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 September 30, 2001
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) 5,234,800 Shares Outstanding November 12, 2001
1
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2001 and
December 31, 2000 Page 3
Consolidated Statement of Income - Three and Nine Months
Ended September 30, 2001 and 2000 Page 4
Consolidated Statement of Cash Flows - Nine Months Ended
September 30, 2001 and 2000 Page 5
Notes to Consolidated Financial Statements Pages 6 through 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 8 through 21
Item 3. Information About Market Risk Pages 21 and 22
Part II. Other Information Page 23
Signatures Page 24
2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31,
(In Thousands Except Share Data) 2001 2000
(UNAUDITED) (NOTE)
ASSETS
Cash and due from banks:
Noninterest-bearing $ 9,405 $ 11,638
Interest-bearing 21,969 2,186
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 31,374 13,824
Available-for-sale securities 411,665 346,747
Held-to-maturity securities 1,617 1,911
Loans, net 358,888 323,014
Bank-owned life insurance 15,681 15,000
Accrued interest receivable 5,655 4,953
Bank premises and equipment, net 9,679 9,332
Foreclosed assets held for sale 339 316
Other assets 2,378 4,238
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 837,276 $ 719,335
==============================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 72,649 $ 66,125
Interest-bearing 472,148 462,842
- --------------------------------------------------------------------------------------------------------------
Total deposits 544,797 528,967
Dividends payable 1,361 1,353
Short-term borrowings 73,911 94,691
Long-term borrowings 105,590 605
Accrued interest and other liabilities 10,510 4,750
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 736,169 630,366
- --------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 10,000,000
shares; issued 5,378,212 in 2001 and 5,324,962 in 2000 5,378 5,325
Stock dividend distributable - 1,054
Paid-in capital 19,759 18,756
Retained earnings 69,977 65,206
- --------------------------------------------------------------------------------------------------------------
Total 95,114 90,341
Accumulated other comprehensive income 7,953 82
Unamortized stock compensation (23) (35)
Treasury stock, at cost:
143,412 shares at September 30, 2001 (1,937)
117,718 shares at December 31, 2000 (1,419)
- --------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 101,107 88,969
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 837,276 $ 719,335
==============================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 2000 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
CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data) (Unaudited) 3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
INTEREST INCOME (CURRENT) (PRIOR YEAR) (CURRENT) (PRIOR YEAR)
Interest and fees on loans $7,315 $6,859 $21,227 $20,053
Interest on balances with depository institutions 12 39 42 95
Interest on loans to political subdivisions 186 162 534 481
Interest on federal funds sold 33 22 159 35
Income from available-for-sale and
Held-to-maturity securities:
Taxable 4,971 4,571 14,980 13,859
Tax-exempt 1,172 1,082 3,132 3,313
Dividends 397 390 1,173 1,095
- -------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 14,086 13,125 41,247 38,931
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,982 5,903 15,933 16,984
Interest on short-term borrowings 887 1,692 3,367 4,462
Interest on long-term borrowings 1,168 195 2,507 885
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,037 7,790 21,807 22,331
- -------------------------------------------------------------------------------------------------------------------------------
Interest margin 7,049 5,335 19,440 16,600
Provision for loan losses 150 150 450 526
- -------------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for possible loan losses 6,899 5,185 18,990 16,074
- -------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 365 291 991 846
Service charges and fees 62 56 189 175
Trust and financial management income 375 387 1,189 1,212
Insurance commissions, fees and premiums 190 93 443 267
Increase in cash surrender value of life insurance 230 - 681 -
Fees related to credit card operation 132 123 408 737
Other operating income 122 13 287 134
- -------------------------------------------------------------------------------------------------------------------------------
Total other income before realized gains on securities, net 1,476 963 4,188 3,371
Realized gains on securities, (net) 520 230 1,717 567
- -------------------------------------------------------------------------------------------------------------------------------
Total other income 1,996 1,193 5,905 3,938
- -------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and wages 2,108 1,907 6,178 5,584
Pensions and other employee benefits 520 474 1,623 1,410
Occupancy expense, net 247 214 756 673
Furniture and equipment expense 332 316 1,030 873
Expenses related to credit card operation 67 52 205 336
Pennsylvania shares tax 198 188 592 568
Other operating expense 1,103 1,020 3,369 3,052
- -------------------------------------------------------------------------------------------------------------------------------
Total other expenses 4,575 4,171 13,753 12,496
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,320 2,207 11,142 7,516
Income tax provision 914 374 2,282 1,321
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME $3,406 $1,833 $8,860 $6,195
===============================================================================================================================
PER SHARE DATA:
Net income - basic $0.65 $0.35 $1.69 $1.18
Net income - diluted $0.65 $0.35 $1.69 $1.18
- -------------------------------------------------------------------------------------------------------------------------------
Dividend per share $0.26 $0.24 $0.78 $0.72
- -------------------------------------------------------------------------------------------------------------------------------
Number of shares used in computation - basic 5,234,800 5,257,546 5,246,520 5,257,486
Number of shares used in computation - diluted 5,236,799 5,259,017 5,247,516 5,258,663
The accompanying notes are an integral part of these
consolidated financial statements.
4
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
CONSOLIDATED STATEMENT OF CASH FLOWS
(In Thousands) (Unaudited) NINE MONTH PERIODS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,860 $ 6,195
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 450 526
Realized gains on securities, net (1,717) (567)
Gain on sale of foreclosed assets, net (69) (57)
Depreciation expense 933 815
Accretion and amortization, net (1,584) (1,843)
Increase in cash surrender value of life insurance (681) -
Amortization of restricted stock 17 -
Deferred income taxes - (89)
(Increase) decrease in accrued interest receivable and other assets (1,008) 825
Increase in accrued interest payable and other liabilities 3,871 2,663
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 9,072 8,468
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 916 44
Purchase of held-to-maturity securities (626) (196)
Proceeds from sales of available-for-sale securities 9,963 15,407
Proceeds from maturities of available-for-sale securities 95,310 10,003
Purchase of available-for-sale securities (154,960) (11,155)
Net increase in loans (36,712) (14,276)
Purchase of premises and equipment (1,280) (1,914)
Proceeds from sale of foreclosed assets 434 502
Purchase of investment in limited partnership - (697)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (86,955) (2,282)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 15,830 1,809
Net (decrease) increase in short-term borrowings (20,780) 8,252
Proceeds from long-term borrowings 105,000 -
Repayments of long-term borrowings (15) (19,415)
Proceeds from sale of treasury stock - 5
Purchase of treasury stock (521) -
Dividends paid (4,081) (3,736)
- ------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 95,433 (13,085)
- ------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,550 (6,899)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,824 18,063
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,374 $ 11,164
==================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans $ 388 $ 253
Interest paid $ 18,585 $ 18,903
Income taxes paid $ 2,028 $ 1,259
The accompanying notes are an integral part of these
consolidated financial statements.
5
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
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, 2000, is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods.
Results reported for the three-month and nine-month periods ended September 30,
2001 might not be indicative of the results for the year ending December 31,
2001.
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.
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001
Earnings per share - basic $8,860,000 5,246,520 $1.69
Dilutive effect of stock options 996
- -----------------------------------------------------------------------------------------------------------
Earnings per share - diluted $8,860,000 5,247,516 $1.69
===========================================================================================================
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2000
Earnings per share - basic $6,195,000 5,257,486 $1.18
Dilutive effect of stock options 1,177
- -----------------------------------------------------------------------------------------------------------
Earnings per share - diluted $6,195,000 5,258,663 $1.18
===========================================================================================================
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
QUARTER ENDED SEPTEMBER 30, 2001
Earnings per share - basic $3,406,000 5,234,800 $0.65
Dilutive effect of stock options 1,999
- -----------------------------------------------------------------------------------------------------------
Earnings per share - diluted $3,406,000 5,236,799 $0.65
===========================================================================================================
QUARTER ENDED SEPTEMBER 30, 2000
Earnings per share - basic $1,833,000 5,257,546 $0.35
Dilutive effect of stock options 1,471
- -----------------------------------------------------------------------------------------------------------
Earnings per share - diluted $1,833,000 5,259,017 $0.35
===========================================================================================================
6
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
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 (in thousands):
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
Net income $ 3,406 $ 1,833 $ 8,860 $ 6,195
Other comprehensive income:
Unrealized holding gains on available-for-sale Securities:
Gains arising during the period 6,891 5,378 13,643 4,173
Reclassification adjustment for realized gains (520) (230) (1,717) (567)
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income before income tax 6,371 5,148 11,926 3,606
Income tax related to other comprehensive income (2,166) (1,750) (4,055) (1,226)
- --------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 4,205 3,398 7,871 2,380
- --------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 7,611 $ 5,231 $ 16,731 $ 8,575
================================================================================================================================
4. DERIVATIVE FINANCIAL INSTRUMENTS
In June 2001, the Corporation began to utilize derivative financial instruments
related to a new certificate of deposit product called the "Index Powered
Certificate of Deposit" (IPCD). IPCDs have a term of 5 years, with interest paid
at maturity based on 90% of the appreciation (as defined) in the S&P 500 index.
There is no guaranteed interest payable to a depositor of an IPCD - however,
assuming an IPCD is held to maturity, a depositor is guaranteed the return of
his or her principal, at a minimum.
Statement of Financial Accounting Standards No. 133 requires the Corporation to
separate the amount received from each IPCD issued into 2 components: (1) an
embedded derivative, and (2) the principal amount of each deposit. Embedded
derivatives are derived from the Corporation's obligation to pay each IPCD
depositor a return based on appreciation in the S&P 500 index. Embedded
derivatives are carried at fair value, and are included in other liabilities in
the consolidated balance sheet. Changes in fair value of the embedded derivative
are included in other expense in the consolidated income statement. The
difference between the contractual amount of each IPCD issued, and the amount of
the embedded derivative, is recorded as the initial deposit (included in
interest-bearing deposits in the consolidated balance sheet). Interest expense
is added to principal ratably over the term of each IPCD at an effective
interest rate that will increase the principal balance to equal the contractual
IPCD amount at maturity.
In connection with IPCD transactions, the Corporation has entered into Equity
Indexed Call Option (Swap) contracts with the Federal Home Loan Bank of
Pittsburgh (FHLB-Pittsburgh). Under the terms of the Swap contracts, the
Corporation must pay FHLB-Pittsburgh quarterly amounts calculated based on the
contractual amount of IPCDs issued times a negotiated rate. In return,
FHLB-Pittsburgh is obligated to pay the Corporation, at the time of maturity of
the IPCDs, an amount equal to 90% of the appreciation (as defined) in the S&P
500 index. If the S&P 500 index does not appreciate over the term of the related
IPCDs, the FHLB-Pittsburgh would make no payment to the Corporation. The effect
of the Swap contracts is to limit the Corporation's cost of IPCD funds to the
market rate of interest paid to FHLB-Pittsburgh. (In addition, the Corporation
pays a fee of 0.75% to a consulting firm at inception of each deposit. This fee
is amortized to interest expense over the term of the IPCDs.) Swap liabilities
are carried at fair value, and included in other liabilities in
7
the consolidated balance sheet. Changes in fair value of swap liabilities are
included in other expense in the consolidated income statement.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Amounts recorded as of and through September 30, 2001 related to IPCDs are as
follows (in thousands):
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $ 925
Carrying value of IPCDs 750
Carrying value of embedded derivative liabilities 89
Carrying value of Swap contract liabilities 100
Interest expense 7
Other expense 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this section and elsewhere in Form 10-Q are
forward-looking statements. Citizens & Northern Corporation and its wholly-owned
subsidiaries (collectively, the Corporation) intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe
future plans, business objectives and expectations, 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 effect on the
operations and future prospects of the Corporation include, but are not limited
to, the following:
- - changes in monetary and fiscal policies of the U.S. Treasury and the Federal
Reserve Board, particularly related to changes in interest rates
- - changes in general economic conditions
- - legislative or regulatory changes
- - downturn in demand for loan, deposit and other financial services in the
Corporation's market area
- - increased competition from other banks and non-bank providers of financial
services
- - technological changes and increased technology-related costs
- - changes in accounting principles.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
8
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
REFERENCES TO 2001 AND 2000
Unless otherwise noted, all references to "2001" in the following discussion of
operating results are intended to mean the nine months ended September 30, 2001,
and similarly, references to "2000" are intended to mean the first nine months
of 2000.
EARNINGS OVERVIEW
Net income for the first nine months of 2001 was $8,860,000, or $1.69 per share
(basic and diluted). This represents an increase of 43.0% over the first nine
months of 2000. Return on average assets, excluding unrealized gains and losses
on securities, increased 29.3%, to 1.50% in 2001 compared to 1.16% in 2000.
Including the effects of unrealized gains and losses on securities, return on
average assets increased to 1.49% in 2001 from 1.17% in 2000. Return on average
equity, excluding unrealized gains and losses on securities, rose 38.0%, to
13.01% in 2001 from 9.43% in 2000. Including unrealized gains and losses on
securities, return on average equity increased 19.7%, to 12.57% in 2001 from
10.50% in 2000.
The most significant income statement changes between the 9-month periods ended
September 30, 2001 and 2000 were as follows:
- - The interest margin increased significantly ($2,840,000, or 17.1%), to
$19,440,000 in 2001 from $16,600,000 in 2000. The Corporation's net interest
margin (excess of interest and dividend income over interest expense) widened
dramatically in the second and third quarters of 2001 compared to the previous
several quarters. This resulted primarily from reductions in interest rates on
deposits and borrowed funds. As widely publicized, the Federal Reserve Board
has lowered its targeted federal funds rate several times in 2001. The Fed's
actions have led to a decline in short-term interest rates in the
Corporation's market. Long-term rates, on the other hand, have held fairly
steady, and the Corporation has been able to generate loans and purchase
mortgage-backed and other long-term securities at interest rates that are only
slightly lower (on average) than the Corporation's holdings in 2000.
- - Net realized gains on securities were $1,717,000 in 2001, compared to $567,000
in 2000. Most of the gains in 2001 resulted from sales of bank stocks. In the
third quarter 2001, the Corporation realized a loss of $354,000 from the sale
of a bond. This security, which had a carrying value of approximately
$5,000,000 prior to the sale, was sold in an effort to restructure a portion
of the available-for-sale securities portfolio for future opportunities to
increase income. This loss is netted against realized gains in the
consolidated income statement.
- - In 2001, the Corporation recorded an increase in cash surrender value of life
insurance of $681,000. In late December 2000, the Corporation purchased
bank-owned life insurance (BOLI) at a cost of $15,000,000.
- - Other (noninterest) expenses increased $1,257,000, or 10.1%, in 2001 compared
to 2000. The increase reflects higher staffing levels and other additional
costs required for the addition of the Muncy, PA branch (opened in October
2001), as well as increased trust and financial management and insurance sales
and service personnel.
- - The income tax provision increased to $2,282,000 in 2001 from $1,321,000 in
2000, because pre-tax income is higher.
THIRD QUARTER 2001
- ------------------
Net income for the third quarter 2001 was $3,406,000, or $0.65 per share (basic
and diluted). This represents an increase of 85.8% over the third quarter 2000,
and 6.8% over the second quarter 2001. The Corporation's net interest margin
continued to grow in the third quarter 2001, primarily from reductions in
interest rates on deposits and borrowed funds. Table I shows quarterly income
statement results for each historical quarter of 2001 and 2000.
9
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE I - QUARTERLY FINANCIAL DATA
(IN THOUSANDS)
QUARTER ENDED:
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2001 2001 2001 2000 2000 2000 2000
Interest income $14,086 $13,947 $13,214 $13,224 $13,125 $12,949 $12,857
Interest expense 7,037 7,278 7,492 7,814 7,790 7,396 7,145
- ---------------------------------------------------------------------------------------------------------------------------------
Interest margin 7,049 6,669 5,722 5,410 5,335 5,553 5,712
Provision for loan losses 150 150 150 150 150 150 226
- ---------------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 6,899 6,519 5,572 5,260 5,185 5,403 5,486
Other income 1,476 1,399 1,313 1,119 963 1,050 1,358
Securities gains 520 742 455 810 230 322 15
Other expenses 4,575 4,580 4,598 4,410 4,171 4,116 4,209
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,320 4,080 2,742 2,779 2,207 2,659 2,650
Income tax provision 914 891 477 498 374 446 501
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,406 $ 3,189 $ 2,265 $ 2,281 $ 1,833 $ 2,213 $ 2,149
=================================================================================================================================
Net income per share - basic $ 0.65 $ 0.61 $ 0.43 $ 0.43 $ 0.35 $ 0.42 $ 0.41
=================================================================================================================================
Net income per share - diluted $ 0.65 $ 0.61 $ 0.43 $ 0.43 $ 0.35 $ 0.42 $ 0.41
=================================================================================================================================
The number of shares used in calculating net income per share for each quarter
of 2000 reflects the retroactive effect of a 1% stock dividend declared in
November 2000 and issued in January 2001.
PROSPECTS FOR THE FOURTH QUARTER 2001
- -------------------------------------
Obviously, the Corporation's management is concerned about potential
consequences from the September 11 terrorists' attacks. Recent economic reports
indicate the national economy, which was showing signs of weakness prior to the
attacks, has (in many respects) declined further. A further downturn in the
economy could impact the Corporation by affecting interest rates, loan demand or
credit losses.
The Fed lowered their targeted federal funds rate for the ninth time in 2001, to
2.50%, in October. Lower interest rates have resulted in a significant flow of
investment securities being called in September and October, to which management
has reacted by reinvesting at lower, current yields. Management has also lowered
rates on some types of commercial loans (most of which have traditionally been
priced based on the prime rate, which has also fallen). Current rates offered on
deposits and rates available on short-term borrowed funds have also fallen.
Overall, changes in interest rates are not expected to have a major impact on
the Corporation's operating results for the fourth quarter, as compared to the
second and third quarters of 2001. In fact, short-term rates have fallen to such
low levels that management does not expect lower rates to result in an increase
in earnings proportionate to the changes that occurred in the previous 2
quarters.
To date, there has been no evidence of deterioration in collectibility of the
loan portfolio, and new loan demand has been good. Total loan balances past due
30 days or more was 2.15% of gross loans at September 30, 2001, as compared to
2.30% a year earlier. Net loans increased 5.9% during the third quarter 2001, to
$358,888,000 at September 30 from $338,893,000 at June 30.
The other major variable that could affect fourth quarter earnings is securities
gains and losses. At this time, it is impossible to predict, with any degree of
precision, the amounts of securities gains and losses that may be realized in
the fourth quarter 2001.
10
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
NET INTEREST MARGIN
The Corporation's primary source of operating income is represented by the net
interest margin. The net interest margin is equal to the difference between the
amounts of interest income and interest expense. Tables II, III and IV include
information regarding the Corporation's net interest margin in 2001 and 2000. In
each of these tables, the amounts of interest income earned on tax-exempt
securities and loans have been adjusted to a fully taxable-equivalent basis.
Accordingly, the net interest margin amounts reflected in these tables exceed
the amounts presented in the consolidated financial statements. The discussion
that follows is based on amounts in the Tables.
The net interest margin, on a tax-equivalent basis, was $21,074,000 in 2001, an
increase of $2,745,000 or 15.0% from 2000. As described in the "Earnings
Overview" section of Management's Discussion, the main reason for the increase
in net interest margin was the decrease in interest rates on the Corporation's
deposits and borrowed funds. Table IV displays the effect of volume and rate
changes on the Corporation's major interest earning assets and interest-bearing
liabilities. Most significantly, Table IV shows that interest rate changes had
the effect of increasing net interest income $2,530,000 in 2001. Similarly,
Table III, which displays average daily balances and rates, shows a widening of
the "Interest Rate Spread" (excess of average rate of return on interest-bearing
assets over average cost of funds on interest-bearing liabilities) to 3.07% in
2001 from 2.61% in the first 9 months of 2000.
INTEREST INCOME AND EARNING ASSETS
Interest income increased 5.5% to $42,881,000 in 2001 from $40,660,000 in 2000.
Income from available-for-sale securities increased $913,000, or 4.6%, and
interest from loans increased $1,254,000 or 6.0%. The increase in income from
available-for-sale securities was mainly attributable to higher average
available-for-sale securities balances in 2001. As indicated in Table III,
average available-for-sale securities in 2001 amounted to $397,763,000, an
increase of 7.7% over the first 9 months of 2000. Most of the increase in
available-for-securities was in mortgage-backed securities, which increased
$33,663,000, or 32.5%. As reflected in Table IV, the increase in interest from
loans was also volume-related. Average gross loans in 2001 (as shown in Table
III) amounted to $339,483,000, or 7.4% higher than in the first 9 months of
2000.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense decreased 2.3% to $21,807,000 in 2001. As reflected in Table
IV, the decrease in interest expense resulted from decreases in rates that more
than compensated for increases in volume. Lower interest rates significantly
reduced interest expense from money market accounts and IRAs in 2001 compared to
2000. The average interest rate on money market accounts fell to 3.82% in 2001
from 5.31% in 2000, and the average rate on IRAs fell to 5.17% from 6.38%.
As you can see in Table III, average total interest-bearing liabilities
increased $65,645,000, or 11.6%, in 2001 compared to 2000. Average borrowed
funds (excluding federal funds purchased) increased $31,154,000, or 27.7%, in
2001. As indicated in the consolidated statement of cash flows, the Corporation
entered into long-term borrowing arrangements totaling $105,000,000 in 2001.
Proceeds from these borrowings were used to help fund the purchase of
available-for-sale securities, principally mortgage-backed securities. Average
CD balances increased $23,795,000 (16.6%) in 2001 compared to 2000, and average
money market balances increased $8,701,000 (6.0%). Growth in these deposit
categories resulted from several factors, including increased deposits from
governmental entities and school districts and an expanded branch system, with
relatively new offices opened in Mansfield (1998) and Muncy (2000).
11
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
NINE MONTHS ENDED
SEPTEMBER 30,
(IN THOUSANDS) 2001 2000
INTEREST INCOME
Available-for-sale securities:
U.S. Treasury securities $ 113 $ 116
Securities of other U.S. Government agencies and corporations 6,453 7,070
Mortgage-backed securities 6,654 5,288
Obligations of states and political subdivisions 4,529 4,832
Equity securities 1,173 1,095
Other securities 1,683 1,291
- -------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 20,605 19,692
- -------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 30 27
Securities of other U.S. Government agencies and corporations 34 51
Mortgage-backed securities 13 16
- -------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 77 94
- -------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 42 95
Federal funds sold 159 35
Loans:
Real estate loans 17,327 16,219
Consumer 2,291 2,295
Agricultural 143 142
Commercial/industrial 1,401 1,328
Other 53 52
Political subdivisions 771 691
Leases 12 17
- -------------------------------------------------------------------------------------------------------------
Total loans 21,998 20,744
- -------------------------------------------------------------------------------------------------------------
Total Interest Income 42,881 40,660
- -------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 529 764
Money market 4,368 5,714
Savings 785 858
Certificates of deposit 7,157 5,958
Individual Retirement Accounts 3,064 3,658
Other time deposits 30 32
Federal funds purchased 147 298
Other borrowed funds 5,727 5,049
- -------------------------------------------------------------------------------------------------------------
Total Interest Expense 21,807 22,331
- -------------------------------------------------------------------------------------------------------------
Net Interest Income $21,074 $18,329
=============================================================================================================
Income on tax-exempt securities and loans is presented on a fully
taxable-equivalent basis, using the Corporation's marginal federal income tax
rate of 34%.
12
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
<Table>
<Caption>
NINE RATE OF RATE OF NINE RATE OF
(IN THOUSANDS) MONTHS RETURN/ YEAR RETURN/ MONTHS RETURN/
ENDED COST OF ENDED COST OF ENDED COST OF
EARNING ASSETS 09/30/01 FUNDS % 12/31/00 FUNDS % 09/30/00 FUNDS %
Available-for-sale securities, at amortized cost:
U.S. Treasury securities $ 2,507 6.03% $ 2,512 6.13% $ 2,512 6.17%
Securities of other U.S. Gov't agencies and corporations 125,822 6.86% 133,063 7.08% 132,730 7.12%
Mortgage-backed securities 137,353 6.48% 101,155 6.80% 103,690 6.82%
Obligations of states and political subdivisions 74,849 8.09% 81,312 7.80% 81,351 7.94%
Equity Securities 28,517 5.50% 25,899 5.68% 25,791 5.68%
Other securities 28,715 7.84% 22,572 7.64% 23,343 7.39%
- ----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 397,763 6.93% 366,513 7.09% 369,417 7.13%
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U. S. Treasury securities 742 5.41% 685 5.40% 669 5.40%
Securities of other U.S. Gov't agencies and corporations 713 6.38% 1,019 6.67% 1,031 6.61%
Mortgage-backed securities 217 8.01% 283 7.42% 290 7.38%
- ----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 1,672 6.16% 1,987 6.34% 1,990 6.32%
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 1,997 2.81% 1,861 6.13% 2,214 5.74%
Federal funds sold 5,224 4.07% 1,000 6.40% 758 6.17%
Loans:
Real estate loans 273,584 8.47% 254,225 8.61% 252,211 8.60%
Consumer 27,790 11.02% 27,760 11.01% 27,739 11.06%
Agricultural 2,043 9.36% 1,963 9.73% 1,964 9.67%
Commercial/industrial 21,991 8.52% 21,336 8.66% 21,150 8.39%
Other 906 7.82% 886 8.01% 877 7.93%
Political subdivisions 12,981 7.94% 12,009 7.57% 11,981 7.71%
Leases 188 9.22% 203 10.84% 194 11.72%
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 339,483 8.66% 318,382 8.79% 316,116 8.77%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 746,139 7.68% 689,743 7.87% 690,495 7.87%
Cash 11,735 10,887 10,636
Unrealized gain/loss on securities 4,707 (12,831) (13,818)
Allowance for loan losses (5,384) (5,233) (5,197)
Bank premises and equipment 9,508 8,712 8,500
Other assets 23,773 12,943 13,153
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 790,478 $ 704,221 $703,769
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
13
Interest checking $ 36,626 1.93% $ 36,086 2.87% $ 35,952 2.84%
Money market 152,701 3.82% 146,209 5.39% 144,000 5.31%
Savings 46,284 2.27% 45,963 2.49% 46,055 2.49%
Certificates of deposit 167,286 5.72% 144,997 5.64% 143,491 5.55%
Individual Retirement Accounts 79,248 5.17% 76,439 6.32% 76,714 6.38%
Other time deposits 2,242 1.79% 1,717 2.56% 1,971 2.17%
Federal funds purchased 4,560 4.31% 5,721 6.71% 6,273 6.35%
Other borrowed funds 143,775 5.33% 108,581 6.13% 112,621 5.99%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 632,722 4.61% 565,713 5.33% 567,077 5.26%
Demand deposits 55,409 52,437 51,746
Other liabilities 8,349 7,279 6,311
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 696,480 625,429 625,134
- ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, excluding other comprehensive income/loss 90,833 87,258 87,613
Other comprehensive income/loss 3,165 (8,466) (8,978)
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 93,998 78,792 78,635
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 790,478 $ 704,221 $ 703,769
=================================================================================================================================
Interest Rate Spread 3.07% 2.54% 2.61%
Net Interest Income/Earning Assets 3.78% 3.50% 3.55%
(1) Changes in income on tax-exempt securities and loans is presented on a fully
taxable-equivalent basis, using the Corporation's marginal federal income tax
rate of 34%.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing
net interest earnings.
14
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE IV - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME
AND INTEREST EXPENSE
<Table>
<Caption>
(IN THOUSANDS) PERIODS ENDED SEPTEMBER 30, 2001/2000
CHANGE IN CHANGE IN TOTAL
VOLUME RATE CHANGE
EARNING ASSETS
Available-for-sale securities:
U.S Treasury securities $ -- $ (3) $ (3)
Securities of other U.S. Government agencies and corporations (360) (257) (617)
Mortgage-backed securities 1,642 (276) 1,366
Obligations of states and political subdivisions (392) 89 (303)
Equity securities 113 (35) 78
Other securities 311 81 392
- -----------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 1,314 (401) 913
- -----------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities
U.S Treasury securities 3 -- 3
Securities of other U.S. Government agencies and corporations (15) (2) (17)
Mortgage-backed securities (4) 1 (3)
- -----------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities (16) (1) (17)
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks (8) (45) (53)
Federal funds sold 140 (16) 124
Loans:
Real estate loans 1,358 (250) 1,108
Consumer 4 (8) (4)
Agricultural 5 (4) 1
Commercial/industrial 54 19 73
Other 2 (1) 1
Political subdivisions 59 21 80
Leases -- (5) (5)
- -----------------------------------------------------------------------------------------------------------------------
Total loans 1,482 (228) 1,254
- -----------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,912 (691) 2,221
- -----------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 14 (249) (235)
Money market 328 (1,674) (1,346)
Savings 4 (77) (73)
Certificates of deposit 1,014 185 1,199
Individual Retirement Accounts 118 (712) (594)
15
Other time deposits 4 (6) (2)
Federal funds purchased (69) (82) (151)
Other borrowed funds 1,284 (606) 678
- ----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 2,697 (3,221) (524)
- ----------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 215 $ 2,530 $ 2,745
======================================================================================================================
(1) Changes in income on tax-exempt securities and loans is presented on a fully
taxable-equivalent basis, using the Corporation's marginal federal income tax
rate of 34%.
(2) 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.
16
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE V - COMPARISON OF NONINTEREST INCOME
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
Service charges on deposit accounts $ 991 $ 846
Service charges and fees 189 175
Trust and financial management revenue 1,189 1,212
Insurance commissions, fees and premiums 443 267
Increase in cash surrender value of life insurance 681 --
Fees related to credit card operation 408 737
Other operating income 287 134
- ------------------------------------------------------------------------------------------------
Total other operating income, before realized
Gains on securities, net 4,188 3,371
Realized gains on securities, net 1,717 567
- ------------------------------------------------------------------------------------------------
Total Other Income $5,905 $3,938
================================================================================================
Total noninterest income increased $1,967,000, or 49.9%, in 2001 compared to
2000. The most significant changes - the increase in security gains and income
from the (BOLI) life insurance contract - are discussed in the "Earnings
Overview" section of Management's Discussion and Analysis. Other items of
significance are as follows:
- - Service charges on deposit accounts increased $145,000, or 17.1%. This
increase resulted from increased numbers of accounts and higher average
balances, as well as fee increases on certain types of services.
- - Trust and financial management revenue decreased $23,000, or 1.9%. Trust and
financial management revenue is affected significantly by the market value of
assets under management. In 2001, equity markets have been down substantially,
which has had the effect of reducing the earnings base. Trust assets under
management amounted to $287,000,000 at September 30, 2001, or 12.9% less than
the value of assets under management a year earlier.
- - Insurance revenue increased $176,000, or 65.9%. This increase is attributable
to revenue from the insurance agency division of C&N Financial Services
Corporation (C&NFSC). C&NFSC began operations in 2000, with minimal revenues.
In the first 9 months of 2001, C&NFSC has generated revenue of $161,000.
- - Noninterest fees from the credit card operation decreased $329,000, or 44.6%.
In late 1999, the Corporation sold its merchant processing program, which
dramatically reduced the amount of interchange fees earned and costs incurred.
In the first quarter 2000, the Corporation recorded final residual fees.
- - Other operating income increased $153,000. In 2001, C&NFSC began operating a
broker-dealer division, which offers annuities, mutual funds and other
non-bank investment products. The broker-dealer division has generated revenue
of $50,000 in 2001. The other significant change within the items included in
other operating income is interchange fees received from the Bank's VISA check
card product. This product was introduced in late 1999, and has grown in
numbers of accounts and usage. These fees increased to $60,000 in 2001 from
$26,000 in 2000.
17
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VI- COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
Salaries and wages $ 6,178 $ 5,584
Pensions and other employee benefits 1,623 1,410
Occupancy expense, net 756 673
Furniture and equipment expense 1,030 873
Expenses related to credit card operation 205 336
Pennsylvania shares tax 592 568
Other operating expense 3,369 3,052
- -----------------------------------------------------------------------------
Total Other Expense $ 13,753 $ 12,496
=============================================================================
Salaries and wages increased $594,000, or 10.6%, in 2001 compared to 2000. The
increase is the result of annual merit raises ranging from 2%-5%, and an
increase in the number of employees. Higher staffing levels were required for
the Muncy branch, trust and financial management and insurance sales and
service.
Pensions and other employee benefits increased $213,000, or 15.1%, in 2001. In
addition to increased costs resulting from the higher number of employees, the
Corporation experienced an increase in medical insurance premium rates.
Occupancy expense increased $83,000, or 12.3%, in 2001. This increase is mainly
due to additional facilities. In 2000, the Corporation constructed a new branch
in Muncy, purchased a building for the credit operations, and purchased 2
buildings near the Wellsboro branch/administrative building for additional
administrative space.
Furniture and equipment expense increased $157,000, or 18.0%, in 2001. The major
categories of furniture and equipment expense that increased in 2001 compared to
2000 were maintenance costs associated with computer hardware and software, and
depreciation. The increase in computer maintenance costs is mainly attributable
to the timing of certain expenses. Increased depreciation expense resulted
primarily from the addition of the Muncy branch, which began operations in the
4th quarter 2000, and the opening of the new credit card operations facility in
mid-2000.
Credit card expenses decreased in 2001 because of lower interchange fees paid.
This change resulted from the sale of the merchant banking program, as discussed
in the "Noninterest Expense" section of Management's Discussion and Analysis.
Other expense increased $317,000, or 10.4%, in 2001. This category includes many
different types of expenses. Some of the overall increase in this category was
caused by increases in number of transactions processed and number of employees.
The most significant fluctuations in individual types of expenses between years
are as follows:
- Advertising expenses increased $48,000, to $250,000, in 2001. This
increase resulted from several factors, including a decision to advertise
on an additional cable television network, costs related to promoting the
Muncy branch and costs associated with internet advertising for the
Corporation's "Virtual Village" program. Virtual Village is an e-commerce
web site for consumers and businesses in the Corporation's market area.
- Public relations expense increased $44,000, to $152,000, in 2001. This
increase includes new sponsorships of several community-oriented programs
located in the Corporation's market area, as well as costs related to
promotion of the Muncy office.
- Telephone expenses related to data lines increased $40,000, to $187,000,
in 2001. These costs are mainly related to the Corporation's computer
network that allows all branches and operating locations to access
mainframe and PC applications. The Corporation's monthly data line costs
increased to approximately the current level starting in the 2nd quarter
2000.
18
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
- Legal and professional expenses increased $39,000, to $203,000, in 2001.
Most of this increase resulted from trust and financial management
expenses associated with changes in certain service providers.
- Expenses associated with maintaining other real estate properties
increased $34,000, to $63,000, in 2001.
FINANCIAL CONDITION
Significant changes in the average balances of the Corporation's earning assets
and interest-bearing liabilities are described in the "Net Interest Margin"
section of Management's Discussion and Analysis. This section addresses changes
in the Corporation's balance sheet (excluding the allowance for loan losses and
stockholders' equity, which are discussed in separate sections) that are not
addressed in that discussion.
Interest-bearing cash amounted to $21,969,000 at September 30, 2001. This
balance was higher than normal because the Corporation received approximately
$20,000,000 from U.S. Government Agency securities being called (principal paid
off prior to maturity) during September. These funds were substantially all
reinvested in mortgage-backed securities and other securities in October 2001.
Available-for-sale securities increased $64,918,000, or 18.7%, from December 31,
2000 to September 30, 2001. Table VII provides a breakdown of securities at
September 30, 2001 and December 31, 2000. In 2001, the Corporation purchased
substantial amounts of mortgage-backed securities, other securities (mainly
"Trust Preferred" securities issued by financial institutions) and municipal
bonds. Securities purchases were funded primarily from 2 sources: (1) proceeds
from maturities of available-for-sale securities (mainly U.S. Agency securities
that were called and principal repayments from mortgage-backed securities) of
$95,310,000, and (2) long-term borrowings of $105,000,000. The maturities of the
long-term borrowings range from 2002 to 2011, with $65,000,000 maturing in 2002
and 2003. As short-term and intermediate-term interest rates declined in 2001,
management identified opportunities to purchase securities using borrowed funds
at a positive spread.
Net loans increased $35,874,000, or 11.1%, at September 30, 2001 compared to
December 31, 2000. As indicated in Table X, most of the growth in loans occurred
in loans secured by real estate.
Total deposits increased $15,830,000, or 3.0%, at September 30, 2001 compared to
December 31, 2000. The most significant change within types of deposits was in
CDs, which increased $15,301,000. Much of the increase in CDs was from new and
larger accounts held by governmental entities and school districts.
19
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VII - INVESTMENT SECURITIES
(IN THOUSANDS)
SEPTEMBER 30, 2001 DECEMBER 31, 2000
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,504 $ 2,570 $ 2,509 $ 2,533
Obligations of other U.S. Government agencies 94,261 94,715 132,713 128,883
Obligations of states and political subdivisions 86,044 87,182 68,236 69,065
Other securities 29,987 30,427 22,111 20,964
Mortgage-backed securities 158,252 161,267 91,708 91,240
- ---------------------------------------------------------------------------------------------------------------------------
Total debt securities 371,048 376,161 317,277 312,685
Marketable equity securities 28,567 35,504 29,346 34,062
- ---------------------------------------------------------------------------------------------------------------------------
Total $399,615 $411,665 $346,623 $346,747
===========================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 743 $ 752 $ 707 $ 708
Obligations of other U.S. Government agencies 696 722 946 947
Mortgage-backed securities 178 183 258 259
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 1,617 $ 1,657 $ 1,911 $ 1,914
===========================================================================================================================
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses includes two components, allocated and
unallocated. The allocated component of the allowance for loan losses reflects
probable losses resulting from the analysis of individual loans, specific
allowances for loans in certain industries and historical loss experience for
each loan category. The historical loan loss experience element is determined
based on the ratio of net charge-offs to average loan balances over a five-year
period, for each significant type of loan. The charge-off ratio is then applied
to the current outstanding loan balance for each type of loan (net of other
loans that are individually evaluated).
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 market area. This determination inherently involves a higher degree of
uncertainty and considers current risk factors that may not have yet manifested
themselves in the Bank's historical loss factors used to determine the allocated
component of the allowance, and it recognizes that knowledge of the portfolio
credit risk may be incomplete.
As noted in Table IX below, the unallocated portion of the allowance for loan
losses increased to $2,339,000 at September 30, 2001 from $1,983,000 at December
31, 2000. The unallocated balance at September 30, 2001 is consistent with the
June 30, 2001 unallocated allowance of $2,364,000. The larger unallocated
allowance balances in 2001 reflect management's concern related to adverse
changes in the economy, including several local plant lay-offs. Through
September 30, 2001, these adverse changes had not yet significantly increased
levels of delinquent loans.
The provision for loan losses decreased to $450,000 in 2001 from $526,000 in
2000. The amount of the provision in each period is determined based on the
amount required to maintain an appropriate allowance in light of the factors
described above.
Tables VIII, IX and X present an analysis of the allowance for loan losses, the
allocation of the allowance and a five-year summary of loans by type.
20
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VIII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) NINE MONTHS
ENDED
SEPT. 30, YEARS ENDED DECEMBER 31:
2001 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $5,291 $5,131 $4,820 $4,913 $4,776 $4,579
Charge-offs:
Real estate loans 144 272 81 257 246 157
Installment loans 109 77 138 144 230 240
Credit cards and related plans 150 214 192 264 305 201
Commercial and other loans 129 53 219 301 3 74
- -----------------------------------------------------------------------------------------------------------------------------
Total charge-offs 532 616 630 966 784 672
- -----------------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate loans 5 26 81 12 21 22
Installment loans 21 23 60 43 64 53
Credit cards and related plans 17 28 30 40 30 38
Commercial and other loans 33 23 10 15 9 55
- -----------------------------------------------------------------------------------------------------------------------------
Total recoveries 76 100 181 110 124 168
- -----------------------------------------------------------------------------------------------------------------------------
Net charge-offs 456 516 449 856 660 504
Additions charged to operations 450 676 760 763 797 701
- -----------------------------------------------------------------------------------------------------------------------------
Balance at end of period $5,285 $5,291 $5,131 $4,820 $4,913 $4,776
=============================================================================================================================
TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
(IN THOUSANDS)
AT
SEPT. 30, AT DECEMBER 31:
2001 2000 1999 1998 1997 1996
Commercial $1,630 $1,612 $2,081 $ 650 $ 625 $ 630
Noncommercial mortgages 676 952 834 97 350 58
Impaired loans 174 273 609 290 274 113
Consumer 466 471 437 702 375 303
All other commitments -- -- 150 202 343 369
Unallocated 2,339 1,983 1,020 2,879 2,946 3,303
- ----------------------------------------------------------------------------------------------------------------------------
Total Allowance $5,285 $5,291 $5,131 $4,820 $4,913 $4,776
============================================================================================================================
21
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE X - LOANS BY TYPE
(IN THOUSANDS) SEPT. 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2001 2000 1999 1998 1997 1996
Real estate - construction $ 4,631 $ 452 $ 649 $ 1,004 $ 406 $ 1,166
Real estate - mortgage 291,273 263,325 247,604 230,815 219,952 213,957
Consumer 28,562 28,141 29,140 30,924 33,094 33,420
Agriculture 2,092 1,983 1,899 1,930 2,424 2,603
Commercial 22,546 20,776 18,050 17,630 17,176 15,751
Other 1,334 948 1,025 1,062 6,260 5,014
Political subdivisions 13,568 12,462 12,332 7,449 5,895 6,464
Lease receivables 167 218 222 218 256 264
- -------------------------------------------------------------------------------------------------------------------------------
Total 364,173 328,305 310,921 291,032 285,463 278,639
Less: unearned discount - - (29) (29) (37) (42)
- -------------------------------------------------------------------------------------------------------------------------------
364,173 328,305 310,892 291,003 285,426 278,597
Less: allowance for loan losses (5,285) (5,291) (5,131) (4,820) (4,913) (4,776)
- -------------------------------------------------------------------------------------------------------------------------------
Loans, net $ 358,888 $ 323,014 $ 305,761 $ 286,183 $ 280,513 $ 273,821
===============================================================================================================================
LIQUIDITY
Liquidity is the ability to quickly raise cash 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 Corporation
maintains overnight borrowing facilities with several correspondent banks that
provide a source of day-to-day liquidity. Also, the Corporation maintains
borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by
mortgage loans and mortgage-backed securities. At September 30, 2001, the
Corporation had unused borrowing availability with correspondent banks and the
Federal Home Loan Bank of Pittsburgh totaling approximately $210,147,000.
Additionally, the Corporation uses repurchase agreements placed with brokers to
borrow short-term funds secured by investment assets, and uses "RepoSweep"
arrangements to borrow funds from commercial banking customers on an overnight
basis.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. For many years, the
Corporation and the Bank have maintained strong capital positions. The following
table presents consolidated capital ratios at September 30, 2001:
TABLE XI - CAPITAL RATIOS
(In thousands)
CITIZENS & NORTHERN REGULATORY STANDARDS
CORPORATION WELL MINIMUM
(ACTUAL) CAPITALIZED STANDARD
- -------------------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets 23.69% 10.00% 8.00%
Tier 1 capital to risk-weighted assets 21.73% 6.00% 4.00%
Tier 1 capital to average total assets 11.78% 5.00% 4.00%
Management expects the Corporation and the Bank to maintain capital levels that
exceed the regulatory standards for well-capitalized institutions for the next
12 months and for the foreseeable future. Planned capital expenditures during
the next 12 months are not expected to have a detrimental effect on capital
ratios or results of operations.
22
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
INFLATION
Over the last several years, direct inflationary pressures on the Corporation's
payroll-related and other noninterest costs have been modest. However, the
Corporation is significantly affected by the Federal Reserve Board's efforts to
control inflation through changes in interest rates. Management monitors the
impact of economic trends, including any indicators of inflationary pressure, in
managing interest rate and other financial risks.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 3. INTEREST RATE RISK AND MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
MARKET RISK
The Corporation's two major categories of market risk, interest rate and equity
securities risk, are discussed in the following sections.
INTEREST RATE RISK
Business risk arising from changes in interest rates is an inherent factor in
operating a bank. The Corporation's assets are predominantly long-term, fixed
rate loans and debt securities. Funding for these assets comes principally from
short-term deposits and borrowed funds. Accordingly, there is an inherent risk
of lower future earnings or decline in fair value of the Corporation's financial
instruments when interest rates change.
The Bank uses a simulation model to calculate the potential effects of interest
rate fluctuations on net interest income and the market value of portfolio
equity. Only assets and liabilities of the Bank are included in management's
monthly simulation model calculations. Since the Bank makes up more than 90% of
the Corporation's total assets and liabilities, and because the Bank is the
source of the most volatile interest rate risk, management does not consider it
necessary to run the model for the remaining entities within the consolidated
group. For purposes of these calculations, the market value of portfolio equity
includes the fair values of financial instruments, such as securities, loans,
deposits and borrowed funds, and the book values of nonfinancial assets and
liabilities, such as premises and equipment and accrued interest. The model
measures and projects potential changes in net interest income, and calculates
the discounted present value of anticipated cash flows of financial instruments,
under the "base most likely" and "what if" scenarios. Typically, management runs
these calculations using the base most likely scenario, and assuming increases
and decreases of 100 basis points (1%), 200 basis points and 300 basis points
from the base most likely interest rates.
The Bank's Board of Directors has established policy guidelines for acceptable
levels of interest rate risk, based on an immediate increase or decrease in
interest rates of 200 basis points. The policy limit for fluctuation in net
interest income is minus 20% from the base most likely one-year scenario. The
policy limit for market value variance is minus 30% from the base most likely
one-year scenario. As Table XII shows, as of September 30, 2001, the Bank's
interest rate risk calculations were within the policy thresholds. The most
sensitive scenario presented is the "+200 basis points" scenario. If interest
rates were to immediately increase 200 basis points, the Bank's calculations
based on the model show that net interest income would decrease 13.55% over the
next 12 months, and the market value of portfolio equity would decrease 23.55%.
The table that follows was prepared using the simulation model described above.
The model 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
calculations 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.
23
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE XII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
PERIOD ENDING SEPTEMBER 30, 2002
(IN THOUSANDS)
PLUS 200 MINUS 200
MOST LIKELY BASIS BASIS
FORECAST POINTS POINTS
AMOUNT AMOUNT % CHANGE AMOUNT % CHANGE
Interest income:
Securities $23,694 $25,528 7.74 $22,787 (3.83)
Interest-bearing due from banks
and federal funds sold 234 338 44.44 205 (12.39)
Loans 30,436 31,728 4.24 28,188 (7.39)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest income 54,364 57,594 5.94 51,180 (5.86)
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 19,376 25,298 30.56 17,371 (10.35)
Interest on borrowed funds 7,181 8,258 15.00 7,052 (1.80)
- -------------------------------------------------------------------------------------------------------------------------------
Total interest expense 26,557 33,556 26.35 24,423 (8.04)
- -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $27,807 $24,038 (13.55) $26,757 (3.78)
===============================================================================================================================
Market Value of Portfolio Equity at September 30, 2001 $84,946 $64,938 (23.55) $95,617 12.56
===============================================================================================================================
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists primarily of investments
in stock of banks and bank holding companies located mainly in Pennsylvania. The
Corporation also owns restricted stock issued by the Federal Home Loan Bank of
Pittsburgh.
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 stocks 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 September 30, 2001 and December 31, 2000 are
presented in Table XII.
TABLE XIII - EQUITY SECURITIES HYPOTHETICAL HYPOTHETICAL
10% DECLINE 20% DECLINE
FAIR IN MARKET IN MARKET
COST VALUE VALUE VALUE
AT SEPTEMBER 30, 2001
Banks and bank holding companies $21,542 $28,819 $(2,777) $(5,555)
Federal Home Loan Bank 7,005 7,005 (773) (1,546)
- ------------------------------------------------------------------------------------------------------------------------
Total $28,547 $35,824 $(3,550) $(7,101)
========================================================================================================================
</Table>
24
HYPOTHETICAL HYPOTHETICAL
10% DECLINE 20% DECLINE
FAIR IN MARKET IN MARKET
COST VALUE VALUE VALUE
AT DECEMBER 31, 2000
Banks and bank holding companies $22,098 $26,814 $(2,681) $(5,362)
Federal Home Loan Bank 7,248 7,248 (725) (1,450)
- ---------------------------------------------------------------------------------------------------------------------
Total $29,346 $34,062 $(3,406) $(6,812)
=====================================================================================================================
25
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Corporation nor any of its subsidiaries is a party to any
material pending legal proceedings.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
a. None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits have been omitted either because not applicable or because
the required information is included elsewhere in Form 10-Q.
b. There were no reports on Form 8-K filed during the 3rd quarter 2001.
26
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
November 12, 2001 By: Craig G. Litchfield /s/
- ----------------- -----------------------
Date Chairman, President and Chief Executive Officer
November 12, 2001 By: Mark A. Hughes /s/
- ----------------- ------------------
Date Treasurer and Principal Accounting Officer
27