FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-16084 CITIZENS & NORTHERN CORPORATION (Exact name of Registrant as specified in its charter) Pennsylvania 23-2451943 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 90-92 Main Street Wellsboro, Pa. 16901 (Address of principal executive offices) (Zip code) 717-724-3411 (Registrant's telephone number including area code) Not applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Title Outstanding COMMON STOCK ($1.00 par value) 5,168,354 SHARES ISSUED AND OUTSTANDING OCTOBER 1, 1997 1
CITIZENS & NORTHERN CORPORATION INDEX PART I. FINANCIAL INFORMATION Page ITEM 1. FINANCIAL STATEMENTS Consolidated Statement of Condition - September 30, 1997 and December 31, 1996 3 Consolidated Statements of Income - Three Months Ended September 30, 1997, 1996 and Nine Months Ended September 30, 1997, 1996 4,5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1997, 1996 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS 8 thru 21 ITEM 3. INFORMATION ABOUT MARKET RISK 19 PART II. OTHER INFORMATION 22 ITEM 1. LEGAL PROCEEDINGS 22 ITEMS 2,3, AND 5 HAVE BEEN OMITTED AS THEY ARE NOT APPLICABLE TO REGISTRANT. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22 SIGNATURES 23 2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheet (In Thousands) Unaudited Audited September 30, December 31, 1997 1996 ASSETS Cash & Due From Banks $14,556 $14,320 Interest Bearing Deposits 610 655 Available-for-Sale Securities: U.S. Treasury Securities 2,530 2,475 Securities of Other U.S. Government Agencies 74,146 36,341 Mortgage Backed Securities 137,862 183,483 Obligations of States and Municipal Subdivisions 62,224 55,943 Other Securities 30,684 29,611 Total Available-for-Sale Securities 307,446 307,853 Held-to-Maturity Securities: U.S. Treasury Securities 599 699 Securities of Other U.S. Government Agencies 350 100 Mortgage Backed Securities 664 770 Total Held-to-Maturity Securities 1,613 1,569 Federal Funds Sold Loans: Loans to Political Subdivisions 6,430 6,555 Other Loans 278,879 272,084 Total Loans 285,309 278,639 Less - Allowance for Possible Loan Losses (4,880) (4,776) Unearned Income (41) (42) Loans, Net 280,388 273,821 Bank Premises and Equipment 6,628 6,609 Other Real Estate 189 583 Accrued Interest on Bonds and Loans 4,223 4,404 Other Assets 753 378 TOTAL ASSETS $616,406 $610,192 LIABILITIES Deposits: Demand $46,539 $47,320 Interest Checking 37,012 38,916 Money Market 107,472 100,523 Savings 45,298 46,175 Other Time 201,565 197,377 Total Deposits 437,886 430,311 Dividends Payable 911 902 Borrowed Funds 50,665 59,600 Securities Sold Under Agreement to Repurchase 36,800 44,650 Other Liabilities 8,830 3,136 TOTAL LIABILITIES 535,092 538,599 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 1305 Paid in Capital 13,795 12,539 Retained Earnings 52,814 47,862 Total 71,777 66,823 Unrealized Gains on Available-for-Sale Securities 10,533 5,767 Less: Treasury Stock at Cost 105,761 shares at September 30, 1997 (996) 105,100 shares at September 30, 1996 (997) TOTAL SHAREHOLDERS' EQUITY 81,314 71,593 TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $616,406 $610,192 The accompanying notes are an integral part of these condensed financial statements. 3
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information Item 1. Financial Statements Three Months Ended CONSOLIDATED STATEMENT OF INCOME September 30, 1997 1996 INTEREST INCOME (Current) (Prior Year) Interest and Fees on Loans $ 7,254 $ 6,986 Interest on Balances with Depository Institutions 16 10 Interest on Loans to Political Subdivisions 100 106 Interest on Federal Funds Sold 118 1 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable 3,525 4,000 Tax Exempt 916 785 Dividends 217 206 Total Interest and Dividend Income 12,146 12,094 INTEREST EXPENSE Interest on Deposits 4,697 4,521 Interest on Other Borrowings 1,189 1,415 Total Interest Expense 5,886 5,936 Interest Margin 6,260 6,158 Provision for Possible Loan Losses 181 175 Interest Margin After Provision for Possible Loan Losses 6,079 5,983 OTHER INCOME Service Charges on Deposit Accounts 272 289 Service Charges and Fees 79 70 Trust Department Income 264 227 Insurance Commissions, Fees and Premiums 110 134 Other Operating Income 19 7 Total Other Income Before Realized Gains on Securities, Net 744 727 Realized Gains on Securities, Net 62 183 Total Other Income 806 910 OTHER EXPENSES Salaries and Wages 1,493 1,484 Pensions and Other Employee Benefits 396 415 Occupancy Expense, Net 180 174 Furniture and Equipment Expense 178 181 Other Operating Expense 1,475 1,398 Total Other Expenses 3,722 3,652 Income Before Income Tax Provision 3,163 3,241 Income Tax Provision 724 875 NET INCOME $ 2,439 $ 2,366 PER SHARE DATA: Net Income $0.48 $0.47 Dividend Per Share $0.18 $0.17 Number Shares Used in Computation 5,062,536 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 The accompanying notes are an integral part of these condensed financial statements. 4
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information Item 1. Financial Statements Nine Months Ended Consolidated Statement of Income September 30, (In Thousands) 1997 1996 INTEREST INCOME (Current) (Prior Year) Interest and Fees on Loans $ 21,382 $ 20,516 Interest on Balances with Depository Institutions 35 27 Interest on Loans to Political Subdivisions 295 318 Interest on Federal Funds Sold 242 59 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable 10,699 12,059 Tax Exempt 2,668 2,226 Dividends 629 613 Total Interest and Dividend Income 35,950 35,818 INTEREST EXPENSE Interest on Deposits 13,670 13,290 Interest on Other Borrowings 3,799 4,218 Total Interest Expense 17,469 17,508 Interest Margin 18,481 18,310 Provision for Possible Loan Losses 543 525 Interest Margin After Provision for Possible Loan Losses 17,938 17,785 OTHER INCOME Service Charges on Deposit Accounts 812 847 Service Charges and Fees 210 200 Trust Department Income 774 615 Insurance Commissions, Fees and Premiums 343 402 Other Operating Income 382 34 Total Other Income Before Realized Gains on Securities, Net 2,521 2,098 Realized Gains on Securities, Net 869 451 Total Other Income 3,390 2,549 OTHER EXPENSES Salaries and Wages 4,459 4,406 Pensions and Other Employee Benefits 1,266 1,300 Occupancy Expense, Net 535 541 Furniture and Equipment Expense 513 546 Other Operating Expense 4,501 4,070 Total Other Expenses 11,274 10,863 Income Before Income Tax Provision 10,054 9,471 Income Tax Provision 2,368 2,439 NET INCOME $ 7,686 $ 7,032 PER SHARE DATA: Net Income $1.52 $1.39 Dividend Per Share $0.54 $0.51 Number Shares Used in Computation 5,062,536 5,062,453 Number Shares Issued 5,168,354 5,117,182 Number Shares Authorized 10,000,000 10,000,000 Dividends Actually Paid $0.54 $0.51 The accompanying notes are an integral part of these condensed financial statements. 5
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information Item 1. Financial Statements Periods Ended September 30, CONSOLIDATED STATEMENT OF CASH FLOWS (In Thousands) 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 7,686 $ 7,032 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Possible Loan Losses 543 525 Realized (Gain) on Available-for-Sale and Held-to-Maturity Securities, Net (869) (451) Provision for Depreciation 530 572 Accretion and Amortization 507 869 Deferred Income Tax (118) (67) (Increase) Decrease in Accrued Interest Receivable and Other Assets 759 (1,182) Increase in Accrued Interest Payable and Other Liabilities 3,246 5,112 Net Cash Provided by Operating Activities 12,284 12,410 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the Maturity of Held-to-Maturity Securities 206 118 Purchase of Held-to-Maturity Securities (250) (199) Proceeds from Sales of Available-for-Sale Securities 131,333 11,573 Proceeds from Maturities of Available-for-Sale Securities 36,371 28,844 Purchase of Available-for-Sale Securities (160,547) (55,452) Net Increase in Loans (7,110) (12,194) Purchase of Premises and Equipment (549) (319) Sale of Foreclosed Assets 487 212 Purchase of Other Real Estate (93) (455) Net Cash Used in Investing Activities (152) (27,872) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase in Deposits 7,575 325 Increase (Decrease) in Short Term Borrowings (7,850) 7,650 Proceeds from (Repayment of) Long Term Borrowings (8,935) 14,000 Sale of Treasury Stock 3 Dividends Declared (2,734) (2,556) Net Cash Provided by Financing Activities (11,941) 19,419 INCREASE IN CASH AND CASH EQUIVALENTS 191 3,957 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,975 13,590 CASH AND CASH EQUIVALENTS, END OF YEAR $ 15,166 $ 17,547 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid $ 12,978 $ 13,567 Income Taxes Paid $ 2,466 $ 2,599 The accompanying notes are an integral part of these condensed financial statements. 6
CITIZENS & 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 nine-month period ended September 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. 2. The Financial Accounting Standards Board, in June 1997, issued SFAS No. 130 "Reporting Comprehensive Income". The Statement is to become effective for fiscal years beginning after December 15, 1997; however, earlier implementation is acceptable. If adopted at September 30, 1997, there would not be a significant impact on the financial statements of the Corporation. 7
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information ( continued ) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations EARNINGS OVERVIEW The Corporation reported net income for the nine months ended September 30, 1997 of $7,686,000, or $1.52 per common share. This compares to $ 7,032,000, or $1.39 per share, for the nine-month period ended September 30, 1996. The increase was the result of realized gains on the sale of Available-for-Sale securities and certain equity investments, as well as the sale of a copyright. The gross realized gains amounted to $869,000; this compares to realized gains reported September 30, 1996 of $451,000. Excluding realized securities gains and the copyright sale, net income was slightly ahead of budget and last year actuals for the nine-month period. 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 Nine-Month Periods Ended September 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 nine-month period ended September 30, 1996. The net spread for the nine-month periods ended September 30, 1997 and September 30, 1996 was 3.47 percent and 3.52 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 nine-month periods ended September 30, 1997, September 30, 1996 and the year ended December 31, 1996 was 8.32 percent, 8.31 percent and 8.29 percent, respectively. The average cost of interest-bearing liabilities for the same periods was 4.84 percent, 4.79 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 fourth quarter. To increase the return and market value of the Available-for Sale investment portfolio, $111,000,000 in seasoned mortgage-backed securities were sold and replaced with higher yielding mortgage-backed instruments. The sale accomplished two goals: it increased pretax income and improved the market value of portfolio equity. Pretax income is expected to improve $772,000 per annum and the market value of the portfolio in a rising rate scenario of 200 basis points improved $2,500,000 immediately. The restructuring did, however, lengthen the average life of the mortgage-backed portfolio by 3.1 years. The sale and replacement generated a before-tax loss of $1,885,000 that was offset by the sale of equity investments. The average rate of return on Available-for-Sale investments was 6.46 percent, down 3 basis points when compared to the same period in 1996 and 4 basis points when compared to the year ended December 31, 1996. The average value of the Available-for-Sale investments was $287,959,000 for the nine months ended September 30, 1997, compared to $303,548,000 for the 12 months ending December 31, 1996 and $305,462,000 for the nine-month period ended September 30 1996. The decline was caused by an increase in loan demand that was funded by the payment stream of the mortgage-backed investments. The rate of return on the loan portfolio was 10.29 percent, off by 14 basis points, when comparing the nine months ended September 30, 1997 to the same nine-month period in 1996. The rate of return on the loan portfolio for the year ended December 31, 1996 was 10.31 percent. Average gross loans for the periods ended September 30, 1997, December 31, 1996 and September 30, 1996 totaled $281,774,000, $271,618,000 and $267,190,000, 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. On the interest-bearing liability side of the balance sheet, average total interest-bearing deposit balances increased 1 percent during the nine months ended September 30, 1997 when compared to the period ended September 30, 1996 and 1.4 percent when compared to the year ended December 31, 1996. Interest-bearing deposits posting the largest increase were money market accounts. All other deposit categories remained relatively flat except Interest-checking accounts which were down about $2,000,000 when compared to the year ended December 31, 1996 and the nine months ended September 30, 1996. Average interest-bearing balances for the periods, respectively, amounted to $391,970,000 and $388,659,000. Average interest-bearing balances for the year ended December 31, 1996 were $386,536,000. The Corporation still maintains a strong base of Money Market accounts and average balances have increased $6,671,000 since the period ended September 30, 1996. 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 nine months ended September 30, 1997 have decreased $10,803,000 when compared to the nine months ended September 30, 1996 and $11,797,000 when compared to the year ended December 31, 1996. The decline is caused by a flat yield curve making investment opportunities with spreads large enough to make the risk worthwhile scarce. 8
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information ( continued ) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Management is expecting interest rates to remain stable during the remainder of 1997. If the FOMC does raise rates it will probable be in the 25 basis points range. Tables I and II are provided to reflect average balances and rates paid for the quarters ended September 30, 1997, September 30, 1996 and the year ended December 31, 1996. 9
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information ( continued ) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Table I - Analysis of Average Daily Balances and Rates <TABLE> <CAPTION> Rate Rate Rate Period Earned/ Period Earned/ Period Earned/ (In Thousands) Ended Paid Ended Paid Ended Paid EARNING ASSETS 09/30/97 % 12/31/96 % 09/30/96 % <S> <C> <C> <C> <C> <C> <C> Available-for-Sale Securities: U. S. Treasury Securities $2,511 5.38 $2,506 5.11 $2,507 5.12 Securities of Other U.S. Government Agencies and Corporations 32,502 7.03 30,514 6.96 28,580 6.91 Mortgage Backed Securities 174,409 6.71 197,581 6.64 203,037 6.57 Obligations of States and Political Subdivisions 58,840 6.06 49,700 6.06 47,962 6.21 Stock 14,941 5.64 16,342 5.34 16,392 5.00 Other Securities 4,756 1.38 6,905 6.84 6,984 8.21 Total Available-for-Sale Securities 287,959 6.46 303,548 6.50 305,462 6.49 Held-to-Maturity Securities: U. S. Treasury Securities 598 6.26 698 6.02 698 6.13 Securities of Other U. S. Government Agencies and Corporations 279 7.19 50 8.00 44 6.08 Mortgage Backed Securities 707 7.56 829 7.12 844 6.97 Obligations of States and Political Subdivisions Stock Other Securities Total Held-to-Maturity Securities 1,584 7.01 1,577 6.66 1,586 6.58 Interest -bearing Due from Banks 698 6.70 455 8.13 568 6.36 Federal Funds Sold 5,999 5.39 1,100 5.45 1,444 5.46 Loans: Real Estate 222,935 9.03 210,289 9.17 205,520 9.34 Consumer 32,122 20.24 35,305 18.13 35,438 17.92 Agricultural 2,720 10.08 2,750 10.11 2,739 10.10 Commercial/Industrial 16,682 9.65 16,207 9.73 16,346 9.64 Other 679 8.27 237 10.55 268 7.98 Political Subdivisions 6,397 6.17 6,629 6.40 6,685 6.36 Leases 239 7.83 201 7.96 194 8.96 Total Loans 281,774 10.29 271,618 10.31 267,190 10.43 Total Earning Assets 578,014 8.32 578,298 8.29 576,250 8.31 Cash 12,252 11,502 13,962 Securities Valuation Reserve 7,968 5,924 5,776 Allowance for Possible Loan Losses (4,814) (4,726) (4,647) Other Assets 5,858 6,617 5,347 Bank Premises & Equipment 6,549 6,793 6,822 Total Assets $605,827 $604,408 $603,510 INTEREST-BEARING LIABILITIES Interest Checking $38,614 2.47 $40,558 2.46 $40,664 2.47 Money Market 106,712 4.54 100,618 4.53 100,041 4.55 Savings 46,629 2.48 46,751 2.50 47,225 2.49 Certificates of Deposit 118,599 5.48 117,596 5.47 117,595 5.50 Individual Retirement Accounts 78,999 6.03 79,076 5.77 80,069 5.63 Other Time Deposits 2,417 2.43 1,937 2.99 2,465 2.44 Federal Funds Purchased 498 6.17 967 5.69 1,220 5.92 Other Borrowed Funds 89,793 5.62 101,121 5.56 99,874 5.57 Total Interest-bearing Liabilities 482,261 4.84 488,624 4.80 489,153 4.79 Demand Deposits 42,296 42,500 42,786 Other Liabilities 7,121 6,794 6,467 TOTAL LIABILITIES 531,678 537,918 538,406 Stockholders' Equity 68,855 62,797 61,291 Securities Valuation Reserve 5,294 3,693 3,813 Total Liabilities and Stockholders' Equity $605,827 $604,408 $603,510 Interest Rate Spread 3.47 3.49 3.52 </TABLE> 10
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information ( continued ) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Table II - Analysis of the Effect of Volume and Rate Changes in Interest Income and Interest Expense <TABLE> <CAPTION> Nine-Month period Ended September 30, 1997/1996 (In Thousands) Change in Change in Total Volume Rate Change <S> <C> <C> <C> EARNING ASSETS Available-for-Sale Securities: U. S. Treasury Securities $0 $5 $5 Securities of Other U.S. Government Agencies and Corporations 206 27 233 Mortgage Backed Securities (1,442) 219 (1,223) Obligations of States and Political Subdivisions 492 (50) 442 Stock (39) 56 17 Other Securities (105) (275) (380) Total Available-for-Sale Securities (888) (18) (906) Held-to-Maturity Securities: U. S. Treasury Securities (5) 1 (4) Securities of Other U.S. Government Agencies and Corporations 13 0 13 Mortgage Backed Securities (8) 4 (4) Obligations of States and Political Subdivisions Stock Other Securities Total Held-to-Maturity Securities 0 5 5 Interest -bearing Due from Banks 6 2 8 Federal Funds Sold 184 (1) 183 Loans: Real Estate Loans 1,150 (448) 702 Consumer (294) 407 113 Agricultural (1) (1) (2) Commercial/Industrial 24 1 25 Other 25 1 26 Political Subdivisions (13) (10) (23) Leases 2 (1) 1 Total Loans 893 (51) 842 Total Interest Income $195 ($63) $132 INTEREST BEARING LIABILITIES Interest Checking (38) (2) (40) Money Market 227 (10) 217 Savings (11) (3) (14) Certificates of Deposit 41 (17) 24 Individual Retirement Accounts (44) 239 195 Other Time Deposits (1) (0) (1) Federal Funds Purchased (33) 2 (31) Other Borrowed Funds (424) 35 (389) Total Interest Expense (283) 244 (39) NET INTEREST INCOME $478 $(307) $171 </TABLE> The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 11
CITIZENS & 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 June 30, 1997 as the committee had not completed the third quarter review at this writing. The third quarter allocations should not vary greatly from those of the second 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. The report of the independent appraiser as of June 13, 1997 lists substandard loans at $7,878,483, doubtful loans at $357,809 and loss loans at $3,205. The reserve allocation based upon these classifications would amount to $1,363,882. 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> Estimated Actual Actual Actual Actual Dec. 31, 1997 Sept. 30, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec 31, 1994 <S> <C> <C> <C> <C> <C> Beginning Balance January 1, $4,775,960 $4,775,960 $4,579,210 $4,228,741 43,816,982 Provision Charged to Earnings 723,500 542,628 700,500 736,500 737,496 Year-to-Date Recoveries $196,167 $78,898 $167,926 $187,473 $194,312 Year-to-Date Charge-offs (495,627) (517,749) (671,676) (573,504) (520,049) Ending Balance $5,200,000 $4,879,737 $4,775,960 $4,579,210 $4,228,741 </TABLE> 12
CITIZENS & 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 1992 1991 AVERAGE <S> <C> <C> <C> <C> <C> <C> <C> <C> Net Loans * 293,542 278,597 264,182 258,472 238,755 225,475 199,072 244,092 Net Charge offs 448 504 387 326 247 518 3,142 854 Allowance Balance 5,200 4,776 4,579 4,229 3,817 3,356 2,548 3,884 Provision Charged to Earnings 724 721 737 737 708 1,326 3,151 1,230 Earnings (Budget) 8,676 9,255 7,866 7,494 8,127 7,290 5,643 7,613 Earnings Coverage of Net Charge offs 19.4 x 18.4 x 20.3 x 23.0 x 32.9 x 14.1 x 1.8 x 18 x Allowance Coverage of Net Charge offs 11.6 x 9.5 x 11.8 x 13.0 x 15.5 x 6.5 x 0.8 x 10 x Loans Ninety Days or More Past Due and Still Accruing 2,900 2,994 2,915 2,743 2,899 2,532 3,810 2,982 Net Charge offs as a Percentage of the Provision 61.9% 69.9% 52.5% 44.2% 34.9% 39.1% 99.7% 56.7% Year-End Nonperforming Loans 864 279 624 843 1,351 417 730 Allowance as a Percentage of Gross Loans: * Bank (1) 1.71% 1.71% 1.73% 1.64% 1.60% 1.49% 1.28% 1.58% Peer Group (2) 1.45% 1.50% 1.61% 1.65% 1.82% 1.42% 1.44% 1.57% * Gross Loans less Unearned Discount (1) At September 30, 1997 (2) At June 30, 1997 Averages are based on the years 1991 through 1996. <CAPTION> Table V - Allocation of the Allowance for Possible Loan Losses based on Historical Data LOAN CLASSIFICATION 1997 Est 1996 1995 1994 1993 1992 1991 Average <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial, Ag., Mun. & Other $20,000 $29,832 $26,318 $22,649 $26,376 $22,712 $23,541 $25,238 0.02006 X $29,832 = $598 Real Estate - - Construction 1,250 1,166 1,284 2,593 2,224 993 982 1,540 0.00000 X 1,166 = Real Estate - - Mortgage 229,042 213,957 200,066 193,095 170,532 162,434 136,716 179,467 0.00027 X 213,957 = 59 Credit Card & Related Plans 10,000 8,902 9,934 9,896 9,212 9,991 6,694 9,105 0.01369 X 8,902 = 122 All Other Loans to Individuals 33,000 24,518 26,417 30,094 30,282 29,182 31,762 28,709 0.00605 X 24,518 = 148 Lease Financing 250 222 163 145 154 162 129 163 0.00000 X 222 = 0 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 0.04010 X 4,191 = 168 All Other Commitments Consumer 28,000 28,049 24,811 24,202 23,323 22,174 N/A 23,628 0.00605 X 28,049 = 170 Mortgage 6,000 5,802 7,276 9,566 9,466 9,117 N/A 8,856 0.00027 X 5,802 = 2 Commercial $11,000 $10,825 $10,201 $9,901 $9,790 $5,670 N/A $8,891 0.02006 X $10,825 = $217 Reserve Allocation $1,484 FASB 114 Allocation 113 Unallocated Portion 3,603 Reserve Balance $5,200 </TABLE> The reserve allocation is determined by using the six-year average net charge-offs divided by the six-year average loan balance by type. Table VI - Allocation of The Allowance for Possible Loan Losses Based on Regulatory Standards June 30, 1997 Loan Classifications Substandard @ 15 % $ 1,364,941 Doubtful @ 50 % 217,500 Loss @ 100 % 139,323 Required Reserve 1,721,764 Unallocated 3,157,696 Total Reserve $ 4,879,460 13
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information ( continued ) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ( continued ) Table VII - Major Categories of Noninterest Income Nine-Month Periods Ended September 30, $ % 1997 1996 Change Change Service Charges on Deposit Accounts $812 $847 $(35) (4.13) Service Charges and Fees 210 200 10 5.00 Trust Department Income 774 615 159 25.85 Ins. Commissions, Fees and Premiums 343 402 (59) (14.68) Other Operating Income 382 34 348 1,023.53 Total Other Income, Excl. Realized Sec. Gains 2,521 2,098 423 20.16 Realized Gains on Sec., Net 869 451 418 92.68 Total Other Income $3,390 $2,549 $841 32.99 Total Other Income increased 20.16 percent when comparing the nine months ended September 30, 1997 to the same nine-month period in 1996 and (1.13) percent when compared to the nine months beginning April 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, Fees, and Premiums and Other Operating Income. The significant increase recorded during the nine-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 a 4 percent decline between the current nine-month period when compared to the same period in 1996, and nearly 5 percent when comparing the current period to the nine months ended December 31, 1996. The fees collected monthly are nearly evenly split between overdraft charges and checking account maintenance. The total monthly fees collected normally average between $92,000 and $94,000; however, during the nine months ended September 30, 1997 the fees have averaged about $90,000 per month. The decline is due in part to a reduction in overdrafts. 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 nine-month period, the previous nine months and the nine months ended September 30, 1996 reveals a 5 percent increase during the current period compared to the previous nine-month periods. Normally, the miscellaneous fees average $22,000 to $23,000 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 nine months ended September 30, 1997, December 31, 1996 and September 30, 1996, respectively, amounted to $774,000, $615,000 and $647,000. 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 nine-month periods ended September 30, 1997, December 31, 1996 and September 30, 1996 were $343,000, $436,000 and $402,000, respectively. Premiums generated in the nine months ended December 31, 1996 were slightly higher than the other comparable nine-month periods because the amount included ten 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 nine-month period. The insurance company writes life and accident and health insurance on the bank's consumer loan portfolio. 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 ) Other Operating Income for the nine months ended September 30, 1997, December 31, 1996 and September 30, 1996 amounted to $382,000, $47,000 and $34,000, respectively. The large increase posted during the nine-month period ended September 30, 1997 reflects the sale of the copyright mentioned earlier. Also posted during the nine months ended September 30, 1997 was $26,000 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 $869,000 during the nine months ended September 30, 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 holdings of six equity investments were sold at a gain of $1,625,000 to offset the loss generated by the restructuring of the mortgage-backed investment portfolio. 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. 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 ) The following table compares the various categories of other expense for the periods ended September 30, 1997 and September 30, 1996. Table VIII - Major Categories of Noninterest Expense Nine-Month Periods Ended September 30, $ % 1997 1996 Change Change Salaries and Wages $4,459 $4,406 $53 1.20 Pensions and Other Employee Benefits 1,266 1,300 (34) (2.62) Occupancy Expense, Net 535 541 (6) (1.11) Furniture and Equipment Expense 513 546 (33) (6.04) Other Operating Expense 4,501 4,070 431 10.59 Total Other Expense $11,274 $10,863 $411 3.78 Other Noninterest Expense consists of Salaries and Wages, Pension and Other Employee Benefits Expense, Furniture and Equipment Expense and Other Operating Expense. Salaries and Wages increased $53,000 when comparing the nine-month periods ended September 30, 1997 and September 30, 1996 and $21,000 when comparing the nine-month period ended December 31, 1996 to the current nine-month period. The absence of a larger increase in salaries and wages even after merit increases can be attributed to several retirements, including the Corporation's President. Pensions and Other Employee Benefits declined $34,000 when comparing the nine-month periods ended September 30, 1997 and 1996. Several factors contributed to the decrease, including a decrease in the cost of group health insurance. Also, the retirement of the President reduced the contribution to the Supplemental Employees Retirement Plan. Occupancy Expense is made up of depreciation, building maintenance and real estate taxes and has remained insignificantly unchanged during the comparable periods. Furniture and Equipment Expense consists primarily of depreciation, maintenance and rental costs. Normally Furniture and Equipment Expense will average between $55,000 and $60,000 per month and it has not increased significantly when comparing the current and previous year's nine-month periods. Other Operating Expense averages between $450,000 and $500,000 per month. The largest of the 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 $1,799,000 for the current nine-month period and $1,601,000 during the same period in 1996; for the nine-month period ended December 31, 1996 costs amounted to $1,747,000. On the income side, credit cards generated interest and fees amounting to $2,837,000 for the nine-month period ended September 30, 1997, contributing average net monthly income of about $115,000. Other Operating Expense increased 11 percent and 4 percent, respectively, when comparing the nine-month periods ended September 30, 1996 and December 31, 1996 to the current nine-month period. 16
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 nine-month periods ended September 30, 1997, September 30, 1996 and the year ended December 31, 1996 were $605,827,000, $603,510,000 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 $47,962,000 during the nine-month period ended September 30,1996 to an average of $58,840,000 for the current nine-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 $281,774,000, $267,190,000 and $271,618,000 for the nine-month periods ended September 30, 1997, September 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. The Available-for-Sale investment portfolio was restructured during August and September 1997. Approximately $111,000,000 in mortgage-backed instruments, primarily FNMA pools, were sold at a loss of $1,885,000. The investments were replaced with higher yielding FNMA pools and U.S. Agency investments, primarily Federal Home Loan Bank instruments. The loss was offset by the sale of equity investments totaling $3,600,000 with accumulated appreciation amounting to $1,838,000. The restructuring will increase the yield on the sold investments by approximately $772,000 per year; however, the average life of the investments purchased versus the sold securities will increase by an estimated 3.1 years. 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 and Individual Retirement Accounts did decline slightly during 1996; however, the decline was offset by the strength of the Money Market Accounts which continue to exhibit growth. Also, Certificates of Deposit have begun to add growth since year-end 1996. Total average borrowed funds have declined to an average balance of $89,793,000 for the nine-month period ended September 30, 1997. This compares to an annual average of $101,121,000 for 1996 and a nine-month average of $99,874,000 for the period ended September 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 September 30, 1997, December 31, 1996 and September 30, 1996 were $10,533,000, $5,767,000 and $3,338,000, respectively. Management and the Board of Directors are aware of the market risk associated with rising interest rates and have a self imposed limitation of a 25 percent decline in capital at a 200 basis point increase in interest rates. The limitation may seem excessive, however, the corporation's capital is well in excess of the regulatory definition of a "Well Capitalized" institution. Interest rates have remained stable during the mid and latter months 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. 17
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) 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, 1998 will amount to approximately $500,000. The planned capital expenditures will not have an adverse effect on liquidity or projected earnings of the Corporation. 18
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- ASSETS One Year Years Years Years Interest Total <S> <C> <C> <C> <C> <C> <C> Interest-Bearing Deposits $610 $610 "Available-for-Sale" Securities U.S.Treasury Securities $2,530 2,530 U.S.Agency Securities 10,009 $39,021 $25,116 74,146 Mortgage Backed Securities 6,333 1,060 130,469 137,862 Municipals 2,660 5,491 4,099 49,974 62,224 Other Bonds 2,035 575 1,216 3,826 Stocks 26,858 26,858 Total "Available-for-Sale" Securities 2,660 26,398 44,755 233,633 307,446 "Held-to-Maturity" Securities: U.S.Treasury Securities 499 100 599 U.S.Agency Securities 200 150 350 Mortgage Backed Securities 25 299 340 664 Total "Held-to-Maturity" Securities 499 125 499 490 1,613 Loans and Lease Financing: Real Estate-Construction 497 497 Real Estate-Mortgage 82,278 56,294 53,675 31,821 224,068 Consumer 15,376 14,589 1,918 460 32,343 Agricultural 1,116 1,345 70 2,531 Commercial 11,948 4,119 646 173 16,886 Other 673 141 76 890 Political Subdivisions 1,747 2,144 1,166 1,203 6,260 Leases 12 48 60 160 280 Nonperforming Loans $1,554 1,554 Total Loans 113,647 78,680 57,611 33,817 1,554 285,309 Less: Unearned Discount (41) (41) Allowance for Possible Loan Losses (4,880) (4,880) Net Loans and Leases 113,647 78,680 57,611 33,817 (3,367) 280,388 Federal Funds Sold Cash and Due From Banks 14,556 14,556 Other Assets 4,223 7,570 11,793 Total Assets $121,639 $105,203 $102,865 $267,940 $18,759 $616,406 LIABILITIES AND EQUITY Interest Bearing Deposits: Money Market $107,472 $107,472 NOW and SNOW 37,012 37,012 Christmas/Fund Clubs 2,591 2,591 CD's 82,898 $36,811 $32 119,741 Reg/Key Savings $45,298 45,298 GPS 700 700 IRA's 78,533 78,533 Total Interest-Bearing Deposits 309,206 36,811 32 45,298 391,347 Demand Deposits $46,539 46,539 Federal Funds Purchased Repurchase Agreements 21,800 15,000 36,800 Borrowed Funds: Variable 15,000 15,000 Fixed 25,000 10,000 665 35,665 Total Borrowed Funds 40,000 10,000 665 50,665 Other Liabilities 911 8,830 9,741 Stockholders' Equity 81,314 81,314 Total Liabilities and Equity $371,917 $61,811 $32 $45,963 $136,683 $616,406 Interest Rate Sensitivity Gap $(250,278) $43,392 $102,833 $221,977 $(117,924) </TABLE> 19
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 September 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 616,406 616,406 616,406 616,406 616,406 616,406 616,406 Market Value 671,016 653,929 638,134 631,205 609,291 599,199 589,005 CHANGE 54,610 37,523 21,728 14,799 (7,115) (17,207) (27,401) LIABILITIES Book Value 535,092 535,092 535,092 535,092 535,092 535,092 535,092 Market Value 549,867 544,500 539,277 535,319 529,244 524,426 519,735 CHANGE (14,775) (9,408) (4,185) (227) 5,848 10,666 15,357 EQUITY Beginning Balance 70,781 70,781 70,781 70,781 70,781 70,781 70,781 Asset Change 54,609 37,522 21,727 14,799 (7,116) (17,208) (27,402) Liability Change (14,774) (9,407) (4,184) (227) 5,849 10,667 15,358 ENDING EQUITY 110,616 98,896 88,324 85,353 69,514 64,240 58,737 </TABLE> Table XI - Current Exposure to Hypothetical Change in Interest Rates for the Period Ended September 30, 1997 Net Interest Income MV of Portfolio Equity Change in Rates Projected Projected Basis Points Change Change 300 -7.5 -30.3 200 -5.7 -24.1 100 -4.6 -18.1 0 0.0 0.0 -100 4.6 3.4 -200 9.6 15.4 -300 14.6 28.8 20
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 September 30, 1997, December 31, 1996 and September 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 XII - CAPITAL RATIOS <TABLE> <CAPTION> (In Thousands) September 30, December 31, September 30, 1997 1996 1996 <S> <C> <C> <C> Leverage Ratio (Equity/Total Liabilities) 13.3% 12.2% 11.9% TIER I Total Stockholders' Equity $70,781 $65,826 $64,501 TIER II Allowance for Possible Loan Losses (1) 3,913 3,957 3,934 Total Qualifying Capital $74,694 $69,783 $68,435 Risk Adjusted Assets - Balance Sheet 299,168 303,417 301,762 Risk Adjusted Assets - Off Balance Sheet 13,886 13,172 12,941 Total Risk Adjusted Assets $313,054 $316,589 $314,703 Ratios TIER I Capital to Risk Weighted Assets 22.61% 20.79% 20.50% Minimum Required September 30, 1997 4.00% Minimum Required December 31, 1996 4.00% Minimum Required September 30, 1996 4.00% Total Capital to Risk Weighted Assets 23.86% 22.04% 21.75% 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. 21
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q Part II - Other Information Item 1. Legal Proceedings 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 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 September 30, 1997 22
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 NOV. 6, 1997 /s/ CRAIG G. LITCHFIELD ------------------------ Craig G. Litchfield President and Chief Executive Officer Date NOV. 6, 1997 /s/ JAMES W. SEIPLER ------------------------ James W. Seipler Treasurer 23