SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) FOR THE SIX MONTH PERIOD ENDED JUNE 30, 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 July 1, 1997 5,168,354 COMMON SHARES WERE OUTSTANDING 1
CITIZENS AND NORTHERN CORPORATION - FORM 10-Q INDEX <TABLE> <CAPTION> PAGE ----- <S> <C> PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Statements of Condition--June 30, 1997 and December 31, 1996.............. 3 Consolidated Statements of Income--Three Months Ended June 30, 1997, 1996.............. 4 Six Months Ended June 30, 1997, June 30, 1996........................................ 5 Consolidated Statements of Cash Flows--Six Months Ended June 30, 1997, 1996............ 6 Notes to Consolidated Financial Statements............................................. 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 8-19 PART II. OTHER INFORMATION 20 Items 1,2,3, 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 (In Thousands) <TABLE> <CAPTION> AUDITED UNAUDITED DECEMBER 31, JUNE 30, 1997 1996 ------------- ------------ <S> <C> <C> ASSETS Cash & Due From Banks.............................................. 16,679 14,320 Interest Bearing Deposits.......................................... 601 655 ------------- ------------ 17,280 14,975 Available-for-Sale Securities: U.S. Treasury Securities......................................... 2,484 2,475 Securities of Other U.S. Government Agencies..................... 26,948 36,341 Mortgage Backed Securities....................................... 173,898 183,483 Obligations of States and Municipal Subdivisions................. 62,043 55,943 Other Securities................................................. 30,404 29,611 ------------- ------------ Total Available-for-Sale Securities............................ 295,777 307,853 Held-to-Maturity Securities: U.S. Treasury Securities......................................... 598 699 Securities of Other U.S. Government Agencies..................... 350 100 Mortgage Backed Securities....................................... 682 770 ------------- ------------ Total Held-to-Maturity Securities.............................. 1,630 1,569 Loans: Loans to Political Subdivisions.................................. 6,586 6,555 Other Loans...................................................... 278,299 272,084 ------------- ------------ Total Loans.................................................... 284,885 278,639 Less--Allowance for Possible Loan Losses....................... (4,809) (4,776) Unearned Income.............................................. (50) (42) ------------- ------------ Loans, Net................................................. 280,026 273,821 Bank Premises and Equipment........................................ 6,560 6,609 Other Real Estate.................................................. 286 583 Accrued Interest on Bonds and Loans................................ 4,337 4,404 Other Assets....................................................... 1,008 378 ------------- ------------ TOTAL ASSETS....................................................... 606,904 610,192 ------------- ------------ ------------- ------------ LIABILITIES Deposits: Demand........................................................... 48,915 47,320 Interest Checking................................................ 37,732 38,916 Money Market..................................................... 105,787 100,523 Savings.......................................................... 47,009 46,175 Other Time....................................................... 199,618 197,377 ------------- ------------ Total Deposits................................................. 439,061 430,311 Dividends Payable.................................................. 911 902 Borrowed Funds..................................................... 50,669 59,600 Federal Funds Purchased............................................ 4,000 Securities Sold Under Agreement to Repurchase...................... 29,800 44,650 Other Liabilities.................................................. 5,978 3,136 ------------- ------------ TOTAL LIABILITIES.................................................. 530,419 538,599 SHAREHOLDERS' EQUITY Common Stock, Par Value $1.00 per Share............................ 5,168 5,117 Authorized 10,000,000; Issued 5,168,354 and 5,117,182 in 1997 and 1996, respectively Stock Dividend Distributable..................................... 1,305 Paid in Capital.................................................... 13,795 12,539 Retained Earnings.................................................. 51,290 47,862 ------------- ------------ Total 70,253 66,823 Unrealized Gains on Available-for-Sale Securities 7,228 5,767 Less: Treasury Stock at Cost 105,761 shares at June 30, 1997.................................. (996) 105,101 shares at December 31, 1996.............................. (997) ------------- ------------ TOTAL SHAREHOLDERS' EQUITY......................................... 76,485 71,593 ------------- ------------ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY........................... 606,904 610,192 ------------- ------------ ------------- ------------ </TABLE> The accompanying notes are an integral part of these condensed financial statements 3
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information Item 1. Financial Statements <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF INCOME THREE MONTHS ENDED (In Thousands) (Unaudited) JUNE 30, <S> <C> <C> 1997 1996 ------------ ------------ INTEREST INCOME Interest and Fees on Loans..................................... 7,129 6,807 Interest on Balances with Depository Institutions.............. 10 10 Interest on Loans to Political Subdivisions.................... 101 106 Interest on Federal Funds Sold................................. 68 23 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable...................................................... 3539 4,065 Tax Exempt................................................... 893 761 Dividends.................................................... 205 227 ------------ ------------ Total Interest and Dividend Income............................. 11,945 11,999 INTEREST EXPENSE Interest on Deposits........................................... 4554 4,371 Interest on Other Borrowings................................... 1292 1,415 ------------ ------------ Total Interest Expense......................................... 5,846 5,786 ------------ ------------ Interest Margin................................................ 6,099 6,213 Provision for Possible Loan Losses............................. 181 175 ------------ ------------ Interest Margin After Provision for Possible................... 5,918 6,038 Loan Losses OTHER INCOME Service Charges on Deposit Accounts............................ 274 288 Service Charges and Fees....................................... 72 67 Trust Department Income........................................ 249 183 Insurance Commissions, Fees and Premiums....................... 124 149 Other Operating Income......................................... 319 9 ------------ ------------ Total Other Income Before Realized Gains on Securities, Net.... 1,038 696 Realized Gains on Securities, (Net)............................ 20 171 ------------ ------------ Total Other Income............................................. 1,058 867 OTHER EXPENSES Salaries and Wages............................................. 1470 1,473 Pensions and Other Employee Benefits........................... 401 420 Occupancy Expense, Net......................................... 183 189 Furniture and Equipment Expense................................ 173 177 Other Operating Expense........................................ 1522 1,347 ------------ ------------ Total Other Expenses........................................... 3,749 3,606 ------------ ------------ Income Before Income Tax Provision............................. 3,227 3,299 Income Tax Provision........................................... 743 812 ------------ ------------ NET INCOME..................................................... 2,484 2,487 ------------ ------------ ------------ ------------ PER SHARE DATA: Net Income....................................................... 0.49 0.49 ------------ ------------ Dividend Per Share............................................... 0.18 0.17 ------------ ------------ Number Shares Used in Computation................................ 5,062,507 5,062,453 Number Shares Issued............................................. 5,168,354 5,117,182 Number Shares Authorized......................................... 10,000,000 10,000,000 Dividends Actually Paid.......................................... 0.18 0.17 ------------ ------------ </TABLE> The accompanying notes are an integral part of these condensed financial statements 4
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information Item 1. Financial Statements <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF INCOME SIX MONTHS ENDED (In Thousands) (Unaudited) JUNE 30, <S> <C> <C> 1997 1996 ------------ ----------- INTEREST INCOME Interest and Fees on Loans..................................... 14,128 13,530 Interest on Balances with Depository Institutions.............. 19 17 Interest on Loans to Political Subdivisions.................... 195 212 Interest on Federal Funds Sold................................. 124 58 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable...................................................... 7,174 8,059 Tax Exempt................................................... 1,752 1,441 Dividends.................................................... 412 407 ------------ ----------- Total Interest and Dividend Income............................. 23,804 23,724 INTEREST EXPENSE Interest on Deposits........................................... 8,973 8,769 Interest on Other Borrowings................................... 2,610 2,803 ------------ ----------- Total Interest Expense......................................... 11,583 11,572 ------------ ----------- Interest Margin................................................ 12,221 12,152 Provision for Possible Loan Losses............................. 362 350 ------------ ----------- Interest Margin After Provision for Possible................... 11,859 11,802 Loan Losses OTHER INCOME Service Charges on Deposit Accounts............................ 540 558 Service Charges and Fees....................................... 131 130 Trust Department Income........................................ 510 388 Insurance Commissions, Fees and Premiums....................... 233 268 Other Operating Income......................................... 363 27 ------------ ----------- Total Other Income Before Realized Gains on Securities, Net.... 1,777 1,371 Realized Gains on Securities, (Net)............................ 807 268 ------------ ----------- Total Other Income............................................. 2,584 1,639 OTHER EXPENSES Salaries and Wages............................................. 2,966 2,922 Pensions and Other Employee Benefits........................... 870 885 Occupancy Expense, Net......................................... 355 367 Furniture and Equipment Expense................................ 335 365 Other Operating Expense........................................ 3,026 2,672 ------------ ----------- Total Other Expenses........................................... 7,552 7,211 ------------ ----------- Income Before Income Tax Provision............................. 6,891 6,230 Income Tax Provision........................................... 1,644 1,564 ------------ ----------- NET INCOME..................................................... 5,247 4,666 ------------ ----------- ------------ ----------- PER SHARE DATA: Net Income....................................................... 1.04 0.92 ------------ ----------- Dividend Per Share............................................... 0.36 0.34 ------------ ----------- Number Shares Used in Computation................................ 5,062,507 5,062,453 Number Shares Issued............................................. 5,168,354 5,117,182 Number Shares Authorized......................................... 10,000,000 10,000,000 Dividends Actually Paid.......................................... 0.36 0.34 ------------ ----------- </TABLE> The accompanying notes are an integral part of these condensed financial statements 5
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information Item 1. Financial Statements <TABLE> <CAPTION> PERIODS ENDED JUNE 30 -------------------- <S> <C> <C> (IN THOUSANDS) 1997 1996 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income................................................................................. 5,247 4,666 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Possible Loan Losses....................................................... 362 350 Realized (Gain) Loss on Securities, Net.................................................. (807) (268) Provision for Depreciation............................................................... 346 381 Accretion and Amortization............................................................... 284 429 Deferred Income Tax...................................................................... (130) (20) Decrease (Increase) in Accrued Interest Receivable and Other Assets...................... 404 (1,682) (Decrease) Increase in Accrued Interest Payable and Other Liabilities.................... 2,099 3,869 --------- --------- Net Cash Provided by Operating Activities................................................ 7,805 7,725 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the Maturity of Held-to-Maturity Securities.................................. 189 82 Purchase of Held-to-Maturity Securities.................................................... (250) (200) Proceeds from Sales of Available-for-Sale Securities....................................... 17,358 11,071 Proceeds from Maturities of Available-for-Sale Securities.................................. 23,360 20,418 Purchase of Available-for-Sale Securities.................................................. (26,739) (51,937) Net Increase in Loans...................................................................... (6,567) (5,643) Purchase of Premises and Equipment......................................................... (297) (174) Sale of Foreclosed Assets.................................................................. 356 174 Purchase of Foreclosed Assets.............................................................. (60) (331) --------- --------- Net Cash Used in Investing Activities.................................................... 7,350 (26,540) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits................................................................... 8,750 403 Increase (Decrease) in Short Term Borrowings............................................... (10,850) 7,650 Proceeds from (Repayment of) Long Term Borrowings.......................................... (8,931) 14,000 Proceeds from the Sale of Treasury Stock................................................... 3 Dividends Declared......................................................................... (1,822) (1,704) --------- --------- Net Cash Provided by (Used In) Financing Activities...................................... (12,850) 20,349 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................................. 2,305 1,534 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................................. 14,975 13,590 --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR....................................................... 17,280 15,124 --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid.............................................................................. 8,297 9,052 Income Taxes Paid.......................................................................... 1,617 1,876 </TABLE> The accompanying notes are an integral part of these condensed financial statements 6
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 six-month period ended June 30, 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. 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 EARNINGS OVERVIEW The Corporation reported net income for the six months ended June 30, 1997 of $5,247,000, or $1.04 per common share. This compares to $4,666,000, or $.92 per share, for the six-month period ended June 30, 1996 and $.91 per share for the six month period ended December 31, 1996. Income for the six-month period ended June 30, 1997 increased 13.04 percent when compared to the same six - month period in 1996. The increase was the result of realized gains on the sale of certain equity investments and the sale of a copyright. The gross realized gains amounted to $807,000; this compares to realized gains reported June 30, 1996 of $268,000 and $207,000 for the last six months 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 Six-Month Periods Ended June 30, 1997/1996 The net spread between the rate of return on earning assets and the cost of interest-bearing liabilities declined slightly when compared to the six-month period ended June 30, 1996. The net spread for the six-month periods ended June 30, 1997 and June 30, 1996 was 3.48 percent and 3.55 percent, respectively. The net spread for the year ended December 31, 1996 was 3.49 percent. The gross rate of return on earning assets for the six-month periods ended June 30, 1997, June 30, 1996 and the year ended December 31, 1996 was 8.30 percent, 8.31 percent and 8.29 percent, respectively. The average cost of interest-bearing liabilities for the same periods was 4.82 percent, 4.76 percent and 4.80 percent, respectively. Interest rates have remained relatively flat since the FOMC increased the Federal Funds rate by 25 basis points at its April 1997 meeting. The Corporation is anticipating very little change in the current rate structure for the balance of the third quarter with a possible small hike in the fourth quarter. The average rate of return on the portfolio of Available-for-Sale investments remained nearly unchanged during the periods being compared. However, the average balance for the six-month period ended June 30, 1997 has declined about $16,000,000 when compared to the average outstanding balances held for the six months ended June 30, 1996. Average balances have declined just over $13,000,000 since 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 averages about $2,100,000 per month. Average gross loans for the periods ended June 30, 1997, December 31, 1996 and June 30, 1996 totaled $281,059,000, $271,618,000 and $264,895,000, respectively. The composition of the portfolio has remained unchanged with loans secured by real estate remaining the largest single category of loans. Other loan categories also remained unchanged with the exception of consumer loans which declined slightly. The average rate of return on the loan portfolio has declined slightly from 10.46 percent for the six months ended June 30 1996 to the current 10.28 percent. The loan portfolio returned 10.31 percent for the year ended December 31, 1996. On the liability side of the balance sheet, average total interest-bearing deposit balances have stayed at nearly the same level for the periods ended June 30, 1997 and June 30, 1996. Average interest-bearing balances for the periods, respectively, amounted to $390,698,000 and $388,999,000. Average interest- bearing balances for the year ended December 31, 1997 were $386,536,000. The Corporation still maintains a strong base of Money Market accounts and average balances have increased more than $7,000,000 since the period ended June 30, 1996. Other deposit categories have remained flat or declined slightly. The corporation has had difficulty 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 six months ended June 30, 1997 have decreased $5,489,000 when compared to the six months ended June 30, 1996 and $7,448,000 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. Investment 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 last half of 1997, possibly in the last quarter of the year. Tables I and II are provided to reflect average balances and rates paid for the quarters ended June 30, 1997, June 30, 1996 and the year ended December 31, 1996, respectively. 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 I--ANALYSIS OF AVERAGE DAILY BALANCES AND RATES <TABLE> <CAPTION> RATE RATE RATE PERIOD EARNED/ PERIOD EARNED/ PERIOD EARNED/ (IN THOUSANDS) ENDED PAID ENDED PAID ENDED PAID - ---------------------------------------------------------- --------- ----------- --------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> EARNING ASSETS............................................ 06/30/97 % 12/31/96 % 06/30/96 % Available-for-Sale Securities: U. S. Treasury Securities................................. 2,504 5.15 2,506 5.11 2,507 5.15 Securities of Other U. S. Government Agencies and......... 29,778 7.00 30,514 6.96 24,693 6.90 Mortgage Backed Securities................................ 180,623 6.68 197,581 6.64 206,841 6.55 Obligations of States and Political Subdivisions.......... 57,902 6.10 49,700 6.06 46,201 6.29 Stock..................................................... 15,197 5.47 16,342 5.34 16,805 4.90 Other Securities.......................................... 4,429 1.64 6,905 6.84 9,562 8.10 --------- ----- --------- ----- --------- ----- Total Available-for-Sale Securities................... 290,433 6.45 303,548 6.50 306,609 6.48 --------- ----- --------- ----- --------- ----- Held-to-Maturity Securities: U. S. Treasury Securities................................. 598 6.41 698 6.02 698 6.07 Securities of Other U. S. Government Agencies and Corporations............................................ 242 6.67 50 8.00 16 12.60 Mortgage Backed Securities................................ 725 7.79 829 7.12 866 6.75 Obligations of States and Political Subdivisions Stock Other Securities --------- ----- --------- ----- --------- ----- Total Held-to-Maturity Securities..................... 1,565 7.09 1,577 6.66 1,580 6.51 --------- ----- --------- ----- --------- ----- Interest -bearing Due from Banks.......................... 428 8.95 455 8.13 575 5.96 Federal Funds Sold........................................ 4,681 5.34 1,100 5.45 2,176 5.38 Loans: Real Estate Loans......................................... 221,674 9.05 210,289 9.17 203,930 9.41 Consumer.................................................. 32,527 19.85 35,305 18.13 35,192 17.70 Agricultural.............................................. 2,749 10.05 2,750 10.11 2,676 10.17 Commercial/Industrial..................................... 16,923 9.63 16,207 9.73 16,014 9.76 Other..................................................... 558 8.31 237 10.55 229 7.93 Political Subdivisions.................................... 6,394 6.15 6,629 6.40 6,680 6.40 Leases.................................................... 234 4.31 201 7.96 174 8.11 --------- ----- --------- ----- --------- ----- Total Loans........................................... 281,059 10.28 271,618 10.31 264,895 10.46 --------- ----- --------- ----- --------- ----- Total Earning Assets...................................... 578,166 8.30 578,298 8.29 575,835 8.31 Cash...................................................... 12,162 11,502 12,549 Securities Valuation Reserve.............................. 6,537 5,924 6,936 Allowance for Possible Loan Losses........................ (4,796) (4,726) (4,581) Other Assets.............................................. 5,790 6,617 5,597 Bank Premises & Equipment................................. 6,521 6,793 6,946 --------- ----- --------- ----- --------- ----- Total Assets.......................................... 604,380 604,408 603,282 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- INTEREST-BEARING LIABILITIES Interest Checking......................................... 38,738 2.46 40,558 2.46 40,735 2.45 Money Market.............................................. 106,093 4.53 100,618 4.53 99,006 4.52 Savings................................................... 46,696 2.48 46,751 2.50 47,186 2.50 Certificates of Deposit................................... 118,019 5.46 117,596 5.47 118,745 5.55 Individual Retirement Accounts............................ 79,014 5.93 79,076 5.77 81,067 5.41 Other Time Deposits....................................... 2,138 2.36 1,937 2.99 2,260 2.41 Federal Funds Purchased................................... 448 6.30 967 5.69 1,829 5.95 Other Borrowed Funds...................................... 93,673 5.59 101,121 5.56 99,162 5.59 --------- ----- --------- ----- --------- ----- Total Interest-bearing Liabilities........................ 484,819 4.82 488,624 4.80 489,990 4.76 Demand Deposits........................................... 40,996 42,500 41,871 Other Liabilities....................................... 6,600 6,794 5,278 --------- ----- --------- ----- --------- ----- TOTAL LIABILITIES......................................... 532,415 537,918 537,139 Stockholders' Equity...................................... 67,598 62,797 60,555 --------- ----- --------- ----- --------- ----- Securities Valuation Reserve.............................. 4,367 3,693 5,588 --------- ----- --------- ----- --------- ----- Total Liabilities and Stockholders' Equity.................................................. 604,380 604,408 603,282 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Interest Rate Spread...................................... 3.48 3.49 3.55 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- </TABLE> 9
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> SIX-MONTH PERIOD ENDED JUNE 30, 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.................. 176 13 189 Mortgage Backed Securities..................................................... (872) 142 (730) Obligations of States and Political Subdivisions............................... 353 (42) 311 Stock.......................................................................... (18) 23 5 Other Securities............................................................... (140) (208) (348) ------ ------ ------ Total Available-for-Sale Securities.......................................... (501) (72) (573) ------ ------ ------ Held-to-Maturity Securities: U. S. Treasury Securities...................................................... (3) 1 (2) Securities of Other U.S. Government Agencies and Corporations.................. 7 (0) 7 Mortgage Backed Securities..................................................... (17) 16 (1) Obligations of States and Political Subdivisions Stock Other Securities ------ ------ ------ Total Held-to-Maturity Securities............................................ (13) 17 4 ------ ------ ------ Interest-bearing Due from Banks.................................................. 2 2 Federal Funds Sold............................................................... 66 66 Loans: Real Estate Loans.............................................................. 773 (334) 439 Consumer....................................................................... (187) 299 112 Agricultural................................................................... 4 (2) 2 Commercial/Industrial.......................................................... 43 (10) 33 Other.......................................................................... 14 0 14 Political Subdivisions......................................................... (9) (8) (17) Leases......................................................................... 6 (8) (2) ------ ------ ------ Total Loans.................................................................. 644 (63) 581 ------ ------ ------ Total Interest Income............................................................ 196 (116) 80 ------ ------ ------ INTEREST-BEARING LIABILITIES Interest Checking................................................................ (24) 3 (21) Money Market..................................................................... 159 5 164 Savings.......................................................................... (6) (4) (10) Certificates of Deposit.......................................................... (20) (56) (76) Individual Retirement Accounts................................................... (53) 203 150 Other Time Deposits.............................................................. (1) (1) (2) Federal Funds Purchased.......................................................... (43) 3 (40) Other Borrowed Funds............................................................. (153) (1) (154) ------ ------ ------ Total Interest Expense........................................................... (141) 152 11 ------ ------ ------ NET INTEREST INCOME.............................................................. 337 (268) 69 ------ ------ ------ ------ ------ ------ </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. 10
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 following allocations are as of March 31, 1997 as the committee had not completed the second quarter review at this writing. The second quarter allocations should not vary greatly from those of the first quarter presented here. 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. Although the 1997 appraisal has been completed the report will not be available until late in August. 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 DEC. 31, ACTUAL DEC. 31, DEC. 31, ACTUAL (IN THOUSANDS) 1997 JUNE 30, 1997 1996 1995 DEC 31, 1994 ------------ ------------- ------------ ------------ ------------ <S> <C> <C> <C> <C> <C> Beginning Balance January 1,t............ 4,775,960 4,775,960 4,579,210 4,228,741 3,816,982 Provision Charged to Earnings............ 723,500 361,752 700,500 736,500 737,496 Year-to-Date Recoveries.................. 196,167 51,779 167,926 187,473 194,312 Year-to-Date Charge-offs................. (495,627) (380,722) (671,676) (573,504) (520,049) ------------ ------------- ------------ ------------ ------------ Ending Balance........................... 5,200,000 4,808,769 4,775,960 4,579,210 4,228,741 ------------ ------------- ------------ ------------ ------------ ------------ ------------- ------------ ------------ ------------ </TABLE> 11
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) Table IV--Loan Loss History and Other Statistics <TABLE> <CAPTION> (IN THOUSANDS) 1997 EST 1996 1995 1994 1993 ----------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> Net Loans*............................... 293,542 278,597 264,182 258,472 238,755 Net Charge-offs.......................... 447 504 387 326 247 Allowance for Possible Loan Losses Balance................................ 5,052 4,776 4,579 4,229 3,817 Provision for Loan Losses Charged to..... 724 701 737 737 708 Earnings................................. 9,300 9,255 7,866 7,494 8,127 Earnings Coverage of Net Charge-offs..... 20.8x 18.4x 20.3x 23.0x 32.9x Allowance Coverage of Net Charge-offs.... 11.3x 9.5x 11.8x 13.0x 15.5x Loans Ninety Days or More Past Due and Still Accruing......................... 2,900 2,994 2,915 2,743 2,899 Net Charge offs as a Percent of the Provision.............................. 61.7% 71.9% 52.5% 44.2% 34.9% Year-End Nonperforming Loans............. 864 279 624 843 Allowance as a Percentage of Gross Loans: * Bank(1).................................. 1.72% 1.71% 1.73% 1.64% 1.60% Peer Group(2)............................ 1.49% 1.50% 1.61% 1.65% 1.82% </TABLE> <TABLE> <CAPTION> 1992 1991 AVERAGE (IN THOUSANDS) --------- --------- --------- <S> <C> <C> <C> Net Loans*............................... 225,475 199,072 209,222 Net Charge-offs.......................... 518 3,142 732 Allowance for Possible Loan Losses Balance................................ 3,356 2,548 3,329 Provision for Loan Losses Charged to..... 1,326 3,151 1,051 Earnings................................. 7,290 5,643 6,525 Earnings Coverage of Net Charge-offs..... 14.1x 1.8x 8.9x Allowance Coverage of Net Charge-offs.... 6.5x 0.8x 4.5x Loans Ninety Days or More Past Due and Still Accruing......................... 2,532 3,810 2,556 Net Charge offs as a Percent of the Provision.............................. 39.1% 99.7% 69.6% Year-End Nonperforming Loans............. 1,351 417 625 Allowance as a Percentage of Gross Loans: * Bank(1).................................. 1.49% 1.28% 1.60% Peer Group(2)............................ 1.42% 1.44% 1.59% </TABLE> - ------------------------ * Gross Loans less Unearned Discount (1) Estimated Year-end 1997 (2) At March 31, 1997 Averages are based on the years 1991 through 1996 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 V--Allocation of the Allowance for Possible Loan Losses based on Historical Data <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> <C> <C> 1997 --------- LOAN CLASSIFICATION EST 1996 1995 1994 1993 1992 1991 AVERAGE - ------------------- --------- --------- --------- --------- --------- --------- --------- ----------- Commercial & Agricultural................ 26,600 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................... 223,492 213,957 200,066 193,095 170,532 162,434 136,716 179,467 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........... 32,000 24,518 26,417 30,094 30,282 29,182 31,762 28,709 Lease Financing.......................... 200 222 163 145 154 162 129 163 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 --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- Reserve Allocation....................... Fasb 114 Allocation...................... Unallocated Portion...................... --------- --------- --------- --------- --------- --------- --------- ----------- Reserve Balance.......................... --------- --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- --------- ----------- </TABLE> <TABLE> <S> <C> <C> <C> LOAN CLASSIFICATION - ------------------- Commercial & Agricultural................ 0.02006 X 26,600 = 534 Real Estate - Construction............... 0.00000 X 1,250 = 0 Real Estate - Mortgage................... 0.00027 X 223,492 = 61 Credit Card & Related Plans.............. 0.01369 X 10,000 = 137 All Other Loans to Individuals........... 0.00605 X 32,000 = 194 Lease Financing.......................... 0.00000 X 200 = 0 Total Loans............................ Letter of Credit Commitments............. 0.00000 X 5,000 = 0 All Other Commitments.................... Consumer................................. 0.00605 X 28,000 = 170 Mortgage................................. 0.00027 X 6,000 = 2 Commercial............................... 0.02006 X 11,000 = 221 ----------- ------------ --------- ----------- ------------ --------- Reserve Allocation....................... 1,318 Fasb 114 Allocation...................... 113 Unallocated Portion...................... 3,621 ----------- ------------ --------- Reserve Balance.......................... 5,052 ----------- ------------ --------- ----------- ------------ --------- </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 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 ------------ ------------ 13
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> SIX-MONTH PERIODS ENDED JUNE 30, -------------------- $ % 1997 1996 CHANGE CHANGE --------- --------- ----------- --------- <S> <C> <C> <C> <C> Service Charges on Deposit Accounts..................... 540 558 (18) (3.23) Service Charges and Fees................................ 131 130 1 0.77 Trust Department Income................................. 510 388 122 31.44 Ins. Commissions, Fees and Premiums..................... 233 268 (35) (13.06) Other Operating Income.................................. 363 27 336 1,244.44 --------- --------- ----- --------- Total Other Income, Excl. Realized Sec. Gains........... 1,777 1,371 406 29.61 --------- --------- ----- --------- Realized Gains on Sec., Net............................. 807 268 539 201.12 --------- --------- ----- --------- Total Other Income...................................... 4,361 3,010 1,351 44.88 --------- --------- ----- --------- --------- --------- ----- --------- </TABLE> Total Other Income increased 29.6 percent when comparing the six months ended June 30, 1997 to the same six-month period in 1996 and 20.4 percent when compared to the six months beginning July 1, 1996 and ending 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. The significant increase recorded during the six-month period being reviewed was due to the sale of a registered logo owned by the Corporation; the copyright was sold for $301,000. Service Charges on Deposit Accounts consist of fees generated by the use of the deposit accounts and overdraft charges. There was not a significant change when comparing the six months ended June 30, 1997 to the six months ended December 31, 1996 or the six months ended June 30, 1996. The fees collected monthly are nearly evenly split between overdraft charges and checking account maintenance. The total monthly fees collected average about $92,000. 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 six-month period, the previous six months and the six months ended June 30, 1996 reveals a negligible amount of change. Normally, the miscellaneous fees average about $22,000 per month. Trust Department Income is the second largest contributor to noninterest income, excluding realized securities gains. Income generated by the Trust Department for the six months ended June 30, 1997, December 31, 1996 and June 30, 1996, respectively, amounted to $510,000, $464,000 and $388,000. The observable increase in Trust income is due to an increase in the number of accounts under management and the increase in the market value of the trust assets. There has been an increase of nearly 100 accounts since June 30, 1996. The Trust Department normally contributes $80,000 to $85,000 in income per month. Insurance Commissions, Fees and Premiums generated by Bucktail Life Insurance Company for the six-month periods June 30, 1997, December 31, 1996 and June 30, 1996 were $233,000, $287,000 and $268,000, respectively. Premiums generated in the six months ended December 31, 1996 were slightly higher than the other comparable six month periods as it included seven months of premium income. Also, life premiums experienced a decline from an average of $17,000 per month during 1996 to $10,000 per month during the current six-month period. The insurance company writes life and accident and health insurance on the bank's consumer loan portfolio. Other Operating Income for the six months ended June 30, 1997, December 31, 1996 and June 30, 1996 amounted to $363,000, $27,000 and $20,000, respectively. The large increase posted during the six-month period ended June 30, 1997 reflects the sale of the copyright mentioned earlier. Also posted during the first six months of 1997 was $18,000 in income associated with the Corporation's Supplemental Retirement Plan. This income had previously been added back to the Asset account. Other Operating Income is normally $8,000 to $12,000 per month. Realized Securities Gains and Losses amounted to $807,000 during the first six months 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. 14
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) The following table compares the various categories of other expense for the periods ended June 30, 1997 and June 30, 1996. Table VIII--Major Categories of Noninterest Expense <TABLE> <CAPTION> SIX-MONTH PERIODS ENDED JUNE 30, -------------------- <S> <C> <C> <C> <C> $ % 1997 1996 CHANGE CHANGE --------- --------- ----------- ----------- Salaries and Wages................................. 2,966 2,922 44 1.51 Pensions and Other Employee Benefits............... 870 885 (15) (1.69) Occupancy Expense, Net............................. 355 367 (12) (3.27) Furniture and Equipment Expense.................... 335 365 (30) (8.22) Other Operating Expense............................ 3,026 2,672 354 13.25 --------- --------- ----------- ----------- Total Other Expense................................ 7,552 7,211 341 4.73 --------- --------- ----------- ----------- --------- --------- ----------- ----------- </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 $44,000 when comparing the six-month periods ended June 30, 1997 and June 30, 1996 and no increase when comparing the six-month period ended December 31, 1996 to the current six-month period. The absence of an increase in salaries and wages even after merit increases can be attributed to several retirements, including the Corporation's President's. The increase in Pensions and Other Employee Benefits when comparing the six-month periods ended June 30, 1997 and June 30, 1996 was negligible at 2 percent. When comparing the current period to the six months ended December 31, 1996, the increase amounted to 5.5 percent due to the payment of accumulated sick days to 1996 retirees and adjustments made to budgeted contributions to the 401 (k) Plan in December 1996 as annual income figures were known. Furniture and Equipment Expense amounted to $355,000, $354,000 and $367,000, respectively, for the six-month periods ended June 30, 1997, December 31, 1996 and June 30, 1996. Furniture and Fixtures Expense consists of maintenance, rental and depreciation and normally does not vary significantly, averaging $115,000 to $120,000 per month. Other Operating Expense averages between $450,000 and $500,000 per month. The five largest Other Operating Expense categories are credit card processing costs, Pennsylvania Shares Tax, Bucktail Life Ins. Co. commissions and fees, advertising, postage and Directors' fees. Combined they make up 62 percent of Other Operating Expense. The largest contributor to Other Operating Expense is credit card processing costs. Credit card processing costs amounted to $1,151,000 for the current six-month period and $1,022,000 during the same period in 1996; for the six-month period ended December 31, 1996 costs amounted to $1,199,000. On the income side, credit cards generated interest and fees amounting to $1,839,000 for the six month period ended June 30, 1997, contributing net monthly income of about $110,000. Other Operating Expense increased 13 percent and 2 percent, respectively, when comparing the six-month periods ended June 30, 1996 and December 31, 1996 to the current six-month period. 15
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) STATEMENT OF CONDITION Average total assets of the Corporation have remained relatively unchanged during the past year. Average total assets, for the six-month periods ended June 30, 1997, June 30, 1996 and the year ended December 31, 1996 were $604,380,000, $603,282,000 and $604,408,000, respectively. 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 $46,201,000 during the six-month period ended June 30,1996 to $57,902,000 at the end of the current six-month period. The increase is due to the favorable after tax returns available on tax free investments. The respective average balance of the loan portfolio was $264,895,000, $281,059,000 and $271,618,000 for the six-month periods ended June 30, 1997, June 30, 1996 and the year ended December 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. There are no immediate plans to make any changes in the asset structure of the Corporation. Mortgage-backed securities will continue to pay down about $2,100,000 per month and be used to fund loans as the demand requires. The liability side of the balance sheet has also remained relatively constant during the past twelve to fifteen months. Average total deposits have begun to show some improvement after a lackluster 1996. Interest Checking, Individual Retirement Accounts and Certificates of Deposit did decline slightly during 1996; however, the decline was offset by the strength of the Money Market Accounts which continue to exhibit growth. Total average borrowed funds have declined to an average balance of $93,673,000 for the six-month period ended June 30, 1996. This compares to an annual average of $101,121,000 for 1996 and a six-month average of $99,162,000 for the six months ended June 30, 1997. The decrease is the result of paying off borrowings of $4,850,000 in April 1997 and $10,000,000 in June 1997. The primary source of borrowed funds is 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 are in the form of term loans with the Federal Home Loan Bank of Pittsburgh which are secured by a blanket security agreement. Interest rate fluctuations cause the market value of the investment portfolio to vary by wide margins during periods of rising and falling rates. The net adjustments to capital for June 30, 1997, December 31, 1996 and June 30, 1996 were $7,228,000, $5,767,000 and $2,315,000, respectively. Interest rates have stabilized during the second quarter of 1997 after a slight rise in the first quarter. Management expects rates to remain about the same 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 is able to absorb short term deposit fluctuations or meet unusually heavy loan demand, should either occur, 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 five 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 $2,100,000 each month. The Corporation uses a computer model to measure the theoretical effect of increases or decreases in interest rates on the market value and the net interest margin. The model shocks the rate of return on the earning assets of the bank and the rates paid on interest-bearing liabilities. The rate shock is applied to the assets and liabilities based on the stated maturity of the asset or liability. For instance, Money Market accounts reprice weekly; therefore the rate is shocked immediately. One, two and three hundred basis points are the shock intervals. 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. Capital expenditures planned during the next 12 months could amount to $1,000,000. The largest of these will be the installation of Automated Teller Machines at an estimated cost of between $200,000 and $500,000 depending on the type and number installed. Other expenditures for capital assets between now and December 31, 1997 will amount to approximately $500,000. The planned capital expenditures will not have an adverse effect on liquidity or projected earnings of the Corporation. 16
CITIZENS AND NORTHERN CORPORATION--FORM 10--Q Part I--Financial Information (continued) Item 2. Management's Discussion and Analysis of Condition and Results of Operations (continued) 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........................... 601 601 'Available-for-Sale" Securities: U.S. Treasury Securities.......................... 2,484 2,484 U.S. Agency Securities............................ 22,125 4,823 26,948 Mortgage Backed Securities........................ 364 32,734 2,834 137,966 173,898 Municipals........................................ 2,154 6,665 4,350 48,874 62,043 Other Bonds....................................... 1,000 1,592 1,284 3,876 Stocks............................................ 26,528 26,528 ---------- ----------- ----------- --------- --------- --------- Total "Available-for-Sale" Securities............... 2,518 42,883 30,901 219,475 295,777 'Held-to-Maturity" Securities: U.S.Treasury Securities........................... 499 99 598 U.S.Agency Securities............................. 200 150 350 Mortgage Backed Securities........................ 27 309 346 682 ---------- ----------- ----------- --------- --------- --------- Total "Held-to-Maturity" Securities:................ 499 126 509 496 1,630 Loans and Lease Financing: Real Estate-Construction.......................... 713 713 Real Estate-Mortgage.............................. 89,527 46,891 43,502 38,387 218,307 Consumer.......................................... 12,234 13,385 1,419 10,424 37,462 Agriculture....................................... 1,285 1,265 97 72 2,719 Commercial........................................ 11,534 3,564 676 1,127 16,901 Other............................................. 219 26 627 872 Political Subdivisions............................ 1,569 2,441 1,454 1,122 6,586 Leases............................................ 36 107 127 270 Nonperforming Loans............................... 1,055 1,055 ---------- ----------- ----------- --------- --------- --------- Total Loans......................................... 117,117 67,679 47,148 51,886 1,055 284,885 Less: Unearned Discount............................. (50) (50) Allowance for Possible Loan Losses.............. (4,809) (4,809) ---------- ----------- ----------- --------- --------- --------- Net Loans and Leases................................ 117,117 67,679 47,148 51,886 (3,804) 280,026 Federal Funds Sold Cash and Due From Banks............................. 16,679 16,679 Other Assets........................................ 12,191 12,191 ---------- ----------- ----------- --------- --------- --------- ---------- ----------- ----------- --------- --------- --------- Total Assets........................................ 120,735 110,688 78,558 271,857 25,066 606,904 LIABILITIES AND EQUITY Interest Bearing Deposits: Money Market...................................... 105,787 105,787 NOW and SNOW...................................... 37,732 37,732 Christmas/Fund Clubs.............................. 1,898 1,898 CD's.............................................. 62,288 55,843 1 118,132 Reg/Key Savings................................... 47,009 47,009 GPS............................................... 714 714 IRA's............................................. 78,874 78,874 ---------- ----------- ----------- --------- --------- --------- Total Interest-Bearing Deposits..................... 286,579 55,843 1 47,723 390,146 Demand Deposits..................................... 48,915 48,915 Federal Funds Purchased............................. 4,000 4,000 Repurchase Agreements............................... 29,800 29,800 Borrowed Funds: Variable.......................................... 15,000 15,000 Fixed............................................. 34,000 1,669 35,669 ---------- ----------- ----------- --------- --------- --------- Total Borrowed Funds................................ 49,000 1,669 50,669 Other Liabilities................................... 911 5,978 6,889 Stockholders' Equity................................ 7,228 69,257 76,485 ---------- ----------- ----------- --------- --------- --------- Total Liabilities and Equity........................ 377,518 57,512 1 47,723 124,150 606,904 ---------- ----------- ----------- --------- --------- --------- Interest Rate Sensitivity Gap....................... (256,783) 53,176 78,557 224,134 (99,084) ---------- ----------- ----------- --------- --------- --------- ---------- ----------- ----------- --------- --------- --------- </TABLE> 17
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 X--Rate Shock Analysis and the Theoretical Effect on Equity Market Values for the Period Ended June 30, 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................................... 606,904 606,904 606,904 606,904 606,904 606,904 606,904 MARKET VALUE................................. 662,792 645,932 630,363 618,224 601,737 591,641 582,035 CHANGE....................................... 55,888 39,028 23,459 11,320 (5,167) (15,263) (24,869) LIABILITIES BOOK VALUE................................... 530,419 530,419 530,419 530,419 530,419 530,419 530,419 MARKET VALUE................................. 544,257 539,253 534,383 529,857 525,028 520,535 516,159 CHANGE....................................... (13,838) (8,834) (3,964) 562 5,391 9,884 14,260 EQUITY BEG BALANCE.................................. 69,257 69,257 69,257 69,257 69,257 69,257 69,257 ASSET CHANGE................................. 55,888 39,028 23,459 11,320 (5,167) (15,263) (24,869) LIAB CHANGE.................................. (13,838) (8,834) (3,964) 562 5,391 9,884 14,260 MARKET VALUE................................. 111,307 99,451 88,752 81,139 69,481 63,878 58,648 </TABLE> Table XI--Current Exposure to Hypothetical Change in Interest Rates for the Period Ended June 30, 1997 MV OF PORTFOLIO NET INTEREST INCOME EQUITY CHANGE IN RATES PROJECTED PROJECTED BASIS POINTS CHANGE CHANGE - ----------------- --------------------- --------------------- 300 -4.8 27.72 200 -3.9 21.27 100 -3.4 14.37 0 0.0 0.00 -100 5.6 -9.38 -200 10.6 -22.57 -300 15.7 -37.18 18
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) CAPITAL Total capital of the Corporation, excluding unrealized gains on Available-for-Sale Securities, at June 30, 1997, December 31, 1996 and June 30, 1996 amounted to $69,257,000, $65,826,000 and $62,987,000, respectively, and as shown in the following table, is well in excess of regulatory guidelines. <TABLE> <CAPTION> JUNE 30, DECEMBER 31, JUNE 30, 1997 1996 1996 --------- ------------ --------- <S> <C> <C> <C> Leverage Ratio (Equity/Total Liabilities).................................... 13.1% 12.2% 11.6% TIER I Total Stockholders' Equity............................................ 69,257 65,826 62,987 TIER II Allowance for Possible Loan Losses (1)............................... 3,995 3,957 3,881 Total Qualifying Capital................................................. 73,252 69,783 66,868 Risk Adjusted Assets--Balance Sheet.......................................... 305,608 303,417 298,168 Risk Adjusted Assets--Off Balance Sheet...................................... 13,957 13,172 12,280 Total Risk Adjusted Assets................................................... 319,565 316,589 310,448 Ratios TIER I Capital to Risk Weighted Assets................................... 21.67% 20.79% 20.29% Minimum Required June 30, 1997........................................... 4.00% Minimum Required December 31, 1996....................................... 4.00% Minimum Required June 30, 1996........................................... 4.00% Total Capital to Risk Weighted Assets.................................... 22.92% 22.04% 21.54% Minimum Required December 31, 1996....................................... 8.00% Minimum Required December 31, 1995....................................... 8.00% Minimum Required December 31, 1994....................................... 8.00% </TABLE> - ------------------------ (1) Allowable addition may not exceed 1.25 percent of Risk Adjusted Assets. 19
(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 4. Submission of Matters to A vote of Security Holders The Annual Meeting of Shareholders of Citizens & Northern Corporation was held on Tuesday, April 15, 1997. The Board of Directors fixed the close of business on March 3, 1997 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. On this record date, there were outstanding and entitled to vote 5,062,453 shares of Common Stock. The total number of votes cast were 3,970,104. All were voted by proxy for the following purposes and with the following results. 1. The election of the following as Class I Directors to serve for a term of three years: R. Robert DeCamp Edward H. Owlett III Adelbert E. Eldridge F. David Pennypacker Robert J. Murphy The total votes in favor of any one of the above listed Directors were not less than 3,932,031. 2. The approval and adoption of the Citizens & Northern Corporation 1996 Independent Directors Stock Option Plan. Total Votes in Favor............. 3,414,568 Total votes Against.............. 485,308 Total Votes Abstained............ 70,228 3. The ratification of the action of the Board of Directors in the appointment of the firm of Parente, Randolph, Orlando, Carey & Associates as independent auditors of the Corporation. Total Votes in Favor............. 3,955,607 Total Votes Against.............. 2,250 Total Votes Abstained............ 12,247 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 June 30, 1997 20
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 Aug. 6, 1997 CRAIG G. LITCHFIELD /S/ ------------------------------------- Craig G. Litchfield President and Chief Executive Officer Date Aug. 6, 1997 JAMES W. SEIPLER /S/ ------------------------------------- James W. Seipler Treasurer (Chief Financial Officer) 21