Citizens & Northern Corp - 10-Q quarterly report FY

 

(Exact name of Registrant as specified in its charter)

90-92 MAIN STREET, WELLSBORO, PA 16901

570-724-3411

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

The accompanying notes are an integral part of these consolidated financial statements.

Note: The balance sheet at December 31, 2007 has been derived from the audited financial statements at that date but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

     The accompanying notes are an integral part of these consolidated financial statements.

The financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2007, is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods.

Results reported for the three-month and six-month periods ended June 30, 2008 might not be indicative of the results for the year ending December 31, 2008.

This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency.

Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflects the retroactive effect of stock dividends for all periods presented. The following data shows the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.

Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income. The components of comprehensive (loss) income, and the related tax effects, are as follows:

The Corporation’s trading assets at June 30, 2008 were composed exclusively of municipal bonds. Gains and losses from trading activities are included in Other Operating Income in the consolidated income statement as follows:

Amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2008 are summarized as follows:

The following table presents gross unrealized losses and fair value of available-for-sale investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2008.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

In addition to the effects of volatility in interest rates on individual debt securities, management believes valuations of debt securities at June 30, 2008 have been negatively impacted by events affecting the overall credit markets during the last quarter of 2007 and the first six months of 2008. There have been widespread disruptions to the normal operation of bond markets. Particularly with regard to trust-preferred securities (which comprise most of the balance in “Other securities” in the table above), trading volume has been limited and consisted almost entirely of sales by distressed sellers.

Trust-preferred securities are very long-term (usually 30-year maturity) instruments with characteristics of both debt and equity, mainly issued by banks. Most of the Corporation’s investments in trust-preferred securities are of pooled issues, each made up of 30 or more companies with geographic and size diversification. Almost all of the Corporation’s pooled trust-preferred securities are comprised of debt issued by banking companies, with lesser amounts issued by insurance companies and real estate investment trusts. Management believes trust-preferred valuations have been negatively affected by concerns that the underlying banks and other companies may have significant exposure to losses from sub-prime mortgages, defaulted collateralized debt obligations or other concerns. Although none of the Corporation’s trust-preferred securities has been downgraded, major ratings services (primarily Moody’s and Fitch) have put most of the pooled trust-preferred securities on “Ratings Watch Negative,” meaning that a downgrade may be possible in the foreseeable future. In the first half of 2008, some of the issuers of trust-preferred securities that are included in the Corporation’s pooled investments have elected to defer payment of interest on these obligations (trust-preferred securities typically permit deferral of quarterly interest payments for up to five years), and a few issuers have defaulted. Trust-preferred securities are structured so that the issuers pay more interest into the trusts than would be required for pass through to the investors in the rated notes (such as the Corporation), with the excess used to cover administrative and other expenses, and to provide a cushion for some protection against the risk of loss for investors in the rated notes. Although credit risk associated with some of the trust-preferred issuers has increased, management has reviewed the Corporation’s individual holdings of trust-preferred securities and the financial condition and near term prospects of the underlying issuers, and has concluded that based on events through June 30, 2008, the Corporation should expect to collect all principal and interest on essentially the same schedule as originally anticipated when they were purchased.

Based on the Corporation’s ability and intent to hold its debt securities for the foreseeable future, and management’s assessment of the creditworthiness of the issuers, management believes the Corporation’s debt securities at June 30, 2008 were not other-than-temporarily impaired.

Unrealized losses on marketable equity securities are mainly from investments in common stocks of banking corporations. Management evaluated equity securities held as of June 30, 2008. Upon evaluation, it was determined that equity securities issued by six banking corporations were other-than-temporarily impaired. Management’s assessment that these securities were other-than-temporarily impaired was based on a large (50% or more) amount of unrealized loss, poor and rapidly deteriorating financial conditions reflected in published financial reports for each entity, and in some cases, publicly announced endeavors to issue additional shares of stock that would dilute the Corporation’s ownership interest. These securities were written down to current market value at June 30, 2008, and the Corporation recognized a pretax loss in the second quarter 2008 of $1,171,000. As of June 30, 2008, management believes the impairment of the Corporation’s other marketable equity securities to be temporary. For the six months ended June 30, 2008, pretax losses from other-than-temporary impairment charges totaled $1,420,000.

The Corporation measures certain assets at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Statement of Financial Accounting Standards No. 157 establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

Level 3 – Fair value would be based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

At June 30, 2008, assets measured at fair value on a recurring basis and the valuation methods used are as follows:

The Corporation has a noncontributory defined benefit pension plan for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years within the final ten years of employment.

On October 18, 2007, the Corporation’s Board of Directors adopted amendments to the defined benefit pension plan to freeze and terminate the Plan, effective December 31, 2007. The Corporation expects to fund and settle its obligations under the Plan sometime in 2008.

In addition, the Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not affect the liability balance at June 30, 2008 and December 31, 2007, and will not affect the Corporation’s future expenses.

The Corporation uses a December 31 measurement date for its plans. In 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan for which benefit accruals and participation were frozen in 2002. The Corporation used a September 30 measurement date for this plan in 2007, and will change to a December 31 measurement date in 2008. The Citizens Trust Company Retirement Plan is not significant in comparison to the other defined benefit plans, and information related to that plan is not included in the table that follows.

The components of net periodic benefit costs from these defined benefit plans are as follows:

The Corporation has not made a 2008 contribution to the defined benefit pension plan through June 2008, and the timing and amount of its contribution in 2008 will depend on requirements to fund its final obligations under the terminated plan. At this time, the Corporation cannot estimate the amount of contribution required for the defined benefit pension plan in 2008. In the first six months of 2008, the Corporation funded postretirement contributions totaling $29,000, with estimated annual postretirement contributions of $51,000 expected in 2008 for the full year.

In January 2008, the Corporation granted options to purchase a total of 83,257 shares of common stock through its Stock Incentive and Independent Directors Stock Incentive Plans. In January 2007, the Corporation granted options to purchase a total of 43,385 shares of common stock. The exercise price for the 2008 awards is $17.50 per share, and the exercise price for the 2007 awards is $22.325 per share, based on the market price as of the date of each grant. The Corporation records stock option expense based on estimated fair value calculated using an option valuation model.

In calculating the fair value, the Corporation utilized the Black-Scholes option-pricing model. The calculated fair value of each option granted, and significant assumptions used in the calculations, are as follows:

In calculating the estimated fair value of stock option awards, management based its estimates of volatility and dividend yield on the Corporation’s experience over the immediately prior period of time consistent with the estimated lives of the options. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips with an applicable maturity as of the grant dates. The 9-year expected option life used for 2008 awards, and 8-year expected option life used for 2007 awards, was based on management’s estimates of the average term for all options issued under both plans. For the 2008 and 2007 awards, management assumed a 23% forfeiture rate for options granted under the Stock Incentive Plan, and a 0% forfeiture rate for the Directors Stock Incentive Plan. These estimated forfeiture rates were determined based on the Corporation’s historical experience.

Also, the Corporation awarded a total of 5,062 shares in January 2008 and 6,529 shares in January 2007 of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.

Total stock-based compensation expense is as follows:

Stock option expense has been recognized over the six-month vesting period for both the 2008 and 2007 awards. Management expects no additional stock option expense in the last six months of 2008.

In the normal course of business, the Corporation may be subject to pending and threatened lawsuits in which claims for monetary damages could be asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings.

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, “should”, “likely”, “expect”, “plan”, “anticipate”, “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

Unless otherwise noted, all references to “2008” in the following discussion of operating results are intended to mean the six months ended June 30, 2008, and similarly, references to “2007” relate to the six months ended June 30, 2007.

Net income in 2008 was $6,869,000 in the first six months of 2008, as compared to $4,394,000 in 2007. Net income per share was $0.77 basic, and $0.76 diluted, for the first six months of 2008 compared to $0.51 per share (basic and diluted) for 2007, an increase of 49.0% in net income per diluted share. Return on average assets was 1.08% in 2008, up from 0.76% in 2007. Return on average equity was 10.07% for 2008, up from 6.49% in 2007.

The most significant changes in the components of earnings for the first six months of 2008, as compared to the same period in 2007, were as follows:

Net income per diluted share for the second quarter of 2008 was $0.42, which was $0.20 (90.9%) higher than the second quarter of 2007. The most significant changes in the components of earnings for the second quarter of 2008, as compared to 2007, were increases in the interest margin of $1,636,000 and noninterest income of $511,000. Also, the Corporation benefited from a negative provision for loan losses of $376,000 in the second quarter 2008, while the provision for loan losses was $0 in the second quarter 2007. The negative provision in the second quarter 2008 resulted mainly from reversing a previously established allowance on a large commercial loan relationship that paid off.

Second quarter 2008 net income per diluted share was $0.07, or 20%, higher than the first quarter 2008 results. The provision for loan losses was $1,280,000 lower than in the first quarter. Also, the interest margin increased $605,000. Offsetting some of the earnings increases were higher losses on available-for-sale securities of $757,000 as a result of the impairment charge on bank stocks described above, and lower noninterest income attributable to the gain from the Visa IPO that occurred in the first quarter.

The number of shares used in calculating net income per share for each quarter presented in Table I reflects the retroactive effect of stock dividends.

Earnings have increased significantly in the first half of 2008 over results from 2007, and there are many factors pointing to continued good results and improvement over the remainder of the year. The largest area of concern for the remainder of 2008 is the potential need to recognize realized losses in the securities portfolio, as described in more detail below.

As described in more detail in Item 3, Quantitative and Qualitative Disclosures About Market Risk, the Corporation is liability sensitive, meaning that its sources of funds (mainly deposits and borrowings) tend to re-price more quickly on average when interest rates change than do its earning assets (mainly loans and available-for-sale debt securities). Accordingly, the Corporation tends to generate lower earnings when short-term interest rates rise and higher earnings when short-term rates fall. Reductions in the Fed Funds target rate (which has fallen from 5.25% in August 2007 to its late-July 2008 level of 2%), the Corporation has experienced some recent reductions in its cost of funds and improvement in its net interest margin. In June 2008, a new “E-Z Money Checking” product was introduced. A relatively high rate of interest is paid on E-Z Money accounts (a 4.17% rate, or 4.25% average percentage yield, as of June 30, 2008), subject to several customer requirements. Management expects that transfers by existing customers to this new account may increase the Corporation’s aggregate cost of funds slightly in 2008, with the goal of increasing profitability in 2009 and future years by increasing total checking account balances from existing and new customers.

The addition of Citizens Bancorp, Inc. is expected to be accretive to earnings in 2008, and inclusion of those operations for the full year in 2008 (as opposed to eight months in 2007) will lead to higher reported levels of revenues and expenses. The addition of the Citizens Trust Company trust department has contributed significantly to growth in Trust and Financial Management revenue.

In January 2008, the Corporation implemented an overdraft privilege program. This program is designed to provide customers an opportunity to have checks paid that would otherwise have been returned, and to avoid charges from merchants and other payees. As described in the Earnings Overview section of Management’s Discussion and Analysis, the Corporation generated a significant increase in noninterest revenue as a result of implementing the overdraft privilege program in 2008, and management expects to continue that trend for the remainder of the year.

The provision for loan losses for the first six months of 2008 was $528,000, including a credit of $376,000 in the second quarter and a charge to earnings of $904,000 in the first quarter. Issues related to larger commercial borrowers significantly affect the Corporation’s provision for loan losses in any particular period. Accordingly, the amount of loan loss provision for the remainder of 2008 will depend substantially on the credit status of the commercial portfolio. Although management is concerned about reports that the national economy is in or near recessionary status, to date the Corporation has not experienced significant deterioration in loan delinquencies, nor a noticeable change in volume of activity related to troubled debts or foreclosures. The Corporation has not originated interest only mortgages, loans without documentation of the borrowers’ sources of income or net worth, or other types of subprime mortgage loans that have received negative publicity in 2007 and 2008.

Benefits under the Corporation’s defined benefit pension plan were frozen, and a decision was made to terminate the Plan, effective December 31, 2007. The Corporation will record a realized loss from settlement of the defined benefit pension plan at the time it funds the final amounts necessary to extinguish its obligations under the Plan. The amount of settlement loss, which management expects will be incurred in 2008, has not yet been finally determined; however, management estimates a settlement loss in the income statement from termination of the plan in 2008 in an amount ranging from $500,000 to $1,000,000. Management expects to settle at least a portion of its obligations under the Plan in the third quarter 2008, but it is not known how much of the settlement will occur in the third quarter, and how much (if any) will occur in the fourth quarter. As reflected in Note 6 to the consolidated financial statements, in the first six months of 2008, the Corporation recorded expense from the defined benefit plan of $153,000. For the year ended December 31, 2007, when a significant amount of service cost was still accruing, expense from the defined benefit plan (excluding a loss from curtailment of $77,000) totaled $495,000. Also in 2008, employer matching contributions under the Corporation’s Employee Savings & Retirement Plan (a 401(k) plan), were increased, which will result in an estimated increase in expense of $150,000 for the year. Going forward after termination and settlement of the Plan, management expects the net impact of terminating the defined benefit plan and increasing the Savings & Retirement Plan contributions to be lower ongoing employee benefit expenses.

Another major variable that affects the Corporation’s earnings is securities gains and losses. In the first six months of 2008, the Corporation reported net realized losses from available-for-sale securities of $977,000, including the effect of writing down impaired bank stocks by $1,420,000. Recently, market valuations of most financial stocks have been depressed, with some of the nation’s largest financial institutions reporting net losses in 2007 and the first half of 2008, triggered by write-offs of sub-prime mortgages, commercial and construction loans, collateralized debt obligations and other investments. Management believes this valuation issue to be cyclical; however, opportunities for realized gains from bank stocks are expected to be limited in 2008. Further, as discussed in more detail in Note 4 to the financial statements, the Corporation has significant unrealized losses on its holdings of trust-preferred securities as of June 30, 2008. Although credit risk associated with some of the trust-preferred issuers has increased, management has reviewed the Corporation’s individual holdings of trust-preferred securities and the financial condition and near-term prospects of the underlying issuers, and has concluded that based on events through June 30, 2008, the Corporation should expect to collect all principal and interest on essentially the same schedule as originally anticipated when they were purchased. Management has reviewed its holdings of bank stocks, trust-preferred securities and other securities as of June 30, 2008, and concluded that – with the exception of the bank stocks that have been written down through earnings – none of them were other-than-temporarily impaired. Management will continue to closely monitor the status of impaired securities throughout 2008.

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate and reasonable. The Corporation’s methodology for determining the allowance for loan losses is described in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore, calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Another material estimate is the calculation of fair values of the Corporation’s debt securities. The Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing these fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. Accordingly, when selling debt securities, management typically obtains price quotes from more than one source. The large majority of the Corporation’s securities are classified as available-for-sale. Accordingly, these securities are carried at fair value on the consolidated balance sheet, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss) (included in stockholders’ equity).

The Corporation’s primary source of operating income is represented by the net interest margin. The net interest margin is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest margin for 2008 and 2007. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest margin amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

The fully taxable equivalent net interest margin was $21,693,000 in 2008, which is $3,472,000 (19.1%) higher than in 2007. As shown in Table IV, net increases in volume had the effect of increasing net interest income $1,265,000 in 2008 over 2007, and interest rate changes had the effect of increasing net interest income $2,207,000. Increases in the volume of earning assets and interest-bearing liabilities were significantly affected by the acquisition of Citizens Trust Company on May 1, 2007. The most significant components of the volume changes in interest income in 2008 were an increase of $2,626,000 attributable to growth in the available-for-sale securities portfolio and an increase of $921,000 attributable to loan growth. The most significant volume change in interest expense in 2008 was an increase of $1,909,000 resulting from an increase in long-term borrowings. As presented in Table III, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.17% in the first six months of 2008, as compared to 2.92% for the year ended December 31, 2007 and 2.83% in the first six months of 2007.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $38,073,000 in 2008, an increase of 9.1% over 2007. Income from available-for-sale securities increased $2,616,000, or 27.0%, and interest and fees from loans increased $638,000, or 2.6%. As indicated in Table III, total average available-for-sale securities in 2008 rose to $445,172,000, an increase of $97,010,000, or 27.9% from 2007. Throughout much of 2007, proceeds from sales and maturities of securities were used, in part, to help fund loans and pay off borrowings. In December 2007, the Corporation purchased approximately $86,152,000 in mortgage-backed securities in connection with two repurchase agreements. The average rate of return on available-for-sale securities was 5.55% for 2008, in line with the 5.65% return for the year ended December 31, 2007 and 5.60% in the first six months of 2007.

The average balance of gross loans increased 3.5% to $737,740,000 in 2008 from $712,858,000 in the first six months of 2007. Over the last several months of 2007 and the first quarter of 2008, the Corporation has experienced modest growth in the average balance of residential mortgage loans, including home equity loans. During the same period, the average commercial loans balances have decreased as a result of payoffs of several individual commercial relationships; however, there has been modest growth during the most recent quarter. The average rate of return on loans was 6.98% in 2008, down from the 7.10% return for the year ended December 31, 2007 and 7.07% in the first six months of 2007.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense decreased $299,000, or 1.8%, to $16,380,000 in 2008 from $16,679,000 in 2007. Table III shows that the overall cost of funds on interest-bearing liabilities fell to 3.25% in 2008, from 3.70% for the year ended December 31, 2007 and 3.74% in the first six months of 2007.

From Table III, you can calculate that total average deposits (interest-bearing and noninterest-bearing) increased 5.4%, to $835,466,000 in 2008 from $792,390,000 in the first six months of 2007. The average rates incurred on deposit accounts have decreased significantly in the first six months of 2008 as compared to the first six months of 2007. The decreases in rates reduced interest expense on deposits by $2,478,000.

The combined average total short-term and long-term borrowed funds increased $81,389,000 to $297,688,000 in 2008 from $216,299,000 in the first six months of 2007. In December 2007, the Corporation entered into two repurchase agreements totaling $80,000,000; the proceeds were used to purchase mortgage-backed securities as described above. In addition, the Corporation’s interest expense increased as several borrowings matured in 2007 and were replaced at higher rates. The average rate on long-term borrowings was 4.25% in 2008, up from 4.06% in the first six months of 2007.

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 34%.