SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) FOR THE QUARTER ENDED: MARCH 31, 1997 COMMISSION FILE NUMBER: 0-16084 CITIZENS AND NORTHERN CORPORATION STATE OF INCORPORATION: PENNSYLVANIA I.R.S. EMPLOYER IDENTIFICATION NUMBER: 23-2451943 REGISTRANT'S TELEPHONE NUMBER (INCLUDING AREA CODE) : 717-724-3411 ADDRESS OF PRINCIPAL EXECUTIVE OFFICE: THOMPSON STREET RALSTON, PA 17763 MAILING ADDRESS OF EXECUTIVE OFFICE: 90-92 MAIN STREET WELLSBORO, PA 16901 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 report), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ---- ---- As of April 1, 1997 5,168,354 COMMON SHARES WERE OUTSTANDING
CITIZENS AND NORTHERN CORPORATION--FORM 10-Q <TABLE> <CAPTION> INDEX PAGE - --------------------------------------------------------------------- -------- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Condition--March 31, 1997 3 and December 31, 1996 Consolidated Statements of Income--Three Months Ended 4 March 31, 1997, 1996 Consolidated Statements of Cash Flows--Three Months 5 Ended March 31, 1997, 1996 Notes to Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7--19 PART II. OTHER INFORMATION 20 Items 1,2,3,4, and 5 have been omitted as they are not applicable to the registrant. ITEM 6. Exhibits and Reports on FORM 8-K (a) Exhibits (b) Reports on FORM 8-K Signature Page 21 </TABLE> 2
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information Item 1. Financial Statements CONSOLIDATED BALANCE SHEET <TABLE> <CAPTION> UNAUDITED AUDITED MARCH 31, DECEMBER 31, (IN THOUSANDS) 1997 1996 - -------------------------------------------------------- ----------------- ----------------- <S> <C> <C> ASSETS Cash & Due From Banks................................... 15,058 14,320 Interest-Bearing Deposits............................... 730 655 Available-for-Sale Securities: US Treasury Securities................................. 2,470 2,475 Securities of Other US Government Agencies............. 30,531 36,341 Mortgage Backed Securities............................. 178,306 183,483 Obligations of States and Municipal Subdivisions....... 59,708 55,943 Other Securities....................................... 27,892 29,611 Total Available-for-Sale Securities................... 298,907 307,853 Held-to-Maturity Securities: US Treasury Securities................................. 598 699 Mortgage Backed Securities............................. 729 770 Securities of Other US Government Agencies............ 200 100 Total Held-to-Maturity Securities.................... 1,527 1,569 Federal Funds Sold Loans: Loans to Political Subdivisions........................ 6,240 6,555 Other Loans............................................ 274,554 272,084 Total Loans........................................... 280,794 278,639 Less--Allowance for Possible Loan Losses.............. (4,801) (4,776) Unearned Income................................... (39) (42) Loans, Net.......................................... 275,954 273,821 Bank Premises and Equipment............................. 6,492 6,609 Other Real Estate....................................... 421 583 Accrued Interest on Bonds and Loans..................... 4,292 4,404 Other Assets............................................ 2,298 378 TOTAL ASSETS............................................ 605,679 610,192 LIABILITIES Deposits: Demand............................................... 44,212 47,320 Interest Checking.................................... 39,238 38,916 Money Market......................................... 102,926 100,523 Savings.............................................. 46,731 46,175 Other Time........................................... 199,388 197,377 Total Deposits..................................... 432,495 430,311 Dividends Payable...................................... 911 902 Borrowed Funds......................................... 50,598 59,600 Federal Funds Purchased................................ 2,000 Securities Sold Under Agreement to Repurchase.......... 44,650 44,650 Other Liabilities...................................... 4,353 3,136 TOTAL LIABILITIES...................................... 535,007 538,599 SHAREHOLDERS' EQUITY Common Stock, Par Value $1.00 per Share Authorized 10,000,000; Issued 5,168,354 and 5,117,182 in 1997 and 1996, respectively............ 5,168 5,117 Stock Dividend Distributable........................... 1,305 Paid in Capital........................................ 13,794 12,539 Retained Earnings...................................... 49,713 47,862 Total.................................................. 68,675 66,823 Unrealized Gains on Available-for-Sale Securities........................................... 2,994 5,767 Less: Treasury Stock at Cost 105,901 shares at March 31, 1997..................... (997) 104,850 shares at December 31, 1996.................. (997) TOTAL SHAREHOLDERS' EQUITY............................. 70,672 71,593 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY.............. 605,679 610,192 Contingent Liabilities Under Unused Letters of Credit.................................... 4,866 5,106 </TABLE> 3
CITIZENS AND NORTHERN CORPORATION--FORM 10-Q Part I--Financial Information (continued) Item 1. Financial Statements (continued) CONSOLIDATED STATEMENT OF INCOME (Dollars in Thousands Except Share Data) <TABLE> <CAPTION> 3 MONTHS ENDED FISCAL YEAR TO DATE MARCH 31, 3 MONTHS ENDED MARCH 31, --------------- --------------------------- <S> <C> <C> <C> <C> 1997 1996 1997 1996 INTEREST INCOME....................... (Current) (Prior Year) (Current) (Prior Year) Interest and Fees on Loans............ 6,999 6,723 6,999 6,723 Interest on Balances with Depository Institutions........................ 9 7 9 7 Interest on Loans to Political Subdivisions........................ 94 106 94 106 Interest on Federal Funds Sold........ 56 35 56 35 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable............................. 3,635 3,994 3,635 3,994 Tax Exempt.......................... 859 680 859 680 Dividends........................... 207 180 207 180 Total Interest and Dividend Income... 11,859 11,725 11,859 11,725 INTEREST EXPENSE Interest on Deposits................. 4,419 4,398 4,419 4,398 Interest on Other Borrowings......... 1,318 1,388 1,318 1,388 Total Interest Expense............... 5,737 5,786 5,737 5,786 Interest Margin...................... 6,122 5,939 6,122 5,939 Provision for Possible Loan Losses... 181 175 181 175 Interest Margin After Provision for Possible Loan Losses................ 5,941 5,764 5,941 5,764 OTHER INCOME Service Charges on Deposit Accounts.. 266 270 266 270 Service Charges and Fees............. 59 63 59 63 Trust Department Income.............. 261 205 261 205 Insurance Commissions, Fees and Premiums........................... 109 119 109 119 Other Operating Income............... 44 18 44 18 Total Other Income Before Realized Gains on Securities, Net............ 739 675 739 675 Realized Gains on Securities, (Net).. 787 97 787 97 Total Other Income................... 1,526 772 1,526 772 OTHER EXPENSES Salaries and Wages................... 1,496 1,449 1,496 1,449 Pensions and Other Employee Benefits. 469 465 469 465 Occupancy Expense, Net............... 172 178 172 178 Furniture and Equipment Expense...... 162 188 162 188 Other Operating Expense.............. 1,504 1,325 1,504 1,325 Total Other Expenses................. 3,803 3,605 3,803 3,605 Income Before Income Tax Provision... 3,664 2,931 3,664 2,931 Income Tax Provision................. 901 752 901 752 NET INCOME............................ 2,763 2,179 2,763 2,179 PER SHARE DATA: Net Income............................ 0.55 0.43 0.55 0.43 Dividend Per Share.................... 0.18 0.17 0.18 0.17 Number Shares Used in Computation..... 5,062,453 5,062,453 5,062,453 5,062,453 Number Shares Issued.................. 5,168,354 5,117,182 5,168,354 5,117,182 Number Shares Authorized.............. 10,000,000 10,000,000 10,000,000 10,000,000 Dividends Actually Paid............... 0.18 0.17 0.18 0.17 </TABLE> 4
CITIZENS AND NORTHERN CORPORATION--FORM 10-Q Part I--Financial Information (continued) Item 1. Financial Statements (continued) CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) <TABLE> <CAPTION> PERIODS ENDED MARCH 31, <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: 1997 1996 Net Income............................................ 2,763 2,179 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Possible Loan Losses................... 181 175 Realized (Gain), on Available-for-Sale and Held-to-Maturity Securities, Net.................... (787) (97) Provision for Depreciation........................... 164 191 Accretion and Amortization........................... 153 243 Deferred Income Tax.................................. (61) (18) (Increase) in Accrued Interest Receivable and Other Assets......................... (914) (363) Increase (Decrease) in Accrued Interest Payable and Other Liabilities................................... 2,655 2,112 Net Cash Provided by Operating Activities............. 4,154 4,422 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the Maturity of Held-to-Maturity Securities........................................... 142 34 Purchase of Held-to-Maturity Securities............... (100) (100) Proceeds from Sales of Available-for-Sale Securities........................................... 13,811 144 Proceeds from Maturities of Available-for-Sale Securities........................................... 12,474 10,494 Purchase of Available-for-Sale Securities............. (21,740) (31,451) Net Increase in Loans................................. (2,314) (218) Purchase of Premises and Equipment.................... (47) (34) Sale of Other Real Estate............................. 162 Purchase of Foreclosed Assets......................... (331) Net Cash Used in Investing Activities................. 2,388 (21,462) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits.............................. 2,184 3,639 Increase (Decrease) in Short Term Borrowings.......... 2,000 (15,200) Proceeds from (Repayment of) Long Term Borrowings..... (9,002) 34,000 Dividends Declared.................................... (911) (852) Net Cash Provided by Financing Activities.......... (5,729) 21,587 INCREASE IN CASH AND CASH EQUIVALENTS.................. 813 4,547 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........... 14,975 13,590 CASH AND CASH EQUIVALENTS, END OF YEAR................. 15,788 18,137 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid......................................... 6,660 4,324 Income Taxes Paid..................................... 73 1,063 </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q Part I - Financial Information (continued) Item 1. Financial Statements (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The financial information included herein, with the exception of the Consolidated Balance Sheet dated December 31, 1996, is unaudited; however, such information reflects all adjustments ( consisting solely of normal recurring adjustments ) that are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations and changes in financial position for the interim periods. Results reported for the three-month period ended March 31, 1997 may not be indicative of the results for the year ended December 31, 1997. This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation. 6
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations EARNINGS OVERVIEW The Corporation reported net income for the quarter ended March 31, 1997 of $2,763,000, or $.55 per common share. This compares to $2,179,000, or $.43 per share, for the quarter ended March 31, 1996 and $.44 per share for the fourth quarter of 1996. Income for the three months ended March 31, 1997 increased 26.8 percent when compared to the same three- month period in 1996. The increase was the result of realized gains on the sale of certain equity investments. The gross realized gains amounted to $787,000; this compares to realized gains reported March 31, 1996 of $97,000 and $24,000 for the fourth quarter of 1996. The directors and management of the Corporation expect that 1997 will produce results comparable to those reported for 1996. This assumption is based on the current interest rate environment and could change if the FOMC decides to raise rates again in 1997. NET INTEREST MARGIN Quarters Ended March 31, 1997/1996 The net spread between the rate of return on earning assets and the cost of interest-bearing liabilities remained virtually unchanged; it was 3.53 percent for the quarter ended March 31, 1996 and 3.54 percent for the quarter ended March 31, 1997. The net spread for the year ended December 31, 1996 was 3.49 percent. The gross rate of return on earning assets for the quarters ended March 31, 1997, March 31, 1996 and the year ended December 31, 1996 were 8.34 percent, 8.33 percent and 8.29 percent, respectively. The average cost of interest-bearing liabilities for the quarters ended March 31, 1997, March 31, 1996 and the year ended December 31, 1996 were 4.80 percent, 4.80 percent and 4.80 percent, respectively. Interest rates have increased slightly since March 31, 1997 as the FOMC increased the Federal Funds rate by 25 basis points at its April 1997 meeting. The corporation is already seeing the cost of funds increase on its deposit base and borrowings that must be refunded. The average rate of return on the portfolio of available-for-sale investments remained unchanged during the periods being compared. However, the average balance for the quarter ended March 31, 1997 has declined about $10,000,000 when compared to the outstanding balance at March 31, 1996 and December 31, 1996. The decrease is caused by payments on mortgage-backed securities being used to fund loan demand. The payment stream on the mortgage-backed instruments amounts to $1,800,000 to $2,100,000 per month. Average gross loans for the periods ended March 31, 1997, December 31, 1996 and March 31, 1996 totaled $279,430,000, $271,616,000 and $263,960,000, respectively. The composition of the portfolio has remained unchanged with loans secured by real estate posting the largest increase. Other loan categories remained unchanged with the exception of consumer loans which declined slightly. The average rate of return on the loan portfolio has increased from 9.84 percent for the period ended March 31, 1996 to 10.29 percent for the quarter ended March 31, 1997. The rate of return on the loan portfolio for the year ended December 31, 1996 was 10.31 percent. On the liability side of the balance sheet average total deposits have remained nearly unchanged. Average deposits for the quarters ended March, 31, 1997, March 31, 1996 and the year ended December 31, 1996 were respectively, $428,308,000, $429,036,000 and $427,559,000. The Corporation still maintains a strong base of Money Market accounts and average balances have increased nearly $7,000,000 since the period ended March 31, 1996. Other deposit categories have remained flat or declined slightly. The corporation has had a difficult time attracting deposits due to the flow of funds into mutual funds and the competition in our market area from credit unions. Average borrowed funds for the quarter ended March 31, 1997 have decreased $2,205,000 when compared to the quarter ended March 31, 1996 and just over $4,500,000 when compared to the year ended December 31, 1996. The decline will more than likely continue into 1997 as the yield curve remains relatively flat. Funding opportunities with spreads large enough to make the risk worthwhile are scarce. Management is expecting interest rates to increase another 25 basis points in the first half of 1997 and level off for the remainder of the year. Tables I and II are provided to reflect average balances and rates paid for the quarters ended March 31, 1997, March 31, 1996 and the year ended December 31, 1996, respectively. 7
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q Part I - Financial Information (continued) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) <TABLE> <CAPTION> Rate Rate Rate TABLE I--ANALYSIS OF AVERAGE DAILY BALANCES AND RATES Period Earned/ Period Earned/ Period Earned (In Thousands) Ended Paid Ended Paid Ended Paid 3/31/97 % 12/31/96 % 3/31/96 % <S> <C> <C> <C> <C> <C> <C> Available-for-Sale Securities: U S Treasury Securities 2,505 5.18 2,506 5.11 2,508 5.17 Securities of Other US Government Agencies and Corporations 31,808 6.99 30,514 6.96 16,599 6.87 Mortgage Backed Securities 181,750 6.73 197,581 6.64 208,718 6.61 Obligations of States and Political Subdivisions 56,170 6.20 49,700 6.06 43,900 6.28 Stock 15,313 5.48 16,342 5.34 16,689 4.37 Other Securities 3,340 2.06 6,905 6.84 12,945 7.93 Total Available-for-Sale Securities 290,886 6.52 303,548 6.50 301,359 6.50 Held-to-Maturity Securities: U S Treasury Securities 599 6.77 698 6.02 667 6.08 Securities of Other U S Government Agencies and Corporations 133 6.10 50 8.00 Mortgage Backed Securities 745 7.62 829 7.12 1,072 6.43 Obligations of States and Political Subdivisions Stock Other Securities Total Held-to-Maturity Securities 1,477 7.14 1,577 6.66 1,739 6.30 Interest -bearing Due from Banks 548 6.66 455 8.13 881 3.22 Federal Funds Sold 4,273 5.32 1,100 5.45 2,740 5.18 Loans: Real Estate Loans 220,166 9.04 210,289 9.17 203,401 9.48 Consumer 32,672 19.96 35,305 18.13 35,368 17.36 Agricultural 2,770 9.96 2,750 10.11 2,654 10.24 Commercial/Industrial 16,875 9.61 16,207 9.73 15,505 9.89 Other 520 7.80 237 10.55 215 7.55 Political Subdivisions 6,198 6.15 6,629 6.40 6,660 6.45 Leases 229 5.31 201 7.96 157 10.33 Total Loans 279,430 10.29 271,618 10.31 263,960 9.84 Total Earning Assets 576,614 8.34 578,298 8.29 570,679 8.33 Cash 11,918 11,502 12,454 Securities Valuation Reserve 8,667 5,924 9,092 Allowance for Possible Loan Losses (4,769) (4,726) (4,681) Other Assets 6,492 6,617 3,809 Bank Premises & Equipment 6,555 6,793 7,241 Total Assets 605,477 604,408 598,594 INTEREST-BEARING LIABILITIES Interest Checking 38,341 2.45 40,558 2.46 40,729 2.44 Money Market 104,125 4.56 100,618 4.53 97,145 4.48 Savings 46,297 2.48 46,751 2.50 46,479 2.50 Certificate of Deposit 117,522 5.46 117,596 5.47 119,814 5.66 Individual Retirement Accounts 78,927 5.86 79,076 5.77 81,901 5.50 Other Time Deposits 1,947 2.71 1,937 2.99 2,113 2.30 Federal Funds Purchased 467 6.08 967 5.69 1,403 6.07 Other Borrowed Funds 96,613 5.50 101,121 5.56 98,818 5.61 Total Interest-bearing Liabilities 484,239 4.80 488,624 4.80 488,402 4.80 Demand Deposits 41,139 42,500 39,378 Other Liabilities 8,769 6,794 3,291 TOTAL LIABILITIES 534,157 537,918 531,071 Stockholders' Equity 65,599 62,797 60,532 Securities Valuation Reserve 5,721 3,693 6,991 Total Liabilities and Stockholders' Equity 605,477 604,408 598,594 Interest Rate Spread 3.54 3.49 3.53 </TABLE> 8
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information ( continued ) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Table II--Analysis of the Effect of Volume and Rate Changes in Interest Income and Interest Expense <TABLE> <CAPTION> QUARTERS ENDED MARCH 31, 1997/1996 ----------------------------------------- <S> <C> <C> <C> CHANGE IN CHANGE IN TOTAL (IN THOUSANDS) VOLUME RATE CHANGE - --------------------------------------------------------------------------------- ------------- ------------- ----------- EARNING ASSETS Available-for-Sale Securities: U S Treasury Securities Securities of Other U S Government Agencies and Corporations..................... 262 5 267 Mortgage Backed Securities....................................................... (448) 61 (387) Obligations of States and Political Subdivisions................................. 188 (9) 179 Stock............................................................................ (13) 40 27 Other Securities................................................................. (118) (118) (236) Total Available-for-Sale Securities............................................ (129) (21) (150) Held-to-Maturity Securities: U S Treasury Securities Securities of Other U S Government Agencies and Corporations..................... 2 2 Mortgage Backed Securities....................................................... (8) 5 (3) Obligations of States and Political Subdivisions Stock Other Securities Total Held-to-Maturity Securities.............................................. (6) 5 (1) Interest -bearing Due from Banks................................................... 2 2 Federal Funds Sold................................................................. 21 21 Loans: Real Estate Loans................................................................ 350 (198) 152 Consumer......................................................................... (97) 191 94 Agricultural..................................................................... 3 (2) 1 Commercial/Industrial............................................................ 32 (10) 22 Other............................................................................ 6 6 Political Subdivisions........................................................... (7) (5) (12) Leases........................................................................... 17 (18) (1) Total Loans.................................................................... 304 (42) 262 Total Interest Income.............................................................. 190 (56) 134 INTEREST-BEARING LIABILITIES Interest Checking.................................................................. (14) 1 (13) Money Market....................................................................... 78 20 98 Savings............................................................................ (1) (3) (4) Certificates of Deposit............................................................ (32) (58) (90) Individual Retirement Accounts..................................................... (37) 66 29 Other Time Deposits................................................................ (1) 2 1 Federal Funds Purchased............................................................ (14) (14) Other Borrowed Funds............................................................... (30) (26) (56) Total Interest Expense............................................................. (51) 2 (49) NET INTEREST INCOME................................................................ 241 (58) 183 </TABLE> The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 9
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part 1--Financial Information ( continued ) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ( CONTINUED ) ALLOWANCE FOR POSSIBLE LOAN LOSSES The Allowance for Possible Loan Losses is a reserve established by management, which it believes will be adequate to absorb future loan losses based on management's assessment of the quality of the total loan portfolio. The assessment is performed on an ongoing basis and reviewed by the Board of Directors quarterly. The quarterly assessment process is conducted by a loan quality committee which consists of the President, Chief Financial Officer, Executive Vice Presidents in charge of loans and branch administration and the Auditor. The committee reviews the "Watch List", a collection of loans that have had a history of delinquency, past due reports, nonperforming loans and historical information related to charge-offs and recoveries by loan categories. The committee then allocates the reserve balance across the various loan categories to determine the unallocated portion. The committee uses two methods of allocation. The first calculates a ratio of average losses by type to the average outstanding balance by type. The ratio is then applied to the current outstanding balance of the various loan categories to determine the portion of the reserve to be allocated. The second method extracts loans by a quality rating system. The loans are categorized as "Substandard", "Doubtful" and "Loss". Regulatory guidelines of 15 percent of substandard, 50 percent of doubtful and 100 percent of loss are applied to establish reserve allocations. The Corporation also employs and relies heavily on an independent loan appraiser. However, his work is only performed annually and on loans of $175,000 or higher. Other factors used to evaluate the reserve level are loan growth, economic conditions of the market area and peer group comparisons. Tables III through VI present current and historical information related to the Allowance for Possible Loan Losses. TABLE III--RECONCILIATION OF THE RESERVE FOR POSSIBLE LOAN LOSSES <TABLE> <CAPTION> ESTIMATE ACTUAL ACTUAL ACTUAL ACTUAL DEC 31, 1997 MAR 31, 1997 DEC 31, 1996 DEC 31, 1995 DEC 31, 1994 ------------ ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Beginning Balance January 1,............... 4,775,960 4,775,960 4,579,210 4,228,741 3,816,982 Provision Charged to Earnings.............. 723,500 180,876 700,500 736,500 737,496 Year-to-Date Recoveries.................... 196,167 27,863 167,926 187,473 194,312 Year-to-Date Charge-offs................... (495,627) (183,384) (671,676) (573,504) (520,049) Ending Balance............................. 5,200,000 4,801,315 4,775,960 4,579,210 4,228,741 </TABLE> 10
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part 1--Financial Information ( continued ) TEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ( CONTINUED ) TABLE IV--LOAN LOSS HISTORY AND OTHER STATISTICS <TABLE> <CAPTION> (IN THOUSANDS) 1997 EST 1996 1995 1994 1993 1992 1991 AVE. - ----------------------------------------- --------- --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Net Loans *.............................. 293,542 278,597 264,182 258,472 238,755 225,475 199,072 244,092 Net Charge offs.......................... 299 504 387 326 247 518 3,142 854 Allowance for Possible Loan Losses Balance................................ 5,200 4,776 4,579 4,229 3,817 3,356 2,548 3,884 Provision for Loan Losses Charged to Earnings............................... 724 701 737 737 708 1,326 3,151 1,230 Earnings (Budget)........................ 8,676 9,255 7,866 7,494 8,127 7,290 5,643 7,613 Earnings Coverage of Net Charge offs..... 19.4x 18.4x 20.3x 23.0x 32.9x 14.1x 1.8x 18x Allowance Coverage of Net Charge offs.... 11.6x 9.5x 11.8x 13.0x 15.5x 6.5x 0.8x 10x Loans Ninety Days or More Past Due and Still Accruing......................... 2,900 2,994 2,915 2,743 2,899 2,532 3,810 2,982 Net Charge offs as a Percent of the Provision.............................. 61.9% 69.9% 52.5% 44.2% 34.9% 39.1% 99.7% 56.7% Year-End Nonperforming Loans............. 1,000 864 279 624 843 1,351 417 730 Allowance as a Percentage of Gross Loans: *...................................... Bank (1)................................. 1.77% 1.71% 1.73% 1.64% 1.60% 1.49% 1.28% 1.58% Peer Group (2)........................... 1.48% 1.50% 1.61% 1.65% 1.82% 1.42% 1.44% 1.57% </TABLE> *Gross Loans less Unearned Discount (1) At March 31, 1997 (2) At December 31, 1996 Averages are based on the years 1991 through 1996 11
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information ( continued ) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Table V--Allocation of the Allowance for Possible Loan Losses based on Historical Data (In Thousands) <TABLE> <CAPTION> LOAN CLASSIFICATION 1997 EST 1996 1995 1994 1993 1992 1991 AVERAGE - ------------------------------- ----------- --------- --------- --------- --------- --------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Commercial, Ag., Mun.& Other... 20,000 29,832 26,318 22,649 26,376 22,712 23,541 25,238 Real Estate--Construction...... 1,250 1,166 1,284 2,593 2,224 993 982 1,540 Real Estate--Mortgage.......... 229,042 213,957 200,066 193,095 170,532 162,434 136,716 179,467 Credit Card & Related Plans.... 10,000 8,902 9,934 9,896 9,212 9,991 6,694 9,105 All Other Loans to Individuals.................. 33,000 24,518 26,417 30,094 30,282 29,182 31,762 28,709 Lease Financing................ 250 222 163 145 154 162 129 163 Total Loans.................... 293,542 278,597 264,182 258,472 238,780 225,474 199,824 244,222 Letter of Credit Commitments... 5,000 5,106 2,633 4,415 5,046 4,670 N/A 4,191 All Other Commitments Consumer....................... 28,000 28,049 24,811 24,202 23,323 22,174 N/A 23,628 Mortgage....................... 6,000 5,802 7,276 9,566 9,466 9,117 N/A 8,856 Commercial..................... 11,000 10,825 10,201 9,901 9,790 5,670 N/A 8,891 <CAPTION> LOAN CLASSIFICATION - ------------------------------- <S> <C> <C> <C> Commercial, Ag., Mun.& Other... 0.02006 X 29,832= 598 Real Estate--Construction...... 0.00000 X 1,166= Real Estate--Mortgage.......... 0.00027 X 213,957= 59 Credit Card & Related Plans.... 0.01369 X 8,902= 122 All Other Loans to Individuals.................. 0.00605 X 24,518= 148 Lease Financing................ 0.00000 X 222= 0 Total Loans.................... Letter of Credit Commitments... 0.00000 X 5,106= 0 All Other Commitments Consumer....................... 0.00605 X 28,049= 170 Mortgage....................... 0.00027 X 5,802= 2 Commercial..................... 0.02006 X 10,825= 217 Reserve Allocation 1,360 Fasb 114 Allocation 209 Unallocated Portion 3,631 Reserve Balance 5,200 </TABLE> The reserve allocation is determined by using the six-year average net charge-offs divided by the six-year average loan balance by type Table VI--Allocation of The Allowance for Possible Loan Losses Based on Regulatory Standards <TABLE> <S> <C> FDIC Reserve Allocation................................... Mar 31, 1997 Substandard @ 15 %........................................ 999,008 Doubtful @ 50 %........................................... 36,000 Loss @ 100%............................................... 174,348 ------------ Required Reserve.......................................... 1,209,356 Unallocated............................................... 3,591,959 ------------ Reserve Balance........................................... 4,801,315 ------------ ------------ </TABLE> 12
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q PART I--FINANCIAL INFORMATION (continued) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) TABLE VII--MAJOR CATEGORIES OF NONINTEREST INCOME <TABLE> <CAPTION> PERIODS ENDED MARCH 31, -------------------------------------------- $ % 1997 1996 CHANGE CHANGE --------- --------- ----------- --------- <S> <C> <C> <C> <C> Service Charges on Deposit Accounts........................................... 266 270 (4) (1.48) Service Charges and Fees...................................................... 59 63 (4) (6.35) Trust Department Income....................................................... 261 205 56 27.32 Insurance Commissions, Fees and Premiums...................................... 109 119 (10) (8.40) Other Operating Income........................................................ 44 18 26 144.44 Total Other Income, Excluding Realized Securities Gains....................... 739 675 64 9.48 Realized Gains on Securities, Net............................................. 787 97 690 711.34 Total Other Income............................................................ 2,265 1,447 818 56.53 </TABLE> Total Other Income increased 9 percent when comparing the quarter ended March 31, 1997 to the same quarter in 1996 and slightly over 1 percent when compared to the quarter ended December 31, 1996. Other operating income consists of service charges on deposit accounts, other service charges and fees, trust department income, insurance commissions and fees, and other operating income. Service Charges on Deposit Accounts is made up of fees generated by the use of the deposit accounts and overdraft charges. There was not a significant change when comparing the quarter ended March 31, 1997 and the previous quarter to the quarter ended March 31, 1996. Other Service Charges and Fees is comprised of debit card fees, credit card annual fees, fees for issuing official checks, noncustomer check cashing fees and other miscellaneous fees. A comparison of the current quarter, the previous quarter and the quarter ended March 31, 1996 reveals a negligible amount of change. Trust Department Income is the second largest contributor of noninterest income, excluding realized securities gains. Income generated by the Trust Department for the quarter ended March 31, 1997, December 31, 1996 and March 31, 1996, respectively, amounted to $261,000, $237,000 and $205,000. The increases posted during the periods being compared is due to the increase in trust assets under management. The increase can be attributed to new accounts and the increase in the market values of investments. Insurance Commissions, Fees and Premiums generated by Bucktail Life Insurance Company for March 31, 1997, December 31, 1996 and March 31, 1996 were $109,000, $153,000 and $119,000, respectively. Premiums generated in the fourth quarter slightly exceeded the first quarter 1997 as they included four months of Life Premiums due to a posting error. Also, life premiums experienced a decline from an average of $17,000 per month during 1996 to $10,000 per month during the current quarter. The insurance company writes life and accident and health insurance on the bank's consumer loan portfolio. Other Operating Income for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996 amounted to $44,000, $13,000 and $18,000, respectively. The increase in fees during the first quarter of 1997 was caused by the posting of income totaling $18,000 associated with the Supplemental Employee Retirement Plan. The income had previously been posted directly to the investment account. Realized Securities Gains and Losses amounted to $787,000 during the first quarter of 1997. The recognized gains were primarily from the sale of bank stocks which management and the Board of Directors felt had become overpriced in relation to the book value and some had been driven up in price because of merger speculation. It was deemed appropriate to lock in the appreciated value. The Corporation also sold two thirds of it Student Loan portfolio due to disappointing returns on that asset; a premium amounting to $28,000 was realized. Also, during the first quarter of 1996 and the fourth quarter of 1996 one issue of bank stock was sold from the portfolio because it had become overpriced. Gains amounted to $97,000 during the first quarter of 1996 and $24,000 in the fourth quarter. 13
The following table compares the various categories of other expense for the periods ended March 31, 1997 and March 31, 1996. TABLE VIII--MAJOR CATEGORIES OF NONINTEREST EXPENSE <TABLE> <CAPTION> PERIODS ENDED MARCH 31, -------------------------------------------- $ % 1997 1996 CHANGE CHANGE --------- --------- ----------- --------- <S> <C> <C> <C> <C> Salaries and Wages............................................................ 1,496 1,449 47 3.24 Pensions and Other Employee Benefits.......................................... 469 465 4 0.86 Occupancy Expense, Net........................................................ 172 178 (6) (3.37) Furniture and Equipment Expense............................................... 162 188 (26) (13.83) Other Operating Expense....................................................... 1,504 1,325 179 13.51 Total Other Expense........................................................... 3,803 3,605 198 5.49 </TABLE> Other noninterest expense consists of Salaries and Wages, Pension and Other Benefit Expense, Furniture and Equipment Expense and Other Operating Expense. Salaries and Wages increased just over three percent when comparing the quarters ended March 31, 1997 and March 31, 1996 and one percent when compared to the quarter ended December 31, 1996. This can be attributed to merit raises and an increase in full time equivalent employees from 198 at March 31, 1996 to 202 at December 31, 1996 and 205 at March 31, 1997. Pensions and Other Employee Benefits were nearly equal for the quarters ended March 31, 1997 and March 31, 1996, at $469,000 and $465,000, respectively. When compared to December 31, 1996, however, they reflect an increase of 14.6 percent and 13.7 percent, respectively. This is caused by adjustments made to budgeted amounts in the fourth quarter when actual expense amounts are known for 401(k) contributions. Occupancy Expense did not change materially during the three quarterly periods being compared. Furniture and Equipment Expense amounted to $162,000, $180,000 and $188,000, respectively, for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996. The decline reflected in the first quarter of 1997 when compared to the other periods was due to a decrease in depreciation expense as the main frame computer was fully depreciated in the last quarter of 1996. Other Operating Expense increased 13.51 percent during the first quarter of 1997 when compared to the same period a year ago. The increase can be attributed to two expense categories and a loss amounting to $53,000 on the sale of other real estate that sold for less than the booked market value. The expense categories that increased significantly were credit card processing costs and advertising expense; they increased $62,890 and $79,699, respectively. There was a negligible change when comparing the last quarter of 1996 to the quarter ended March 31, 1997. 14
STATEMENT OF CONDITION Average total assets of the Corporation for the quarter ended March 31, 1997 increased slightly at 1.1 percent over the quarter ended March 31, 1996. When compared to the year ended December 31, 1996 the increase was less than 1 percent. The asset side of the balance sheet saw a decline in the average investment portfolio as the amortization of the mortgage-backed investments was used to fund loan growth. The municipal bond portfolio has increased from an average balance of $43,900,000 during the first quarter of 1996 to $56,170,000 for the quarter ended March 31, 1997. The increase is due to the favorable after tax returns available on tax free investments. The respective average balance in the loan portfolio was $279,430,000, $271,618,000 and $263,960,000 for the quarters ended March 31, 1997, December 31, 1996 and March 31, 1996. The loan growth was centered around real estate secured loans as other loan categories showed little or no change. Consumer loans did decline slightly as just over $2,000,000 in students loans were sold. The liability side of the balance sheet has also remained relatively constant during the past fifteen months. Average total deposits have remained nearly unchanged. Interest Checking, Individual Retirement Accounts and Certificates of Deposit did decline slightly during 1996, however, the decline was made up by the strength of the Money Market Accounts which continue to exhibit growth. Total average borrowed funds also changed very little during the quarters being compared. The primary source of borrowed funds was repurchase agreements placed with the Federal Home Loan Bank of Pittsburgh and other brokers. Terms of the Repurchase Agreements range from one to five years. Other borrowed funds were in the form of term loans with the Federal Home Loan Bank of Pittsburgh which are secured by a blanket security agreement. Interest rate swings have caused wide fluctuations in the market value of the Available-for-Sale securities, causing large adjustments to the capital account. The net adjustments to capital for March 31, 1997, December 31, 1996 and March 31, 1996 were $2,994,000, ($5,767,000) and ($4,239,000), respectively. Interest rates have begun to increase slightly during the first quarter of 1997 and it is expected that the trend will continue into the second quarter of 1997 before stabilizing for the remainder of 1997. The Corporation's capital remains well in excess of regulatory guidelines and will be discussed later in Management's Discussion and Analysis. LIQUIDITY AND INTEREST RATE SENSITIVITY The Corporation's ability to absorb short term deposit fluctuations or unusually heavy loan demand, should they occur, are met by using a flexline of credit available through the Federal Home Loan Bank of Pittsburgh, repurchase agreements or payments derived from amortizing investments. The flexline of credit provides the Corporation with a credit line which approximates 10 percent of the Corporation's borrowing capacity, or about $28.5 million. Repurchase agreements are secured with mortgage-backed instruments. The maturities of the repurchase agreements generally range from one to two years. The Corporation also has credit lines with correspondent banks totaling approximately $15,000,000 and amortizing payments received on the investment portfolio amount to about $2,000,000 each month. The Corporation uses a computer model to measure the theoretical effect of interest rate swings on the market value and the net interest margin using a rate shock. The model shocks interest 300 basis points upward and downward. The Asset and Liability Policy set by the Board of Directors imposes limits on the change in net interest income and market value of portfolio equity at a 200 basis point increase in interest rates. Net interest income may not decline more than 20 percent and the change in market value of portfolio equity may not decline more than 25 percent. The Board of Directors feels that the parameters are reasonable based on the capital strength of the Corporation. 15
TABLE IX--RATE SENSITIVE ASSETS AND RATE SENSITIVE LIABILITIES <TABLE> <CAPTION> UNDER ONE TO FIVE FIVE TO TEN OVER TEN NON- ONE YEAR YEARS YEARS YEARS INTEREST TOTAL ---------- ----------- ----------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> ASSETS Interest-bearing Deposits........................... 730 730 Available-for-Sale Securities: U S Treasury Securities......................... 2,470 2,470 U S Agency Securities........................... 25,708 4,823 30,531 Mortgage Backed Securities...................... 533 26,348 14,575 136,850 178,306 Municipals...................................... 1,526 8,180 4,104 45,898 59,708 Other Bonds..................................... 2,015 550 1,350 3,915 Stocks.......................................... 23,977 23,977 Total Available-for-Sale Securities................. 2,059 39,013 44,937 212,898 298,907 Held-to-Maturity Securities: U S Treasury Securities......................... 598 598 U S Agency Securities........................... 100 100 200 Mortgage Backed Securities...................... 28 278 423 729 Total Held-to-Maturity Securities................... 598 128 378 423 1,527 Loans and Lease Financing: Real Estate-Construction........................ 1,184 1,184 Real Estate-Mortgage............................ 84,007 47,390 44,002 40,117 215,516 Consumer........................................ 11,445 22,229 1,420 1,578 36,672 Agricultural.................................... 1,286 1,265 97 88 2,736 Commercial...................................... 12,170 3,564 676 1,137 17,547 Other........................................... 219 26 389 634 Political Subdivisions.......................... 1,569 2,441 1,454 776 6,240 Leases.......................................... 9 9 18 229 265 Total Loans......................................... 111,889 76,924 47,667 44,314 280,794 Less: Unearned Discount............................. (39) (39) Allowance for Loan Losses..................... (4,801) (4,801) Net Loans and Leases................................ 111,889 76,924 47,667 44,314 (4,840) 275,954 Federal Funds Sold.................................. 0 Cash and Due From Banks............................. 15,058 15,058 Other Assets........................................ 4,292 9,211 13,503 Total Assets........................................ 119,568 116,065 92,982 257,635 19,429 605,679 LIABILITIES AND EQUITY Interest-bearing Deposits: Money Market.................................... 102,926 102,926 NOW and SNOW.................................... 39,238 39,238 Christmas/Fund Clubs............................ 1,616 1,616 CD's............................................ 79,364 38,398 41 0 117,803 Reg/Key Savings................................. 46,731 46,731 GPS............................................. 714 714 IRA's........................................... 79,255 79,255 Total Interest-bearing Deposits..................... 303,113 38,398 41 46,731 388,283 Demand Deposits..................................... 44,212 44,212 Federal Funds Purchased............................. 2,000 2,000 Repurchase Agreements............................... 19,650 25,000 44,650 Borrowed Funds: Variable Fixed........................................... 35,000 15,000 598 50,598 Total Borrowed Funds................................ 35,000 15,000 598 50,598 Other Liabilities................................... 911 4,353 5,264 Stockholders' Equity................................ 70,672 70,672 Total Liabilities and Equity........................ 360,674 78,398 41 47,329 119,237 605,679 Interest Rate Sensitivity Gap....................... (241,106) 37,667 92,941 210,306 (99,808) 0 </TABLE> 16
Table X--Rate Shock Analysis and the Theoretical Effect on Equity Market Values for the Period Ended March 31, 1997 (In Thousands) <TABLE> <CAPTION> -3.00 -2.00 -1.00 FLAT 1.00 2.00 3.00 --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> ASSETS BOOK VALUE................................... 605,679 605,679 605,679 605,679 605,679 605,679 605,679 MARKET VALUE................................. 664,664 646,500 629,888 613,043 599,839 589,220 579,258 CHANGE....................................... 58,985 40,821 24,209 7,364 (5,840) (16,459) (26,421) LIABILITIES BOOK VALUE................................... 535,007 535,007 535,007 535,007 535,007 535,007 535,007 MARKET VALUE................................. 548,399 543,447 538,629 533,425 529,373 524,928 520,600 CHANGE....................................... (13,392) (8,440) (3,622) 1,582 5,634 10,079 14,407 EQUITY BEGINNING BALANCE............................ 62,976 62,976 62,976 62,976 62,976 62,976 62,976 ASSET CHANGE................................. 58,985 40,821 24,209 7,364 (5,840) (16,459) (26,421) LIABILITY CHANGE............................. (13,392) (8,440) (3,622) 1,582 5,634 10,079 14,407 MARKET VALUE................................. 108,569 95,357 83,563 71,922 62,770 56,596 50,962 </TABLE> Table XI--Current Exposure to Hypothetical Change in Interest Rates for the Period Ended March 31, 1997 <TABLE> <CAPTION> NET INTEREST INCOME MV OF PORTFOLIO EQUITY CHANGE IN RATES PROJECTED PROJECTED BASIS POINTS CHANGE CHANGE - --------------------------------------------------- --------------------- ----------------------- <S> <C> <C> 300............................................... -4.1 -28.9 200............................................... -3.5 -21.2 100............................................... -3.2 -12.7 0............................................... 0.0 0.0 - -100............................................... 5.3 16.1 - -200............................................... 10.2 32.3 - -300............................................... 14.5 50.6 </TABLE> 17
CAPITAL Total capital of the Corporation, excluding unrealized gains on Available-for-Sale Securities, at March 31, 1997, December 31, 1996 and March 31, 1996 amounted to $67,678,000, $65,826,000 and $61,351,000, respectively, and as is shown in the following table is well in excess of regulatory guidelines. TABLE XII--CAPITAL RATIOS (In Thousands) <TABLE> <CAPTION> MARCH 31, DECEMBER 31, MARCH 31, 1997 1996 1996 ----------- ------------ ----------- <S> <C> <C> <C> Leverage Ratio (Equity/Total Liabilities).................................. 12.6% 12.2% 11.3% TIER I Total Stockholders' Equity........................................... 67,678 65,826 61,351 TIER II Allowance for Possible Loan Losses(1)............................... 3,953 3,957 0 Total Qualifying Capital............................................... 71,631 69,783 61,351 Risk Adjusted Assets--Balance Sheet......................................... 303,107 303,147 301,646 Risk Adjusted Assets--Off Balance Sheet..................................... 12,464 13,172 12,328 Total Risk Adjusted Assets.................................................. 315,571 316,319 313,974 Ratios TIER I Capital to Risk Weighted Assets................................. 21.45% 20.81% 17.11% Minimum Required March 31, 1997........................................ 4.00% Minimum Required December 31, 1996..................................... 4.00% Minimum Required March 31, 1996........................................ 4.00% Total Capital to Risk Weighted Assets.................................. 22.70% 22.06% 19.54% Minimum Required March 31, 1997........................................ 8.00% Minimum Required December 31, 1996..................................... 8.00% Minimum Required March 31, 1996........................................ 8.00% </TABLE> - ------------------------ (1) Allowable addition may not exceed 1.25 percent of Risk Adjusted Assets. 18
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Citizens and Northern Corporation is not a litigant in any pending material lawsuits. It is the opinion of the counsel of Citizens and Northern Corporation that minor lawsuits which are pending will not have a significant or materially detrimental affect on the capital of the Corporation or in any way affect the results of operations. ITEM 5. OTHER EVENTS a. None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits filed as part of this report--None b. No reports on Form 8-K were filed during the period ended March 31, 1997 19
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q SIGNATURE PAGE -------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date May 14, 1997 /S/ CRAIG G. LITCHFIELD ----------- ---------------------- Craig G. Litchfield President and Chief Executive Officer Date May 14, 1997 /S/ JAMES W. SEIPLER ----------- ---------------------- James W. Seipler Treasurer (Chief Financial Officer) 20