-----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, LTGQVeakBe+KIgA9KHYSdRF1RIt0+w5gdXPHVb3ZFPslZJfs7/HViNiMvMVjk2rb XzoQ00v6HK0Oz+YGAmJsoA== 0000950152-01-503793.txt : 20010814 0000950152-01-503793.hdr.sgml : 20010814 ACCESSION NUMBER: 0000950152-01-503793 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010813 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: 1934 Act SEC FILE NUMBER: 000-16084 FILM NUMBER: 1706089 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 l89587ae10-q.txt CITIZENS & 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 June 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 August 10, 2001 1 2 CITIZENS & NORTHERN CORPORATION Index Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - June 30, 2001 and December 31, 2000 Page 3 Consolidated Statement of Income - Three and Six Months Ended June 30, 2001 and 2000 Page 4 Consolidated Statement of Cash Flows - Six Months Ended June 30, 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 19 Item 3. Information About Market Risk Pages 20 and 21 Part II. Other Information Page 22 Signatures Page 23 2 3 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET JUNE 30, DECEMBER 31, (In Thousands Except Share Data) 2001 2000 (UNAUDITED) (NOTE) ASSETS Cash and due from banks: Noninterest-bearing $ 11,580 $ 11,638 Interest-bearing 1,236 2,186 - -------------------------------------------------------------------------------------------- Total cash and cash equivalents 12,816 13,824 Available-for-sale securities 422,424 346,747 Held-to-maturity securities 1,639 1,911 Loans, net 338,893 323,014 Bank-owned life insurance 15,451 15,000 Accrued interest receivable 5,420 4,953 Bank premises and equipment, net 9,694 9,332 Foreclosed assets held for sale 299 316 Other assets 2,533 4,238 - -------------------------------------------------------------------------------------------- TOTAL ASSETS $ 809,169 $ 719,335 ============================================================================================ LIABILITIES Deposits: Noninterest-bearing $ 72,361 $ 66,125 Interest-bearing 476,843 462,842 - -------------------------------------------------------------------------------------------- Total deposits 549,204 528,967 Dividends payable 1,365 1,353 Short-term borrowings 85,562 94,691 Long-term borrowings 70,595 605 Accrued interest and other liabilities 7,595 4,750 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES 714,321 630,366 - -------------------------------------------------------------------------------------------- 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 67,929 65,206 - -------------------------------------------------------------------------------------------- Total 93,066 90,341 Accumulated other comprehensive income 3,748 82 Unamortized stock compensation (29) (35) Treasury stock, at cost: 143,412 shares at June 30, 2001 (1,937) 117,718 shares at December 31, 2000 (1,419) - -------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 94,848 88,969 - -------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 809,169 $ 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 FISCAL YEAR TO DATE (In thousands, except per share data) (Unaudited) JUNE 30, JUNE 30, 6 MONTHS ENDED JUNE 30, 2001 2000 2001 2000 INTEREST INCOME (CURRENT) (PRIOR YEAR) (CURRENT) (PRIOR YEAR) Interest and fees on loans $ 7,010 $ 6,686 $ 13,912 $ 13,194 Interest on balances with depository institutions 11 31 30 56 Interest on loans to political subdivisions 177 156 348 319 Interest on federal funds sold 65 7 126 13 Income from available-for-sale and Held-to-maturity securities: Taxable 5,276 4,609 10,009 9,288 Tax-exempt 1,016 1,117 1,960 2,231 Dividends 392 343 776 705 - ---------------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 13,947 12,949 27,161 25,806 - ---------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits 5,258 5,668 10,951 11,081 Interest on short-term borrowings 1,149 1,410 2,480 2,470 Interest on long-term borrowings 871 318 1,339 990 - ---------------------------------------------------------------------------------------------------------------------------- Total interest expense 7,278 7,396 14,770 14,541 - ---------------------------------------------------------------------------------------------------------------------------- Interest margin 6,669 5,553 12,391 11,265 Provision for loan losses 150 150 300 376 - ---------------------------------------------------------------------------------------------------------------------------- Interest margin after provision for possible loan losses 6,519 5,403 12,091 10,889 - ---------------------------------------------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts 330 287 626 555 Service charges and fees 59 68 127 119 Trust and financial management income 427 424 814 825 Insurance commissions, fees and premiums 115 94 253 174 Increase in cash surrender value of life insurance 229 -- 451 -- Fees related to credit card operation 148 149 276 614 Other operating income 91 28 165 121 - ---------------------------------------------------------------------------------------------------------------------------- Total other income before realized gains on securities, net 1,399 1,050 2,712 2,408 Realized gains on securities, (net) 742 322 1,197 337 - ---------------------------------------------------------------------------------------------------------------------------- Total other income 2,141 1,372 3,909 2,745 - ---------------------------------------------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and wages 2,052 1,848 4,070 3,677 Pensions and other employee benefits 523 449 1,103 936 Occupancy expense, net 250 206 509 459 Furniture and equipment expense 352 304 698 557 Expenses related to credit card operation 61 93 138 284 Pennsylvania shares tax 198 199 394 380 Other operating expense 1,144 1,017 2,266 2,032 - ---------------------------------------------------------------------------------------------------------------------------- Total other expenses 4,580 4,116 9,178 8,325 - ---------------------------------------------------------------------------------------------------------------------------- Income before income tax provision 4,080 2,659 6,822 5,309 Income tax provision 891 446 1,368 947 - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 3,189 $ 2,213 $ 5,454 $ 4,362 ============================================================================================================================= PER SHARE DATA: Net income - basic $ 0.61 $ 0.42 $ 1.04 $ 0.83 Net income - diluted $ 0.61 $ 0.42 $ 1.04 $ 0.83 - ---------------------------------------------------------------------------------------------------------------------------- Dividend per share $ 0.26 $ 0.24 $ 0.52 $ 0.48 - ---------------------------------------------------------------------------------------------------------------------------- Number of shares used in computation - basic 5,248,992 5,257,546 5,252,478 5,257,461 Number of shares used in computation - diluted 5,249,781 5,259,156 5,252,984 5,258,682
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
(In Thousands) (Unaudited) SIX MONTH PERIODS ENDED JUNE 30, 2001 JUNE 30, 2000 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,454 $ 4,362 Adjustments to reconcile net income to net cash provided by operating activities Provision for possible loan losses 300 376 Realized gains on securities, net (1,197) (337) Gain on sale of foreclosed assets, net (5) (51) Depreciation expense 616 537 Accretion and amortization, net (1,166) (1,205) Increase in cash surrender value of life insurance (451) -- Amortization of restricted stock 11 -- Deferred income tax -- (59) (Increase) decrease in accrued interest receivable and other assets (928) 770 Increase in accrued interest payable and other liabilities 3,122 1,703 - ---------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 5,756 6,096 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the maturity of held-to-maturity securities 894 32 Purchase of held-to-maturity securities (626) (96) Proceeds from sales of available-for-sale securities 2,559 13,413 Proceeds from maturities of available-for-sale securities 54,637 6,598 Purchase of available-for-sale securities (124,951) (9,467) Net increase in loans (16,437) (8,926) Purchase of premises and equipment (978) (1,030) Proceeds from sale of foreclosed assets 280 461 - ---------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Investing Activities (84,622) 985 - ---------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 20,237 (1,523) Net (decrease) increase in short-term borrowings (9,129) 2,744 Proceeds from long-term borrowings 70,000 -- Repayments of long-term borrowings (10) (9,410) Proceeds from the sale of treasury stock -- 5 Purchase of treasury stock (521) -- Dividends paid (2,719) (2,500) - ---------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities 77,858 (10,684) - ---------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (1,008) (3,603) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,824 18,063 - ---------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,816 $ 14,460 ==================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Assets acquired through foreclosure of real estate loans $ 258 $ 225 Interest paid $ 11,915 $ 12,051 Income taxes paid $ 1,014 $ 842
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 and six-month periods ended June 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 SIX-MONTH PERIOD ENDED JUNE 30, 2001 Earnings per share - basic $5,454,000 5,252,478 $ 1.04 Dilutive effect of stock options 506 - ------------------------------------------------------------------------------------- Earnings per share - diluted $5,454,000 5,252,984 $ 1.04 ====================================================================================== SIX-MONTH PERIOD ENDED JUNE 30, 2000 Earnings per share - basic $4,362,000 5,257,461 $ 0.83 Dilutive effect of stock options 1,221 - ------------------------------------------------------------------------------------- Earnings per share - diluted $4,362,000 5,258,682 $ 0.83 ======================================================================================
WEIGHTED- AVERAGE EARNINGS NET COMMON PER INCOME SHARES SHARE QUARTER ENDED JUNE 30, 2001 Earnings per share - basic $3,189,000 5,248,992 $ 0.61 Dilutive effect of stock options 789 - ------------------------------------------------------------------------------------- Earnings per share - diluted $3,189,000 5,249,781 $ 0.61 ====================================================================================== QUARTER ENDED JUNE 30, 2000 Earnings per share - basic $2,213,000 5,257,546 $ 0.42 Dilutive effect of stock options 1,610 - ------------------------------------------------------------------------------------- Earnings per share - diluted $2,213,000 5,259,156 $ 0.42 ======================================================================================
6 7 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 6 MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2001 2000 2001 2000 Net income $ 3,189 $ 2,213 $ 5,454 $ 4,362 Other comprehensive income (loss): Unrealized holding gains (losses) on available-for-sale securities: Gains (losses) arising during the period (289) (583) 6,752 (1,207) Reclassification adjustment for realized gains (742) (322) (1,197) (337) - --------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) before income tax (1,031) (905) 5,555 (1,544) Income tax related to other comprehensive income/loss 350 308 (1,889) 526 - --------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (681) (597) 3,666 (1,018) - --------------------------------------------------------------------------------------------------------- Comprehensive income $ 2,508 $ 1,616 $ 9,120 $ 3,344 ==========================================================================================================
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. 7 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 six months ended June 30, 2001, and similarly, references to "2000" are intended to mean the first six months of 2000. EARNINGS OVERVIEW Net income for the first six months of 2001 was $5,454,000, or $1.04 per share (basic and diluted). This represents an increase of 25.0% over the first six months of 2000. Most of the increase is reflected in second quarter results, as net income of $3,189,000 in the second quarter 2001 exceeded net income for the second quarter 2000 by 44.1%. The most significant income statement changes between the 6-month periods were as follows: - - The interest margin increased significantly ($1,126,000, or 10.0%), to $12,391,000 in 2001 from $11,265,000 in 2000. Most of this increase occurred during the second quarter 2001 compared to the second quarter 2000, as discussed in more detail in the "Second Quarter 2001" section below. - - Realized gains on securities were $1,197,000 in 2001, compared to $337,000 in 2000. Most of the gains in 2001 resulted from sales of bank stocks. The 2 largest individual gains (each in excess of $300,000) were from sales of stock of banking companies that have announced they are being acquired. - - In 2001, the Corporation recorded an increase in cash surrender value of life insurance of $451,000. In late December 2000, the Corporation purchased bank-owned life insurance (BOLI) at a cost of $15,000,000. - - Credit card fee revenues (excluding interest income) decreased to $276,000 in 2001 from $614,000 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. - - Other (noninterest) expenses increased $853,000, or 10.2%, in 2001 compared to 2000. Changes in other expenses are discussed in more detail later in Management's Discussion and Analysis. - - The income tax provision increased to $1,368,000 in 2001 from $947,000 in 2000, because pre-tax income is higher. SECOND QUARTER 2001 The Corporation's net interest margin (excess of interest and dividend income over interest expense) widened dramatically in the second quarter 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, from 6.25% as of December 31, 2000, to 3.5% as of June 30, 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. 8 9 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE I - QUARTERLY FINANCIAL DATA (IN THOUSANDS)
QUARTER ENDED: JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, 2001 2001 2000 2000 2000 2000 Interest income $13,947 $13,214 $13,224 $13,125 $12,949 $12,857 Interest expense 7,278 7,492 7,814 7,790 7,396 7,145 - ----------------------------------------------------------------------------------------------------------------------- Interest margin 6,669 5,722 5,410 5,335 5,553 5,712 Provision for loan losses 150 150 150 150 150 226 - ----------------------------------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 6,519 5,572 5,260 5,185 5,403 5,486 Other income 1,399 1,313 1,119 963 1,050 1,358 Securities gains 742 455 810 230 322 15 Other expenses 4,580 4,598 4,410 4,171 4,116 4,209 - ----------------------------------------------------------------------------------------------------------------------- Income before income tax provision 4,080 2,742 2,779 2,207 2,659 2,650 Income tax provision 891 477 498 374 446 501 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 3,189 $ 2,265 $ 2,281 $ 1,833 $ 2,213 $ 2,149 ======================================================================================================================= Net income per share - basic $ 0.61 $ 0.43 $ 0.43 $ 0.35 $ 0.42 $ 0.41 ======================================================================================================================= Net income per share - diluted $ 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 REST OF 2001 Based on current economic forecasts, management believes the net interest margin throughout the remainder of 2001 will be fairly consistent with the second quarter 2001 results, and may increase slightly. In fact, many economic forecasts indicate that the Federal Reserve Board may lower their targeted federal funds rate again, by .25%, in August. The possible negative consequences of a further downturn in the economy in the Corporation's markets is a concern; however, to date, there has been no evidence of deterioration in collectibility of the loan portfolio, and new loan demand has been good. Securities gains and losses have a significant impact on the Corporation's net income - it is impossible to predict, with any degree of precision, the amounts of securities gains and losses that may be realized in the rest of 2001. 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 $13,417,000 in 2001, an increase of $1,035,000 or 8.4% 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 $1,077,000 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 2.98% in 2001 from 2.71% in the first 6 months of 2000. 9 10 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q INTEREST INCOME AND EARNING ASSETS Interest income increased 4.7% to $28,187,000 in 2001 from $26,923,000 in 2000. Income from available-for-sale securities increased $425,000, or 3.2%, and interest from loans increased $762,000 or 5.6%. 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 $391,631,000, an increase of 5.1% over the first 6 months of 2000. Most of the increase in available-for-securities was in mortgage-backed securities, which increased $25,103,000, or 23.4%. As reflected in Table IV, the increase in interest from loans was also primarily volume-related. Average gross loans in 2001 (as shown in Table III) amounted to $331,666,000, or 5.9% higher than in the 1st 6 months of 2000. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense increased to $14,770,000 in 2001, an increase of 1.6% over 2000. The increase in interest expense resulted from increases in volume, primarily of CDs, money market accounts and borrowed funds. As you can see in Table III, the average balances of CDs increased $22,630,000 (15.8%) in 2001 compared to 2000, and average money market balances increased $10,410,000 (7.3%). 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). Average borrowed funds (excluding federal funds purchased) increased $20,980,000, or 18.2%, in 2001. As indicated in the consolidated statement of cash flows, the Corporation entered into long-term borrowing arrangements totaling $70,000,000 in 2001. Proceeds from these borrowings were used to help fund the purchase of available-for-sale securities, principally mortgage-backed securities. As reflected in Table IV, 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 4.08% in 2001 from 5.23% in 2000, and the average rate on IRAs fell to 5.26% from 6.29%. However, the average rate incurred on CDs was higher in 2001 than in 2000, offsetting some of the lower interest costs from the other deposit categories. A significant amount of the CDs in 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. 10 11 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
SIX-MONTHS ENDED JUNE 30, (IN THOUSANDS) 2001 2000 INTEREST INCOME Available-for-sale securities: U.S. Treasury securities $ 76 $ 79 Securities of other U.S. Government agencies and corporations 4,505 4,654 Mortgage-backed securities 4,354 3,635 Obligations of states and political subdivisions 2,832 3,209 Equity securities 776 705 Other securities 1,022 858 - -------------------------------------------------------------------------------------------- Total available-for-sale securities 13,565 13,140 - -------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities 20 17 Securities of other U.S. Government agencies and corporations 23 34 Mortgage-backed securities 9 11 - -------------------------------------------------------------------------------------------- Total held-to-maturity securities 52 62 - -------------------------------------------------------------------------------------------- Interest-bearing due from banks 30 56 Federal funds sold 126 13 Loans: Real estate loans 11,296 10,675 Consumer 1,543 1,521 Agricultural 94 94 Commercial/industrial 936 860 Other 34 33 Political subdivisions 502 458 Leases 9 11 - -------------------------------------------------------------------------------------------- Total loans 14,414 13,652 - -------------------------------------------------------------------------------------------- Total Interest Income 28,187 26,923 - -------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest checking 367 500 Money market 3,693 3,092 Savings 545 570 Certificates of deposit 3,891 4,856 Individual Retirement Accounts 2,403 2,067 Other time deposits 24 24 Federal funds purchased 69 187 Other borrowed funds 3,750 3,273 - -------------------------------------------------------------------------------------------- Total Interest Expense 14,770 14,541 - -------------------------------------------------------------------------------------------- Net Interest Income $13,417 $12,382 ============================================================================================
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%. 11 12 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
SIX RATE OF RATE OF SIX RATE OF (IN THOUSANDS) MONTHS RETURN/ YEAR RETURN/ MONTHS RETURN/ ENDED COST OF ENDED COST OF ENDED COST OF EARNING ASSETS 06/30/01 FUNDS % 12/31/00 FUNDS % 06/30/00 FUNDS % Available-for-sale securities, at amortized cost: U.S. Treasury securities $ 2,507 6.11% $ 2,512 6.13% $ 2,513 6.34% Securities of other U.S. Gov't agencies and corporations 128,709 7.06% 133,063 7.08% 132,287 7.09% Mortgage-backed securities 132,339 6.63% 101,155 6.80% 107,236 6.84% Obligations of states and political subdivisions 71,006 8.04% 81,312 7.80% 81,229 7.97% Equity Securities 28,870 5.42% 25,899 5.68% 26,096 5.45% Other securities 28,200 7.31% 22,572 7.64% 23,254 7.44% - ---------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities 391,631 6.98% 366,513 7.09% 372,615 7.11% - ---------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: U. S. Treasury securities 742 5.44% 685 5.40% 635 5.40% Securities of other U.S. Gov't agencies and corporations 721 6.43% 1,019 6.67% 1,036 6.62% Mortgage-backed securities 231 7.86% 283 7.42% 297 7.47% - ---------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities 1,694 6.19% 1,987 6.34% 1,968 6.35% - ---------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks 1,539 3.93% 1,861 6.13% 2,473 4.57% Federal funds sold 5,224 4.86% 1,000 6.40% 441 5.94% Loans: Real estate loans 266,502 8.55% 254,225 8.61% 249,646 8.62% Consumer 27,755 11.21% 27,760 11.01% 27,971 10.97% Agricultural 1,992 9.52% 1,963 9.73% 1,962 9.66% Commercial/industrial 21,596 8.74% 21,336 8.66% 20,528 8.45% Other 862 7.95% 886 8.01% 845 7.88% Political subdivisions 12,762 7.93% 12,009 7.57% 12,001 7.70% Leases 197 9.21% 203 10.84% 177 12.53% - ---------------------------------------------------------------------------------------------------------------------------------- Total loans 331,666 8.76% 318,382 8.79% 313,130 8.79% - ---------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 731,754 7.77% 689,743 7.87% 690,627 7.86% Cash 11,096 10,887 10,335 Unrealized gain/loss on securities 3,200 (12,831) (13,472) Allowance for loan losses (5,374) (5,233) (5,152) Bank premises and equipment 9,399 8,712 8,388 Other assets 24,689 12,943 13,356 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $ 774,764 $ 704,221 $ 704,082 =================================================================================================================================== INTEREST-BEARING LIABILITIES Interest checking $ 35,980 2.06% $ 36,086 2.87% $ 36,423 2.77% Money market 152,826 4.08% 146,209 5.39% 142,416 5.23% Savings 45,788 2.40% 45,963 2.49% 45,968 2.50% Certificates of deposit 166,308 5.89% 144,997 5.64% 143,678 5.46% Individual Retirement Accounts 79,252 5.26% 76,439 6.32% 77,057 6.29% Other time deposits 2,011 2.41% 1,717 2.56% 1,663 2.91% Federal funds purchased 2,915 4.77% 5,721 6.71% 6,097 6.18% Other borrowed funds 136,425 5.54% 108,581 6.13% 115,445 5.72% - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 621,505 4.79% 565,713 5.33% 568,747 5.16% Demand deposits 53,579 52,437 51,163 Other liabilities 7,600 7,279 5,411 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 682,684 625,429 625,321 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity, excluding other comprehensive income/loss 89,968 87,258 87,439 Other comprehensive income/loss 2,112 (8,466) (8,678) - ---------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 92,080 78,792 78,761 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 774,764 $ 704,221 $ 704,082 =================================================================================================================================== Interest Rate Spread 2.98% 2.54% 2.71% Net Interest Income/Earning Assets 3.70% 3.50% 3.62%
(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. 12 13 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE IV - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME AND INTEREST EXPENSE
(IN THOUSANDS) PERIODS ENDED JUNE 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 (125) (24) (149) Mortgage-backed securities 829 (110) 719 Obligations of states and political subdivisions (408) 31 (377) Equity securities 75 (4) 71 Other securities 179 (15) 164 - -------------------------------------------------------------------------------------------------------- Total available-for-sale securities 550 (125) 425 - -------------------------------------------------------------------------------------------------------- Held-to-maturity securities U.S Treasury securities 3 -- 3 Securities of other U.S. Government agencies and corporations (10) (1) (11) Mortgage-backed securities (3) 1 (2) - -------------------------------------------------------------------------------------------------------- Total held-to-maturity securities (10) -- (10) - -------------------------------------------------------------------------------------------------------- Interest-bearing due from banks (19) (7) (26) Federal funds sold 115 (2) 113 Loans: Real estate loans 715 (94) 621 Consumer (12) 34 22 Agricultural 1 (1) -- Commercial/industrial 46 30 76 Other 1 -- 1 Political subdivisions 30 14 44 Leases 1 (3) (2) - -------------------------------------------------------------------------------------------------------- Total loans 782 (20) 762 - -------------------------------------------------------------------------------------------------------- Total Interest Income 1,418 (154) 1,264 - -------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES Interest checking (6) (127) (133) Money market 255 (856) (601) Savings (2) (23) (25) Certificates of deposit 645 320 965 Individual Retirement Accounts 66 (402) (336) Other time deposits 4 (4) -- Federal funds purchased (82) (36) (118) Other borrowed funds 580 (103) 477 - -------------------------------------------------------------------------------------------------------- Total Interest Expense 1,460 (1,231) 229 - -------------------------------------------------------------------------------------------------------- Net Interest Income $ (42) $ 1,077 $ 1,035 ========================================================================================================
(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. 13 14 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE V - COMPARISON OF NONINTEREST INCOME (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 Service charges on deposit accounts $ 626 $ 555 Service charges and fees 127 119 Trust and financial management revenue 814 825 Insurance commissions, fees and premiums 253 174 Increase in cash surrender value of life insurance 451 - Fees related to credit card operation 276 614 Other operating income 165 121 - ----------------------------------------------------------------------------------------- Total other operating income, before realized gains on securities, net 2,712 2,408 Realized gains on securities, net 1,197 337 - ----------------------------------------------------------------------------------------- Total Other Income $ 3,909 $ 2,745 =========================================================================================
Total noninterest income increased $1,164,000, or 42.4%, 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 VI- COMPARISON OF NONINTEREST EXPENSE (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 Salaries and wages $ 4,070 $ 3,677 Pensions and other employee benefits 1,103 936 Occupancy expense, net 509 459 Furniture and equipment expense 698 557 Expenses related to credit card operation 138 284 Pennsylvania shares tax 394 380 Other operating expense 2,266 2,032 - --------------------------------------------------------------------------------------- Total Other Expense $ 9,178 $ 8,325 ========================================================================================
Salaries and wages increased $393,000, or 10.7%, 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 $167,000, or 17.8%, 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. 14 15 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Furniture and equipment expense increased $141,000, or 25.3%, 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. 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. Other expense increased $234,000, or 11.5%, in 2001 compared to 2000. 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 $27,000, to $157,000, 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. - Telephone expenses related to data lines increased $27,000, to $122,000, 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. - Public relations expense increased $24,000, to $113,000, 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. - Employee meetings, educational seminars and other education-related expenses increased $23,000, to $199,000, in 2001. Included in this category are costs associated with trust and financial management employees' efforts to obtain required licenses, as well as costs related to employees' attendance at conferences and courses. 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 balance sheet, available-for-sale securities increased $75,677,000, or 21.8%, from December 31, 2000 to June 30, 2001. Table VII provides a breakdown of securities at June 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 $54,637,000, and (2) long-term borrowings of $70,000,000. The terms of the long-term borrowings range from 2002 to 2011, with $45,000,000 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 $15,879,000, or 4.9%, at June 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 $20,237,000, or 3.8%, at June 30, 2001 compared to December 31, 2000. The most significant change within types of deposits was in CDs, which increased $23,345,000. Much of the increase in CDs was from new and larger accounts held by governmental entities and school districts. 15 16 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE VII - INVESTMENT SECURITIES (IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000 AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ 2,506 $ 2,557 $ 2,509 $ 2,533 Obligations of other U.S. Government agencies 118,620 117,210 132,713 128,883 Obligations of states and political subdivisions 78,641 79,482 68,236 69,065 Other securities 36,788 36,086 22,111 20,964 Mortgage-backed securities 151,643 151,265 91,708 91,240 - -------------------------------------------------------------------------------------------------------------- Total debt securities 388,198 386,600 317,277 312,685 Marketable equity securities 28,547 35,824 29,346 34,062 - -------------------------------------------------------------------------------------------------------------- Total $ 416,745 $ 422,424 $ 346,623 $346,747 ============================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 743 $ 733 $ 707 $ 708 Obligations of other U.S. Government agencies 696 701 946 947 Mortgage-backed securities 200 204 258 259 - -------------------------------------------------------------------------------------------------------------- Total $ 1,639 $ 1,638 $ 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 $2,364,000 at June 30, 2001 from $1,983,000 at December 31, 2000. The unallocated balance at June 30, 2001 is consistent with the March 31, 2001 unallocated allowance of $2,331,000. 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 June 30, 2001, these adverse changes had not yet significantly increased levels of delinquent loans. The provision for loan losses decreased to $300,000 in 2001 from $376,000 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. 16 17 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VIII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS) SIX-MONTHS ENDED JUNE 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 123 272 81 257 246 157 Installment loans 44 77 138 144 230 240 Credit cards and related plans 103 214 192 264 305 201 Commercial and other loans -- 53 219 301 3 74 - --------------------------------------------------------------------------------------------------- Total charge-offs 270 616 630 966 784 672 - --------------------------------------------------------------------------------------------------- Recoveries: Real estate loans 5 26 81 12 21 22 Installment loans 13 23 60 43 64 53 Credit cards and related plans 15 28 30 40 30 38 Commercial and other loans 32 23 10 15 9 55 - --------------------------------------------------------------------------------------------------- Total recoveries 65 100 181 110 124 168 - --------------------------------------------------------------------------------------------------- Net charge-offs 205 516 449 856 660 504 Additions charged to operations 300 676 760 763 797 701 - --------------------------------------------------------------------------------------------------- Balance at end of period $5,386 $5,291 $5,131 $4,820 $4,913 $4,776 =====================================================================================================
TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE (IN THOUSANDS) AT JUNE 30, AT DECEMBER 31: 2001 2000 1999 1998 1997 1996 Commercial $1,589 $1,612 $2,081 $ 650 $ 625 $ 630 Noncommercial mortgages 830 952 834 97 350 58 Impaired loans 169 273 609 290 274 113 Consumer 434 471 437 702 375 303 All other commitments -- -- 150 202 343 369 Unallocated 2,364 1,983 1,020 2,879 2,946 3,303 - --------------------------------------------------------------------------------------------------- Total Allowance $5,386 $5,291 $5,131 $4,820 $4,913 $4,776 =====================================================================================================
17 18 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE X - LOANS BY TYPE
(IN THOUSANDS) JUNE 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, 2001 2000 1999 1998 1997 1996 Real estate - construction $ 1,989 $ 452 $ 649 $ 1,004 $ 406 $ 1,166 Real estate - mortgage 275,365 263,325 247,604 230,815 219,952 213,957 Consumer 26,925 28,141 29,140 30,924 33,094 33,420 Agriculture 2,155 1,983 1,899 1,930 2,424 2,603 Commercial 23,384 20,776 18,050 17,630 17,176 15,751 Other 916 948 1,025 1,062 6,260 5,014 Political subdivisions 13,367 12,462 12,332 7,449 5,895 6,464 Lease receivables 178 218 222 218 256 264 - --------------------------------------------------------------------------------------------------------------------------- Total 344,279 328,305 310,921 291,032 285,463 278,639 Less: unearned discount -- -- (29) (29) (37) (42) - --------------------------------------------------------------------------------------------------------------------------- 344,279 328,305 310,892 291,003 285,426 278,597 Less: allowance for loan losses (5,386) (5,291) (5,131) (4,820) (4,913) (4,776) - --------------------------------------------------------------------------------------------------------------------------- Loans, net $ 338,893 $ 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 June 30, 2001, the Corporation had unused borrowing availability with correspondent banks and the Federal Home Loan Bank of Pittsburgh totaling approximately $242,054,000. 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 June 30, 2001: TABLE XI - CAPITAL RATIOS (In thousands)
CITIZENS & NORTHERN REGULATORY STANDARDS CORPORATION WELL MINIMUM (ACTUAL) CAPITALIZED STANDARD - ------------------------------------------------------------------------------------------------------------- Total capital to risk-weighted assets 22.53% 10.00% 8.00% Tier 1 capital to risk-weighted assets 20.57% 6.00% 4.00% Tier 1 capital to average total assets 11.76% 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. 18 19 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. 19 20 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 June 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 19.1% over the next 12 months, and the market value of portfolio equity would decrease 27.91%. 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. 20 21 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE XII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
PERIOD ENDING JUNE 30, 2002 (IN THOUSANDS) PLUS 200 MINUS 200 MOST LIKELY BASIS BASIS FORECAST POINTS POINTS AMOUNT AMOUNT % CHANGE AMOUNT % CHANGE Interest income: Securities $25,472 $26,183 2.79 $24,654 (3.21) Interest-bearing due from banks and federal funds sold 258 330 27.91 201 (22.09) Loans 30,198 31,502 4.32 28,148 (6.79) - --------------------------------------------------------------------------------------------------------------- Total interest income 55,928 58,015 3.73 53,003 (5.23) - --------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 21,273 27,757 30.48 17,310 (18.63) Interest on borrowed funds 6,434 7,428 15.45 5,853 (9.03) - --------------------------------------------------------------------------------------------------------------- Total interest expense 27,707 35,185 26.99 23,163 (16.40) - --------------------------------------------------------------------------------------------------------------- Net Interest Income $28,221 $22,830 (19.10) $29,840 5.74 =============================================================================================================== Market Value of Portfolio Equity at June 30, 2001 $83,859 $60,452 (27.91) $98,212 17.12 ===============================================================================================================
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 June 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 JUNE 30, 2001 Banks and bank holding companies $ 21,542 $ 28,819 $ (2,882) $ (5,764) Federal Home Loan Bank 7,005 7,005 (701) (1,401) - ------------------------------------------------------------------------------------------- Total $ 28,547 $ 35,824 $ (3,583) $ (7,165) ==========================================================================================
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 (725) (1,450) 7,248 7,248 - ------------------------------------------------------------------------------------------- Total $ 29,346 $ 34,062 $ (3,406) $ (6,812) ==========================================================================================
21 22 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 2nd quarter 2001. 22 23 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 AUGUST 13, 2001 By: CRAIG G. LITCHFIELD /S/ - --------------- ----------------------- Date Chairman, President and Chief Executive Officer AUGUST 13, 2001 By: MARK A. HUGHES /S/ - --------------- ------------------ Date Treasurer and Principal Accounting Officer 23 -----END PRIVACY-ENHANCED MESSAGE-----