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 Three-month period ended March 31, 2000 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) 570-724-3411 (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) 5,205,492 Shares Outstanding May 11, 2000 1
CITIZENS & NORTHERN CORPORATION Index Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - March 31, 2000 and December 31, 1999 Page 3 Consolidated Statement of Income - Three Months Ended March 31, 2000 and March 31, 1999 Page 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 2000 and March 31, 1999 Page 5 Notes to Consolidated Financial Statements Pages 6 and 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 8 through 17 Item 3. Information About Market Risk Pages 18 And 19 Part II. Other Information Page 20 Signatures Page 21 2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information Item 1. Financial Statements CONSOLIDATED BALANCE SHEET (In Thousands, Except Share Data) <TABLE> <CAPTION> March 31, December 31, 2000 1999 --------- ------------ ASSETS (Unaudited) (Note) <S> <C> <C> Cash & Due From Banks $11,295 $15,337 Interest Bearing Deposits 2,409 2,726 Available-for-Sale Securities: U.S. Treasury Securities 2,484 2,498 Securities of Other U.S. Government Agencies 121,965 116,691 Mortgage Backed Securities 104,647 107,816 Obligations of States and Municipal Subdivisions 78,633 76,748 Other Securities 52,766 55,176 ----------------------------------- Total Available-for-Sale Securities 360,495 358,929 Held-to-Maturity Securities: U.S. Treasury Securities 615 617 Securities of Other U.S. Government Agencies 1,045 949 Mortgage Backed Securities 303 314 ----------------------------------- Total Held-to-Maturity Securities 1,963 1,880 Loans: Loans to Political Subdivisions 11,943 12,466 Other Loans 300,094 298,455 ----------------------------------- Total Loans 312,037 310,921 Less - Allowance for Possible Loan Losses (5,146) (5,131) Unearned Income (27) (29) ----------------------------------- Loans, Net 306,864 305,761 Bank Premises and Equipment 8,442 7,992 Other Real Estate 389 310 Accrued Interest on Bonds and Loans 4,732 5,066 Other Assets 7,562 7,897 ----------------------------------- TOTAL ASSETS $704,151 $705,898 =================================== LIABILITIES Deposits: Demand $63,615 $67,200 Interest Checking 35,762 39,077 Money Market 128,752 126,994 Savings 46,131 45,420 Other Time 222,628 221,783 ----------------------------------- Total Deposits 496,888 500,474 Dividends Payable 1,249 1,237 Short - Term Borrowings 99,124 89,036 Long - Term Borrowings 25,620 35,025 Other Liabilities 4,030 3,503 ----------------------------------- TOTAL LIABILITIES 626,911 629,275 =================================== SHAREHOLDERS' EQUITY Common Stock, Par Value $ 1.00 per Share Authorized 10,000,000; Issued 5,324,962 5,325 5,272 and 5,272,239 in 2000 and 1999, respectively Stock Dividend Distributable 1,437 Paid in Capital 18,891 17,355 Retained Earnings 63,768 62,886 ----------------------------------- Total 87,984 86,950 ----------------------------------- Accumulated Other Comprehensive Income (Loss) (9,304) (8,884) Less: Treasury Stock at Cost 119,470 shares at March 31, 2000 (1,440) 118,510 shares at December 31,1999 (1,443) ----------------------------------- TOTAL SHAREHOLDERS' EQUITY 77,240 76,623 ----------------------------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $704,151 $705,898 =================================== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. Note: The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statements. 3
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information (Continued) Item 1. Financial Statements (Continued) CONSOLIDATED STATEMENT OF INCOME (In Thousands, Except Per Share Data) (Unaudited) <TABLE> <CAPTION> 3 Months Ended March 31, March 31, 2000 1999 --------- --------- <S> <C> <C> INTEREST INCOME Interest and Fees on Loans $6,508 $6,313 Interest on Balances with Depository Institutions 25 5 Interest on Loans to Political Subdivisions 163 117 Interest on Federal Funds Sold 6 5 Income from Available-for-Sale and Held-to-Maturity Securities: Taxable 4,679 3,494 Tax Exempt 1,114 1,114 Dividends 362 267 ------------------------------- Total Interest and Dividend Income 12,857 11,315 INTEREST EXPENSE Interest on Deposits 5,413 4,529 Interest on Short-Term Borrowings 1,060 79 Interest on Long-Term Borrowings 672 789 ------------------------------- Total Interest Expense 7,145 5,397 ------------------------------- Interest Margin 5,712 5,918 Provision for Possible Loan Losses 226 225 ------------------------------- Interest Margin After Provision for Possible Loan Losses 5,486 5,693 OTHER INCOME Service Charges on Deposit Accounts 268 270 Service Charges and Fees 51 69 Trust Department Income 401 370 Insurance Commissions, Fees and Premiums 80 133 Fees Related to Credit Card Operation 465 665 Other Operating Income 93 28 ------------------------------- Total Other Income Before Realized Gains on Securities, Net 1,358 1,535 Realized Gains on Securities, Net 15 490 ------------------------------- Total Other Income 1,373 2,025 OTHER EXPENSES Salaries and Wages 1,829 1,561 Pensions and Other Employee Benefits 487 471 Occupancy Expense, Net 253 233 Furniture and Equipment Expense 253 209 Expenses Related to Credit Card Operation 191 576 Pennsylvania Shares Tax 181 181 Other Operating Expense 1,015 1,022 ------------------------------- Total Other Expenses 4,209 4,253 ------------------------------- Income Before Income Tax Provision 2,650 3,465 Income Tax Provision 501 789 ------------------------------- NET INCOME $2,149 $2,676 =============================== PER SHARE DATA: Net Income - Basic $0.41 $0.51 Net Income - Diluted $0.41 $0.51 ------------------------------- Dividend Per Share $0.24 $0.22 ------------------------------- Number Shares Used in Computation - Basic 5,205,314 5,204,919 Number Shares Used in Computation - Diluted 5,207,547 5,212,264 Number Shares Issued 5,324,962 5,272,239 Number Shares Authorized 10,000,000 10,000,000 ------------------------------- Dividends Actually Paid $0.24 $0.22 ------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 4
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information (Continued) Item 1. Financial Statements (Continued) <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended (In Thousands) (Unaudited) March 31, 2000 March 31, 1999 -------------- -------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $2,149 $2,676 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Provision for Possible Loan Losses 226 225 Realized Gain on Securities, Net (15) (490) Realized Gain on Sale of Foreclosed Assets (34) - Provision for Depreciation 263 215 Accretion and Amortization (592) (385) Deferred Income Tax 28 (151) (Decrease) Increase in Accrued Interest Receivable and Other Assets 668 (678) Increase in Accrued Interest Payable and Other Liabilities 726 1,963 - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 3,419 3,375 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the Maturity of Held-to-Maturity Securities 12 282 Purchase of Held-to-Maturity Securities (96) (254) Proceeds from Sales of Available-for-Sale Securities 864 3,639 Proceeds from Maturities of Available-for-Sale Securities 3,112 16,770 Purchase of Available-for-Sale Securities (5,435) (40,109) Net Increase in Loans (1,643) (2,636) Purchase of Premises and Equipment (713) (340) Proceeds from the Sale of Foreclosed Assets 269 62 - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (3,630) (22,586) CASH FLOWS FROM FINANCING ACTIVITIES: Net Increase (Decrease) in Deposits (3,586) 2,812 Increase in Short-Term Borrowings 10,088 17,853 Repayments of Long-Term Borrowings (9,405) (5) Proceeds from the Sale of Treasury Stock 4 14 Dividends Declared (1,249) (1,134) - ---------------------------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities (4,148) 19,540 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,359) 329 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $18,063 $16,128 - ---------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $13,704 $16,457 ============================================================================================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest Paid $5,810 $4,412 ============================================================================================================================ Income Taxes Paid $475 $796 ============================================================================================================================ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 5
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information (Continued) Item 1. Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 1. BASIS OF INTERIM PRESENTATION. The financial information included herein, with the exception of the Consolidated Balance Sheet dated December 31, 1999, 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 cash flows for the interim periods. Certain 1999 amounts have been reclassified to conform to the 2000 presentation. Results reported for the three-month period ended March 31, 2000 might not be indicative of the results for the year ended December 31, 2000. This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency. 2. PER SHARE DATA Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflect the retroactive effect of stock dividends for all periods presented. The following data show the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options. The dilutive effect of stock options is computed as the weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period. <TABLE> <CAPTION> Weighted- Earnings Net Average Per Income Common Shares Share ------ ------------- -------- <S> <C> <C> <C> Quarter Ended March 31, 2000 Earnings per share - basic $2,149,000 5,205,314 $0.41 Dilutive effect of stock options 2,233 ----------------------------------------------------------------------------------------------------------------- Earnings per share - diluted $2,149,000 5,207,547 $0.41 ================================================================================================================= Quarter Ended March 31, 1999 Earnings per share - basic $2,676,000 5,204,919 $0.51 Dilutive effect of stock options 7,345 ----------------------------------------------------------------------------------------------------------------- Earnings per share - diluted $2,676,000 5,212,264 $0.51 ================================================================================================================= </TABLE> 3. COMPREHENSIVE INCOME Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Comprehensive income is calculated as follows: <TABLE> <CAPTION> (In Thousands) Quarters Ended March 31, -------------------------------- 2000 1999 ---- ---- <S> <C> <C> Net Income $2,149 $2,676 Other Comprehensive Income : Unrealized holding gains (losses) on available-for-sale securities Losses arising during the period (623) (3,927) Reclassification adjustment (15) (490) -------------------------------- Other comprehensive loss before income tax (638) (4,417) Income tax related to other comprehensive loss 217 1,501 -------------------------------- Other comprehensive loss (421) (2,916) -------------------------------- Comprehensive Income (loss) $1,728 ($240) ================================ </TABLE> 6
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 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains certain forward-looking statements. The Corporation intends 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, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, business objectives and future expectations of the Corporation, are generally identifiable by the use of words such as, "believe", "expect", "intend", "anticipate", "estimate", "project", and similar expressions. The Corporation's ability to predict results or the actual effect of future plans or occurrences is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in : interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U. S. government, including policies of the U. S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market area, our implementation of new technologies, our ability to develop and maintain secure and reliable electronic systems and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. EARNINGS OVERVIEW Net after-tax income for the three-month period ended March 31, 2000 amounted to $2,149,000 or $.41 per share (on a basic and diluted basis). This compares to $2,676,000 or $.51 per share (on a basic and diluted basis) for the same period in 1999. Net income for the three month period ended December 31, 1999 amounted to $3,096,000 or $.59 per share (on a basic and diluted basis). Total assets at March 31, 2000, December 31, 1999 and March 31, 1999, respectively, totaled $704,151,000, $705,898,000 and $665,909,000. Earnings, excluding investment security gains, net of tax for the three-month periods ended March 31, 2000, December 31, 1999 and March 31, 1999, per common share (basic and diluted) would have amounted to $.41, $.44 and $.45, respectively. Results for the first three months of 2000, were slightly less than budgeted expectations. This was due primarily to the lack of realized gains on equity investments. Management and the Board of Directors decided that it would not be prudent to sell equity investments under current market conditions, especially those in the financial sector. There will be continued pressure on the net interest margin as the Fed continues to raise short-term interest rates and it will probably impact earnings for the remainder of 2000. It should be emphasized that although earnings will be slightly lower they will still be substantial and are being compared to prior periods that were exceptional under much better interest rate structures. NET INTEREST MARGIN Net interest margin or net interest income is the dollar amount of difference between all interest income received and interest expense paid. The net interest spread or interest margin is the difference, stated as a percentage, between the average rate received on all interest-earning assets and the average rate paid on all interest-bearing liabilities. The net interest margin as reflected in the income statement has not been adjusted for federal income taxes. Management's discussion of the net interest margin includes references to 4th quarter 1999 information that is not presented in this Form 10-Q. Summarized financial data for the 4th quarter 1999 is included in the 1999 Annual Report, which was incorporated by reference into the 1999 Form 10-K. THREE-MONTH PERIODS ENDED MARCH 31, 2000, DECEMBER 31, 1999 AND MARCH 31, 1999. Net interest income for the three-month period ended March 31, 2000 decreased $206,000 or 3.5 percent when compared to the same period in 1999 and $155,000 or 2.6 percent compared to the quarter ended December 31, 1999. Respectively, gross interest income for the periods ended March 31, 2000 and December 31, 1999 and March 31, 1999 amounted to $12,857,000, $12,713,000, and $11,315,000. Gross interest expense for the same respective periods amounted to $7,145,000 and $6,846,000, and $5,397,000. The interest rate spread, as presented in Table I for the current three-month period was 2.46 percent; the interest rate spread for the same period last year was 3.18 percent. The interest rate spread for the quarter ended December 31, 1999 was approximately 2.56 percent. 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 (Continued) Average assets did increase appreciably between the comparable periods. Average assets for the current three-month period were $703,234,000 and $643,726,000 for the three-month period ended March 31, 1999. The growth between the periods was due primarily to an increase in average deposits of $24,533,000 or 5.2 percent. Also contributing to the growth was an increase in average borrowed funds, including Customer Repo accounts, of $49,232,000. Average total assets for the quarter ended December 31, 1999 were $690,332,000. The volume of average interest-bearing assets increased from $605,863,000 for the quarter ended March 31, 1999 to $689,116,000 for the current quarter, an increase of 13.7 percent. Average interest-bearing liabilities amounted to $499,138,000 for the quarter ended March 31, 1999 and $570,729,000 for the current quarter, an increase of 14.3 percent. Average interest-bearing assets and liabilities did not change significantly between the quarter ended December 31, 1999 and March 31, 2000. The increase in earning assets was primarily in the investment portfolio, which increased 20.1 percent or $63,188,000, with the largest increase in U. S. Government Agency issues. Average total loans increased $20,065,000 or 6.9 percent. Loan categories that increased were mortgage loans and municipal loans. Mortgage loans increased $16,930,000 and municipal loans increased $4,056,000. Other loan categories remained relatively flat. The increase in interest-bearing liabilities was primarily the more expensive deposit categories: Money Market accounts, Certificates of Deposit and borrowed funds. Money Market accounts increased $16,692,000 or 13.2 percent and Certificates of Deposit increased $5,179,000 or 3.7 percent. Borrowed funds increased $49,232,000. The average rate earned on interest-bearing assets for the quarter ended March 31, 2000 was 7.50 percent; this compares to 7.57 percent for the same period in 1999. The quarter ended December 31, 1999 approximated that of the first quarter of 2000. The small change in rates between the periods is reflective of the amount of time it takes cash flows from maturing assets to reprice. This is due primarily to the slow down in prepayment speeds of mortgages in the loan portfolio and mortgage-backed securities in the investment portfolio. On the liability side of the balance sheet interest-bearing liabilities mature and are repriced at a much faster rate. The average rate paid on interest-bearing liabilities for the quarter ended March 31, 2000 was 5.04 percent. This compares to an average rate of 4.39 percent for the same period in 1999. The average rate for the 4th quarter of 1999 was about 4.84 percent. The average rate paid on Money Market Accounts during the 1st quarter of 2000 was 5.08 percent, during the same period in 1999 the rate paid 4.14 percent. This represents an increase of 94 basis points. The average rate paid on borrowed funds also increased substantially between the quarters being compared. During the 1st quarter of 2000 the average rate paid was 5.65 percent. This compares to an average rate of 4.73 percent for the same period in 1999. Rates paid on the balance of interest-bearing liabilities did not increase significantly. The difference in the period of time it takes assets and liabilities to reprice causes the net interest margin and the corresponding earnings in a rising rate environment to be depressed for a period of time. The amount of time it takes for the net interest margin and net spread to align themselves is approximately 18 months assuming no change in the short-term rate structure. Management expects a further decline in the net interest spread and net interest income in the short run as the Federal Reserve Open Market Committee is expected to again increase interest rates at its May meeting. 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) TABLE I - ANALYSIS OF AVERAGE BALANCES AND RATES <TABLE> <CAPTION> Rate of Rate of Rate of (In Thousands) Return/ Return/ Return/ Cost of Year Cost of Cost of Funds Ended Funds funds EARNING ASSETS 03/31/00 % 12/31/99 % 03/31/99 % -------- ------- -------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> Available-for-Sale Securities: U. S. Treasury Securities $ 2,514 6.40 $ 2,510 5.90 $ 2,511 6.14 Securities of Other U.S. Government Agencies and Corporations 131,628 7.07 101,205 6.92 65,682 6.82 Mortgage Backed Securities 110,283 6.82 117,902 6.61 126,346 6.53 Obligations of States and Political Subdivisions 80,967 5.53 80,970 5.58 78,449 5.76 Stock 26,299 5.54 22,288 5.42 21,601 5.01 Other Securities 21,205 8.06 20,948 6.47 16,825 6.92 - ---------------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities 372,896 6.61 345,823 6.37 311,414 6.31 - ----------------------------------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities: U. S. Treasury Securities 635 5.70 615 5.53 600 5.41 Securities of Other U. S. Government Agencies and 1,026 6.66 895 6.48 799 7.11 Corporations Mortgage Backed Securities 306 7.89 368 7.34 416 7.80 - ---------------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities 1,967 6.54 1,878 6.34 1,815 6.70 - ----------------------------------------------------------------------------------------------------------------------------------- Interest -bearing Due from Banks 2,323 4.33 566 5.30 794 2.55 Federal Funds Sold 438 5.51 866 4.85 413 4.91 Loans: Real Estate Loans 248,822 8.54 240,951 8.56 231,892 8.75 Consumer 28,688 10.61 28,982 10.94 29,885 11.32 Agricultural 1,986 9.52 1,961 9.89 1,975 10.88 Commercial/Industrial 18,687 8.63 19,271 8.25 18,548 8.83 Other 859 7.96 714 7.70 743 7.64 Political Subdivisions 12,258 5.35 9,499 5.70 8,202 5.79 Leases 192 4.19 206 6.31 182 6.68 - ---------------------------------------------------------------------------------------------------------------------------------- Total Loans 311,492 8.61 301,584 8.68 291,427 8.95 - ---------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 689,116 7.50 650,717 7.44 605,863 7.57 - ---------------------------------------------------------------------------------------------------------------------------------- Cash 10,077 14,028 12,699 Securities Valuation Reserve (12,858) 7,865 17,307 Allowance for Possible Loan Losses (5,097) (5,083) (4,894) Other Assets 13,725 5,509 5,220 Bank Premises & Equipment 8,271 7,828 7,531 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets 703,234 680,864 643,726 ================================================================================================================================== INTEREST-BEARING LIABILITIES Interest Checking 36,594 2.70 37,248 2.27 36,414 2.15 Money Market 142,328 5.08 131,741 4.34 125,636 4.14 Savings 45,516 2.49 46,643 2.48 46,161 2.48 Certificates of Deposit 144,179 5.35 139,916 5.24 139,000 5.32 Individual Retirement Accounts 77,311 6.02 75,882 5.21 76,433 4.97 Other Time Deposits 1,449 3.33 1,641 2.68 1,374 2.95 Federal Funds Purchased 3,926 5.53 6,085 4.91 6,322 4.94 Other Borrowed Funds 119,426 5.65 97,585 5.35 67,798 4.73 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 570,729 5.04 536,741 4.58 499,138 4.39 Demand Deposits 50,340 50,787 48,166 Other Liabilities 5,313 6,193 6,090 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 626,382 593,721 553,394 Stockholders' Equity 85,013 81,767 78,909 - ---------------------------------------------------------------------------------------------------------------------------------- Securities Valuation Reserve (8,161) 5,376 11,423 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 703,234 $ 680,864 $ 643,726 ================================================================================================================================== Interest Rate Spread 2.46 2.86 3.18 ================================================================================================================================== </TABLE> 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 II - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME AND INTEREST EXPENSE <TABLE> <CAPTION> Three-month Periods Ended March 31, 2000/1999 --------------------------------------------- (In Thousands) Change in Change in Total Volume Rate Change --------- --------- ------ <S> <C> <C> <C> EARNING ASSETS Available-for-Sale Securities: U. S. Treasury Securities $ - $ 2 $ 2 Securities of Other U.S. Government Agencies and Corporations 1,157 51 1,208 Mortgage Backed Securities (282) 117 (165) Obligations of States and Political Subdivisions - - - Stock 62 33 95 Other Securities 83 55 138 - ------------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale Securities 1,020 258 1,278 - ------------------------------------------------------------------------------------------------------------------------------- Held-to-Maturity Securities U. S. Treasury Securities - 1 1 Securities of Other U.S. Government Agencies and Corporations 4 (1) 3 Mortgage Backed Securities (2) - (2) - ------------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity Securities 2 - 2 - ------------------------------------------------------------------------------------------------------------------------------- Interest-bearing Due from Banks 15 5 20 Federal Funds Sold - 1 1 Loans: Real Estate Loans 358 (79) 279 Consumer (33) (44) (77) Agricultural - (6) (6) Commercial/Industrial 3 (6) (3) Other 2 1 3 Political Subdivisions 53 (7) 46 Leases - (1) (1) - ------------------------------------------------------------------------------------------------------------------------------- Total Loans 383 (142) 241 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 1,420 122 1,542 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST BEARING LIABILITIES Interest Checking 1 52 53 Money Market 185 330 515 Savings - - - Certificates of Deposit 69 26 95 Individual Retirement Accounts 11 209 220 Other Time Deposits 1 1 2 Federal Funds Purchased (35) 12 (23) Other Borrowed Funds 699 187 886 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 930 818 1,748 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME $ 490 $ (696) $ (206) =============================================================================================================================== </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 & 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) ALLOWANCE FOR POSSIBLE LOAN LOSSES The Allowance for Possible Loan Losses is an allowance established by management and the Board of Directors, which they believe will absorb existing loan losses, based on management's assessment of the quality and volume of the loan portfolio. The assessment is performed on an ongoing basis and reviewed by the Board of Directors quarterly. The quarterly review process is performed by a loan quality committee consisting of the President, Chief Financial Officer, Executive Vice-Presidents in charge of loans and branch administration and monitored by the Corporation's Auditor. The committee reviews all of the known risk elements in the portfolio; namely, the "Watch List" (a collection of loans that have had a history of delinquency), past due reports, non-performing loans and historical information related to charge-offs and recoveries by loan category. The allowance for loan losses is evaluated based on an assessment of the losses inherent in the loan portfolio. This assessment results in an allowance consisting of two components, allocated and unallocated. The allocated portion of the allowance balance reflects expected losses resulting from the analysis of individual loans, developed through specific credit allocations for individual loans and historical experience for each loan category. The specific credit allocations are based on a regular analysis of all loans and commitments on the Corporation's "Watch List". Also, the historical loan loss element is determined based on a ratio of net charge-offs to average loan balances over a five-year period for each significant type of loans. The unallocated portion of the allowance is determined based on management's assessment of general economic conditions as well as specific economic factors in the Corporation's market area. This determination inherently involves a higher degree of uncertainty and considers current risk factors that may not have manifested themselves in the Corporation's historical loss factors used to determine the allocated component of the allowance and it recognizes that knowledge of the portfolio may be incomplete. It should be noted that the unallocated portion of the allowance has increased from $1,020,000 at December 31, 1999 to $1,738,000 at March 31, 2000. The increase is attributable to an improvement in the quality of the commercial portion of the portfolio. Total substandard or "Watch List" loans decreased from $13,226,000 at December 31, 1999 to $12,057,000 at March 31, 2000. If in management's judgement this is a sustainable trend and the unallocated portion of the allowance is high relative to the overall quality of the portfolio, future charges to earnings for loan loss provisions may be reduced accordingly. The following tables present current and historical information on the loan portfolio and the Allowance for Possible Loan Losses. TABLE III - ALLOWANCE FOR POSSIBLE LOAN LOSSES RECONCILIATION <TABLE> <CAPTION> Quarter Ended Years Ended Mar. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2000 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> Balance at Beginning of Year $5,131 $4,820 $4,913 $4,776 $4,579 $4,229 Charge-offs Real Estate Loans 126 81 257 246 157 38 Installment Loans 31 138 144 230 240 236 Credit Cards and Related Plans 61 192 264 305 201 184 Commercial and Other Loans 6 219 301 3 74 116 - ---------------------------------------------------------------------------------------------------------------------------------- Total Charge-offs 224 630 966 784 672 574 Recoveries Real Estate Loans 81 12 21 22 0 Installment Loans 6 60 43 64 53 60 Credit Card and Related Plans 5 30 40 30 38 41 Commercial and Other Loans 2 10 15 9 55 86 - ---------------------------------------------------------------------------------------------------------------------------------- Total Recoveries 13 181 110 124 168 187 Net Charge-offs 211 449 856 660 504 387 Additions Charged to Operations 226 760 763 797 701 737 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at End of Period $5,146 $5,131 $4,820 $4,913 $4,776 $4,579 ================================================================================================================================== </TABLE> 11
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 IV - ALLOWANCE FOR POSSIBLE LOAN LOSSES ALLOCATION <TABLE> <CAPTION> Mar. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, (In Thousands) 2000 1999 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Mortgage 771 834 97 350 58 38 35 Consumer 523 437 702 375 303 286 241 Commercial 1,185 2,081 650 625 630 604 443 Impaired Loans 796 609 290 274 113 228 - All Other Commitments 133 150 202 343 369 374 386 Unallocated 1,738 1,020 2,879 2,946 3,303 3,049 3,124 - ------------------------------------------------------------------------------------------------------ Total Allowance 5,146 5,131 4,820 4,913 4,776 4,579 4,229 ====================================================================================================== </TABLE> 12
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 V - COMPARISON OF NONINTEREST INCOME <TABLE> <CAPTION> Three-Month Periods Ended March 31, March 31, December 31, 2000 1999 1999 --------- --------- ------------ <S> <C> <C> <C> Service Charges on Deposit Accounts $ 268 $ 270 $ 286 Service Charges and Fees 51 69 68 Trust Department Income 401 370 360 Insurance Commissions, Fees and Premiums 80 133 120 Fees Related to Credit Card Operation 465 665 736 Other Operating Income 93 28 28 - --------------------------------------------------------------------------------------------------- Total Other Operating Income before Realized Gains on Securities, Net 1,358 1,535 1,598 Realized Gains on Securities, Net 15 490 1,196 - --------------------------------------------------------------------------------------------------- Total Other Income $1,373 $2,025 $2,794 =================================================================================================== </TABLE> Other Operating Income Before Realized Gains on Securities decreased 11.5 percent or $177,000 during the three-month period ended March 31, 2000 when compared to the three-month period ended March 31, 1999. The decrease was caused by a sharp decline in Fees Related to the Credit Card Operation. Those fees were down sharply due to the loss of two large agent banks because of mergers and the discontinuance of annual fees on the cards due to increased competition. Insurance Commissions, Fees and Premiums provided by Bucktail Life Insurance Company also declined sharply due to a decline in consumer loan production that lends itself to the sale of the insurance products. Loan growth was centered in larger commercial products that are insured by other insurance sources. Bucktail Life Insurance Company, a subsidiary of Citizens & Northern Corporation, provides credit life and accident and health insurance for Citizens & Northern Bank. Trust Department Income increased 8.4 percent as trust assets continue to post substantial increases. Trust Department Income is expected to become a substantial provider of noninterest income in the future as the Corporation places more emphasis on becoming a full financial service provider with an expanding range of financial products as demonstrated with the addition of three financial service professionals in 1999. The Corporation is also very proud of and has made a substantial commitment in terms of dollars and personnel in its internet banking product, which currently provides a wide range of services including bill paying. Future use of this product, including loan generation, deposit relationships and connections to other businesses in our market area is limitless and can be provided at a much lower cost than traditional banking as more and more consumers become owners of personal computers. Other Income, excluding Realized Securities Gains, generated during the 4th quarter of 1999 totaled $1,598,000 compared to $1,358,000 during the current three month period. The difference is primarily in Fees Related to Credit Card Operation for reasons previously described. Other categories of noninterest income did not change significantly between the periods being compared. Other Income, excluding Realized Gains on Securities, historically adds between $1,350,000 and $1,650,000 to the bottom line on a quarterly basis. The Corporation, going forward, is committed to increasing the importance of Other Income to the profitability of the Company. At January 1, 2000, a new subsidiary, Citizens & Northern Financial Services Corporation, was added. The new subsidiary is licensed as an insurance agency and will provide a full range of insurance products. The net loss of the subsidiary for the quarter ended March 31, 2000 was $16,000, as payroll and some other start-up costs were incurred, with no revenues generated during the quarter. Realized Gains on Securities normally provide additional Other Income as selected equity investments are sold at gains to enhance their value to the portfolio. Equity investments in financial institutions historically produce a very low rate of return that will not cover the cost of funds provided to purchase them and from time to time certain equities that have market appreciation are sold to provide gains. However, during recent periods stocks of financial service providers have fallen out of favor in the market for a number of illogical reasons. The Corporation, therefore, felt it would be imprudent to sell these investments at this time due to current market conditions. 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 VI- COMPARISON OF NONINTEREST EXPENSE <TABLE> <CAPTION> Three-Month Periods Ended Other Operating Expense March 31, March 31, December 31, (In thousands) 2000 1999 1999 --------- --------- ------------ <S> <C> <C> <C> Salaries and Wages $ 1,829 $ 1,561 $ 1,911 Pensions and Other Employee Benefits 487 471 480 Occupancy Expense, Net 253 233 217 Furniture and Equipment Expense 253 209 294 Expenses Related to Credit Card Operation 191 576 559 Pennsylvania Shares Tax 181 181 181 Other Operating Expense 1,015 1,022 872 - --------------------------------------------------------------------------------------------------- Total Other Expense $ 4,209 $ 4,253 $ 4,514 =================================================================================================== </TABLE> Salaries and Wages increased 17.2 percent or $268,000 during the three-month period ended March 31, 2000 when compared to the three-month period ended March 31, 1999. The increase is the result of annual merit raises of approximately 4.5 percent and the addition of 9 full time equivalent employees between the comparable periods. The additional employees were needed to staff the internet banking product, the Trust and Financial Services Division and the growing MIS department. The number of full time equivalent employees employed during the 1st quarter of 1999 was 209. Salaries and wages for the 4th quarter of 1999 amounted to $1,911,000, slightly higher than the current quarter because of year-end retirements. Pensions and Other Employee Benefits consists primarily of social security taxes, group life and health insurance, contributions to the 401 (k) plan and pension expense. The cost of Pensions and Other Employee Benefits did not change significantly when comparing the respective three-month periods ended March 31, 2000, March 31, 1999 and December 31, 1999. Totals for those periods respectively, were $487,000, $471,000 and $480,000. Occupancy Expense, consisting of insurance, maintenance, real estate taxes, depreciation and other utilities, increased 8.6 percent or $20,000 when comparing the three-month periods ended March 31, 2000 and March 31, 1999. The increase was due to maintenance costs and the purchase of an additional facility in Wellsboro Pa. The new facility will be used to house the credit card operation. When compared to the 4th quarter of 1999 occupancy costs were up $37,000, again the result of maintenance costs. Furniture and Equipment Expense increased $44,000 or 21.0 percent when comparing the three-month periods ended March 31, 2000 and March 31, 1999. The increase is due to the internet banking system and the associated hardware and software costs and depreciation. To support the system thin clients (personal computers without memory) had to be installed in all branch locations. Servers (memory and operating systems) had to be installed in the operations centers to run the thin clients. Total Furniture and Fixtures costs for the 4th quarter of 1999 amounted to $294,000, an increase of $41,000 over the current quarter. The increase in the 4th quarter was related to software and hardware replacement related to Y2K. Credit card expense for the respective periods ended March 31, 2000, March 31, 1999 and December 31, 1999 amounted to $191,000, $576,000 and $559,000. The significant decrease during the 1st quarter of 2000 is related to the loss of two large agent banks and merchant processing costs. Pennsylvania Shares Tax did not change significantly between the comparable periods. Other Operating Expense did not change significantly between the quarters ended March 31, 2000 and March 31, 1999. When compared to the 4th quarter of 1999 Other Operating Expense for the 1st quarter of 2000 increased $143,000 or 16.4 percent. The increase was caused in part to a write-down of other real estate during the current quarter, the cost of schools and educational seminars and costs related to the startup of Citizens & Northern Financial Services Corporation. 14
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) BALANCE SHEET: THREE-MONTH PERIOD ENDED MARCH 31, 2000/1999 -- THREE-MONTH PERIOD ENDED DECEMBER 31, 1999 Average total assets of the Corporation were $703,234,000 and $643,726,000, respectively, for the periods ended March 31, 2000 and March 31, 1999 and $706,897,000 for the three-month period ended December 31, 1999. The average asset growth of $59,508,000 which occurred between March 31, 1999 and March 31, 2000 was primarily from increases in deposits and borrowing. The increase in available funds was used to increase the investment portfolio, specifically U. S. Agency securities of the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank. A portion of the available funds was used to fund average loan growth of approximately $9,908,000. The increase in loans was mainly real estate secured commercial loans. Municipal loans also increased significantly with the financing of elderly housing projects in the Corporation's market area. Average Interest-bearing Due from Banks increased approximately $1,800,000. This increase occurred as balances held by Citizens & Northern Investment Corporation were transferred from a money market account held at the Bank to a money market account maintained by a fiduciary in Delaware. The average outstanding balance in Bank Premises and Equipment also increased nearly 10 percent. This increase can be attributed to the purchase of a building located in Wellsboro, Pa. to house the credit card operation, a lot for the new Muncy branch, an additional lot in Athens, Pa. and the purchase of new profitability analysis software. The Corporation also created a new Pennsylvania subsidiary under Citizens & Northern Bank. The new subsidiary has been licensed to sell a variety of insurance products in our market area. The subsidiary is headed by a newly hired insurance professional and several Bank officers are in the process of obtaining the required licenses to sell insurance products. The increase in short-term interest rates caused by the Federal Reserve Open-Market Committee has caused a decline in the market value of the investment portfolio. Average portfolio depreciation for the quarter ended March 31, 2000 was ($12,858,000). The average appreciation for the quarter ended March 31, 1999 was $17,307,000. It should be emphasized that the decline is unrealized and does not affect earnings unless the underlying investments are sold. The rate of return is still adequate to support the underlying liabilities. It is hoped that short-term rates will peak in the second quarter of this year. On the liability side of the balance sheet the growth of average interest-bearing deposits amounted to $24,533,000 between March 31, 1999 and March 31, 2000. Categories that posted the largest increases were Money Market accounts and Certificates of Deposit. The reason for the increase was an aggressive advertising campaign and a very competitive rate structure. The Corporation also offered a new product to the municipal depositors, including school districts in the market area. The product carries a slightly higher rate and was designed to keep municipal deposits in their respective communities. Merger activity and the sale of several competing branches also enhanced deposit growth. Average borrowed funds increased just over $49,000,000 as a result of leveraging opportunities that were available late in the 1st quarter and the 2nd quarter of 1999. The spread afforded by the leveraged products at inception was about 180 basis points. Rising short-term rates has caused the spread on those instruments to decline to about 85 basis points. Management expects that 2000 will bring continued competition for deposits from credit unions, brokerage houses and other nonbank competitors and it will continue to look for innovative deposit products to hold current customers and attract new business. 15
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) LIQUIDITY Liquidity is the ability to raise cash quickly and at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. The major source of funding for loans and investing activities has been deposit growth, Federal Home Loan Bank advances, repayment of loans and cash flows generated from the investment portfolio. Excess funds from deposit growth are used primarily for fund loan growth. When deposit growth exceeds loan demand the excess is invested in securities or to repay Federal Home Loan Bank advances when due. The Corporation's liquidity position can be easily analyzed by reviewing the cash flow statement presented in this report. In addition to the daily sources of cash, such as loan repayments, amortization of mortgage-backed investments, maturing bonds and deposit growth, the Corporation has several additional sources of liquidity: the sale of assets (primarily available-for-sale investment securities), short-term or long-term borrowing. Sources of borrowing include the Federal Home Loan Bank of Pittsburgh and several correspondent bank relationships. CAPITAL ADEQUACY Under regulations published by the Federal Deposit Insurance Corporation and other bank regulators, a bank's capital must be divided into two tiers. The first tier or tier one capital consists primarily of common stock, retained earnings, surplus and non-cumulative perpetual preferred stock. Tier two includes the allowance for possible loan losses (limited to 1.25 percent of risk-weighted assets), cumulative preferred stock, subordinated debt and 45 percent of unrealized gains on equity investments. Risk-based capital guidelines published in 1990 require banks to maintain a risk-based capital ratio of 8 percent, 4 percent of which must be tier one; the remainder may be tier two. The total risk-based capital ratios at March 31, 2000, March 31, 1999 and December 31, 1999 were 23.66 percent, 24.56 percent and 23.60 percent, respectively. The primary source of capital growth for the Corporation is earnings. Capital growth for the three-month periods ended March 31, 2000 and March 31, 1999 on an annualized basis was 8.6 percent and 7.9 percent, respectively; capital growth for the year ended December 31, 1999 was 8.7 percent. Dividend payments as a percentage of net income amounted to 58.5 percent for the three months ended March 31, 2000 and 44.1 percent for the same period in 1999. The dividend as a percentage of net income for the 4th quarter of 1999 was 40.7 percent. Total capital of the Corporation (excluding unrealized gains or losses on available-for-sale securities) at March 31, 2000, March 31, 1999 and December 31, 1999 was $86,544,000, $80,201,000 and $85,507,000, respectively. The leverage ratio (capital divided by total liabilities), excluding unrealized gains on available-for-sale securities, at March 31, 2000, March 31,1999 and December 31, 1999, was 13.8 percent, 13.9 percent and 13.6 percent, respectively. Planned capital expenditures during the next 12 months are not expected to exceed $1,000,000. These expenditures will not have a detrimental effect on capital ratios or results of operations. INFLATION Inflation affects nearly every aspect of banking, primarily interest rates. The effect of inflation, when it is high, also has an impact on the cost of goods, such as supplies, services and labor. Inflation, with the exception of energy products, does not appear to be a problem in the near-term and should not impact the results of operations for the balance of 2000. 16
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information (Continued) Item 3. Interest Rate Risk and Market Risk INTEREST RATE RISK AND MARKET RISK The risk that arises from changes in interest rates is an inherent factor in operating a bank. The risk associated with changes in interest rates is two fold: the risk to earnings and the risk to the market values of assets and liabilities. From an earnings risk perspective, an asset sensitive institution (positive gap) will normally benefit from rising rates and a liability sensitive (negative gap) will benefit from falling interest rates. Citizens & Northern Corporation uses a simulation model that calculates earnings under varying interest rate shock scenarios, most commonly up 100, 200 and 300 basis points and the same rate scenarios in a falling rate environment. The Asset and Liability Management Committee and the Board of Directors have established a 20 percent decrease in net interest income as a parameter at a 200 basis point (2 percent) increase in interest rates. The model is run monthly using the current maturity schedule of the Corporation's assets and liabilities and certain prepayment assumptions. Projecting earnings out one year through March 31, 2001 assuming a 200 basis point rate shock produces a decline in net interest income of 21.76 percent. The risk associated with interest rate increases and decreases as they relate to the market value of the assets and liabilities of the Corporation is also calculated using the same model and the same parallel rate shock of plus and minus 100, 200, and 300 basis point swings in rates. Market values are estimated by applying present value calculations to the cash flow generated by the Corporation's balance sheet. The Asset and Liability Management Committee and Board of Directors has established a market loss limit of 30 percent at a 200 basis point rate shock. At March 31, 2000 the estimated loss of market value amounted to $31,818 or 36.77 percent. The Board of Directors is aware of and continually monitors the results of the rate shock, but does not feel that it would be appropriate to restructure the portfolio at this time even though the results are outside of established guidelines. The model utilized to create Table VII makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates which could result in significant differences in the calculation of projected changes in net interest margin and market value of portfolio equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates. <TABLE> <CAPTION> TABLE VI I -EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES NIM = Net Interest Margin MVPE= Market Value of Portfolio Equity Plus 2% Plus 2 % Minus 2% Minus 2% Estimated Estimated Estimated Estimated Year Ended March 31, 2001 (In Thousands) Expected Change in Change in Change in Change in NIM NIM NIM NIM NIM $ $ % $ % -------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> INTEREST INCOME Investment Securities 25,111 25,901 3.15 22,200 (11.59) Interest-bearing Due From Banks 516 680 31.78 340 (34.11) Loan Income 28,079 29,275 4.26 24,849 (11.50) - -------------------------------------------------------------------------------------------------------------------- Total Interest Income 53,706 55,856 4.00 47,389 (11.76) ==================================================================================================================== INTEREST EXPENSE Now Accounts and Regular Savings 2,417 3,227 33.51 1,734 (28.26) Money Market Accounts 8,195 11,088 35.30 3,962 (51.65) All Other Deposits 12,482 14,419 15.52 9,693 (22.34) - -------------------------------------------------------------------------------------------------------------------- Total Deposits 23,094 28,734 24.42 15,389 (33.36) Borrowed Funds 7,433 8,986 20.89 5,338 (28.19) - -------------------------------------------------------------------------------------------------------------------- Total Interest Expense 30,527 37,720 23.56 20,727 (32.10) - -------------------------------------------------------------------------------------------------------------------- Net Interest Income 23,179 18,136 -21.76 26,662 15.03 - -------------------------------------------------------------------------------------------------------------------- Market Value of Portfolio Equity at March 31, 2000 64,013 40,694 -36.43 81,523 27.35 ==================================================================================================================== </TABLE> 17
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part I - Financial Information (Continued) Item 3. Interest Rate Risk and Market Risk (Continued) EQUITY SECURITIES RISK The Corporation's equity securities portfolio consists of restricted stock, primarily of the Federal Home Loan Bank of Pittsburgh ("FHLB") and investments in stock of banks and bank holding companies located mainly in Pennsylvania. FHLB stock can only be sold back to the FHLB or to another member institution at par value. Accordingly, the Corporation's investment in FHLB stock is carried at cost, which equals par value, and is evaluated for impairment. Factors that might cause FHLB stock to become impaired are primarily regulatory in nature and are related to potential problems in the residential lending market; for example, the FHLB may be required to make dividend or other payments to the Financing Corporation, the Resolution Funding Corporation, or other entities, in amounts that could exceed the FHLB's total equity. Investments in bank stocks are subject to the risk factors that affect the banking industry in general, including competition from nonbank entities, credit risk, interest rate risk and other factors, which could result in a decline in market prices. Also, losses could occur in individual stock held by the Corporation because of specific circumstances related to each bank. Further, since the stocks held are bank and bank holding companies concentrated in Pennsylvania, these investments could decline in market value if there is a downturn in the state's economy. Equity securities held as of March 31, 2000 and December 31, 1999 are presented in Table X. TABLE X - EQUITY SECURITIES <TABLE> <CAPTION> Hypothetical Hypothetical 10 % Decline 20 % Decline In in (In Thousands) Fair Market Market Cost Value Value value ---- ----- ------------ ------------ <S> <C> <C> <C> <C> At March 31, 2000 Banks and Bank Holding Companies $19,017 $23,759 ($2,376) ($4,752) Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450) - ------------------------------------------------------------------------------------------------------------- Total $26,265 $31,007 ($3,101) ($6,202) ============================================================================================================= (In Thousands) At March 31, 1999 Banks and Bank Holding Companies $18,482 $26,221 $(2,622) $(5,244) Federal Home Loan Bank and Other Restricted Securities 7,248 7,248 (725) (1,450) - ------------------------------------------------------------------------------------------------------------- Total $25,730 $33,469 $(3,347) $(6,694) ============================================================================================================= </TABLE> 18
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Part II - Other Information Item 1. Legal Proceedings There are currently no pending lawsuits against Citizens & Northern Corporation. Item 2. Not Applicable Item 3. Not Applicable Item 4. Not Applicable Item 5. Other Events a. None Item 6. Exhibits and Reports on Form 8 - K a. Exhibits 27. Financial Data Schedule b. On January 13, 2000 a Current Report on Form 8 - K was filed to report the filing of a 10-QA for the nine-month period ended September 30, 1999. 19
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q Signature Page SIGNATURES 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. CITIZENS & NORTHERN CORPORATION MAY 11, 2000 By: /s/ CRAIG G. LITCHFIELD - ------------ ------------------------------------------- Date President and Chief Executive Officer MAY 11, 2000 By: /s/ JAMES W. SEIPLER - ----------- ------------------------------------------- Date Executive Vice President and Treasurer