-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QXNP5EDLztsM4vL4Gwkcp2b++ap3D1ctr5lWdIxd0w/x5YK7LWnwxtc6fJ2mByg/ mzU8wg9k2R0Bs2vCaTBEcA== 0000950152-01-501845.txt : 20010515 0000950152-01-501845.hdr.sgml : 20010515 ACCESSION NUMBER: 0000950152-01-501845 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CITIZENS & NORTHERN CORP CENTRAL INDEX KEY: 0000810958 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232451943 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-16084 FILM NUMBER: 1631656 BUSINESS ADDRESS: STREET 1: THOMPSON ST CITY: RALSTON STATE: PA ZIP: 17763 BUSINESS PHONE: 7172656171 MAIL ADDRESS: STREET 1: 90-92 MAIN ST CITY: WELLSBORO STATE: PA ZIP: 16901 10-Q 1 l88343ae10-q.txt CITIZENS AND NORTHERN CORPORATION 10-Q 1 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, 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) 5,253,339 Shares Outstanding May 10, 2001 1 2 CITIZENS & NORTHERN CORPORATION Index
Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - March 31, 2001 and December 31, 2000 Page 3 Consolidated Statement of Income - Three Months Ended March 31, 2001 and 2000 Page 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 2001 and 2000 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 7 through 18 Item 3. Quantitative and Qualitative Information About Market Risk Pages 19 and 20 Part II. Other Information Page 21 Signatures Page 22
2 3 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET MARCH 31, DECEMBER 31, (In Thousands Except Share Data) 2001 2000 (UNAUDITED) (NOTE) ASSETS Cash and due from banks: Noninterest-bearing $ 11,016 $ 11,638 Interest-bearing 4,895 2,186 - -------------------------------------------------------------------------------------------- Total cash and cash equivalents 15,911 13,824 Available-for-sale securities 406,498 346,747 Held-to-maturity securities 1,675 1,911 Loans, net 324,379 323,014 Bank-owned life insurance 15,222 15,000 Accrued interest receivable 5,159 4,953 Bank premises and equipment, net 9,237 9,332 Foreclosed assets held for sale 372 316 Other assets 2,803 4,238 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 781,256 $ 719,335 ============================================================================================ LIABILITIES Deposits: Noninterest-bearing $ 65,879 $ 66,125 Interest-bearing 464,987 462,842 - -------------------------------------------------------------------------------------------- Total deposits 530,866 528,967 Dividends payable 1,366 1,353 Short-term borrowings 87,385 94,691 Long-term borrowings 60,600 605 Accrued interest and other liabilities 6,954 4,750 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 687,171 630,366 ============================================================================================ 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 19,757 18,756 Retained earnings 66,105 65,206 - -------------------------------------------------------------------------------------------- Total 91,240 90,341 Accumulated other comprehensive income 4,429 82 Unamortized stock compensation (35) (35) Treasury stock, at cost: 125,094 shares at March 31, 2001 (1,549) 117,718 shares at December 31, 2000 (1,419) - -------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 94,085 88,969 ============================================================================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 781,256 $ 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 4 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q CONSOLIDATED STATEMENT OF INCOME
3 MONTHS ENDED (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) MARCH 31, MARCH 31, 2001 2000 INTEREST INCOME Interest and fees on loans $ 6,902 $ 6,508 Interest on balances with depository institutions 19 25 Interest on loans to political subdivisions 171 163 Interest on federal funds sold 61 6 Income from available-for-sale and held-to-maturity securities: Taxable 4,733 4,679 Tax-exempt 944 1,114 Dividends 384 362 - ----------------------------------------------------------------------------------------------- Total interest and dividend income 13,214 12,857 - ----------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 5,693 5,413 Interest on short-term borrowings 1,331 1,060 Interest on long-term borrowings 468 672 - ----------------------------------------------------------------------------------------------- Total interest expense 7,492 7,145 - ----------------------------------------------------------------------------------------------- Interest margin 5,722 5,712 Provision for loan losses 150 226 - ----------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 5,572 5,486 - ----------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 296 268 Service charges and fees 68 51 Trust and financial management revenue 387 401 Insurance commissions, fees and premiums 138 80 Increase in cash surrender value of life insurance 222 -- Fees related to credit card operation 128 465 Other operating income 74 93 - ----------------------------------------------------------------------------------------------- Total other income before realized gains on securities, net 1,313 1,358 Realized gains on securities, net 455 15 - ----------------------------------------------------------------------------------------------- Total other income 1,768 1,373 - ----------------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and wages 2,018 1,829 Pensions and other employee benefits 580 487 Occupancy expense, net 259 253 Furniture and equipment expense 346 253 Expenses related to credit card operation 77 191 Pennsylvania shares tax 196 181 Other operating expense 1,122 1,015 - ----------------------------------------------------------------------------------------------- Total other expenses 4,598 4,209 - ----------------------------------------------------------------------------------------------- Income before income tax provision 2,742 2,650 Income tax provision 477 501 - ----------------------------------------------------------------------------------------------- NET INCOME $ 2,265 $ 2,149 =============================================================================================== PER SHARE DATA: Net income - basic $ 0.43 $ 0.41 Net income - diluted $ 0.43 $ 0.41 - ----------------------------------------------------------------------------------------------- Dividend per share $ 0.26 $ 0.24 - ----------------------------------------------------------------------------------------------- Number of shares used in computation - basic 5,256,002 5,257,366 Number of shares used in computation - diluted 5,256,230 5,259,367
The accompanying notes are an integral part of these consolidated financial statements. 4 5 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED (IN THOUSANDS) (UNAUDITED) MARCH 31, MARCH 31, 2001 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,265 $ 2,149 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 150 226 Realized gains on securities, net (455) (15) Gain on sale of foreclosed assets, net (25) (34) Depreciation expense 305 263 Accretion and amortization, net (627) (592) Increase in cash surrender value of life insurance (222) -- Deferred income taxes -- 28 (Increase) decrease in accrued interest receivable and other assets (1,010) 668 Increase in accrued interest payable and other liabilities 2,204 726 - ---------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 2,585 3,419 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of held-to-maturity securities 860 12 Purchase of held-to-maturity securities (626) (96) Proceeds from sales of available-for-sale securities 576 864 Proceeds from maturities of available-for-sale securities 36,530 3,112 Purchase of available-for-sale securities (89,187) (5,435) Net increase in loans (1,651) (1,643) Purchase of premises and equipment (210) (713) Proceeds from sale of foreclosed assets 105 269 - ---------------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (53,603) (3,630) - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 1,899 (3,586) Net increase (decrease) in short-term borrowings (7,306) 10,088 Proceeds from long-term borrowings 60,000 -- Repayments of long-term borrowings (5) (9,405) Proceeds from sale of treasury stock -- 4 Purchase of treasury stock (130) -- Dividends paid (1,353) (1,249) - ---------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 53,105 (4,148) - ---------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,087 (4,359) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,824 18,063 - ---------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,911 $ 13,704 ==================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Assets acquired through foreclosure of real estate loans $ 136 $ 220 Interest paid $ 5,437 $ 5,810 Income taxes paid $ 25 $ 475
The accompanying notes are an integral part of these consolidated financial statements. 5 6 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 period ended March 31, 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 QUARTER ENDED MARCH 31, 2001 Earnings per share - basic $2,265,000 5,256,002 $ 0.43 Dilutive effect of stock options 228 - ---------------------------------------------------------------------------------- Earnings per share - diluted $2,265,000 5,256,230 $ 0.43 ================================================================================== QUARTER ENDED MARCH 31, 2000 Earnings per share - basic $2,149,000 5,257,366 $ 0.41 Dilutive effect of stock options 2,001 - ---------------------------------------------------------------------------------- Earnings per share - diluted $2,149,000 5,259,367 $ 0.41 ==================================================================================
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: 6 7 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
QUARTERS ENDED MARCH 31, (IN THOUSANDS) 2001 2000 Net income $ 2,265 $ 2,149 Other comprehensive income (loss): Unrealized holding gains (losses) on available-for-sale securities: Gains (losses) arising during the period 7,041 (623) Reclassification adjustment for realized gains (455) (15) - --------------------------------------------------------------------------------------------- Other comprehensive income (loss) before income tax 6,586 (638) Income tax related to other comprehensive income/loss (2,239) 217 - --------------------------------------------------------------------------------------------- Other comprehensive income (loss) 4,347 (421) - --------------------------------------------------------------------------------------------- Comprehensive income $ 6,612 $ 1,728 =============================================================================================
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-K 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. REFERENCES TO 2001 AND 2000 Unless otherwise noted, all references to "2001" in the following discussion of operating results are intended to mean the three months ended March 31, 2001, and similarly, references to "2000" are intended to mean the first three months of 2000. 7 8 EARNINGS OVERVIEW Net income in the first quarter 2001 was $2,265,000, or $.43 per share (basic and diluted). This represents a 5.4% increase over the first quarter 2000, when net income was $2,149,000, or $.41 per share (basic and diluted). The most significant income statement changes between periods were as follows: - - Realized gains on securities were $455,000 in 2001, compared to $15,000 in 2000. Most of the gains in 2001 resulted from sales of bank stocks. The largest individual gain ($301,000) was from the sale of stock from a banking company that announced it is being acquired. - - In 2001, the Corporation recorded an increase in cash surrender value of life insurance of $222,000. In late December 2000, the Corporation purchased bank-owned life insurance (BOLI) at a cost of $15,000,000. The BOLI purchase was done for 2 main reasons: (1) to provide a funding vehicle to cover future employee benefit costs, and (2) to generate tax-exempt, noninterest income at a better rate of return than municipal bonds. - - Credit card fees decreased to $128,000 in 2001 from $465,000 in 2000. 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. The credit card fees and expenses recorded in the 1st quarter 2001 are in line with the amounts recorded in the last 3 quarters of 2000 and with the amounts expected for the remainder of 2001. - - Other (noninterest) expenses increased $389,000, or 9.2%, in 2001 compared to 2000. Changes in other expenses are discussed in more detail later in Management's Discussion and Analysis. Looking ahead to the remainder of 2001, management believes the Corporation's net interest margin may receive a significant "boost" from lower interest rates. In 2001, the Federal Reserve Board has lowered the Discount Rate (the rate charged by Federal Reserve Banks to depository institutions for overnight loans) 4 times through April 30, 2001, for a total of 2%. The Corporation is liability sensitive, which means that rates on its interest-bearing liabilities - deposits and borrowed funds - change more rapidly than rates on its interest-earning assets. Some evidence of the positive effect of lower interest rates to the Corporation is reflected in Table II of the "Net Interest Margin" section of Management's Discussion and Analysis. Table II shows that the "Interest Rate Spread" has widened to 2.77% in 2001 compared to the annual rate for 2000 of 2.54%, and that net interest income as a percentage of average earning assets has increased to 3.55% from 3.50%. Interest spreads may continue to widen in coming months if the Federal Reserve Board institutes further rate reductions, and as higher-rate certificates of deposit mature and are refunded. 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 I, II and III 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 $6,199,000 in 2001, a decrease of $89,000 or 1.4% from 2000. In December 2000, the Corporation sold securities with a carrying value of approximately $15 million, and utilized the proceeds to purchase BOLI (see "Earnings Overview" section of Management's Discussion and Analysis for discussion of the positive impact of BOLI on noninterest income). The sale of securities in December 2000 reduced the Corporation's average balance of available-for-sale securities in 2001 compared to 2000. This is reflected in Table III, which shows that the lower volume of obligations of state and political subdivisions (municipal bonds) had the effect of reducing interest income $234,000 in 2001 compared to 2000. Net interest income for 2001, plus BOLI income, exceeds net interest income for 2000 by $133,000. Other significant factors related to the net interest margin are discussed below. 8 9 INTEREST INCOME AND EARNING ASSETS Interest income increased 1.9% to $13,691,000 in 2001 from $13,433,000 in 2000. Income from available-for-sale securities fell $193,000, or 2.9%, while interest from loans increased $407,000 or 6.0%. The decrease in interest income from available-for-sale securities was mainly attributable to lower interest rates on new securities purchased in 2001, and to a lower average investment in municipal bonds (as discussed in the "Earnings Overview" section of Management's Discussion and Analysis). As reflected in Table III, the increase in interest from loans was primarily volume-related. Average gross loans in 2001 was $328,838,000, or 5.6% higher than in the 1st quarter 2000. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense increased to $7,492,000 in 2001, an increase of 4.9% over 2000. The increase in interest expense resulted from increases in volume, primarily of CDs and money market accounts. As you can see in Table II, the average balances of CDs increased $14,593,000 (10.1%) in 2001 compared to 2000, and average money market balances increased $13,843,000 (9.7%). Growth in each of these deposit categories resulted from several factors, including the following: (1) increased deposits from governmental entities and school districts; (2) an expanded branch system, with relatively new offices opened in Mansfield (1998) and Muncy (2000); and (3) investors' movement of funds out of the U.S. stock market in recent months. As reflected in Table III, lower interest rates significantly reduced interest expense from money market accounts and IRAs in 2001 compared to 2000. However, the average rate incurred on CDs was higher in 2001 than in 2000, offsetting much of the lower interest costs from the other deposit categories. A significant amount of the CDs as of March 31, 2001 were initiated during 2000, when short-term interest rates were higher than in 2001. Management expects many of these accounts to be refunded at lower rates over the remaining months of 2001. 9 10 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
(IN THOUSANDS) QUARTERS ENDED MARCH 31, INTEREST INCOME 2001 2000 Available-for-sale securities: U.S. Treasury securities $ 37 $ 40 Securities of other U.S. Government agencies and corporations 2,339 2,313 Mortgage-backed securities 1,902 1,870 Obligations of states and political subdivisions 1,344 1,617 Equity securities 384 362 Other securities 428 425 - ------------------------------------------------------------------------------------------------------ Total available-for-sale securities 6,434 6,627 - ------------------------------------------------------------------------------------------------------ Held-to-maturity securities: U.S. Treasury securities 11 9 Securities of other U.S. Government agencies and corporations 11 17 Mortgage-backed securities 5 6 - ------------------------------------------------------------------------------------------------------ Total held-to-maturity securities 27 32 - ------------------------------------------------------------------------------------------------------ Interest-bearing due from banks 19 25 Federal funds sold 61 6 Loans: Real estate loans 5,602 5,283 Consumer 778 757 Agricultural 46 47 Commercial/industrial 456 401 Other 17 17 Political subdivisions 246 236 Leases 5 2 - ------------------------------------------------------------------------------------------------------ Total loans 7,150 6,743 - ------------------------------------------------------------------------------------------------------ Total Interest Income 13,691 13,433 - ------------------------------------------------------------------------------------------------------ INTEREST EXPENSE Interest checking 204 246 Money market 1,787 1,798 Savings 275 282 Certificates of deposit 2,333 1,919 Individual Retirement Accounts 1,082 1,157 Other time deposits 12 12 Federal funds purchased 36 54 Other borrowed funds 1,763 1,677 - ------------------------------------------------------------------------------------------------------ Total Interest Expense 7,492 7,145 - ------------------------------------------------------------------------------------------------------ Net Interest Income $ 6,199 $ 6,288 ======================================================================================================
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%. 10 11 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE II - ANALYSIS OF AVERAGE BALANCES AND RATES
(DOLLARS IN THOUSANDS) 3 MONTHS YEAR 3 MONTHS ENDED RATE OF ENDED RATE OF ENDED RATE OF 3/31/01 RETURN/ 12/31/00 RETURN/ 3/31/00 RETURN/ AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF BALANCE FUNDS % BALANCE FUNDS % BALANCE FUNDS % EARNING ASSETS Available-for-sale securities, at amortized cost: U.S. Treasury securities $ 2,508 5.98% $ 2,512 6.13% $ 2,514 6.45% Securities of other U.S. Government agencies and corporations 136,018 6.97% 133,063 7.08% 131,628 7.13% Mortgage-backed securities 113,031 6.82% 101,155 6.80% 110,283 6.88% Obligations of states and political subdivisions 69,005 7.90% 81,312 7.80% 80,967 8.10% Equity securities 29,103 5.35% 25,899 5.68% 26,299 5.58% Other securities 22,030 7.88% 22,572 7.64% 21,205 8.13% - ----------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities 371,695 7.02% 366,513 7.09% 372,896 7.21% - ----------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities 740 6.03% 685 5.40% 635 5.75% Securities of other U.S. Government agencies and corporations 746 5.98% 1,019 6.67% 1,026 6.72% Mortgage-backed securities 234 8.67% 283 7.42% 306 7.95% - ----------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities 1,720 6.37% 1,987 6.34% 1,967 6.60% - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks 1,653 4.66% 1,861 6.13% 2,323 4.36% Federal funds sold 4,358 5.68% 1,000 6.40% 438 5.56% Loans: Real estate loans 264,129 8.60% 254,225 8.61% 248,822 8.61% Consumer 28,100 11.23% 27,760 11.01% 28,688 10.70% Agricultural 1,934 9.65% 1,963 9.73% 1,986 9.60% Commercial/industrial 20,996 8.81% 21,336 8.66% 18,687 8.70% Other 848 8.13% 886 8.01% 859 8.03% Political subdivisions 12,624 7.90% 12,009 7.57% 12,258 7.81% Leases 207 9.80% 203 10.84% 192 4.22% - ----------------------------------------------------------------------------------------------------------------------------------- Total loans 328,838 8.82% 318,382 8.79% 311,492 8.78% - ----------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 708,264 7.84% 689,743 7.87% 689,116 7.91% Cash 10,458 10,887 10,077 Unrealized gain/loss on securities 570 (12,831) (12,858) Allowance for loan losses (5,366) (5,233) (5,097) Bank premises and equipment 9,328 8,712 8,271 Other assets 24,839 12,943 13,725 - ------------------------------------------------------------------------------------------------------------------------ Total Assets $ 748,093 $704,221 $ 703,234 ======================================================================================================================== INTEREST-BEARING LIABILITIES Interest checking $ 35,574 2.33% $ 36,086 2.87% $ 36,594 2.73% Money market 156,171 4.64% 146,209 5.39% 142,328 5.12% Savings 44,982 2.48% 45,963 2.49% 45,516 2.51% Certificates of deposit 158,772 5.96% 144,997 5.64% 144,179 5.40% Individual Retirement Accounts 79,279 5.54% 76,439 6.32% 77,311 6.07% Other time deposits 2,023 2.41% 1,717 2.56% 1,449 3.36% Federal funds purchased 2,369 6.16% 5,721 6.71% 3,926 5.58% Other borrowed funds 120,454 5.94% 108,581 6.13% 119,426 5.69% - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 599,624 5.07% 565,713 5.33% 570,729 5.08% Demand deposits 51,867 52,437 50,340 Other liabilities 6,848 7,279 5,313 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 658,339 625,429 626,382 - ----------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity, excluding other comprehensive income/loss 89,378 87,258 85,013 Other comprehensive income/loss 376 (8,466) (8,161) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 89,754 78,792 76,852 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 748,093 $ 704,221 $ 703,234 =================================================================================================================================== Interest Rate Spread 2.77% 2.54% 2.83% Net Interest Income/Earning Assets 3.55% 3.50% 3.70%
(1) Rates of return on tax-exempt securities and loans are 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. 11 12 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME AND INTEREST EXPENSE
(IN THOUSANDS) QUARTERS ENDED MARCH 31, 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 76 (50) 26 Mortgage-backed securities 46 (14) 32 Obligations of states and political subdivisions (234) (39) (273) Equity securities 38 (16) 22 Other securities 16 (13) 3 - -------------------------------------------------------------------------------------------------- Total available-for-sale securities (58) (135) (193) - -------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities 2 -- 2 Securities of other U.S. Government agencies and corporations (4) (2) (6) Mortgage-backed securities (1) -- (1) - -------------------------------------------------------------------------------------------------- Total held-to-maturity securities (3) (2) (5) - -------------------------------------------------------------------------------------------------- Interest-bearing due from banks (8) 2 (6) Federal funds sold 55 -- 55 Loans: Real estate loans 325 (6) 319 Consumer (16) 37 21 Agricultural (1) -- (1) Commercial/industrial 50 5 55 Other -- -- -- Political subdivisions 7 3 10 Leases -- 3 3 - -------------------------------------------------------------------------------------------------- Total loans 365 42 407 - -------------------------------------------------------------------------------------------------- Total Interest Income 351 (93) 258 - -------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest checking (7) (35) (42) Money market 166 (177) (11) Savings (3) (4) (7) Certificates of deposit 204 210 414 Individual Retirement Accounts 29 (104) (75) Other time deposits 4 (4) -- Federal funds purchased (23) 5 (18) Other borrowed funds 14 72 86 - -------------------------------------------------------------------------------------------------- Total Interest Expense 384 (37) 347 - -------------------------------------------------------------------------------------------------- Net Interest Income $ (33) $ (56) $ (89) ==================================================================================================
(1) Changes in income on tax-exempt securities and loans are 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. 12 13 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE IV - COMPARISON OF NONINTEREST INCOME (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 Service charges on deposit accounts $ 296 $ 268 Service charges and fees 68 51 Trust and financial management revenue 387 401 Insurance commissions, fees and premiums 138 80 Increase in cash surrender value of life insurance 222 -- Fees related to credit card operation 128 465 Other operating income 74 93 - ---------------------------------------------------------------------------------- Total other operating income, before realized gains on securities, net 1,313 1,358 Realized gains on securities, net 455 15 - ---------------------------------------------------------------------------------- Total Other Income $1,768 $1,373 ==================================================================================
Total noninterest income increased $395,000, or 28.8%, in 2001 compared to 2000. The most significant changes - the increase in security gains, income from the (BOLI) life insurance contract and the decrease in credit card-related fees - are discussed in the "Earnings Overview" section of Management's Discussion and Analysis. TABLE V- COMPARISON OF NONINTEREST EXPENSE (IN THOUSANDS) THREE MONTHS ENDED MARCH 31, MARCH 31, 2001 2000 Salaries and wages $2,018 $1,829 Pensions and other employee benefits 580 487 Occupancy expense, net 259 253 Furniture and equipment expense 346 253 Pennsylvania shares tax 196 181 Other operating expense 1,122 1,015 - ------------------------------------------------------------------------- Total other expenses, excluding expenses Related to credit card operation 4,521 4,018 Expenses related to credit card operation 77 191 - ------------------------------------------------------------------------- Total Other Expense $4,598 $4,209 ========================================================================= Salaries and wages increased $189,000, or 10.3%, 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 full-time equivalent employees to 239 as of March 31, 2001 from 218 a year earlier. Higher staffing levels were required for the Muncy branch, trust and financial management and insurance sales and service. Pensions and other employee benefits increased $93,000, or 19.1%, in 2001 compared to 2000. In addition to increased costs resulting from the higher number of employees, the Corporation experienced an increase in medical insurance premium rates. 13 14 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Furniture and equipment expense increased $93,000, or 36.8%, in 2001 compared to 2000. 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 a new credit card operations facility in mid-2000. Other expense increased $107,000, or 10.5%, in 2001 compared to 2000. This category includes many different types of expenses. The most significant fluctuations in individual types of expenses between years are as follows: - - Employee meetings, educational seminars and other education-related expenses increased $34,000, to $103,000, in 2001. Included in this category are costs associated with trust and financial management employees' efforts to obtain required licenses, several executive officers' attendance at the American Bankers' Association conference in February 2001, and a variety of other conferences and courses. - - Telephone expenses related to data lines increased $31,000, to $60,000, 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. - - Advertising expenses increased $27,000, to $88,000, 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. - - Expenses and losses from other real estate transactions decreased $30,000, to $24,000, in 2001. 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 "Earnings Overview" section of Management's Discussion and Analysis. 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. As reflected in the consolidated statement of cash flows, the Corporation made purchases of available-for-sale securities of $89,185,000 in the 1st quarter 2001. Of this amount, $60,768,000 consisted of mortgage-backed securities. These purchases were funded primarily from 2 sources: (1) proceeds from maturities of available-for-sale securities (mainly U.S. Agency securities that were called) of $35,915,000, and (2) long-term borrowings of $60,000,000. The terms of the long-term borrowings range from 2002 to 2011, with $35,000,000 maturing in 2002 and 2003. As short-term and intermediate-term interest rates declined in the 1st quarter 2001, management identified opportunities to purchase securities using borrowed funds at a positive spread. Table VI presents information regarding outstanding investment securities at March 31, 2001 and December 31, 2000. 14 15 TABLE VI - INVESTMENT SECURITIES (IN THOUSANDS)
MARCH 31, 2001 DECEMBER 31, 2000 AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,507 $ 2,563 $ 2,509 $ 2,533 Obligations of other U.S. Government agencies 131,967 131,710 132,713 128,883 Obligations of states and political subdivisions 69,942 70,965 68,236 69,065 Other securities 21,891 21,417 22,111 20,964 Mortgage-backed securities 144,130 144,609 91,708 91,240 - ------------------------------------------------------------------------------------------------------------- Total debt securities 370,437 371,264 317,277 312,685 Marketable equity securities 29,345 35,234 29,346 34,062 - ------------------------------------------------------------------------------------------------------------- Total $399,782 $406,498 $346,623 $346,747 ============================================================================================================= HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 743 $ 751 $ 707 $ 708 Obligations of other U.S. Government agencies 696 708 946 947 Mortgage-backed securities 236 240 258 259 - ------------------------------------------------------------------------------------------------------------- Total $ 1,675 $ 1,699 $ 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 expected 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 may be incomplete. As noted in Table VIII below, the unallocated portion of the allowance for loan losses increased to $2,331,000 at March 31, 2001 from $1,983,000 at December 31, 2000. The larger unallocated allowance reflects management's concern related to adverse changes in the economy, including several local plant lay-offs. Through March 31, 2001, these adverse changes had not yet resulted in increased levels of delinquent loans. The provision for loan losses decreased to $150,000 in 2001 from $226,000 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 VII, VIII and IX present an analysis of the allowance for loan losses, the allocation of the allowance and a five-year summary of loans by type. 15 16 TABLE VII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) QUARTER ENDED MARCH 31, 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 30 272 81 257 246 157 Installment loans 19 77 138 144 230 240 Credit cards and related plans 48 214 192 264 305 201 Commercial and other loans 53 219 301 3 74 - ------------------------------------------------------------------------------------------------------------------- Total charge-offs 97 616 630 966 784 672 - ------------------------------------------------------------------------------------------------------------------- Recoveries: Real estate loans 2 26 81 12 21 22 Installment loans 2 23 60 43 64 53 Credit cards and related plans 10 28 30 40 30 38 Commercial and other loans 26 23 10 15 9 55 - ------------------------------------------------------------------------------------------------------------------- Total recoveries 40 100 181 110 124 168 - ------------------------------------------------------------------------------------------------------------------- Net charge-offs 57 516 449 856 660 504 Additions charged to operations 150 676 760 763 797 701 - ------------------------------------------------------------------------------------------------------------------- Balance at end of period $5,384 $5,291 $5,131 $4,820 $4,913 $4,776 ===================================================================================================================
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE (IN THOUSANDS) QUARTER ENDED MARCH 31, YEARS ENDED DECEMBER 31: 2001 2000 1999 1998 1997 1996 Commercial $1,506 $1,612 $2,081 $ 650 $ 625 $ 630 Noncommercial mortgages 851 952 834 97 350 58 Impaired loans 210 273 609 290 274 113 Consumer 486 471 437 702 375 303 All other commitments -- -- 150 202 343 369 Unallocated 2,331 1,983 1,020 2,879 2,946 3,303 - -------------------------------------------------------------------------------- Total Allowance $5,384 $5,291 $5,131 $4,820 $4,913 $4,776 ================================================================================ 16 17 TABLE IX - LOANS BY TYPE
(IN THOUSANDS) MAR. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, 2001 2000 1999 1998 1997 1996 Real estate - construction $ 372 $ 452 $ 649 $ 1,004 $ 406 $ 1,166 Real estate - mortgage 264,120 263,325 247,604 230,815 219,952 213,957 Consumer 28,202 28,141 29,140 30,924 33,094 33,420 Agriculture 1,896 1,983 1,899 1,930 2,424 2,603 Commercial 21,528 20,776 18,050 17,630 17,176 15,751 Other 1,005 948 1,025 1,062 6,260 5,014 Political subdivisions 12,443 12,462 12,332 7,449 5,895 6,464 Lease receivables 197 218 222 218 256 264 - --------------------------------------------------------------------------------------------------------------- Total 329,763 328,305 310,921 291,032 285,463 278,639 Less: unearned discount - - (29) (29) (37) (42) - --------------------------------------------------------------------------------------------------------------- 329,763 328,305 310,892 291,003 285,426 278,597 Less: allowance for loan losses (5,384) (5,291) (5,131) (4,820) (4,913) (4,776) - --------------------------------------------------------------------------------------------------------------- Loans, net $ 324,379 $ 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 March 31, 2001, the Corporation had unused borrowing availability with correspondent banks and the Federal Home Loan Bank of Pittsburgh totaling approximately $188,211,000. 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 March 31, 2001: TABLE X - CAPITAL RATIOS
CITIZENS & REGULATORY STANDARDS: NORTHERN CORPORATION MINIMUM WELL (ACTUAL) STANDARD CAPITALIZED - ------------------------------------------------------------------------------------------------ Total capital to risk-weighted assets 22.63% 8% 10% Tier 1 capital to risk-weighted assets 20.77% 4% 6% Tier 1 capital to average total assets 11.98% 4% 5%
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. 17 18 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. 18 19 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 assuming increases and decreases of 100 basis points (1%), 200 basis points and 300 basis points from the base most likely scenario. The Bank's Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an 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. Throughout most of 2000, the Bank's calculations showed projected decreases in net interest income and market value of portfolio equity, in the plus 200 basis point scenario, that exceeded the policy thresholds. As the table below shows, as of March 31, 2001, the Bank's interest rate risk calculations were within the policy thresholds. This improvement is mainly attributable to 2 factors: (1) shortened assumed maturities of callable agency securities, because of lower interest rates, and (2) corrections of certain discount rate calculations. 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. 19 20 TABLE XI - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
PERIOD ENDING MARCH 31, 2002 (IN THOUSANDS) PLUS 200 MINUS 200 MOST LIKELY BASIS BASIS FORECAST POINTS POINTS AMOUNT AMOUNT % CHANGE AMOUNT % CHANGE Interest income: Securities $ 24,419 $ 25,178 3.11 $ 23,548 (3.57) Interest-bearing due from banks and federal funds sold 327 378 15.60 215 (34.25) Loans 29,896 31,264 4.58 27,594 (7.70) - ---------------------------------------------------------------------------------------------------------------------- Total interest income 54,642 56,820 3.99 51,357 (6.01) - ---------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 21,656 27,426 26.64 16,773 (22.55) Interest on borrowed funds 6,883 7,702 11.90 6,112 (11.20) - ---------------------------------------------------------------------------------------------------------------------- Total interest expense 28,539 35,128 23.09 22,885 (19.81) - ---------------------------------------------------------------------------------------------------------------------- Net Interest Income $ 26,103 $ 21,692 (16.90) $ 28,472 9.08 ====================================================================================================================== Market Value of Portfolio Equity at March 31, 2001 $ 85,892 $ 63,373 (26.22) $ 98,977 15.23 ======================================================================================================================
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 March 31, 2001 and December 31, 2000 are presented in Table XII.
TABLE XII - EQUITY SECURITIES Hypothetical Hypothetical 10% Decline 20% Decline Fair In In Cost Value Market Value Market Value AT MARCH 31, 2001 Banks and bank holding companies $22,097 $27,986 $(2,799) $(5,597) Federal Home Loan Bank 7,248 7,248 (725) (1,450) - ------------------------------------------------------------------------------------------ Total $29,345 $35,234 $(3,524) $(7,047) ==========================================================================================
Hypothetical Hypothetical 10% Decline 20% Decline Fair In In Cost Value Market Value Market 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) ==========================================================================================
20 21 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 1st quarter 2001. 21 22 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, 2001 By: Craig G. Litchfield /s/ - ------------ ----------------------- Date Chairman, President and Chief Executive Officer May 11, 2001 By: Mark A. Hughes /s/ - ------------ ------------------ Date Treasurer and Principal Accounting Officer 22 -----END PRIVACY-ENHANCED MESSAGE-----