequently, the loan portfolio is retail-oriented, consisting mostly of real estate secured mortgages on one-to-four family dwellings. Total average real estate secured mortgage loans made up approximately 80% of the loan portfolio during 2000, 1999 and 1998. Much of the growth in the loan portfolio in 2000 and 1999 has been in real estate secured loans, including commercial real estate loans. The balance of the loan portfolio includes consumer installment loans and commercial loans. The Corporation also has an extensive credit card operation, which is operated for the Corporation's customers and for other banks. In late 1999, the Corporation sold its merchant processing program, which significantly decreased the level of processing activity for non-Corporation customers. Overall, average loans increased $16,798,000, or 5.6%, in 2000, and $16,308,000, or 5.7%, in 1999. The average return on the Corporation's total loan portfolio for 2000 was 8.79%, which was relatively unchanged from 1999. In 1999, the average return on loans decreased from to 8.76% from 9.24% in 1998, mainly due to the decreases in rates that occurred during 1998, as discussed above. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES As you can see from Table I, interest expense increased $5,574,000, or 22.7%, in 2000 compared to 1999. Further, as reflected in Table III, $4,035,000 of this growth in interest expense was attributable to rate increases. This rate-driven increase in interest expense is a product of the Corporation's interest rate sensitivity, as described in the "Earnings Overview" section of Management's Discussion and Analysis. In contrast, the $1,878,000, or 8.3%, increase in interest expense in 1999 over 1998 was volume-driven, as the average rates incurred on certificates of deposit (CDs) and borrowed funds were lower in 1999. Increases in interest expense on deposits were mainly concentrated in increases related to money market accounts, Individual Retirement Accounts (IRAs) and CDs. Overall, average total deposits, including noninterest-bearing demand deposits as well as interest-bearing deposits, increased 4.1% in 2000 and 7.9% in 1999. The major categories of growth in 2000 and 1999 were money market accounts and certificates of deposit. As presented in Table II, the average balance of money market accounts increased $14,468,000, or 11.0%, in 2000, and $16,598,000, or 14.4%, in 1999. The Corporation offers a variety of money market account options, including two products that attracted significant interest in 2000 and 1999: (1) the Consumer Super Money Fund, which pays a rate of interest equal to 90% of the 91-day Treasury Bill rate for balances of $5,000 or more; and (2) the Municipal Super Money Fund, which pays different rates of interest depending on the balance maintained. While money market accounts have been an excellent source of attracting deposit funding, they are highly interest rate sensitive. The Corporation reprices these accounts weekly. Accordingly, the average rate incurred on money market accounts increased to 5.39% in 2000 from 4.34% in 1999. The average rate incurred on IRAs increased to 6.32% in 2000 from 5.21% in 1999. All of the Corporation's IRAs are variable rate and repriced quarterly. The average balance of CDs increased $5,081,000, or 3.6%, in 2000, and $13,014,000, or 10.3%, in 1999. In the fourth quarter 2000, CDs increased, probably as a result of declines in the U.S. stock market, which may have caused some investors to move to less volatile investments. In 1999, growth in CDs was caused primarily by the purchase of large CDs by school districts in the Corporation's market area. The average rate incurred on CDs increased to 5.64% in 2000 from 5.24% in 1999, after falling from 5.50% in 1998. Interest expense on borrowed funds is presented in Table I in 2 categories - "Federal funds purchased" and "Other borrowed funds." Federal funds purchased consist of overnight borrowings from other banks. Other borrowed funds 10
11 include overnight repurchase agreements with customers (the Corporation's "RepoSweep" accounts), borrowings from the Federal Home Loan Bank of Pittsburgh and other repurchase agreements. Interest expense on average total borrowed funds increased $1,518,000, or 27.5%, in 2000, and $1,078,000, or 24.3%, in 1999. As reflected in Table III, the increase in interest expense on borrowed funds for 2000 included an increase attributable to volume of $606,000 and an increase attributable to rate of $912,000. Approximately half of the volume-related increase in 2000 was caused by increases in RepoSweep accounts. The average balance of RepoSweep accounts increased to $9,475,000 in 2000 from $3,887,000 in 1999. The remainder of the volume-related increase resulted from borrowings initiated in 1999 to fund security purchases, as described in the "INTEREST INCOME - EARNING ASSETS" section above. The rate-related increase reflects the fact that most of the Corporation's borrowings are short-term (less than 1 year) or intermediate-term (1-3 years). In 2000, management elected to stay short-term in its new borrowings (new borrowings in 2000 were mainly renewals of loans that matured) because of an unwillingness to lock in relatively high interest rates for a long time period. As shown in Table II, the average rate on Federal funds purchased in 2000 was 6.71%, compared to 4.91% in 1999. The average rate on other borrowings was 6.13% in 2000 and 5.35% in 1999. In 1999, interest expense on borrowed funds increased over 1998 because of higher average borrowing balances. The higher average borrowing balances in 1999 also resulted from the borrowings used to fund the purchase of available-for-sale securities. 11
12 TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, INCREASE (DECREASE) (IN THOUSANDS) 2000 1999 1998 00/99 99/98 <S> <C> <C> <C> <C> <C> INTEREST INCOME Available-for-sale securities: U.S. Treasury securities $ 154 $ 148 $ 151 $ 6 $ (3) Securities of other U.S. Government agencies and corporations 9,418 7,007 4,842 2,411 2,165 Mortgage-backed securities 6,874 7,791 7,992 (917) (201) Obligations of states and political subdivisions 6,342 6,464 5,702 (122) 762 Equity securities 1,472 1,207 950 265 257 Other securities 1,724 1,355 961 369 394 - --------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities 25,984 23,972 20,598 2,012 3,374 - --------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities 37 34 37 3 (3) Securities of other U.S. Government agencies and corporations 68 58 41 10 17 Mortgage-backed securities 21 27 38 (6) (11) - --------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities 126 119 116 7 3 - --------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks 114 30 37 84 (7) Federal funds sold 64 42 229 22 (187) Loans: Real estate loans 21,895 20,620 20,371 1,275 249 Consumer 3,056 3,170 3,529 (114) (359) Agricultural 191 194 223 (3) (29) Commercial/industrial 1,847 1,590 1,621 257 (31) Other 71 55 55 16 - Political subdivisions 909 776 545 133 231 Leases 22 13 20 9 (7) - --------------------------------------------------------------------------------------------------------------------------- Total loans 27,991 26,418 26,364 1,573 54 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income 54,279 50,581 47,344 3,698 3,237 - --------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest checking 1,036 844 853 192 (9) Money market 7,880 5,723 5,093 2,157 630 Savings 1,144 1,157 1,121 (13) 36 Certificates of deposit 8,175 7,328 6,984 847 344 Individual Retirement Accounts 4,829 3,956 4,152 873 (196) Other time deposits 44 44 49 - (5) Federal funds purchased 384 299 133 85 166 Other borrowed funds 6,653 5,220 4,308 1,433 912 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 30,145 24,571 22,693 5,574 1,878 - --------------------------------------------------------------------------------------------------------------------------- Net Interest Income $24,134 $26,010 $24,651 $(1,876) $ 1,359 =========================================================================================================================== </TABLE> (1) Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation's marginal federal income tax rate of 34%. (2) Fees on loans are included with interest on loans and amounted to $758,000 in 2000, $987,000 in 1999 and $995,000 in 1998. 12
13 TABLE II - AVERAGE DAILY BALANCES AND RATES <TABLE> <CAPTION> 2000 1999 1998 (DOLLARS IN THOUSANDS) RATE OF RATE OF RATE OF RETURN/ RETURN/ RETURN/ AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF BALANCE FUNDS % BALANCE FUNDS % BALANCE FUNDS % EARNING ASSETS Available-for-sale securities, at amortized cost: <S> <C> <C> <C> <C> <C> <C> U.S. Treasury securities $ 2,512 6.13 $ 2,510 5.90 $ 2,516 6.00 Securities of other U.S. Government agencies and corporations 133,063 7.08 101,205 6.92 68,512 7.07 Mortgage-backed securities 101,155 6.80 117,902 6.61 121,466 6.58 Obligations of states and political subdivisions 81,312 7.80 80,970 7.98 68,942 8.27 Equity securities 25,899 5.68 22,288 5.42 18,725 5.07 Other securities 22,572 7.64 20,948 6.47 13,960 6.88 - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities 366,513 7.09 345,823 6.93 294,121 7.00 - ----------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> U.S. Treasury securities 685 5.40 615 5.53 626 5.91 Securities of other U.S. Government agencies and corporations 1,019 6.67 895 6.48 629 6.52 Mortgage-backed securities 283 7.42 368 7.34 507 7.50 - ----------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities 1,987 6.34 1,878 6.34 1,762 6.59 - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks 1,861 6.13 566 5.30 671 5.66 Federal funds sold 1,000 6.40 866 4.85 4,139 5.53 Loans: Real estate loans 254,225 8.61 240,951 8.56 227,845 8.94 Consumer 27,760 11.01 28,982 10.94 30,366 11.62 Agricultural 1,963 9.73 1,961 9.89 2,219 10.05 Commercial/industrial 21,336 8.66 19,271 8.25 17,698 9.16 Other 886 8.01 714 7.70 707 7.78 Political subdivisions 12,009 7.57 9,499 8.16 6,227 8.76 Leases 203 10.84 206 6.31 214 9.35 - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 318,382 8.79 301,584 8.76 285,276 9.24 - ----------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 689,743 7.87 650,717 7.77 585,969 8.08 Cash 10,887 14,028 12,694 Unrealized gain/loss on securities (12,831) 7,865 19,939 Allowance for loan losses (5,233) (5,083) (4,822) Bank premises and equipment 8,712 7,828 6,985 Other assets 12,943 5,509 5,337 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 704,221 $ 680,864 $ 626,102 =================================================================================================================================== INTEREST-BEARING LIABILITIES Interest checking $ 36,086 2.87 $ 37,248 2.27 $ 36,556 2.33 Money market 146,209 5.39 131,741 4.34 115,143 4.42 Savings 45,963 2.49 46,643 2.48 45,207 2.48 Certificates of deposit 144,997 5.64 139,916 5.24 126,902 5.50 Individual Retirement Accounts 76,439 6.32 75,882 5.21 76,557 5.42 Other time deposits 1,717 2.56 1,641 2.68 1,900 2.58 Federal funds purchased 5,721 6.71 6,085 4.91 2,801 4.75 Other borrowed funds 108,581 6.13 97,585 5.35 76,040 5.67 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 565,713 5.33 536,741 4.58 481,106 4.72 Demand deposits 52,437 50,787 46,336 Other liabilities 7,279 6,193 10,663 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 625,429 593,721 538,105 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity, excluding other comprehensive income/loss 87,258 81,767 74,810 Other comprehensive income/loss (8,466) 5,376 13,187 - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 78,792 87,143 87,997 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 704,221 $ 680,864 $ 626,102 =================================================================================================================================== Interest Rate Spread 2.54 3.19 3.36 Net Interest Income/Earning Assets 3.50 4.00 4.21 </TABLE> (1) Rates of return on tax-exempt securities and loans are calculated on a fully taxable-equivalent basis, using the Corporation's marginal federal income tax rate of 34%. (2) Nonaccrual loans are included in the loan balances above. 13
14 TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME AND INTEREST EXPENSE <TABLE> <CAPTION> DECEMBER 31, 2000/1999 DECEMBER 31, 1999/1998 Change in Change in Total Change in Change in Total (IN THOUSANDS) Volume Rate Change Volume Rate Change <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS Available-for-sale securities: U.S. Treasury securities $ -- $ 6 $ 6 $ -- $ (3) $ (3) Securities of other U.S. Government agencies and corporations 2,246 165 2,411 2,270 (105) 2,165 Mortgage-backed securities (1,135) 218 (917) (237) 36 (201) Obligations of states and political subdivisions 27 (149) (122) 967 (205) 762 Equity securities 204 61 265 188 69 257 Other securities 111 258 369 454 (60) 394 - ---------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities 1,453 559 2,012 3,642 (268) 3,374 - ---------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: </TABLE> <TABLE> <S> <C> <C> <C> <C> <C> <C> U.S. Treasury securities 4 (1) 3 (1) (2) (3) Securities of other U.S. Government agencies and corporations 8 2 10 17 -- 17 Mortgage-backed securities (6) -- (6) (10) (1) (11) - ---------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities 6 1 7 6 (3) 3 - ---------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks 78 6 84 (5) (2) (7) Federal funds sold 7 15 22 (162) (25) (187) Loans: Real estate loans 1,153 122 1,275 1,139 (890) 249 Consumer (134) 20 (114) (157) (202) (359) Agricultural -- (3) (3) (25) (4) (29) Commercial/industrial 175 82 257 137 (168) (31) Other 14 2 16 1 (1) -- Political subdivisions 192 (59) 133 270 (39) 231 Leases -- 9 9 (1) (6) (7) - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 1,400 173 1,573 1,364 (1,310) 54 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 2,944 754 3,698 4,845 (1,608) 3,237 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest checking (27) 219 192 15 (24) (9) Money market 674 1,483 2,157 723 (93) 630 Savings (18) 5 (13) 36 -- 36 Certificates of deposit 273 574 847 687 (343) 344 Individual Retirement Accounts 29 844 873 (37) (159) (196) Other time deposits 2 (2) -- (7) 2 (5) Federal funds purchased (19) 104 85 162 4 166 Other borrowed funds 625 808 1,433 1,166 (254) 912 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 1,539 4,035 5,574 2,745 (867) 1,878 - ---------------------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 1,405 $ (3,281) $ (1,876) $ 2,100 $ (741) $ 1,359 ================================================================================================================================== </TABLE> (1) Changes in interest income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation's marginal federal income tax rate of 34%. (2) 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 amounts of the change in each. 14
15 NONINTEREST INCOME 2000/1999/1998 The components of noninterest income are presented in Table IV. In total, noninterest income was $5,867,000 in 2000 compared to $9,487,000 in 1999, a decrease of 38.2%. However, excluding the substantial decreases in realized gains on securities and credit card fees, other income increased $213,000, or 6.3%, in 2000. The decrease in realized gains on securities is discussed in the "EARNINGS OVERVIEW" section of Management's Discussion and Analysis. Credit card fees decreased due to the sale of the merchant processing program in late 1999, which resulted in elimination of interchange fees and costs. As shown in Table V, the reduction in these fees was accompanied by a reduction in related expenses. The net effect of the reductions in these fees and expenses was an increase in pre-tax income of $23,000 between years. Trust department revenue increased 10.8% in 2000 compared to 1999 because assets held in trust have increased significantly over the past 2-3 years. Trust assets under management totaled $327,063,000 at December 31, 2000, compared to $320,385,000 at December 31, 1999 and $283,262,000 at December 31, 1998. The growth in trust assets under management reflects management's emphasis on expanding the Corporation's menu of financial services. Among the other categories of noninterest income, the most significant change in 2000 was an increase in other operating income to $226,000 from $99,000. This increase resulted mainly from an increase in gains from the sale of foreclosed assets of $82,000. In 1999, total noninterest income increased $403,000, or 4.4%, over 1998. The largest growth category was trust department revenue, which increased 13.0% due to new business and stock market appreciation. <TABLE> <CAPTION> TABLE IV - COMPARISON OF NONINTEREST INCOME (IN THOUSANDS) 2000 % CHANGE 1999 % CHANGE 1998 <S> <C> <C> <C> <C> <C> Service charges on deposit accounts $1,150 3.3 $1,113 7.1 $1,039 Service charges and fees 232 (15.3) 274 (4.9) 288 Trust department revenue 1,613 10.8 1,456 13.0 1,288 Insurance commissions, fees and premiums 372 (15.1) 438 8.1 405 Other operating income 226 128.3 99 5.3 94 - --------------------------------------------------------------------------------------------------------------------------- Total other operating income, excluding fees from credit card operation and security gains 3,593 6.3 3,380 8.5 3,114 Fees related to credit card operation 897 (70.7) 3,064 3.2 2,969 Realized gains on securities, net 1,377 (54.7) 3,043 1.4 3,001 - --------------------------------------------------------------------------------------------------------------------------- Total Other Income $5,867 (38.2) $9,487 4.4 $9,084 =========================================================================================================================== </TABLE> OTHER NONINTEREST EXPENSE 2000/1999/1998 Total noninterest expense in 2000 was $16,906,000, a 4.7% decrease from 1999. Excluding the decrease in expenses related to the credit card operation (which is discussed in the "NONINTEREST INCOME" section), noninterest expense increased 9.0% in 2000 and 10.1% in 1999. The more significant changes in amounts of noninterest expense in 2000 and 1999 were as follows: 2000 VS. 1999 - ------------- - - Salaries and wages increased $671,000, or 9.7%. This increase is the result of average merit increases of 4% and an increase in the number of employees. New employees were added in trust and financial services, management information services, the new insurance agency and the Muncy branch, as well as in other areas. The number of full-time equivalent employees increased 12.6%, to 240 at December 31, 2000 from 213 a year earlier. 15
16 - - Pensions and employee benefits increased $108,000, or 5.9%. This increase is directly related to the increase in number of employees. - - Furniture and equipment expense increased $116,000, or 10.8%. This increase is mainly due to higher depreciation expense, including costs associated with the internet banking system and furniture and equipment used in the new credit card facility and the Muncy branch. - - Other operating expense increased $404,000, or 11.0%. Professional fees related to the terminated merger with Peoples, Ltd. amounted to $193,000. Telephone expense increased $126,000, primarily from costs for data connections among the branches. Supply costs increased $109,000, mainly from the increased number of employees and price increases on supplies used in proof of deposit operations. 1999 VS. 1998 - ------------- - - Occupancy expense increased $69,000, or 8.3%. Nearly all of the increase in 1999 resulted from depreciation and insurance costs of the Mansfield branch, which opened in 1998. - - Furniture and equipment expense increased $286,000, or 36.1%. This increase was caused by higher depreciation and maintenance expenses, mainly from the ATM network (installed in 1998), the internet banking system (installed in 1999) and upgrades and replacements of personal computers required for "Y2K" compliance. - - Pennsylvania shares tax increased $67,000, or 10.2%. This tax is based on the Bank's equity, less the amounts invested in certain exempt securities. The increase resulted from a higher 6-year average equity balance, combined with a lower percentage of the Bank's investments in exempt securities. - - Other operating expense increased $586,000, or 18.9%. The major components of the increase were software-related and training costs related to the internet banking system, and costs of introducing a new VISA debit card. <TABLE> <CAPTION> TABLE V - COMPARISON OF NONINTEREST EXPENSE (IN THOUSANDS) 2000 % CHANGE 1999 % CHANGE 1998 <S> <C> <C> <C> <C> <C> Salaries and wages $ 7,597 9.7 $ 6,926 4.6 $ 6,621 Pensions and other employee benefits 1,939 5.9 1,831 4.0 1,760 Occupancy expense, net 928 3.6 896 8.3 827 Furniture and equipment expense 1,194 10.8 1,078 36.1 792 Pennsylvania shares tax 756 4.6 723 10.2 656 Other operating expense 4,085 11.0 3,681 18.9 3,095 - -------------------------------------------------------------------------------------------------------------------------- Total other expenses, excluding expenses related to credit card operation 16,499 9.0 15,135 10.1 13,751 Expenses related to credit card operation 407 (84.3) 2,597 (4.9) 2,732 - -------------------------------------------------------------------------------------------------------------------------- Total Other Expenses $16,906 (4.7) $17,732 7.6 $16,483 ========================================================================================================================== </TABLE> INCOME TAXES The income tax provision for 2000 declined to $1,819,000 from $3,354,000 in 1999 and $3,527,000 in 1998. The lower tax provision resulted primarily from lower pre-tax income in 2000. The tax provision as a percentage of pre-tax income was 17.7% in 2000, compared to 22.6% in 1999 and 24.2% in 1998. The lower effective tax rate in 2000 was also the result of lower pre-tax income, as the amounts of tax-exempt income and other permanent differences were comparable to 1999 and 1998. A more complete analysis of income taxes is presented in Note 12 to the consolidated financial statements. 16
17 FINANCIAL CONDITION Significant changes in the average balances of the Corporation's earning assets and interest-bearing liabilities are described in the "NET INTEREST MARGIN" section of Management's Discussion and Analysis. This section addresses changes in the Corporation's balance sheet (excluding the allowance for loan losses and stockholders' equity, which are discussed in separate sections) that are not addressed in that discussion. As presented in Table II, the average balance of available-for-sale securities (net of unrealized gain or loss) was $353,682,000 in 2000 compared to $353,688,000 in 1999. However, at December 31, 2000, the balance of available-for-sale securities was $346,747,000, a decrease of $12,182,000 compared to December 31, 1999. In late December 2000, the Corporation sold municipal bonds with a carrying value of approximately $15,000,000 (at a minimal gain), and used the proceeds to purchase bank-owned life insurance (BOLI). The purchase of BOLI was done for 2 main purposes: (1) to provide a funding vehicle to cover future employee benefit costs, and (2) to generate tax-exempt, noninterest income at a rate that is expected to exceed the rates of return currently available from municipal bonds. Premises and equipment, net of accumulated depreciation, increased to $9,332,000 at December 31, 2000, compared to $7,992,000 at December 31, 1999. The total cost of premises and equipment purchases in 2000 was $2,426,000, a higher level of spending than in 1999 ($1,547,000) or 1998 ($1,502,000). The most significant capital investment in 2000 was the addition of the Muncy branch, for which land, building construction and initial furniture and equipment cost slightly more than $1,000,000. Other assets decreased to $4,238,000 at December 31, 2000 from $7,897,000 at December 31, 1999. This decrease was primarily caused by a decrease in the net deferred tax asset balance of $4,556,000. The decrease in the net deferred tax asset is mainly attributable to deferred taxes on unrealized security gains or losses, which moved to a deferred tax liability of $42,000 at December 31, 2000 from a deferred tax asset balance of $4,577,000 at December 31, 1999. The change in deferred taxes on unrealized gains or losses resulted from significant appreciation in the fair values of available-for-sale securities in the last 2 months of 2000. Total interest-bearing deposits as of December 31, 2000, were $29,568,000, or 6.8%, higher than the balance at December 31, 1999. The increase in the average balance of interest-bearing deposits for 2000, as reflected in Table II, was $18,340,000, or 4.2%. This disparity reflects a significant increase in deposit balances in the 4th quarter 2000. As of December 31, 2000, total interest-bearing deposits amounted to $462,842,000, compared to $438,747,000 at September 30, 2000, an increase of 5.5% over that time period. The increase in deposits in the 4th quarter 2000 was influenced by the opening of the Muncy branch, and may have been affected by investors' movement of funds out of the declining U.S. stock market. Total short-term and long-term borrowed funds was $95,296,000 at December 31, 2000, a decrease of 23.2% from the balance of total borrowed funds of $124,061,000 at December 31, 1999. The decrease in borrowed funds at December 31, 2000 was made possible, in part, by the deposit growth in the 4th quarter 2000. Relatively high short-term interest rates resulted in limited opportunities to use borrowed funds for security purchases at a profitable spread. Accordingly, management elected to pay off some borrowings when they matured in 2000 without refinancing them. Table VI presents information regarding outstanding investment securities at December 31, 2000, 1999 and 1998. 17
18 <TABLE> <CAPTION> TABLE VI - INVESTMENT SECURITIES (IN THOUSANDS) AS OF DECEMBER 31, 2000 1999 1998 AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE <S> <C> <C> <C> <C> <C> <C> AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,509 $ 2,533 $ 2,514 $ 2,498 $ 2,512 $ 2,556 Obligations of other U.S. Government agencies 132,713 128,883 128,494 116,691 61,998 61,841 Obligations of states and political subdivisions 68,236 69,065 81,219 76,748 78,434 81,423 Other securities 22,111 20,964 22,829 21,707 16,713 16,467 Mortgage-backed securities 91,708 91,240 111,605 107,816 130,189 131,046 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt securities 317,277 312,685 346,661 325,460 289,846 293,333 Marketable equity securities 29,346 34,062 25,730 33,469 21,365 35,942 - ------------------------------------------------------------------------------------------------------------------------------------ Total $346,623 $346,747 $372,391 $358,929 $311,211 $329,275 ==================================================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 707 $ 708 $ 617 $ 609 $ 630 $ 634 Obligations of other U.S. Government agencies 946 947 949 910 849 852 Mortgage-backed securities 258 259 314 311 429 445 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,911 $ 1,914 $ 1,880 $ 1,830 $ 1,908 $ 1,931 ==================================================================================================================================== </TABLE> PROVISION AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Each quarter, management performs a detailed assessment of the allowance and the provision for loan losses. The assessment is performed by a loan quality committee which includes the Bank's President, Chief Financial Officer, Executive Vice-presidents in charge of loans and branch administration and additional commercial lending staff. The committee reviews the identified risk elements in the loan portfolio, including the "Watch List", past due reports and nonperforming loans. The "Watch List" is a collection of loans that have a history of delinquency, collateral deficiency, cash flow problems, or other factors that have come to management's attention to create the need for special monitoring. Total "Watch List" loans amounted to $11,412,000 at December 31, 2000 and $13,453,000 at December 31, 1999. The allowance for loan losses includes two components, allocated and unallocated. The allocated component of the allowance for loan losses reflects expected losses resulting from the analysis of individual loans, specific allowances for loans in certain industries and historical loss experience for each loan category. The historical loan loss experience element is determined based on the ratio of net charge-offs to average loan balances over a five-year period, for each significant type of loan. The charge-off ratio is then applied to the current outstanding loan balance for each type of loan (net of "Watch List" and other loans that are individually evaluated). 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 market area. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have yet manifested themselves in the Bank's historical loss factors used to determine the allocated component of the allowance, and it recognizes that knowledge of the portfolio may be incomplete. 18
19 The Bank also engages a consulting firm each year to perform an independent credit review. Their review is performed annually on loans of $175,000 and higher. The loan quality committee gives substantial consideration to the classifications and recommendations of the independent credit reviewer in determining the allowance for loan losses. As noted in Table IX below, the unallocated portion of the allowance for loan losses increased to $1,983,000 at December 31, 2000 from $1,020,000 at December 31, 1999. The larger unallocated allowance reflects concerns of possible adverse changes in the economy that have not yet resulted in specifically identified problem loans. The reduction in the allocated portion of the allowance resulted from repayments and improvement in prospects in 2000 related to a few large commercial loans that had raised significant concerns at December 31, 1999. The provision for loan losses decreased to $676,000 in 2000 from $760,000 in 1999 and $763,000 in 1998. The amount of the provision in each year is determined based on the amount required to maintain an appropriate allowance in light of the factors described above. Tables VII, VIII, IX and X present an analysis of the loan portfolio, the allowance for loan losses, the allocation of the allowance and a five-year summary of loans by type. <TABLE> <CAPTION> TABLE VII - FIVE-YEAR HISTORY OF LOAN LOSSES (IN THOUSANDS) 2000 1999 1998 1997 1996 AVERAGE <S> <C> <C> <C> <C> <C> <C> Year-end gross loans, excluding unearned discount $328,305 $310,892 $291,003 $285,426 $278,597 $298,845 Year-end allowance for loan losses 5,291 5,131 4,820 4,913 4,776 4,986 Year-end nonaccrual loans 1,608 1,956 1,135 1,412 864 1,395 </TABLE> <TABLE> <S> <C> <C> <C> <C> <C> <C> Year-end loans 90 days or more past due and still accruing 1,104 1,797 1,628 1,986 2,994 1,902 Net charge-offs 516 449 856 660 504 597 Provision for loan losses 676 760 763 797 701 739 Earnings coverage of charge- offs 16.4 25.6 12.9 15.3 18.4 16.9 Allowance coverage of charge- offs 10.3 11.4 5.6 7.4 9.5 8.4 Net charge-offs as a % of provision for loan losses 76.3% 59.1% 112.2% 82.8% 71.9% 80.8% </TABLE> 19
20 <TABLE> <CAPTION> TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (In Thousands) YEARS ENDED DECEMBER 31, 2000 1999 1998 1997 1996 <S> <C> <C> <C> <C> <C> Balance, beginning of year $5,131 $4,820 $4,913 $4,776 $4,579 - ----------------------------------------------------------------------------------------------------------------- Charge-offs: Real estate loans 272 81 257 246 157 Installment loans 77 138 144 230 240 Credit cards and related plans 214 192 264 305 201 Commercial and other loans 53 219 301 3 74 - ----------------------------------------------------------------------------------------------------------------- Total charge-offs 616 630 966 784 672 - ----------------------------------------------------------------------------------------------------------------- Recoveries: Real estate loans 26 81 12 21 22 Installment loans 23 60 43 64 53 Credit cards and related plans 28 30 40 30 38 Commercial and other loans 23 10 15 9 55 - ----------------------------------------------------------------------------------------------------------------- Total recoveries 100 181 110 124 168 - ----------------------------------------------------------------------------------------------------------------- Net charge-offs 516 449 856 660 504 Provision for loan losses 676 760 763 797 701 - ----------------------------------------------------------------------------------------------------------------- Balance, end of year $5,291 $5,131 $4,820 $4,913 $4,776 ================================================================================================================= </TABLE> <TABLE> <CAPTION> TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE (IN THOUSANDS) 2000 1999 1998 1997 1996 <S> <C> <C> <C> <C> <C> Commercial $1,612 $2,081 $ 650 $ 625 $ 630 Noncommercial mortgages 952 834 97 350 58 Impaired loans 273 609 290 274 113 Consumer 471 437 702 375 303 All other commitments -- 150 202 343 369 Unallocated 1,983 1,020 2,879 2,946 3,303 - -------------------------------------------------------------------------------------------------------------- Total Allowance $5,291 $5,131 $4,820 $4,913 $4,776 ============================================================================================================== </TABLE> The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may occur. The calculation for years prior to 1999 did not include specific amounts for "Watch List" loans. These loans were included in the total population of loans and historical loss ratios applied. In 2000 and 1999, these loans were segregated from total loans prior to applying the historical loss ratios. 20
21 <TABLE> <CAPTION> TABLE X - FIVE-YEAR SUMMARY OF LOANS BY TYPE (IN THOUSANDS) 2000 % 1999 % 1998 % 1997 % <S> <C> <C> <C> <C> <C> <C> <C> <C> Real estate - construction $ 452 0.14 $ 649 0.21 $ 1,004 0.34 $ 406 0.14 Real estate - mortgage 263,325 80.21 247,604 79.64 230,815 79.31 219,952 77.05 Consumer 28,141 8.57 29,140 9.37 30,924 10.63 33,094 11.59 Agricultural 1,983 0.60 1,899 0.61 1,930 0.66 2,424 0.85 Commercial 20,776 6.33 18,050 5.81 17,630 6.06 17,176 6.02 Other 948 0.29 1,025 0.33 1,062 0.36 6,260 2.19 Political subdivisions 12,462 3.80 12,332 3.97 7,449 2.56 5,895 2.07 Lease receivables 218 0.07 222 0.07 218 0.07 256 0.09 - ------------------------------------------------------------------------------------------------------------------------------------ Total 328,305 100.00 310,921 100.00 291,032 100.00 285,463 100.00 Less: unearned discount -- (29) (29) (37) - ------------------------------------------------------------------------------------------------------------------------------------ 328,305 310,892 291,003 285,426 Less: allowance for loan Losses (5,291) (5,131) (4,820) (4,913) - ------------------------------------------------------------------------------------------------------------------------------------ Loans, net $ 323,014 $ 305,761 $ 286,183 $ 280,513 ==================================================================================================================================== <CAPTION> 1996 % <S> <C> <C> Real estate - construction $ 1,166 0.42 Real estate - mortgage 213,957 76.79 Consumer 33,420 11.99 Agricultural 2,603 0.93 Commercial 15,751 5.65 Other 5,014 1.80 Political subdivisions 6,464 2.32 Lease receivables 264 0.09 - ---------------------------------------------------------- Total 278,639 100.00 Less: unearned discount (42) - ---------------------------------------------------------- 278,597 Less: allowance for loan Losses (4,776) - ---------------------------------------------------------- Loans, net $ 273,821 ========================================================== </TABLE> Certain types of home improvement loans classified as "Other" in 1997 and 1996 were classified as "Real Estate - mortgage" in 2000, 1999 and 1998. LIQUIDITY Liquidity is the ability to quickly raise cash 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. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by mortgage loans and mortgage-backed securities. At December 31, 2000, the Corporation had unused borrowing availability with correspondent banks and the Federal Home Loan Bank of Pittsburgh totaling approximately $233,000,000. Additionally, the Corporation uses repurchase agreements placed with brokers to borrow short-term funds secured by investment assets, and uses "RepoSweep" arrangements to borrow funds from commercial banking customers on an overnight basis. STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. For many years, the Corporation and the Bank have maintained extremely strong capital positions. Details concerning the Corporation's and the Bank's regulatory capital amounts and ratios are presented in Note 15 to the consolidated financial statements. As reflected in Note 15, at December 31, 2000 and 1999, the ratios of total capital to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital to average total assets are more than double the amounts necessary to be classified as "well-capitalized" by the banking agencies. The Corporation's total stockholders' equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized cost and fair value of available-for-sale securities, net of deferred income tax, is classified as "Accumulated Other Comprehensive Income" within stockholders' equity. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders' equity. Capital expenditures for 2001 are estimated at between $1,000,000 and $1,500,000. Capital expenditures will not have a detrimental effect on the Corporation's financial condition in 2001. 21
22 COMPREHENSIVE INCOME Comprehensive income is a measure of all changes in the equity of a corporation, excluding transactions with owners in their capacity as owners (such as proceeds from issuances of stock and dividends). The difference between net income and comprehensive income is termed "Other Comprehensive Income". For the Corporation, other comprehensive income consists of unrealized gains and losses on available-for-sale securities, net of deferred income tax. Comprehensive income should not be construed to be a measure of net income. The amount of unrealized gains or losses reflected in comprehensive income may vary widely from period-to-period, depending on the financial markets as a whole and how the portfolio of available-for-sale securities is affected by interest rate movements. Total comprehensive income (loss) was $17,442,000 in 2000, ($9,321,000) in 1999 and $9,664,000 in 1998. Other comprehensive income (loss) amounted to $8,966,000 in 2000, ($20,806,000) in 1999 and ($1,413,000) in 1998. INFLATION Over the last several years, direct inflationary pressures on the Corporation's payroll-related and other noninterest costs have been modest. However, the Corporation is significantly affected by the Federal Reserve Board's efforts to control inflation through changes in interest rates. Management monitors the impact of economic trends, including any indicators of inflationary pressure, in managing interest rate and other financial risks. 22
23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK The Corporation's two major categories of market risk, interest rate and equity securities risk, are discussed in the following sections. INTEREST RATE RISK Business risk arising from changes in interest rates is an inherent factor in operating a bank. The Corporation's assets are predominantly long-term, fixed rate loans and debt securities. Funding for these assets comes principally from short-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation's financial instruments when interest rates change. The Bank uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. Only assets and liabilities of the Bank are included in management's monthly simulation model calculations. Since the Bank makes up more than 90% of the Corporation's total assets and liabilities, and because the Bank is the source of the most volatile interest rate risk, management does not consider it necessary to run the model for the remaining entities within the consolidated group. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued interest. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, under the "base most likely" and "what if" scenarios. Typically, management runs these calculations assuming increases and decreases of 100 basis points (1%), 200 basis points and 300 basis points from the base most likely scenario. The Bank's Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an increase or decrease in interest rates of 200 basis points. The policy limit for fluctuation in net interest income is minus 20% from the base most likely one-year scenario. The policy limit for market value variance is minus 30% from the base most likely one-year scenario. Throughout most of 2000, the Bank's calculations showed projected decreases in net interest income and market value of portfolio equity, in the plus 200 basis point scenario, that exceeded the policy thresholds. Management and the Bank's Board of Directors considered various alternatives, including hedging strategies and restructuring of the securities portfolio, but decided not to implement any of these alternatives. In light of the Bank's very strong equity position, it was deemed appropriate to wait out the high short-term interest rate market environment. As discussed in the "Earnings Overview" section of Management's Discussion and Analysis, high short-term interest rates had a significant negative impact on earnings in 2000. However, management believes that the decision not to radically realign the Bank's interest rate risk position has allowed it to be well-positioned for the interest rate decreases that have occurred in January 2001, and for further interest rate decreases that have been forecasted by many financial analysts to continue for more of 2001. The table that follows was prepared using the simulation model described above. The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates, which could result in significant differences in the calculations 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. 23
24 <TABLE> <CAPTION> THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES (IN THOUSANDS) DECEMBER 31, 2000 DATA PERIOD ENDING DECEMBER 31, 2001 PLUS 200 Minus 200 Most Likely Basis Basis Forecast Points Points Amount Amount % Change Amount % Change <S> <C> <C> <C> <C> <C> Interest income: Securities $22,235 $23,384 5.17 $ 21,654 (2.61) Interest-bearing due from banks and federal funds sold 228 291 27.63 202 (11.40) Loans 29,104 30,876 6.09 27,216 (6.49) - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 51,567 54,551 5.79 49,072 (4.84) - ---------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 22,575 31,667 40.27 19,719 (12.65) Interest on borrowed funds 5,579 7,306 30.96 4,990 (10.56) - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 28,154 38,973 38.43 24,709 (12.24) - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income $23,413 $15,578 (33.46) $ 24,363 4.06 ============================================================================================================================ Market Value of Portfolio Equity, December 31, 2000 $95,337 $53,588 (43.79) $107,346 12.60 ============================================================================================================================ <CAPTION> (IN THOUSANDS) DECEMBER 31, 1999 DATA PERIOD ENDING DECEMBER 31, 2000 Plus 200 Minus 200 Most Likely Basis Basis Forecast Points Points Amount Amount % Change Amount % Change <S> <C> <C> <C> <C> <C> Interest income: Securities $24,529 $25,289 3.10 $23,694 (3.40) Interest-bearing due from banks and federal funds sold 462 616 33.33 326 (29.44) Loans 27,607 28,791 4.29 25,461 (7.77) - ---------------------------------------------------------------------------------------------------------------------------- Total interest income 52,598 54,696 3.99 49,481 (5.93) - ---------------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 22,014 27,653 25.62 16,374 (25.62) Interest on borrowed funds 7,523 9,594 27.53 5,557 (26.13) - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 29,537 37,247 26.10 21,931 (25.75) - ---------------------------------------------------------------------------------------------------------------------------- Net Interest Income $23,061 $17,449 (24.34) $27,550 19.47 ============================================================================================================================ Market Value of Portfolio Equity, December 31, 1999 $67,619 $41,817 (38.16) $83,250 23.12 ============================================================================================================================ </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 stocks of other banks and bank holding companies, mainly based 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 (decline in value on an other than temporary basis) 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 affecting the banking industry generally, including competition from non-bank entities, credit risk, interest rate risk and other factors that 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, because of the concentration of its holdings in Pennsylvania banks, these investments could decline in value if there were a downturn in the state's economy. 24
25 The Corporation's management monitors its risk associated with its equity securities holdings by reviewing its holdings on a detailed, individual security basis, at least monthly, considering all of the factors described above. Equity securities held as of December 31, 2000 and 1999 are as follows: (IN THOUSANDS) <TABLE> <CAPTION> HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT DECEMBER 31, 2000 COST VALUE VALUE VALUE - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Banks and bank holding companies $22,098 $26,814 ($2,681) ($5,363) Restricted stock 7,248 7,248 (725) (1,450) - -------------------------------------------------------------------------------------------------------------------- Total $29,346 $34,062 ($3,406) ($6,812) ==================================================================================================================== <CAPTION> HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT DECEMBER 31, 1999 COST VALUE VALUE VALUE - --------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Banks and bank holding companies $18,482 $26,221 ($2,622) ($5,244) Restricted stock 7,248 7,248 (725) (1,450) - --------------------------------------------------------------------------------------------------------------------- Total $25,730 $33,469 ($3,347) ($6,694) ==================================================================================================================== </TABLE> 25
26 <TABLE> <CAPTION> ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- CONSOLIDATED BALANCE SHEET (In Thousands Except Share Data) DECEMBER 31, December 31, 2000 1999 <S> <C> <C> ASSETS Cash and due from banks: Noninterest-bearing $ 11,638 $ 15,337 Interest-bearing 2,186 2,726 - ------------------------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 13,824 18,063 Available-for-sale securities 346,747 358,929 Held-to-maturity securities 1,911 1,880 Loans, net 323,014 305,761 Accrued interest receivable 4,953 5,066 Bank-owned life insurance 15,000 -- Bank premises and equipment, net 9,332 7,992 Foreclosed assets held for sale 316 310 Other assets 4,238 7,897 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 719,335 $ 705,898 ============================================================================================================================== LIABILITIES Deposits: Noninterest-bearing $ 66,125 $ 67,200 Interest-bearing 462,842 433,274 - ------------------------------------------------------------------------------------------------------------------------------ Total deposits 528,967 500,474 Dividends payable 1,353 1,237 Short-term borrowings 94,691 89,036 Long-term borrowings 605 35,025 Accrued interest and other liabilities 4,750 3,503 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 630,366 629,275 - ------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> <S> <C> <C> STOCKHOLDERS' EQUITY Common stock, par value $1.00 per share; authorized 10,000,000 shares; issued 5,324,962 in 2000 and 5,272,239 in 1999 5,325 5,272 Stock dividend distributable 1,054 1,437 Paid-in capital 18,756 17,355 Retained earnings 65,206 62,886 - ------------------------------------------------------------------------------------------------------------------------------ Total 90,341 86,950 Accumulated other comprehensive income (loss) 82 (8,884) Unamortized stock compensation (35) -- Treasury stock, at cost: 117,718 shares at December 31, 2000 (1,419) 118,510 shares at December 31, 1999 (1,443) - ------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 88,969 76,623 - ------------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 719,335 $ 705,898 ============================================================================================================================== The accompanying notes are an integral part of the consolidated financial statements. </TABLE> 26
27 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF INCOME YEARS ENDED DECEMBER 31, (In Thousands Except Per Share Data) 2000 1999 1998 <S> <C> <C> <C> INTEREST INCOME Interest and fees on loans $27,082 $25,642 $25,819 Interest on balances with depository institutions 114 30 37 Interest on loans to political subdivisions 644 541 380 Interest on federal funds sold 64 42 229 Income from available-for-sale and held-to-maturity securities: Taxable 18,296 16,421 14,062 Tax-exempt 4,483 4,534 3,982 Dividends 1,472 1,205 950 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 52,155 48,415 45,459 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 23,108 19,053 18,252 Interest on short-term borrowings 6,102 2,454 824 Interest on long-term borrowings 935 3,064 3,617 - ---------------------------------------------------------------------------------------------------------------------------------- Total interest expense 30,145 24,571 22,693 - ---------------------------------------------------------------------------------------------------------------------------------- Interest margin 22,010 23,844 22,766 Provision for loan losses 676 760 763 - ---------------------------------------------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 21,334 23,084 22,003 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 1,150 1,113 1,039 Service charges and fees 232 274 288 Trust department revenue 1,613 1,456 1,288 Insurance commissions, fees and premiums 372 438 405 Fees related to credit card operation 897 3,064 2,969 Other operating income 226 99 94 - ---------------------------------------------------------------------------------------------------------------------------------- Total other income before realized gains on securities, net 4,490 6,444 6,083 Realized gains on securities, net 1,377 3,043 3,001 - ---------------------------------------------------------------------------------------------------------------------------------- Total other income 5,867 9,487 9,084 - ---------------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and wages 7,597 6,926 6,621 Pensions and other employee benefits 1,939 1,831 1,760 Occupancy expense, net 928 896 827 Furniture and equipment expense 1,194 1,078 792 Expenses related to credit card operation 407 2,597 2,732 </TABLE> <TABLE> <S> <C> <C> <C> Pennsylvania shares tax 756 723 656 Other operating expense 4,085 3,681 3,095 - ---------------------------------------------------------------------------------------------------------------------------------- Total other expenses 16,906 17,732 16,483 - ---------------------------------------------------------------------------------------------------------------------------------- Income before income tax provision 10,295 14,839 14,604 Income tax provision 1,819 3,354 3,527 - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 8,476 $11,485 $11,077 ================================================================================================================================== NET INCOME PER SHARE - BASIC $ 1.61 $ 2.18 $ 2.11 ================================================================================================================================== NET INCOME PER SHARE - DILUTED $ 1.61 $ 2.18 $ 2.10 ================================================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 27
28 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Accumulated Stock Other Unamortized (IN THOUSANDS EXCEPT PER SHARE DATA) Common Dividend Paid-in Retained Comprehensive Stock Stock Distributable Capital Earnings Income Compensation ----- ------------- ------- -------- ------ ------------ <S> <C> <C> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1997 $ 5,168 $ 1,706 $13,799 $52,519 $ 13,335 $ -- Comprehensive income: Net income 11,077 Unrealized loss on securities, net of reclassification adjustment and tax (1,413) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income - ---------------------------------------------------------------------------------------------------------------------------- Stock dividend issued 52 (1,706) 1,654 Cash dividends declared, $.80 per share (4,188) Stock dividend declared, 1% 1,931 (1,931) Treasury stock purchased Shares issued from treasury related to Exercise of stock options 15 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 5,220 1,931 15,468 57,477 11,922 -- - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 11,485 Unrealized loss on securities, net of reclassification adjustment and tax (20,806) - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive loss - ---------------------------------------------------------------------------------------------------------------------------- Stock dividend issued 52 (1,931) 1,879 Cash dividends declared, $.88 per share (4,639) Stock dividend declared, 1% 1,437 (1,437) Shares issued from treasury related to Exercise of stock options 8 - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 5,272 1,437 17,355 62,886 (8,884) -- - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Net income 8,476 Unrealized gain on securities, net of reclassification adjustment and tax 8,966 - ---------------------------------------------------------------------------------------------------------------------------- Total comprehensive income - ---------------------------------------------------------------------------------------------------------------------------- Stock dividend issued 53 (1,437) 1,384 Cash dividends declared, $.97 per share (5,102) Stock dividend declared, 1% 1,054 (1,054) Shares issued from treasury related to Exercise of stock options 3 Restricted stock granted 14 (35) - ---------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 5,325 $ 1,054 $18,756 $65,206 $ 82 $ (35) ============================================================================================================================ <CAPTION> (IN THOUSANDS EXCEPT PER SHARE DATA) Treasury Stock Total ----- ----- <S> <C> <C> BALANCE, DECEMBER 31, 1997 $ (992) $ 85,535 Comprehensive income: Net income 11,077 Unrealized loss on securities, net of reclassification adjustment and tax (1,413) - ------------------------------------------------------------------------ Total comprehensive income 9,664 - ------------------------------------------------------------------------ Stock dividend issued -- Cash dividends declared, $.80 per share (4,188) Stock dividend declared, 1% -- Treasury stock purchased (468) (468) Shares issued from treasury related to Exercise of stock options 9 24 - ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1998 (1,451) 90,567 - ------------------------------------------------------------------------ Comprehensive income: Net income 11,485 Unrealized loss on securities, net of reclassification adjustment and tax (20,806) - ------------------------------------------------------------------------ Total comprehensive loss (9,321) - ------------------------------------------------------------------------ Stock dividend issued -- Cash dividends declared, $.88 per share (4,639) Stock dividend declared, 1% -- Shares issued from treasury related to Exercise of stock options 8 16 - ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1999 (1,443) 76,623 - ------------------------------------------------------------------------ Comprehensive income: Net income 8,476 Unrealized gain on securities, net of reclassification adjustment and tax 8,966 - ------------------------------------------------------------------------ Total comprehensive income 17,442 - ------------------------------------------------------------------------ Stock dividend issued -- Cash dividends declared, $.97 per share (5,102) Stock dividend declared, 1% -- Shares issued from treasury related to Exercise of stock options 3 6 Restricted stock granted 21 -- - ------------------------------------------------------------------------ BALANCE, DECEMBER 31, 2000 $(1,419) $ 88,969 ======================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 28
29 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS) YEARS ENDED DECEMBER 31, 2000 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> <C> Net income $ 8,476 $ 11,485 $ 11,077 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 676 760 763 Realized gains on securities, net (1,377) (3,043) (3,001) (Gain) loss on sale of foreclosed assets, net (59) 44 (26) Depreciation expense 1,086 971 806 Accretion and amortization, net (2,491) (1,837) (455) Deferred income taxes (63) 423 63 Increase (decrease) in accrued interest receivable and other assets (88) (2,282) 717 Increase in accrued interest payable and other liabilities 1,247 2,003 653 - ---------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 7,407 8,524 10,597 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of held-to-maturity securities 156 372 178 Purchase of held-to-maturity securities (196) (354) (498) Proceeds from sales of available-for-sale securities 32,173 30,027 83,888 Proceeds from maturities of available-for-sale securities 15,337 33,436 127,670 Purchase of available-for-sale securities (17,865) (119,753) (232,922) Net increase in loans (18,374) (20,503) (7,231) Purchase of bank-owned life insurance (15,000) -- -- Purchase of interest in low-income housing partnership (697) -- -- Purchase of premises and equipment (2,426) (1,547) (1,502) Proceeds from sale of foreclosed assets 498 463 402 - ---------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (6,394) (77,859) (30,015) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 28,493 23,956 34,262 Net increase (decrease) in short-term borrowings 5,655 76,956 (2,920) Proceeds from long-term borrowings -- -- 34,400 Repayments of long-term borrowings (34,420) (25,019) (39,817) Proceeds from sale of treasury stock 6 16 24 </TABLE> <TABLE> <S> <C> <C> <C> Purchase of treasury stock -- -- (468) Dividends paid (4,986) (4,639) (4,188) - ---------------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities (5,252) 71,270 21,293 - ---------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,239) 1,935 1,875 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,063 16,128 14,253 - ---------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,824 $ 18,063 $ 16,128 ================================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Assets acquired through foreclosure of real estate loans $ 445 $ 165 $ 798 Interest paid $ 29,446 $ 24,006 $ 22,615 Income taxes paid $ 1,801 $ 2,973 $ 3,172 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 29
30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of Citizens & Northern Corporation ("Corporation"), and its subsidiaries, Citizens & Northern Bank ("Bank"), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation. The consolidated financial statements also include the accounts of the Bank's wholly-owned subsidiary, C&N Financial Services Corporation, which was formed in January 2000. All material intercompany balances and transactions have been eliminated in consolidation. NATURE OF OPERATIONS - The Corporation is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in Northcentral Pennsylvania. Lending products include mortgage loans, commercial loans, consumer loans and credit cards, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, individual retirement accounts and certificates of deposit. The Corporation also offers non-insured "Repo Sweep" accounts. The Corporation provides Trust Department services, including the administration of trusts and estates, retirement plans, and other employee benefit plans. Also, in 2000, the Corporation began offering a variety of personal and commercial insurance products through C&N Financial Services Corporation. The Corporation is subject to competition from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities. USE OF ESTIMATES - The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate and reasonable. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. INVESTMENT SECURITIES - Investment securities are accounted for as follows: HELD-TO-MATURITY SECURITIES - includes debt securities that the Corporation has the positive intent and ability to hold to maturity. These securities are reported at cost adjusted for amortization of premiums and accretion of discounts, computed using the level-yield method. AVAILABLE-FOR-SALE SECURITIES - includes debt securities not classified as held-to-maturity and both restricted and unrestricted equity securities. Such securities, except for restricted equity securities, are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income, net of tax. The restricted equity securities consist primarily of Federal Home Loan Bank stock, and are carried at cost and evaluated for impairment. Amortization of premiums and accretion of discounts on available-for-sale securities are recorded using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security. LOANS - Loans are stated at unpaid principal balances, less the allowance for loan losses, net deferred loan fees and unearned discounts. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. 30
31 Loans are placed on nonaccrual status when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. The allowance for loan losses is maintained at a level which, in management's judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation expense is computed using the straight-line method. FORECLOSED ASSETS HELD FOR SALE - Foreclosed assets held for sale consist of real estate acquired by foreclosure and are carried at estimated fair value, less selling cost. INCOME TAXES - Provisions for deferred income taxes are made as a result of temporary differences in financial and income tax methods of accounting. These differences relate principally to the provision for loan losses, amortization of loan origination fees and costs, pension expense, depreciation of bank premises and equipment and postretirement benefits. STOCK COMPENSATION PLANS - As permitted by Accounting Principles Board Opinion No. 25, the Corporation uses the intrinsic value method of accounting for stock compensation plans. Utilizing the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock as of the grant date (or other measurement date) over the amount an employee or director must pay to acquire the stock. Stock options issued under the Corporation's stock option plans have no intrinsic value, and accordingly, no compensation cost is recorded for them. Statement of Financial Accounting Standards No. 123 provides an alternative method of accounting for stock options, based on the estimated fair value of stock option awards. In Note 11, the Corporation has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. The Corporation has also made awards of restricted stock. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date, adjusted for subsequent fluctuations in market price, over the vesting period. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. CASH FLOWS - The Corporation utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. The Corporation considers all cash and amounts due from depository institutions, interest-bearing deposits in other banks, and federal funds sold to be cash equivalents. TRUST ASSETS AND INCOME - Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the financial statements since such items are not assets of the Corporation. Trust income is recorded on a cash basis, which is not materially different from the accrual basis. RECLASSIFICATION - Certain 1999 and 1998 amounts have been reclassified to conform to the 2000 presentation. 31
32 2. 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. The components of other comprehensive income and the related tax effects are as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Unrealized holding gains (losses) on available-for-sale securities $ 14,963 $(28,481) $ 860 Less: Reclassification adjustment for gains realized in income (1,377) (3,043) (3,001) - ------------------------------------------------------------------------------------------ Net unrealized gains (losses) 13,586 (31,524) (2,141) Tax effect (4,620) 10,718 728 - ------------------------------------------------------------------------------------------ Net-of-tax amount $ 8,966 $(20,806) $ (1,413) ========================================================================================== </TABLE> 3. PER SHARE DATA Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflect the retroactive effect of stock dividends declared in the fourth quarter of each year presented, payable in the first quarter of the following year. The following data show the amounts used in computing basic and diluted net income per share. 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 2000 <S> <C> <C> <C> Earnings per share - basic $ 8,476,000 5,257,555 $1.61 Dilutive effect of stock options 1,231 - ------------------------------------------------------------------------------------------------- Earnings per share - diluted $ 8,476,000 5,258,786 $1.61 ================================================================================================= 1999 Earnings per share - basic $11,485,000 5,257,191 $2.18 Dilutive effect of stock options 5,356 - ------------------------------------------------------------------------------------------------- Earnings per share - diluted $11,485,000 5,262,547 $2.18 ================================================================================================= </TABLE> <TABLE> 1998 <S> <C> <C> <C> Earnings per share - basic $11,077,000 5,261,736 $2.11 Dilutive effect of stock options 9,700 - ------------------------------------------------------------------------------------------------- Earnings per share - diluted $11,077,000 5,271,436 $2.10 ================================================================================================= </TABLE> 4. CASH AND DUE FROM BANKS Banks are required to maintain reserves consisting of vault cash and deposit balances with the Federal Reserve Bank in their district. The reserves are based on deposit levels during the year and account activity and other services provided by the Federal Reserve Bank. Average daily currency, coin, and cash balances with the Federal Reserve Bank needed to 32
33 cover reserves against deposits for 2000 ranged from $1,211,000 to $4,868,000. For 1999, these balances ranged from $1,078,000 to $6,546,000. Average daily cash balances with the Federal Reserve Bank required for services provided to the Bank ranged from $25,000 to $1,500,000 in 2000 and from $25,000 to $425,000 during 1999. Total balances restricted amounted to $1,621,000 at December 31, 2000 and $1,695,000 at December 31, 1999. Deposits with one financial institution are insured up to $100,000. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the insured amount. 5. SECURITIES Amortized cost and fair value of securities at December 31, 2000 and 1999 are summarized as follows: <TABLE> <CAPTION> (IN THOUSANDS) DECEMBER 31, 2000 GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR COST GAINS LOSSES VALUE <S> <C> <C> <C> <C> AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,509 $ 24 $ -- $ 2,533 Obligations of other U.S. Government agencies 132,713 163 (3,993) 128,883 Obligations of states and political subdivisions 68,236 1,513 (684) 69,065 Other securities 22,111 -- (1,147) 20,964 Mortgage-backed securities 91,708 531 (999) 91,240 - ------------------------------------------------------------------------------------------------------------------------------ Total debt securities 317,277 2,231 (6,823) 312,685 Marketable equity securities 29,346 6,556 (1,840) 34,062 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 346,623 $ 8,787 $ (8,663) $ 346,747 ============================================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 707 $ 3 $ (2) $ 708 Obligations of other U.S. Government agencies 946 6 (5) 947 Mortgage-backed securities 258 5 (4) 259 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 1,911 $ 14 $ (11) $ 1,914 ============================================================================================================================== <CAPTION> DECEMBER 31, 1999 GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR (IN THOUSANDS) COST GAINS LOSSES VALUE <S> <C> <C> <C> <C> AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,514 $ -- $ (16) $ 2,498 Obligations of other U.S. Government agencies 128,494 -- (11,803) 116,691 Obligations of states and political subdivisions 81,219 571 (5,042) 76,748 Other securities 22,829 140 (1,262) 21,707 </TABLE> <TABLE> <S> <C> <C> <C> <C> Mortgage-backed securities 111,605 396 (4,185) 107,816 - ------------------------------------------------------------------------------------------------------------------------------ Total debt securities 346,661 1,107 (22,308) 325,460 Marketable equity securities 25,730 8,921 (1,182) 33,469 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 372,391 $ 10,028 $ (23,490) $ 358,929 ============================================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 617 $ -- $ (8) $ 609 Obligations of other U.S. Government agencies 949 -- (39) 910 Mortgage-backed securities 314 4 (7) 311 - ------------------------------------------------------------------------------------------------------------------------------ Total $ 1,880 $ 4 $ (54) $ 1,830 ============================================================================================================================== </TABLE> 33
34 The amortized cost and fair value of investment debt securities at December 31, 2000 follow. Expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Maturities of mortgage-backed securities are presented based on contractual maturities. <TABLE> <CAPTION> DECEMBER 31, 2000 AMORTIZED FAIR (IN THOUSANDS) COST VALUE <S> <C> <C> AVAILABLE-FOR-SALE SECURITIES: Due in one year or less $ 4,775 $ 4,762 Due after one year through five years 6,451 6,588 Due after five years through ten years 20,830 20,970 Due after ten years 285,221 280,365 - ------------------------------------------------------------------------------------------------- Total $317,277 $312,685 ================================================================================================= HELD-TO-MATURITY SECURITIES: Due in one year or less $ 302 $ 303 Due after one year through five years 817 818 Due after five years through ten years 715 718 Due after ten years 77 75 - ------------------------------------------------------------------------------------------------- Total $ 1,911 $ 1,914 ================================================================================================= </TABLE> The following table shows the amortized cost and maturity distribution of the debt securities portfolio at December 31, 2000: <TABLE> <CAPTION> (IN THOUSANDS, EXCEPT FOR PERCENTAGES) WITHIN ONE - FIVE - AFTER ONE FIVE TEN TEN YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD AVAILABLE-FOR-SALE SECURITIES: <S> <C> <C> <C> <C> <C> <C> <C> <C> Obligations of the U.S. Treasury $ -- -- $2,509 6.01% $ -- -- $ -- -- Obligations of other U.S. Government agencies -- -- -- -- 16,985 7.61% 115,728 6.97% Obligations of states and political subdivisions 500 7.00% 2,721 6.36% 2,964 6.31% 62,051 5.47% Other securities -- -- 1,000 9.25% 852 7.95% 20,259 7.40% Mortgage-backed securities 4,275 7.45% 221 7.54% 29 8.51% 87,183 6.79% - ---------------------------------------------------------------------------------------------------------------------------------- Total $4,775 7.40% $6,451 6.71% $20,830 7.44% $285,221 6.62% ================================================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 300 7.73% $ 407 6.65% $ -- -- $ -- -- Obligations of other U.S. Government agencies -- -- 400 6.35% 546 6.43% -- -- Mortgage-backed securities 2 8.93% 10 8.59% 169 7.28% 77 7.37% - ---------------------------------------------------------------------------------------------------------------------------------- Total $ 302 7.74% $ 817 6.53% $ 715 6.63% $ 77 7.37% ================================================================================================================================== <CAPTION> (IN THOUSANDS, EXCEPT FOR PERCENTAGES) TOTAL YIELD <S> <C> <C> AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,509 6.01% Obligations of other U.S. Government agencies 132,713 7.05% Obligations of states and political subdivisions 68,236 5.55% Other securities 22,111 7.50% Mortgage-backed securities 91,708 6.82% - ---------------------------------------------------------------------------- Total $317,277 6.69% ============================================================================ HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 707 7.11% Obligations of other U.S. Government agencies 946 6.40% Mortgage-backed securities 258 7.37% - ---------------------------------------------------------------------------- Total $ 1,911 6.79% ============================================================================ </TABLE> Investment securities, carried at $58,280,000 at December 31, 2000 and $50,755,000 at December 31, 1999, were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. In 2000, gross realized gains from the sale of available-for-sale securities were $2,163,000 and gross realized losses were $786,000. Gross realized gains from the sale of available-for-sale securities in 1999 were $3,186,000, while gross realized losses for that year were $143,000. In 1998, gross realized gains from the sale of available-for-sale securities amounted to $3,423,000 and gross realized losses were $422,000. The income tax provision applicable to net realized gains amounted to $468,000 in 2000, $1,035,000 in 1999 and $1,020,000 in 1998. 34
35 6. LOANS Major categories of loans and leases included in the loan portfolio are summarized as follows: <TABLE> <CAPTION> AT DECEMBER 31, (IN THOUSANDS) % OF % OF 2000 TOTAL 1999 TOTAL <S> <C> <C> <C> <C> Real estate - construction $ 452 0.14% $ 649 0.21% Real estate - mortgage 263,325 80.21% 247,604 79.64% Consumer 28,141 8.57% 29,140 9.37% Agricultural 1,983 0.60% 1,899 0.61% Commercial 20,776 6.33% 18,050 5.81% Other 948 0.29% 1,025 0.33% Political subdivisions 12,462 3.80% 12,332 3.97% Lease receivables 218 0.07% 222 0.07% - ------------------------------------------------------------------------------------------------------------------------------ Total 328,305 100.00% 310,921 100.00% Less: unearned discount -- (29) - ------------------------------------------------------------------------------------------------------------------------------ 328,305 310,892 Less: allowance for loan losses (5,291) (5,131) - ------------------------------------------------------------------------------------------------------------------------------ Loans, net $ 323,014 $ 305,761 ============================================================================================================================== </TABLE> Net unamortized loan fees and costs of $1,583,000 at December 31, 2000 and $1,761,000 at December 31, 1999, have been offset against the carrying value of loans. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceeds 10% of total loans at December 31, 2000. The Corporation grants commercial, residential and personal loans to customers primarily in Tioga, Bradford, Sullivan and Lycoming counties. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors' ability to honor their contracts is dependent on the local economic conditions within the region. LOAN MATURITY DISTRIBUTION <TABLE> <CAPTION> DECEMBER 31, 2000 (IN THOUSANDS) OVER ONE YEAR BUT AFTER ONE YEAR LESS THAN FIVE OR LESS FIVE YEARS YEARS TOTAL <S> <C> <C> <C> <C> Real estate - construction $ 452 $ -- $ -- $ 452 Real estate - mortgage 68,194 73,622 121,509 263,325 Consumer 10,372 12,256 5,513 28,141 Agricultural 770 1,121 92 1,983 Commercial 10,124 8,338 2,314 20,776 Other 119 547 282 948 Political subdivisions 1,022 3,640 7,800 12,462 Lease receivables 23 91 104 218 - --------------------------------------------------------------------------------------------------------------------------------- Total $91,076 $99,615 $137,614 $328,305 ================================================================================================================================= </TABLE> Loans in the preceding table with maturities over one year but less than five years and over five years are all fixed rate loans. All loans due on demand or at a variable rate are shown as one year or less. Loans on which the accrual of interest has been discontinued or reduced amounted to $1,608,000 at December 31, 2000 and $1,956,000 at December 31, 1999. Interest income on such loans is recorded only as received. 35
36 Loans on which the original terms have been restructured totaled $77,000 at December 31, 2000 and $143,000 at December 31, 1999. None of the loans on which the original terms were changed were past due at December 31, 2000 and 1999. Loans which were more than 90 days past due and still accruing interest totaled $1,221,000 at December 31, 2000 and $1,797,000 at December 31, 1999. Transactions in the allowance for loan losses were as follows: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Balance at beginning of year $ 5,131 $ 4,820 $ 4,913 Provision charged to operations 676 760 763 Loans charged off (616) (630) (966) Recoveries 100 181 110 - ---------------------------------------------------------------------------------------------------- Balance at end of year $ 5,291 $ 5,131 $ 4,820 ==================================================================================================== </TABLE> Information related to impaired loans as of December 31, 2000 and 1999 is as follows: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 <S> <C> <C> Balance of impaired loans $1,025 $1,956 Specific allowance related to impaired loans 273 956 </TABLE> The average balance of impaired loans amounted to $1,079,000 in 2000, $1,582,000 in 1999 and $1,397,000 in 1998. The following is a summary of cash receipts on impaired loans and how they were applied. <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Cash receipts applied to principal $503 $233 $154 Cash receipts recognized as interest income 87 35 67 - ---------------------------------------------------------------------------------------------------- Total cash receipts $590 $268 $221 ==================================================================================================== </TABLE> 7. BANK PREMISES AND EQUIPMENT Bank premises and equipment are summarized as follows: <TABLE> <CAPTION> (IN THOUSANDS) DECEMBER 31, 2000 1999 <S> <C> <C> Land $ 1,126 $ 648 Buildings and improvements 10,725 9,473 Furniture and equipment 7,285 6,623 - --------------------------------------------------------------------------------------------------- Total 19,136 16,744 Less: accumulated depreciation (9,804) (8,752) - --------------------------------------------------------------------------------------------------- Net $ 9,332 $ 7,992 =================================================================================================== </TABLE> 36
37 Depreciation expense included in occupancy expense and furniture and equipment expense was comprised of the following: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Occupancy expense $ 370 $362 $340 Furniture and equipment expense 716 609 466 - --------------------------------------------------------------------------------------------------- Total $1,086 $971 $806 =================================================================================================== </TABLE> 8. DEPOSITS Balances and maturities of time deposits are as follows: <TABLE> <CAPTION> (IN THOUSANDS) DECEMBER 31, 2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL <S> <C> <C> <C> <C> <C> <C> <C> Certificates of deposit $ 111,579 $ 26,205 $ 8,191 $ 3,652 $ 1,841 $ -- $ 151,468 Yield 5.96% 6.15% 5.60% 5.41% 5.89% -- 5.96% Individual Retirement Accounts 57,070 22,313 -- -- -- -- 79,383 Yield 5.55% 5.55% -- -- -- -- 5.55% - ------------------------------------------------------------------------------------------------------------------------------------ Total time deposits $ 168,649 $ 48,518 $ 8,191 $ 3,652 $ 1,841 $ -- $ 230,851 - ----------------------------------------------------------------------------------------------------------------------------------- Yield 5.82% 5.87% 5.60% 5.41% 5.89% -- 5.82% =================================================================================================================================== <CAPTION> (IN THOUSANDS) DECEMBER 31, 1999 2000 2001 2002 2003 2004 THEREAFTER TOTAL <S> <C> <C> <C> <C> <C> <C> <C> Certificates of deposit $ 90,867 $ 33,564 $ 9,058 $ 6,815 $ 2,765 $ 63 $ 143,132 Yield 5.20% 5.54% 5.71% 5.53% 5.26% 5.60% 5.33% Individual Retirement Accounts 47,218 30,416 -- -- -- -- 77,634 Yield 6.03% 6.03% -- -- -- -- 6.03% - ---------------------------------------------------------------------------------------------------------------------------------- Total time deposits $ 138,085 $ 63,980 $ 9,058 $ 6,815 $ 2,765 $ 63 $ 220,766 - ---------------------------------------------------------------------------------------------------------------------------------- Yield 5.48% 5.77% 5.71% 5.53% 5.26% 5.60% 5.58% ================================================================================================================================= </TABLE> Included in interest-bearing deposits are time deposits in the amount of $100,000 or more. As of December 31, 2000, the remaining maturities or repricing frequency of time deposits of $100,000 or more are as follows: (IN THOUSANDS) Three months or less $ 15,563 Over 3 months through 12 months 19,336 Over 1 year through 3 years 8,120 Over 3 years 1,117 - ----------------------------------------------- Total $ 44,136 =============================================== Interest expense on deposits of $100,000 or more amounted to $1,925,000 in 2000, $1,760,000 in 1999 and $1,047,000 in 1998. 37
38 9. BORROWED FUNDS SHORT-TERM BORROWINGS Short-term borrowings include the following: <TABLE> <CAPTION> (IN THOUSANDS) AT DECEMBER 31, 2000 1999 <S> <C> <C> Federal funds purchased (a) $ 5,000 $ - Federal Home Loan Bank borrowings (b) 70,000 58,000 Customer repurchase agreements (c) 10,241 4,705 Other repurchase agreements (d) 9,450 26,331 - --------------------------------------------------------------------------------------- Total short-term borrowings $ 94,691 $ 89,036 ======================================================================================= </TABLE> The weighted average interest rate on total short-term borrowings outstanding at December 31, 2000 was 6.66%. The maximum amount of total short-term borrowings outstanding at any month-end in 2000 was $104,216,000. (a) Federal funds purchased represent overnight federal funds borrowings from correspondent banks. The maximum month-end amount of such borrowings was $16,500,000 in 2000, $14,500,000 in 1999 and $2,000,000 in 1998. The average amount of such borrowings was $5,721,000 in 2000, $6,085,000 in 1999 and $2,801,000 in 1998. Weighted average interest rates were 6.70% in 2000, 4.91% in 1999 and 4.75% in 1998. (b) Short-term Federal Home Loan Bank loans are as follows: <TABLE> <CAPTION> AT DECEMBER 31, (IN THOUSANDS) 2000 1999 <S> <C> <C> Fixed rate 5.75% matured February 14, 2000 $ -- $10,000 Fixed rate 5.72% matured February 26, 2000 -- 5,000 Fixed rate 6.14% matured March 20, 2000 -- 10,000 Fixed rate 6.12% matured April 21, 2000 -- 10,000 Fixed rate 6.08% matured June 7, 2000 -- 10,000 Fixed rate 5.91% matured August 26, 2000 -- 5,000 Variable rate 5.825% maturing December 22, 2004, paid off in 2000 -- 5,000 Fixed rate 6.64% maturing January 2, 2001 15,000 -- Fixed rate 6.72% maturing January 30, 2001 15,000 -- Fixed rate 7.00% maturing April 20, 2001 15,000 -- Variable rate 6.70% maturing July 11, 2001 10,000 -- Variable rate 6.70% maturing August 28, 2001 5,000 -- Fixed rate 6.65% maturing October 22, 2001 10,000 -- Variable rate Open Repo Plus maturing overnight -- 3,000 - -------------------------------------------------------------------------------------------------------- Total short-term Federal Home Loan Bank borrowings $70,000 $58,000 ======================================================================================================== </TABLE> Collateral for Federal Home Loan Bank loans is described below under long-term borrowings. (c) Customer repurchase agreements mature overnight, and are collateralized by securities with a carrying value of $10,241,000 at December 31, 2000 and $4,705,000 at December 31, 1999. (d) Repurchase agreements included in short-term borrowings are as follows: AT DECEMBER 31, (IN THOUSANDS) 2000 1999 Fixed Rate 5.18% matured March 31, 2000 $ - $ 16,881 Fixed Rate 5.50% matured June 19, 2000 - 9,450 Fixed Rate 7.04% maturing June 16, 2001 9,450 - - ------------------------------------------------------------------------------- Total repurchase agreements $ 9,450 $ 26,331 =============================================================================== 38
39 Collateral arrangements and other terms related to repurchase agreements are described in (f) below. LONG-TERM BORROWINGS Long-term borrowings are as follows: <TABLE> <CAPTION> (IN THOUSANDS) AT DECEMBER 31, 2000 1999 <S> <C> <C> Federal Home Loan Bank borrowings (e) $ 605 $25,625 Repurchase agreements (f) -- 9,400 - ------------------------------------------------------------------------------------------------------- Total long-term borrowings $ 605 $35,025 ======================================================================================================= </TABLE> (e) Long-term Federal Home Loan Bank loans are as follows: <TABLE> <CAPTION> (IN THOUSANDS) AT DECEMBER 31, 2000 1999 <S> <C> <C> Variable rate at 4.74%, matured October 26, 2000 $ -- $ 5,000 Variable rate at 5.60%, maturing July 11, 2002, called in 2000 -- 10,000 Variable rate at 4.32%, maturing October 20, 2003, paid off in 2000 -- 10,000 Fixed rate at 6.86%, maturing December 30, 2016 537 555 Fixed rate at 6.83%, maturing June 5, 2017 68 70 - ------------------------------------------------------------------------------------------------------- Total long-term Federal Home Loan Bank borrowings $ 605 $25,625 ======================================================================================================= </TABLE> All Federal Home Loan Bank loans are collateralized by Federal Home Loan Bank stock, mortgage-backed securities and first mortgage loans with a total book value of $286,515,000 at December 31, 2000. (f) Repurchase agreements included in long-term borrowings are as follows: AT DECEMBER 31, (IN THOUSANDS) 2000 1999 Morgan Stanley fixed rate at 5.68%, matured January 30, 2000 $ - $ 9,400 ================================================================================ Securities sold under repurchase agreements were delivered to the broker-dealers who arrange the transactions. The broker-dealers may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Corporation substantially identical securities at the maturities of the agreements. The carrying value of the underlying securities was $9,940,000 at December 31, 2000 and $32,512,000 at December 31, 1999. Average daily repurchase agreement borrowings amounted to $14,372,000 in 2000, $41,940,000 in 1999 and $29,795,000 in 1998. During 2000, 1999, and 1998, the maximum amounts of outstanding borrowings under repurchase agreements were $35,731,000, $53,731,000 and $39,200,000. The weighted average interest rate on repurchase agreements was 5.68% in 2000, 5.70% in 1999 and 5.40% in 1998. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation's financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, 39
40 the fair value estimates may not be realized in an immediate settlement of the instrument. Statement of Financial Accounting Standards No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation. The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values. SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions. LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, credit card and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans, except residential mortgage and credit card loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The estimate of maturity is based on the Corporation's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates based on historical experience. For credit card loans, cash flows and maturities are estimated based on contractual interest rates and historical experience. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation's lending officers. DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at December 31, 2000 and 1999. The fair value of all other deposit categories is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible. BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements. ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values. The estimated fair values, and related carrying amounts, of the Corporation's financial instruments are as follows: <TABLE> <CAPTION> (IN THOUSANDS) AT DECEMBER 31, 2000 1999 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: <S> <C> <C> <C> <C> Cash and cash equivalents $ 13,824 $ 13,824 $ 18,063 $ 18,063 Available-for-sale securities 346,747 346,747 358,929 358,929 Held-to-maturity securities 1,911 1,914 1,880 1,830 Loans, net 323,014 323,355 305,761 306,062 Accrued interest receivable 4,953 4,953 5,066 5,066 Financial liabilities: Deposits 528,967 530,265 500,474 498,529 Short-term borrowings 94,691 94,771 89,036 88,933 Long-term borrowings 605 699 35,025 34,934 Accrued interest payable 1,725 1,725 1,026 1,026 </TABLE> 40
41 11. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS DEFINED BENEFIT PLANS The Corporation has a noncontributory defined benefit pension plan for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment. Also the Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not affect the liability balance at December 31, 2000 and 1999, and will not affect the Corporation's future expenses. The following tables show the funded status and components of net periodic benefit cost from these defined benefit plans: <TABLE> <CAPTION> (IN THOUSANDS) PENSION POSTRETIREMENT BENEFITS BENEFITS 2000 1999 2000 1999 <S> <C> <C> <C> <C> CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 7,141 $ 6,870 $ 771 $ 732 Service cost 308 302 27 28 Interest cost 491 460 52 50 Plan participants' contributions -- -- 56 44 Actuarial (gain) loss 14 (199) (1) 15 Benefits paid (308) (292) (115) (98) - ----------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year $ 7,646 $ 7,141 $ 790 $ 771 ================================================================================================================= 2000 1999 2000 1999 CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 9,237 $ 8,378 $ -- $ -- Actual return on plan assets 388 1,151 -- -- Employer contribution -- -- 59 54 Plan participants' contributions -- -- 56 44 Benefits paid (308) (292) (115) (98) - ----------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 9,317 $ 9,237 $ -- $ -- ================================================================================================================= Funded status $ 1,671 $ 2,096 $(790) $(771) Unrecognized net actuarial (gain) loss (886) (1,391) (95) (96) Unrecognized transition obligation (228) (251) 438 475 - ----------------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 557 $ 454 $(447) $(392) ================================================================================================================= <CAPTION> 2000 1999 2000 1999 WEIGHTED-AVERAGE ASSUMPTIONS: Discount rate 7.00% 7.00% 7.00% 7.00% Expected return on plan assets 8.50% 8.50% N/A N/A Rate of compensation increase 5.00% 5.00% N/A N/A </TABLE> 41
42 <TABLE> <CAPTION> PENSION BENEFITS POSTRETIREMENT BENEFITS COMPONENTS OF NET PERIODIC BENEFIT COST: 2000 1999 1998 2000 1999 1998 (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Service cost $ 308 $ 302 $ 267 $ 27 $ 28 $ 25 Interest cost 491 460 424 52 50 42 Expected return on plan assets (815) (749) (640) -- -- -- Amortization of transition obligation (23) (23) (23) 37 36 36 Recognized net actuarial (gain) loss (64) -- -- (2) -- (2) - ------------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost (benefit) $(103) $ (10) $ 28 $ 114 $114 $ 101 =============================================================================================================================== </TABLE> PROFIT SHARING AND DEFERRED COMPENSATION PLANS - ---------------------------------------------- The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation's matching contributions to the plan depend upon the tax deferred contributions of employees. The Corporation's basic and matching contributions were $511,000 in 2000, $513,000 in 1999 and $477,000 in 1998. The Corporation also has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to expense for officers' supplemental deferred compensation were $70,000 in 2000, $54,000 in 1999 and $42,000 in 1998. STOCK-BASED COMPENSATION PLANS - ------------------------------ The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 180,000 shares of common stock may be issued under the Stock Incentive Plan. Awards may be made under the Stock Incentive Plan in the form of qualified options ("Incentive Stock Options," as defined in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Through 1999, all awards under the Stock Incentive Plan were Incentive Stock Options, with exercise prices equal to the market price of the stock at the date of grant, ratable vesting over 5 years and a contractual expiration of 10 years. In 2000, there were awards of Incentive Stock Options and restricted stock. The Incentive Stock Options granted in 2000 have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years. The restricted stock awards vest ratably over 3 years. Also, the Corporation has an Independent Directors Stock Option Plan which allows the issuance of approximately 25,000 shares of common stock to non-employee directors. The recipients' rights to exercise these options expire 10 years from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Option Plan are equal to fair market value as of the dates of grant. There were 1,752 shares of restricted stock granted in December 2000. The fair value of the restricted stock granted, based on the market price, was $20.25 per share. There was no compensation expense recorded related to restricted stock awards in 2000. The Corporation applies Accounting Principles Board Opinion 25 and related interpretations in accounting for stock options. Accordingly, no compensation expense has been recognized for the stock options. Had compensation cost for the stock options been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the effect on the Corporation's net income and earnings per share would have been adjusted to the pro forma amounts indicated below. 42
43 <TABLE> <CAPTION> (NET INCOME IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Net income As reported $ 8,476 $ 11,485 $ 11,077 Pro forma $ 8,399 $ 11,428 $ 11,048 Earnings per share-basic As reported $ 1.61 $ 2.18 $ 2.11 Pro forma $ 1.60 $ 2.17 $ 2.10 </TABLE> For purposes of the calculations of SFAS No. 123, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: <TABLE> <CAPTION> 2000 1999 1998 <S> <C> <C> <C> Volatility 18% 18% 18% Expected option lives 6 Years 6 Years 6 Years Risk-free interest rate 5.00% 6.46% 5.05% Dividend yield 3.96% 3.76% 3.78% </TABLE> A summary of the status of the Corporation's stock option plans is presented below: <TABLE> <CAPTION> 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE <S> <C> <C> <C> <C> <C> <C> Outstanding, beginning of year 82,420 $ 29.63 58,850 $ 30.38 39,360 $ 27.09 Granted 18,615 $ 20.91 25,550 $ 27.67 20,500 $ 36.40 Exercised (225) $ 20.00 (680) $ 24.06 (1,010) $ 24.03 Forfeited -- -- (1,300) $ 27.89 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Outstanding, end of year 100,810 $ 28.04 82,420 $ 29.63 58,850 $ 30.38 ================================================================================================================================ Options exercisable at year-end 48,215 $ 28.69 30,700 $ 28.69 17,990 $ 26.99 Fair value of options granted $ 3.14 $ 5.27 $ 5.85 </TABLE> The following table summarizes information about stock options outstanding as of December 31, 2000: <TABLE> <CAPTION> OUTSTANDING REMAINING EXERCISABLE AT CONTRACTUAL AT EXERCISE PRICES DECEMBER 31, 2000 LIFE IN YEARS DECEMBER 31, 2000 <S> <C> <C> <C> $20.00 8,995 5 8,995 $25.50-$27.04 13,100 6 11,040 $33.25-$36.50 16,850 7 11,150 $33.13-$36.38 20,500 8 9,880 $25.00-$27.00 25,350 9 7,150 $20.25 16,015 10 - - --------------------------------------------------------------------------------- 100,810 48,215 ================================================================================= </TABLE> 43
44 \ 12. INCOME TAXES The following temporary differences gave rise to the net deferred tax asset at December 31, 2000 and 1999: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 <S> <C> <C> Deferred tax liabilities: Realized gains on securities $ 432 $ 432 Depreciation 218 241 Prepaid pension 195 156 Accretion on securities 16 15 Unrealized holding gains on securities 42 -- - ------------------------------------------------------------------------------------------------ Total 903 844 - ------------------------------------------------------------------------------------------------ Deferred tax assets: Allowance for loan losses (1,852) (1,796) Postretirement and sick benefits (175) (163) Loan fees and costs (89) (134) Supplemental executive retirement plan (158) (111) Writedown of foreclosed assets (17) (7) Unrealized holding losses on securities -- (4,577) - ------------------------------------------------------------------------------------------------ Total (2,291) (6,788) - ------------------------------------------------------------------------------------------------ Deferred tax asset, net $(1,388) $(5,944) ================================================================================================ </TABLE> The federal income tax provision is comprised of the following components: <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Currently payable $ 1,882 $2,931 $3,464 Deferred (63) 423 63 - ----------------------------------------------------------------------------------------- Total provision $ 1,819 $3,354 $3,527 ========================================================================================= </TABLE> The following tabulation is a reconciliation of the expected provision for federal income taxes determined by application of the statutory rates at which income is expected to be taxed and the actual income tax provision. <TABLE> <CAPTION> (IN THOUSANDS) 2000 1999 1998 AMOUNT % AMOUNT % AMOUNT % <S> <C> <C> <C> <C> <C> <C> Expected provision $ 3,603 35.00% $ 5,194 35.00% $ 5,111 35.00% Tax-exempt interest income (1,738) (16.88) (1,727) (11.64) (1,508) (10.30) Nondeductible interest expense 280 2.72 232 1.56 192 1.30 Dividends received deduction (235) (2.28) (203) (1.37) (165) (1.10) Surtax exemption (103) (1.00) (102) (0.69) (108) (0.70) Other, net 12 0.11 (40) (0.26) 5 -- - ----------------------------------------------------------------------------------------------------------------------------------- Effective income tax provision $ 1,819 17.67% $ 3,354 22.60% $ 3,527 24.20% =================================================================================================================================== </TABLE> 13. RELATED PARTY TRANSACTIONS Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows: 44
45 <TABLE> <CAPTION> (IN THOUSANDS) Beginning New Other Ending Balance Loans Repayments Changes Balance <S> <C> <C> <C> <C> <C> 14 directors, 6 executive officers 2000 $6,640 $ 724 $ (1,450) $ (184) $5,730 15 directors, 6 executive officers 1999 4,709 2,551 (789) 169 6,640 15 directors, 5 executive officers 1998 5,578 1,487 (1,647) (709) 4,709 </TABLE> The above transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risks of collectibility. Other changes represent transfers in and out of the related party category. 14. OFF-BALANCE SHEET RISK The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheet. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31, 2000 and 1999 are as follows: (IN THOUSANDS) 2000 1999 Commitments to extend credit $ 68,809 $ 60,472 Standby letters of credit $ 4,792 $ 6,057 Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management's credit assessment of the counterparty. Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. 15. REGULATORY MATTERS The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. 45
46 Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2000 and 1999, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. To be categorized as well capitalized, an institution must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the following table. The Corporation's and the Bank's actual capital amounts and ratios are also presented in the following table. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) MINIMUM TO BE WELL MINIMUM CAPITALIZED UNDER CAPITAL PROMPT CORRECTIVE ACTUAL REQUIREMENT ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ---------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> DECEMBER 31, 2000: Total capital to risk- weighted assets: Consolidated $96,295 22.77% $33,828 Greater than or equal to 8% $42,285 Greater than or equal to 10% Bank 81,498 22.10% 29,498 Greater than or equal to 8% 36,873 Greater than or equal to 10% Tier 1 capital to risk-weighted assets: Consolidated 88,887 21.02% 16,914 Greater than or equal to 4% 25,371 Greater than or equal to 6% Bank 75,187 20.39% 14,749 Greater than or equal to 4% 22,124 Greater than or equal to 6% Tier 1 capital to average assets: Consolidated 88,887 12.56% 28,309 Greater than or equal to 4% 35,386 Greater than or equal to 5% Bank 75,187 10.89% 27,623 Greater than or equal to 4% 34,529 Greater than or equal to 5% DECEMBER 31, 1999: Total capital to risk- weighted assets: Consolidated 96,222 24.99% $30,798 Greater than or equal to 8% 38,497 Greater than or equal to 10% Bank 78,893 21.62% 29,190 Greater than or equal to 8% 36,487 Greater than or equal to 10% Tier 1 capital to risk- weighted assets: Consolidated 85,507 22.21% 15,399 Greater than or equal to 4% 23,098 Greater than or equal to 6% Bank 72,014 19.74% 14,595 Greater than or equal to 4% 21,892 Greater than or equal to 6% Tier 1 capital to average assets: Consolidated 85,507 12.10% 28,276 Greater than or equal to 4% 35,345 Greater than or equal to 5% Bank 72,014 10.43% 27,613 Greater than or equal to 4% 34,517 Greater than or equal to 5% </TABLE> Restrictions imposed by Federal Reserve Regulation H limit dividend payments in any year to the current year's net income plus the retained net income of the prior two years without approval of the Federal Reserve Board. Accordingly, the Corporation's dividends in 2001 may not exceed $10,220,000, plus consolidated net income for 2001. Additionally, banking regulators limit the amount of dividends that may be paid by the Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $65,160,000 at December 31, 2000, subject to the minimum capital ratio requirements noted above. 46
47 Restrictions imposed by federal law prohibit the Corporation from borrowing from the Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to 10% of the Bank's stockholder's equity (excluding accumulated other comprehensive income) or $7,519,000 at December 31, 2000. 16. PARENT COMPANY ONLY The following is condensed financial information for Citizens & Northern Corporation. <TABLE> <CAPTION> CONDENSED BALANCE SHEET DECEMBER 31, (IN THOUSANDS) 2000 1999 <S> <C> <C> ASSETS Cash $ 63 $ 1,381 Investment in subsidiaries: Citizens & Northern Bank 74,597 60,981 Citizens & Northern Investment Corporation 13,566 13,585 Bucktail Life Insurance Company 2,085 1,913 Other assets 28 -- - ----------------------------------------------------------------------------------------------------------- TOTAL ASSETS $90,339 $77,860 =========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Dividends payable $ 1,353 $ 1,237 Other liabilities 17 -- Stockholders' equity 88,969 76,623 - ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $90,339 $77,860 =========================================================================================================== <CAPTION> CONDENSED INCOME STATEMENT YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> Dividends from Citizens & Northern Bank $ 4,077 $ 7,000 $ 5,500 Other dividend income -- 224 218 Securities gains -- 159 822 Expenses (179) (184) (356) - ---------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 3,898 7,199 6,184 Equity in undistributed income of subsidiaries 4,578 4,286 4,893 - ---------------------------------------------------------------------------------------------------------------- NET INCOME $ 8,476 $ 11,485 $ 11,077 ================================================================================================================ </TABLE> 47
48 <TABLE> <CAPTION> CONDENSED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, (IN THOUSANDS) 2000 1999 1998 <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 8,476 $ 11,485 $ 11,077 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiaries (4,578) (4,286) (4,893) Securities gains -- (159) (822) (Increase) decrease in other assets (28) 1,300 (200) Increase (decrease) in other liabilities 17 (144) 372 - ------------------------------------------------------------------------------------------------------------------ Net Cash Provided by Operating Activities 3,887 8,196 5,534 - ------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <S> <C> <C> <C> CASH FLOWS FROM INVESTING ACTIVITIES: Cash investment in subsidiary (225) (1,888) -- Purchase of available-for-sale securities -- (753) (2,257) Proceeds from sale of available-for-sale securities -- 360 1,441 - ------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (225) (2,281) (816) - ------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of treasury stock 6 16 24 Purchase of treasury stock -- -- (468) Dividends paid (4,986) (4,639) (4,188) - ------------------------------------------------------------------------------------------------------------------ Net Cash Used in Investing Activities (4,980) (4,623) (4,632) - ------------------------------------------------------------------------------------------------------------------ DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS (1,318) 1,292 86 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,381 89 3 - ------------------------------------------------------------------------------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 63 $ 1,381 $ 89 ================================================================================================================== </TABLE> 17. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following table presents summarized quarterly financial data for 2000 and 1999: <TABLE> <CAPTION> (IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 QUARTER ENDED Mar. 31, June 30, Sept. 30, Dec. 31, <S> <C> <C> <C> <C> Interest income $12,857 $12,949 $13,125 $13,224 Interest expense 7,145 7,396 7,790 7,814 - -------------------------------------------------------------------------------------------------------------------------- Interest margin 5,712 5,553 5,335 5,410 Provision for loan losses 226 150 150 150 - -------------------------------------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 5,486 5,403 5,185 5,260 Other income 1,358 1,050 963 1,119 Securities gains 15 322 230 810 Other expenses 4,209 4,116 4,171 4,410 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax provision 2,650 2,659 2,207 2,779 Income tax provision 501 446 374 498 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 2,149 $ 2,213 $ 1,833 $ 2,281 ========================================================================================================================== Net income per share - basic $ 0.41 $ 0.42 $ 0.35 $ 0.43 ========================================================================================================================== Net income per share - diluted $ 0.41 $ 0.42 $ 0.35 $ 0.43 ========================================================================================================================== </TABLE> 48
49 <TABLE> <CAPTION> 1999 QUARTER ENDED Mar. 31, June 30, Sept. 30, Dec. 31, <S> <C> <C> <C> <C> Interest income $11,315 $11,851 $12,536 $12,713 Interest expense 5,397 5,908 6,420 6,846 - -------------------------------------------------------------------------------------------------------------------------- Interest margin 5,918 5,943 6,116 5,867 Provision for loan losses 225 225 120 190 - -------------------------------------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 5,693 5,718 5,996 5,677 Other income 1,535 1,654 1,657 1,598 Securities gains 490 568 789 1,196 Other expenses 4,253 4,401 4,564 4,514 - -------------------------------------------------------------------------------------------------------------------------- Income before income tax provision 3,465 3,539 3,878 3,957 Income tax provision 789 751 954 860 - -------------------------------------------------------------------------------------------------------------------------- Net income $ 2,676 $ 2,788 $ 2,924 $ 3,097 ========================================================================================================================== Net income per share - basic $ 0.51 $ 0.53 $ 0.56 $ 0.59 ========================================================================================================================== Net income per share - diluted $ 0.51 $ 0.53 $ 0.56 $ 0.59 ========================================================================================================================== </TABLE> 49
50
51 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Citizens & Northern Corporation: We have audited the accompanying consolidated balance sheet of Citizens & Northern Corporation and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens & Northern Corporation and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Parente Randolph, PC Williamsport, Pennsylvania February 9, 2001 50
52 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ Information concerning Directors and Executive Officers is incorporated herein by reference to the Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders to be held on April 17, 2001. ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- Executive compensation information is incorporated herein by reference to the Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders to be held on April 17, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------- Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders to be held on April 17, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning loans to Directors and Executive Officers is provided in Note 13 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K. Additional information is incorporated herein by reference to disclosure appearing under the caption "Certain Transactions" of the Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders to be held on April 17, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1). The following consolidated financial statements are set forth in Part II, Item 8: Page ---- Independent Auditors' Report 50 Financial Statements: Consolidated Balance Sheet - December 31, 2000 and 1999 26 Consolidated Statement of Income - Years Ended December 31, 2000, 1999 and 1998 27 Consolidated Statement of Changes in Stockholders' Equity - Years Ended December 31, 2000, 1999 and 1998 28 Consolidated Statement of Cash Flows - Years Ended December 31, 2000, 1999 and 1998 29 Notes to Consolidated Financial Statements 30 - 49 (2) Financial statement schedules are either omitted because inapplicable or included in the financial statements or related notes. Individual financial statements of Bucktail Life Insurance Company and Citizens & Northern Investment Corporation, consolidated subsidiaries, have been omitted, as neither the assets nor the income from continuing operations before tax exceeded ten percent of the consolidated totals. 51
53 (3) Exhibits (numbered as in Item 601 of Regulation S-K): 2. Plan of acquisition, reorganization, arrangement, liquidation or succession Not applicable 3. (i) Articles of Incorporation Incorporated by reference to the exhibits filed with the Corporation's registration statement on Form S-4 on March 27, 1987. 3. (ii) By-laws Incorporated by reference to the exhibits filed with the Corporation's registration statement on Form S-4 on March 27, 1987. 4. Instruments defining the rights of security holders, including indentures Not applicable 9. Voting trust agreement Not applicable 10. Material contracts: <TABLE> <S> <C> 10.1 Citizens & Northern Corporation Independent Incorporated herein by reference to the Directors Stock Incentive Plan Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders to be held on April 17, 2001. 10.2 Citizens & Northern Bank Supplemental Executive Retirement Plan Filed herewith 10.2 (a) Amendment No. 1 to Citizens & Northern Bank Supplemental Executive Retirement Plan Filed herewith 10.2 (b) Amendment No. 2 to Citizens & Northern Bank Supplemental Executive Retirement Plan Filed herewith 10.3 Citizens & Northern Corporation 1995 Stock Incentive Plan Filed herewith 10.4 Citizens & Northern Bank 2001 Incentive Award Plan Filed herewith 11. Statement re: computation of per share earnings Information concerning the computation of earnings per share is provided in Note 3 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K. 12. Statements re: computation of ratios Not applicable 13. Annual report to security holders, Form 10-Q or quarterly report to security holders Not applicable 16. Letter re: change in certifying accountant Not applicable </TABLE> 52
54 <TABLE> <S> <C> <C> 18. Letter re: change in accounting principles Not applicable 21. Subsidiaries of the registrant Filed herewith 22. Published report regarding matters submitted to vote of security holders Not applicable 23. Consents of experts and counsel Not applicable 24. Power of attorney Not applicable 99. Additional exhibits: 99.1 Additional information mailed to stockholders with proxy statement and Form 10-K on March 19, 2001 Filed herewith </TABLE> (b) On November 17, 2000, a Current Report on Form 8-K was filed to report that the stockholders of Peoples Ltd. had voted not to approve the proposed merger with the Corporation, and that related merger and stock option agreements were terminated. (c) Exhibits - The required exhibits are listed under Part IV, Item 14(a)(3) of Form 10-K. (d) Financial statement schedules are omitted because the required information is not applicable or is included elsewhere in Form 10-K. 53
55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Citizens & Northern Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized: CITIZENS & NORTHERN CORPORATION By: /s/ Craig G. Litchfield - ---------------------------- Craig G. Litchfield Chairman, President and Chief Executive Officer Date: March 19, 2001 By: /s/ Mark A. Hughes - --------------------- Treasurer and Principal Accounting Officer Date: March 19, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. BOARD OF DIRECTORS Dennis F Beardslee /s/ Craig G Litchfield /s/ Dennis F. Beardslee Craig G Litchfield Date: March 19, 2001 Date: March 19, 2001 J Robert Bower /s/ Lawrence F Mase /s/ J Robert Bower Lawrence F Mase Date: March 19, 2001 Date: March 19, 2001 R Robert DeCamp /s/ Edward H Owlett, III /s/ R Robert DeCamp Edward H Owlett, III Date: March 19, 2001 Date: March 19, 2001 R Bruce Haner /s/ F David Pennypacker /s/ R Bruce Haner F David Pennypacker Date: March 19, 2001 Date: March 19, 2001 Susan E Hartley /s/ Leonard Simpson /s/ Susan E Hartley Leonard Simpson Date: March 19, 2001 Date: March 19, 2001 Karl W. Kroeck /s/ James E. Towner /s/ Karl W. Kroeck James E. Towner Date: March 19, 2001 Date: March 19, 2001 Edward L. Learn /s/ Donald E Treat /s/ Edward L. Learn Donald E Treat Date: March 19, 2001 Date: March 19, 2001 54