-----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, OFjtUrxgCIFjlzWRvDe7aGi1TiRoE6Kq5WXNj3RhUaD2iPIP45Z92qJfCa9ml0vV s0smBQ3/Cf94h82MoGwRXQ== 0000950152-03-005533.txt : 20030515 0000950152-03-005533.hdr.sgml : 20030515 20030515090833 ACCESSION NUMBER: 0000950152-03-005533 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03701161 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 l00351ae10vq.txt CITIZENS & NORTHERN CORPORATION 10-Q/3-31-03 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, 2003 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] 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) 8,007,504 Shares Outstanding May 13, 2003 CITIZENS & NORTHERN CORPORATION Index Part I. Financial Information Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 2003 and December 31, 2002...................................... Page 3 Consolidated Statement of Income - Three Months Ended March 31, 2003 and 2002................................ Page 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 2003 and 2002.......................... Page 5 Notes to Consolidated Financial Statements............. Pages 6 through 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. Pages 8 through 22 Item 3. Information About Market Risk................. Pages 22 through 24 Item 4. Controls and Procedures....................... Page 25 Part II. Other Information............................ Page 25 Signatures............................................. Page 26 Certifications......................................... Pages 27 and 28 Exhibit 99.1 Certifications Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.................... Page 29
2 CITIZENS & NORTHERN CORPORATION - FORM 10-Q ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET MARCH 31, DECEMBER 31, (In Thousands Except Share Data) 2003 2002 ---------- ------------ (UNAUDITED) (NOTE) ASSETS Cash and due from banks: Noninterest-bearing ....................................................... $ 16,726 $ 14,185 Interest-bearing .......................................................... 4,847 715 - ---------------------------------------------------------------------------------------------------------------- Total cash and cash equivalents ...................................... 21,573 14,900 Available-for-sale securities .................................................. 495,028 512,175 Held-to-maturity securities .................................................... 595 707 Loans, net ..................................................................... 460,425 445,356 Bank-owned life insurance ...................................................... 16,952 16,758 Accrued interest receivable .................................................... 5,966 5,960 Bank premises and equipment, net ............................................... 10,414 10,333 Foreclosed assets held for sale ................................................ 52 56 Other assets ................................................................... 13,682 12,523 - ---------------------------------------------------------------------------------------------------------------- TOTAL ASSETS ................................................................... $ 1,024,687 $ 1,018,768 ================================================================================================================ LIABILITIES Deposits: Noninterest-bearing ....................................................... $ 70,670 $ 70,824 Interest-bearing .......................................................... 577,687 569,480 - ---------------------------------------------------------------------------------------------------------------- Total deposits ....................................................... 648,357 640,304 Dividends payable .............................................................. 1,681 1,586 Short-term borrowings .......................................................... 22,613 43,635 Long-term borrowings ........................................................... 221,208 208,214 Accrued interest and other liabilities ......................................... 11,783 9,192 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES .............................................................. 905,642 902,931 - ---------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock, par value $1.00 per share; authorized 10,000,000 shares; issued 8,226,608 in 2003 and 8,146,532 in 2002 .................... 5,484 5,431 Stock dividend distributable ................................................... -- 1,639 Paid-in capital ................................................................ 22,773 21,153 Retained earnings .............................................................. 79,994 77,584 - ---------------------------------------------------------------------------------------------------------------- Total ..................................................................... 108,251 105,807 Accumulated other comprehensive income ......................................... 13,103 12,146 Unamortized stock compensation ................................................. (130) (49) Treasury stock, at cost: 222,122 shares at March 31, 2003 .......................................... (2,179) 218,123 shares at December 31, 2002 ....................................... (2,067) - ---------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY ..................................................... 119,045 115,837 - ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 1,024,687 $ 1,018,768 ================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all the information and notes required by generally accepted accounting principles for complete financial statements. 3 CITIZENS & NORTHERN CORPORATION - FORM 10-Q CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) 3 MONTHS ENDED ------------------------ MARCH 31, MARCH 31, 2003 2002 --------- --------- INTEREST INCOME Interest and fees on loans ................................ $7,862 $7,257 Interest on balances with depository institutions ......... 2 8 Interest on loans to political subdivisions ............... 167 150 Interest on federal funds sold ............................ 3 4 Income from available-for-sale and held-to-maturity securities: Taxable ................................................. 3,946 4,664 Tax-exempt .............................................. 1,742 1,311 Dividends ............................................... 208 248 - ----------------------------------------------------------------------------------------- Total interest and dividend income ........................ 13,930 13,642 - ----------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on deposits ...................................... 3,916 4,257 Interest on short-term borrowings ......................... 142 272 Interest on long-term borrowings .......................... 2,185 1,787 - ----------------------------------------------------------------------------------------- Total interest expense .................................... 6,243 6,316 - ----------------------------------------------------------------------------------------- Interest margin ........................................... 7,687 7,326 Provision for loan losses ................................. 350 180 - ----------------------------------------------------------------------------------------- Interest margin after provision for loan losses ........... 7,337 7,146 - ----------------------------------------------------------------------------------------- OTHER INCOME Service charges on deposit accounts ....................... 409 384 Service charges and fees .................................. 69 65 Trust and financial management revenue .................... 378 439 Insurance commissions, fees and premiums .................. 80 215 Increase in cash surrender value of life insurance ........ 194 224 Fees related to credit card operation ..................... 162 130 Other operating income .................................... 248 230 - ----------------------------------------------------------------------------------------- Total other income before realized gains on securities, net 1,540 1,687 Realized gains on securities, net ......................... 1,721 1,226 - ----------------------------------------------------------------------------------------- Total other income ........................................ 3,261 2,913 - ----------------------------------------------------------------------------------------- OTHER EXPENSES Salaries and wages ........................................ 2,448 2,238 Pensions and other employee benefits ...................... 864 615 Occupancy expense, net .................................... 340 278 Furniture and equipment expense ........................... 332 447 Pennsylvania shares tax ................................... 196 183 Other operating expense ................................... 1,352 1,345 - ----------------------------------------------------------------------------------------- Total other expenses ...................................... 5,532 5,106 - ----------------------------------------------------------------------------------------- Income before income tax provision ........................ 5,066 4,953 Income tax provision ...................................... 994 1,115 - ----------------------------------------------------------------------------------------- NET INCOME ................................................ $4,072 $3,838 ========================================================================================= PER SHARE DATA: Net income - basic ........................................ $0.51 $0.48 Net income - diluted ...................................... $0.51 $0.48 - ----------------------------------------------------------------------------------------- Dividend per share ........................................ $0.21 $0.1867 - ----------------------------------------------------------------------------------------- Number of shares used in computation - basic .............. 8,007,627 8,015,238 Number of shares used in computation - diluted ............ 8,036,342 8,028,722
The accompanying notes are an integral part of these consolidated financial statements. 4 CITIZENS & NORTHERN CORPORATION - FORM 10-Q CONSOLIDATED STATEMENT OF CASH FLOWS
3 MONTHS ENDED (IN THOUSANDS) (UNAUDITED) ------------------------ MARCH 31, MARCH 31, 2003 2002 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .......................................................... $ 4,072 $ 3,838 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ......................................... 350 180 Realized gains on securities, net ................................. (1,721) (1,226) Gain on sale of foreclosed assets, net ............................ (28) (8) Depreciation expense .............................................. 295 367 Accretion and amortization, net ................................... 313 (101) Increase in cash surrender value of life insurance ................ (194) (224) Amortization of restricted stock .................................. 26 21 Increase in accrued interest receivable and other assets .......... (962) (1,334) Increase in accrued interest payable and other liabilities ........ 2,137 1,167 - ----------------------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities ...................... 4,288 2,680 - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of held-to-maturity securities ............... 112 268 Proceeds from sales of available-for-sale securities ................ 26,566 4,393 Proceeds from calls and maturities of available-for-sale securities.. 45,219 26,408 Purchase of available-for-sale securities ........................... (51,780) (77,838) Purchase of Federal Home Loan Bank of Pittsburgh stock .............. (225) (710) Net increase in loans ............................................... (15,458) (11,829) Purchase of premises and equipment .................................. (376) (620) Proceeds from sale of foreclosed assets ............................. 71 59 - ----------------------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities ............ 4,129 (59,869) - ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits ............................................ 8,053 15,699 Net decrease in short-term borrowings ............................... (21,022) (20,179) Proceeds from long-term borrowings .................................. 14,800 60,153 Repayments of long-term borrowings .................................. (1,806) (6) Purchase of treasury stock .......................................... (174) (32) Sale of treasury stock .............................................. 19 13 Dividends paid ...................................................... (1,614) (1,492) - ----------------------------------------------------------------------------------------------------------- Net Cash (Used in) Provided by Financing Activities ............ (1,744) 54,156 - ----------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... 6,673 (3,033) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ........................... 14,900 16,036 - ----------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD ............................... $ 21,573 $ 13,003 =========================================================================================================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Assets acquired through foreclosure of real estate loans ............ $ 39 $ 191 Interest paid ....................................................... $ 4,960 $ 5,212 Income taxes paid ................................................... $ 960 $ 520
The accompanying notes are an integral part of these consolidated financial statements. 5 CITIZENS & NORTHERN CORPORATION - FORM 10-Q NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF INTERIM PRESENTATION The financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2002, 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. All data regarding number of shares of common stock and per share information have been restated to reflect the 3-for-2 split issued April 21, 2003. Results reported for the three months ended March 31, 2003 might not be indicative of the results for the year ending December 31, 2003. 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 splits and 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. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus 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, 2003 Earnings per share - basic .................................................... $ 4,072,000 8,007,627 $ 0.51 Dilutive effect of potential common stock arising from stock options: Exercise of outstanding stock options ....................................... 182,635 Hypothetical share repurchase at $20.81 ..................................... (153,920) - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share - diluted .................................................. $ 4,072,000 8,036,342 $ 0.51 ============================================================================================================================= QUARTER ENDED MARCH 31, 2002 Earnings per share - basic .................................................... $ 3,838,000 8,015,238 $ 0.48 Dilutive effect of potential common stock arising from stock options: Exercise of outstanding stock options ....................................... 141,152 Hypothetical share repurchase at $18.09 ..................................... (127,668) - ----------------------------------------------------------------------------------------------------------------------------- Earnings per share - diluted .................................................. $ 3,838,000 8,028,722 $ 0.48 =============================================================================================================================
6 CITIZENS & NORTHERN CORPORATION - FORM 10-Q 3. STOCK COMPENSATION PLANS As permitted by Accounting Principles Board Opinion No. 25, the Corporation uses the intrinsic value method of accounting for stock compensation plans. Utilizing the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock as of the grant date (or other measurement date) over the amount an employee or director must pay to acquire the stock. Stock options issued under the Corporation's stock option plans have no intrinsic value, and accordingly, no compensation cost is recorded for them. The Corporation has also made awards of restricted stock. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation," to stock options.
(NET INCOME IN THOUSANDS) 3 MONTHS ENDED MARCH 31, ------------------------- 2003 2002 -------- --------- Net income, as reported ................... $ 4,072 $ 3,838 Deduct: Total stock option compensation expense determined under fair value method for all awards, net of tax effects (59) (89) - ------------------------------------------------------------------------- Pro forma net income ...................... $ 4,013 $ 3,749 ========================================================================= Earnings per share-basic: As reported ............................. $ 0.51 $ 0.48 Pro forma ............................... $ 0.50 $ 0.47 Earnings per share-diluted: As reported ............................. $ 0.51 $ 0.48 Pro forma ............................... $ 0.50 $ 0.47
4. 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. 7 CITIZENS & NORTHERN CORPORATION - FORM 10-Q Comprehensive income is calculated as follows:
QUARTERS ENDED MARCH 31, -------------------- (IN THOUSANDS) 2003 2002 ------- ------- Net income ....................................................... $ 4,072 $ 3,838 Unrealized holding gains (losses) on available-for-sale securities 3,171 (2,257) Less: Reclassification adjustment for gains realized in income ... (1,721) (1,226) - -------------------------------------------------------------------------------------------- Other comprehensive income (loss) before income tax .............. 1,450 (3,483) Income tax related to other comprehensive income/loss ............ (493) 1,184 - -------------------------------------------------------------------------------------------- Other comprehensive income (loss) ................................ 957 (2,299) - -------------------------------------------------------------------------------------------- Comprehensive income ............................................. $ 5,029 $ 1,539 ============================================================================================
5. CONTINGENCIES In the normal course of business, the Corporation may be subject to pending and threatened lawsuits in which claims for monetary damages could be asserted. In management's opinion, the Corporation's financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings. 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, and are generally not historical facts, are identifiable by the use of words such as, "believe", "expect", "intend", "anticipate", "estimate", "project", and similar expressions. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management's control and could cause results to differ materially from those currently anticipated. Factors which could have a material adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following: o changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates o changes in general economic conditions o legislative or regulatory changes o downturn in demand for loan, deposit and other financial services in the Corporation's market area o increased competition from other banks and non-bank providers of financial services o technological changes and increased technology-related costs o changes in accounting principles, or the application of generally accepted accounting principles. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. 8 CITIZENS & NORTHERN CORPORATION - FORM 10-Q REFERENCES TO 2003 AND 2002 Unless otherwise noted, all references to "2003" in the following discussion of operating results are intended to mean the three months ended March 31, 2003, and similarly, references to "2002" are intended to mean the three months ended March 31, 2002. EARNINGS OVERVIEW Net income for the first quarter of 2003 was $4,072,000, or $.51 per share - basic and diluted. This represents an increase of 6.25% in net income per share over 2002. Return on average assets was 1.62% in 2003, down from 1.74% in 2002. Return on average equity decreased 8.35%, to 13.83% in 2003 from 15.09% in 2002. The most significant income statement changes between 2003 and 2002 were as follows: o Net realized gains on securities were $1,721,000 in the first quarter of 2003, compared to $1,226,000 in the first quarter of 2002. In both years, the gains were mainly from sales of bank stocks. These sales resulted from circumstances specific to each underlying company, and the proceeds have been reinvested in other bank stocks. Total gains from sales of bank stocks amounted to $1,286,000 in the first quarter of 2003 and $1,107,000 in the first quarter of 2002. o The interest margin increased ($361,000, or 4.9%), to $7,687,000 in the first quarter of 2003 from $7,326,000 in the first quarter of 2002. The Corporation has experienced significant growth in loans, and has identified opportunities to borrow funds and invest the proceeds in securities at positive spreads. Also, average interest rates on deposits and borrowed funds have been substantially lower in the first quarter of 2003. Changes in the net interest margin are discussed in more detail later in Management's Discussion and Analysis. o Other (noninterest) expenses increased $426,000, or 8.3%, in the first quarter of 2003 compared to 2002. The increase reflects increases in payroll costs and employee benefits. As described in more detail in the "Noninterest Expense" section of Management's Discussion and Analysis, these cost increases reflect a higher number of employees, as well as increases in costs related to employee health insurance and the defined benefit pension plan. o The income tax provision decreased to $994,000 in the first quarter of 2003 from $1,115,000 in the first quarter of 2002. While pre-tax income has increased, the Corporation's effective tax rate fell to 19.6% in 2003 from 22.5% in 2002. This lower effective tax rate resulted mainly from management's decision to increase the weighting of tax-exempt obligations of states and political subdivisions, as a percentage of total assets. 9 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE I - QUARTERLY FINANCIAL DATA
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, (IN THOUSANDS) 2003 2002 2002 2002 2002 -------- -------- --------- -------- -------- Interest income ............................... $13,930 $14,445 $14,675 $14,523 $13,642 Interest expense .............................. 6,243 6,579 6,675 6,745 6,316 - ----------------------------------------------------------------------------------------------------------- Interest margin ............................... 7,687 7,866 8,000 7,778 7,326 Provision for loan losses ..................... 350 300 280 180 180 - ----------------------------------------------------------------------------------------------------------- Interest margin after provision for loan losses 7,337 7,566 7,720 7,598 7,146 Other income .................................. 1,540 1,614 1,642 1,681 1,687 Securities gains .............................. 1,721 392 489 781 1,226 Other expenses ................................ 5,532 5,185 5,310 5,248 5,106 - ----------------------------------------------------------------------------------------------------------- Income before income tax provision ............ 5,066 4,387 4,541 4,812 4,953 Income tax provision .......................... 994 796 831 992 1,115 - ----------------------------------------------------------------------------------------------------------- Net income .................................... $ 4,072 $ 3,591 $ 3,710 $ 3,820 $ 3,838 =========================================================================================================== Net income per share - basic .................. $ 0.51 $ 0.45 $ 0.46 $ 0.48 $ 0.48 =========================================================================================================== Net income per share - diluted ................ $ 0.51 $ 0.45 $ 0.46 $ 0.48 $ 0.48 ===========================================================================================================
The number of shares used in calculating net income per share for each quarter presented in Table I reflects the retroactive effect of stock splits and dividends. PROSPECTS FOR THE REMAINDER OF 2003 Management believes earnings prospects for the remainder of 2003 continue to be very good. Net loans are up 19.5% as of March 31, 2003 compared to one year earlier. The Corporation's major concentration continues to be real estate secured loans, with significant growth over the last 12 months in both residential and commercial loans outstanding. Deposits have also grown substantially (up 9.5% as of March 31, 2003 compared to one year earlier), and there continues to be significant customer demand in recent months. Although the Corporation's rates paid on deposits have fallen over the last several months, rates have remained relatively high compared with rates paid by many bank and non-bank competitors. A key element of the Corporation's earnings over the last 3 quarters of 2003 is the interest margin. As you can see in Table I, the interest margin has shrunk slightly in each of the last 2 quarters, to $7,687,000 in the first quarter of 2003 from $7,866,000 in the 4th quarter 2002 and $8,000,000 in the third quarter of 2002. With interest rates at or near forty-year lows, interest-earning assets have been repricing faster than interest-bearing liabilities. In the current interest rate environment, it is a challenge to maintain or grow the interest margin while limiting interest rate risk to a prudent level. The Corporation's interest rate risk is discussed in more detail in Item 3 of Form 10-Q. 10 CITIZENS & NORTHERN CORPORATION - FORM 10-Q The other major variable that could affect 2003 earnings is securities gains and losses. The Corporation's management makes decisions regarding the sales of securities based on a variety of factors, with an overall goal of maximizing portfolio return over a long-term horizon. Therefore, it is impossible to predict, with any degree of precision, the amounts of securities gains and losses that may be realized over the remainder of 2003. CRITICAL ACCOUNTING ESTIMATES The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that the allowance for loan losses is adequate and reasonable. The Corporation's methodology for determining the allowance for loan losses is described in a separate section later in Management's Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore, calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. Further, in 2003, the American Institute of Certified Public Accountants is expected to issue an exposure draft of a statement of position that would establish detailed implementation guidance for calculating the allowance for loan losses. This statement of position, if it is approved, is expected to call for implementation of its provisions in 2004. Another material estimate is the calculation of fair values of the Corporation's debt securities. The Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing these fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. Accordingly, when selling debt securities, management typically obtains price quotes from more than one source. The large majority of the Corporation's securities are classified as available-for-sale. Accordingly, these securities are carried at fair value on the consolidated balance sheet, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (included in stockholders' equity). 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 for the first quarter of 2003 and 2002. 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 $8,575,000 in the first quarter 2003, an increase of $577,000, or 7.2%, over the first quarter 2002. As reflected in Table IV, the increase in net interest margin was caused by the growth in volume. Increased interest income from higher volumes of earning assets exceeded increases in interest expense attributable to higher volumes of interest-bearing liabilities by $1,199,000 in the first quarter 2003 compared to the first quarter 2002. Table IV also shows that interest rate changes had the effect of decreasing net interest income $622,000 in the first quarter of 2003 over the first quarter 2002. As presented in Table III, the "Interest Rate Spread" (excess of average rate of return on interest-bearing assets over average cost of funds on interest-bearing liabilities) shrunk to 3.30% for the first quarter 2003, from 3.38% for the year ended December 31, 2002 and 3.46% for the first quarter 2002. 11 CITIZENS & NORTHERN CORPORATION - FORM 10-Q INTEREST INCOME AND EARNING ASSETS Interest income increased 3.5% to $14,818,000 in the first quarter 2003 from $14,314,000 in the first quarter 2002. Income from available-for-sale securities decreased $108,000, or 1.6% while interest from loans increased $630,000 or 8.4%. Overall, the majority of the increase in interest income resulted from higher volumes of loans, which more than offset the effect of lower interest rates. As indicated in Table III, average available-for-sale securities in the first quarter 2003 amounted to $477,721,000, an increase of 8.9% over the first quarter 2002. In total, available-for-sale securities grew because management was able to identify opportunities to borrow funds and invest the proceeds in securities at a positive spread in 2002. These opportunities were available because of the "steep yield curve" (longer-term interest rates much higher than shorter-term rates) that existed throughout most of 2002 and the first 3 months of 2003. The average rate of return on available-for-sale securities was 5.69% for first quarter 2003, considerably lower than the 6.29% level in the first quarter 2002. Table III also shows changes in the composition of the available-for-sale securities portfolio. The average balance of U.S. Government agency securities fell to 13% of the average balance of the total portfolio in the first quarter of 2003 from 18% in the first 3 months of 2002. The average balance of mortgage-backed securities has also fallen to 41% of the total portfolio in the first quarter of 2003 from 47% in the first 3 months of 2002. In 2002 and the first quarter 2003, as a result of declining interest rates, substantial amounts of U.S. Government agency securities were called. This rate environment also led to increased prepayments on mortgage-backed securities. The Corporation reinvested much of these proceeds in obligations of state and political subdivisions (municipal bonds). Municipal bonds were a larger portion of the portfolio in the first quarter 2003 than in the first quarter 2002. The average balance of municipal bonds grew to $133,468,000, or 28% of the portfolio, in the first quarter 2003 from $98,853,000, or 23% of the portfolio, in the first 3 months of 2002. On a taxable equivalent basis, municipal bonds are the highest yielding category of available-for-sale security. The Corporation determines the levels of its municipal bond holdings based on income tax planning and other considerations. Other securities consist of corporate obligations, mainly "Trust Preferred Securities" issued by financial institutions. Trust Preferred Securities are long-term obligations (usually 20-40 year maturities, often callable at the issuer's option after 5-10 years) which bear interest at fixed or variable rates. The average balance of other securities increased to $60,702,000 in the first quarter 2003 from $33,435,000 for the first 3 months of 2002, primarily as a result of purchases of Trust Preferred Securities. The average balance of gross loans increased 20.3% in the first quarter 2003 over the first 3 months of 2002, to $458,392,000 from $380,925,000. The largest area of growth was real estate secured loans, with substantial increases in both residential and commercial mortgages. The average rate of return on loans fell to 7.17% in the first quarter 2003 from 7.96% in the first 3 months of 2002, due to lower market rates. The Corporation experienced a great deal of refinancing and rate modification activity in 2002 and early 2003, which has negatively impacted loan yields, and probably will continue to impact them for the next few years. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense fell $73,000, or 1.1%, to $6,243,000 in the first quarter of 2003 from $6,316,000 in the first quarter of 2002. Overall, the impact of lower interest rates was slightly more than the impact of higher volumes of interest-bearing liabilities in the first quarter 2003 compared to the first quarter 2002. In Table IV, you can see the impact of lower interest rates on the Corporation's major categories of interest-bearing deposits - principally, CDs and money market accounts. Table IV also shows that interest expense from other borrowed funds increased in the first quarter 2003 by $267,000 over the first quarter 2002. This increase was attributable to higher average balances, related to borrowings in 2002, used to purchase available-for-sale securities, as discussed earlier. As you can calculate from Table III, total average deposits (interest-bearing and noninterest-bearing) increased to $640,500,000 in the first three months of 2003 from $581,290,000 in the first three months of 2002. This represents an increase of 10.2%. Of the increase in average deposits, the largest growth categories were IRA's (growth in average balance of $15,893,000, or 18.5%), money market accounts ($24,501,000, or 15.0%), demand deposits ($5,572,000, or 9.3%) and CD's ($12,135,000, or 6.6%). Table III also reflects the downward trend in interest rates incurred on liabilities, as the overall cost of funds on interest-bearing liabilities fell to 3.10% for the first quarter 2003, from 3.46% for the year ended December 31, 2002 and 3.59% for the first quarter 2002. 12 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
THREE MONTHS ENDED MARCH 31, ------------------ INCREASE/ (IN THOUSANDS) 2003 2002 (DECREASE) ------ ------- ---------- INTEREST INCOME Available-for-sale securities: U.S. Treasury securities ............................................................ $ - $ 37 $ (37) Securities of other U.S. Government agencies and corporations ....................... 796 1,270 (474) Mortgage-backed securities .......................................................... 2,272 2,747 (475) Obligations of states and political subdivisions .................................... 2,553 1,914 639 Equity securities ................................................................... 208 248 (40) Other securities .................................................................... 868 589 279 - ------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities ............................................ 6,697 6,805 (108) - ------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities ............................................................ 4 11 (7) Securities of other U.S. Government agencies and corporations ....................... 5 7 (2) Mortgage-backed securities .......................................................... 1 3 (2) - ------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities .............................................. 10 21 (11) - ------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks .......................................................... 2 7 (5) Federal funds sold ....................................................................... 3 5 (2) Loans: Real estate loans ................................................................... 6,555 5,995 560 Consumer ............................................................................ 737 736 1 Agricultural ........................................................................ 49 47 2 Commercial/industrial ............................................................... 502 462 40 Other ............................................................................... 17 14 3 Political subdivisions .............................................................. 244 219 25 Leases .............................................................................. 2 3 (1) - ------------------------------------------------------------------------------------------------------------------------------- Total loans .................................................................... 8,106 7,476 630 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Income .................................................................... 14,818 14,314 504 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest checking ........................................................................ 75 106 (31) Money market ............................................................................. 799 958 (159) Savings .................................................................................. 127 130 (3) Certificates of deposit .................................................................. 1,668 1,998 (330) Individual Retirement Accounts ........................................................... 1,245 1,057 188 Other time deposits ...................................................................... 2 8 (6) Federal funds purchased .................................................................. 15 14 1 Other borrowed funds ..................................................................... 2,312 2,045 267 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense ................................................................... 6,243 6,316 (73) - ------------------------------------------------------------------------------------------------------------------------------- Net Interest Income ...................................................................... $ 8,575 $ 7,998 $ 577 ===============================================================================================================================
Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation's marginal federal income tax rate of 34%. 13 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(DOLLARS IN THOUSANDS) 3 MONTHS YEAR 3 MONTHS ENDED RATE OF ENDED RATE OF ENDED RATE OF 3/31/2003 RETURN/ 12/31/2002 RETURN/ 3/31/2002 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 ....................... $ -- 0.00% $ 1,241 6.04% $ 2,502 6.00% Securities of other U.S. Government agencies and corporations ................................. 63,936 5.05% 75,646 6.25% 78,239 6.58% Mortgage-backed securities ..................... 194,678 4.73% 209,539 5.30% 205,440 5.42% Obligations of states and political subdivisions 133,468 7.76% 113,540 7.61% 98,853 7.85% Equity securities .............................. 24,937 3.38% 21,858 5.25% 20,182 4.98% Other securities ............................... 60,702 5.80% 43,826 6.79% 33,435 7.14% - ---------------------------------------------------------------------------------------------------------------------------------- Total available-for-sale securities ....... 477,721 5.69% 465,650 6.16% 438,651 6.29% - ---------------------------------------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities ....................... 321 5.05% 511 5.28% 730 6.11% Securities of other U.S. Government agencies and corporations ................................. 272 7.46% 331 6.04% 434 6.54% Mortgage-backed securities ..................... 82 4.95% 131 6.87% 163 7.46% - ---------------------------------------------------------------------------------------------------------------------------------- Total held-to-maturity securities ......... 675 6.01% 973 5.76% 1,327 6.42% - ---------------------------------------------------------------------------------------------------------------------------------- Interest-bearing due from banks ..................... 1,849 0.44% 1,444 1.18% 1,901 1.49% Federal funds sold .................................. 982 1.24% 2,698 1.56% 1,069 1.90% Loans: Real estate loans .............................. 375,802 7.07% 338,133 7.53% 311,233 7.81% Consumer ....................................... 32,471 9.20% 29,720 10.01% 28,974 10.30% Agricultural ................................... 2,782 7.14% 2,556 7.79% 2,356 8.09% Commercial/industrial .......................... 32,030 6.36% 28,182 6.86% 26,188 7.15% Other .......................................... 1,056 6.53% 1,028 6.71% 864 6.57% Political subdivisions ......................... 14,159 6.99% 10,929 7.85% 11,169 7.95% Leases ......................................... 92 8.82% 122 9.02% 141 8.63% - ---------------------------------------------------------------------------------------------------------------------------------- Total loans ............................... 458,392 7.17% 410,670 7.67% 380,925 7.96% - ---------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets ...................... 939,619 6.40% 881,435 6.84% 823,873 7.05% Cash ................................................ 12,398 13,318 12,769 Unrealized gain/loss on securities .................. 19,271 12,462 9,290 Allowance for loan losses ........................... (5,864) (5,453) (5,326) Bank premises and equipment ......................... 10,444 10,246 10,162 Other assets ........................................ 31,541 30,993 31,082 - ----------------------------------------------------------------------------------------------------------------------- Total Assets ........................................ $ 1,007,409 $ 943,001 $ 881,850 ======================================================================================================================= INTEREST-BEARING LIABILITIES Interest checking ................................... $ 35,707 0.85% $ 37,984 1.12% $ 37,112 1.16% Money market ........................................ 187,697 1.73% 171,767 2.31% 163,196 2.38% Savings ............................................. 51,633 1.00% 49,779 1.01% 49,064 1.07% Certificates of deposit ............................. 196,532 3.44% 195,099 3.97% 184,397 4.39% Individual Retirement Accounts ...................... 101,954 4.95% 90,856 4.98% 86,061 4.98% Other time deposits ................................. 1,479 0.55% 1,814 1.98% 1,534 2.12% Federal funds purchased ............................. 4,229 1.44% 2,347 1.87% 2,746 2.07% Other borrowed funds ................................ 237,913 3.94% 211,092 4.29% 188,669 4.40% - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities ........ 817,144 3.10% 760,738 3.46% 712,779 3.59% Demand deposits ..................................... 65,498 66,093 59,926 Other liabilities ................................... 6,965 8,575 7,399 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities ................................... 889,607 835,406 780,104 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' equity, excluding other comprehensive income/loss ....................................... 105,055 99,361 95,617 Other comprehensive income/loss ..................... 12,747 8,234 6,129 - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity .......................... 117,802 107,595 101,746 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity .......... $ 1,007,409 $ 943,001 $ 881,850 ================================================================================================================================== Interest Rate Spread ................................ 3.30% 3.38% 3.46% Net Interest Income/Earning Assets .................. 3.70% 3.85% 3.94%
(1) Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis. (2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. 14 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
(IN THOUSANDS) 3 MONTHS ENDED 3/31/03 VS. 3/31/02 --------------------------------------- CHANGE IN CHANGE IN TOTAL VOLUME RATE CHANGE --------- --------- -------- EARNING ASSETS Available-for-sale securities: U.S. Treasury securities ....................... $ (19) $ (18) $ (37) Securities of other U.S. Government agencies and corporations ............................. (208) (266) (474) Mortgage-backed securities ..................... (139) (336) (475) Obligations of states and political subdivisions 662 (23) 639 Equity securities .............................. 50 (90) (40) Other securities ............................... 407 (128) 279 - ------------------------------------------------------------------------------------------------- Total available-for-sale securities ....... 753 (861) (108) - ------------------------------------------------------------------------------------------------- Held-to-maturity securities: U.S. Treasury securities ....................... (5) (2) (7) Securities of other U.S. Government agencies and corporations ............................. (3) 1 (2) Mortgage-backed securities ..................... (1) (1) (2) - ------------------------------------------------------------------------------------------------- Total held-to-maturity securities ......... (9) (2) (11) - ------------------------------------------------------------------------------------------------- Interest-bearing due from banks ..................... -- (5) (5) Federal funds sold .................................. -- (2) (2) Loans: Real estate loans .............................. 1,163 (603) 560 Consumer ....................................... 84 (83) 1 Agricultural ................................... 8 (6) 2 Commercial/industrial .......................... 96 (56) 40 Other .......................................... 3 -- 3 Political subdivisions ......................... 54 (29) 25 Leases ......................................... (1) -- (1) - ------------------------------------------------------------------------------------------------- Total loans ............................... 1,407 (777) 630 Total Interest Income ............................... 2,151 (1,647) 504 - ------------------------------------------------------------------------------------------------ INTEREST-BEARING LIABILITIES Interest checking ................................... (4) (27) (31) Money market ........................................ 130 (289) (159) Savings ............................................. 7 (10) (3) Certificates of deposit ............................. 124 (454) (330) Individual Retirement Accounts ...................... 194 (6) 188 Other time deposits ................................. -- (6) (6) Federal funds purchased ............................. 6 (5) 1 Other borrowed funds ................................ 495 (228) 267 - ------------------------------------------------------------------------------------------------- Total Interest Expense .............................. 952 (1,025) (73) - ------------------------------------------------------------------------------------------------- Net Interest Income ................................. $ 1,199 $ (622) $ 577 =================================================================================================
(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. 15 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE V - COMPARISON OF NONINTEREST INCOME
(IN THOUSANDS) 3 MONTHS ENDED ----------------------- MARCH 31, MARCH 31, 2003 2002 --------- --------- Service charges on deposit accounts ................................ $ 409 $ 384 Service charges and fees ........................................... 69 65 Trust and financial management revenue ............................. 378 439 Insurance commissions, fees and premiums ........................... 80 215 Increase in cash surrender value of life insurance.................. 194 224 Fees related to credit card operation .............................. 162 130 Other operating income ............................................. 248 230 - --------------------------------------------------------------------------------------------- Total other operating income, before realized gains on securities, net .................................................. 1,540 1,687 Realized gains on securities, net .................................. 1,721 1,226 - --------------------------------------------------------------------------------------------- Total Other Income ................................................. $3,261 $2,913 =============================================================================================
Total noninterest income increased $348,000, or 11.95%, in the first quarter 2003 compared to the first quarter 2002. The most significant change -- the increase in net realized security gains -- is discussed in the "Earnings Overview" section of Management's Discussion and Analysis. Other items of significance are as follows: o Insurance commissions and fees dropped $135,000, or 62.8%, for the first quarter 2003 compared to the first quarter 2002. The decrease in insurance-related revenues had 2 components: (1) a decrease in the revenues of $86,000 from Bucktail Life Insurance Company ("Bucktail"), a subsidiary of the Corporation that reinsures credit and mortgage life and accident and health insurance, and (2) a decrease in revenues of $49,000 from the insurance division of C&N Financial Services Corporation ("C&NFSC"). The decrease in Bucktail revenues is mainly attributable to timing items which are not expected to be indicative of a long-term decline. C&NFSC, a subsidiary or Citizens & Northern Bank, began its insurance agency operations in 2002, with limited activity to date. C&NFSC insurance revenues amounted to $30,000 in the first quarter 2003 and $79,000 in the first quarter 2002. Management continues to explore opportunities to expand insurance related revenues. o Trust and financial management revenue decreased $61,000, or 13.9%, for the first quarter 2003 versus the first quarter 2002. Trust and financial management revenue is affected significantly by the market value of assets under management. As of March 31, 2003, the value of trust assets under management amounted to $278,548,000, a decrease of $27,664,000 or 9.03% from $306,212,000 as of March 31, 2002. Trust and financial management revenue is recorded on a cash basis, which does not vary materially from the accrual basis. TABLE VI - COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS) MONTHS ENDED ---------------------- MARCH 31, MARCH 31, 2003 2002 --------- --------- Salaries and wages ................................................ $2,448 $2,238 Pensions and other employee benefits............................... 864 615 Occupancy expense, net ............................................ 340 278 Furniture and equipment expense ................................... 332 447 Pennsylvania shares tax ........................................... 196 183 Other operating expense ........................................... 1,352 1,345 - -------------------------------------------------------------------------------------------- Total Other Expense ............................................... $5,532 $5,106 ============================================================================================
16 CITIZENS & NORTHERN CORPORATION - FORM 10-Q Salaries and wages increased $210,000, or 9.38%, for the first quarter 2003 compared to the first quarter 2002. The increase is the result of annual merit raises generally ranging from 2%-5%, an increase in the number of employees and an increase in incentive bonus expense. The number of full-time equivalent employees increased to 265 as of March 31, 2003 from 257 as of March 31, 2002. The incentive bonus plan provides for compensation to be paid to certain key officers, with the payment amounts based on a combination of personal and corporate performance. The estimate of such expense for the first quarter of 2003 increased $69,000 over the accrual recorded for the first quarter of 2002. Pensions and other employee benefits increased $249,000, or 40.5%, in the first quarter 2003 over the first quarter 2002. A portion of this increase is directly related to the increase in salaries and wages. Also, pension expense from the Corporation's defined benefit pension plan increased $114,000 in the first quarter 2003 over the first quarter 2002. Although the defined benefit pension plan remains adequately funded, a decline in the market value of plan assets, along with an increased number of employees, contributed to the increase in expense in 2003. Furniture and equipment expense decreased $115,000, or 25.7%, in the first quarter 2003 compared to the first quarter 2002. The largest decrease within this category was in depreciation expense, which decreased $85,000 or 32.3%. There were several substantial capital expenditures which became fully depreciated in 2002, reducing the expense for the first three months of 2003. Repairs and maintenance expense also decreased $18,000, or 12.1% for the first three months of 2003 compared to the first three months of 2002. 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. Table VII provides a summary of investment securities held at March 31, 2003 and December 31, 2002. The allowance for loan losses and stockholders' equity are discussed in separate sections of Management's Discussion and Analysis. The following are significant changes in the Corporation's consolidated balance sheet as of March 31, 2003 compared to December 31, 2002, other than the items addressed in those discussions: o As reflected in Table VII, the carrying value (fair value) of available-for-sale securities fell to $495,028,000 at March 31, 2003 from $512,175,000 at December 31, 2002. Much of the reduction was caused by rapid principal payments on mortgage-backed securities, due to declining interest rates. o As shown in the consolidated balance sheet, loans (net of the allowance for loan losses) increased $15,069,000 to $460,425,000 as of March 31, 2003 from $445,356,000 at December 31, 2002. On an annualized basis, net loans increased 13.5% during the first quarter 2003, with substantial growth continuing in both residential and commercial activity. o Total deposits increased by just over 5% on an annualized basis, to $648,357,000 as of March 31, 2003 compared to $640,304,000 as of December 31, 2002. o Total short-term and long-term borrowed funds decreased $8,028,000 to $243,821,000 at March 31, 2003 from $251,849,000 at December 31, 2002. This decrease includes a reduction in borrowings outstanding on customer repurchase agreements of $4,105,000, and a reduction in the Corporation's overnight borrowing position of $9,350,000. Also, the mix between short-term and long-term borrowings is weighted more to long-term borrowings at March 31, 2003, as management has entered into fixed rate borrowings with terms of 4 to 5 years for most of the first quarter 2003 originations. 17 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE VII - INVESTMENT SECURITIES
(In Thousands) MARCH 31, 2003 DECEMBER 31, 2002 -------------------- --------------------- AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ------- --------- --------- AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury .................. $ -- $ -- $ -- $ -- Obligations of other U.S. Government agencies ..... 67,442 68,591 71,657 72,348 Obligations of states and political subdivisions... 140,929 144,650 127,690 130,879 Other securities .................................. 57,800 59,415 62,296 63,592 Mortgage-backed securities ........................ 183,757 188,530 207,244 212,276 - ---------------------------------------------------------------------------------------------------- Total debt securities ............................. 449,928 461,186 468,887 479,095 Marketable equity securities ...................... 25,246 33,842 24,886 33,080 - ---------------------------------------------------------------------------------------------------- Total ............................................. $475,174 $495,028 $493,773 $512,175 ==================================================================================================== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury .................. $ 321 $ 358 $ 321 $ 359 Obligations of other U.S. Government agencies ..... 197 221 297 322 Mortgage-backed securities ........................ 77 81 89 93 - ---------------------------------------------------------------------------------------------------- Total ............................................. $ 595 $ 660 $ 707 $ 774 ====================================================================================================
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 and historical loss experience, as modified for identified trends and concerns, 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, modified for risk adjustment factors identified by management for each 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 management's knowledge of specific losses within the portfolio may be incomplete. The allowance for loan losses was $5,693,000 at March 31, 2003, a decrease of $96,000 from the balance at December 31, 2002. As you can see in Table VIII, net charge-offs were high during the first quarter 2003, totaling $446,000. Most of the charge-off amounts for the first quarter 2003 were from loans that had been identified as impaired in 2002, and for which an appropriate allowance had been provided in 2002. Table IX presents a summary of the allocated allowance by loan type, as well as the unallocated portion of the allowance. The allowance for impaired loans decreased $621,000, to $1,256,000 at March 31, 2003 from $1,877,000 at December 31, 2002. The decrease in allowance for impaired loans reflects the charge-offs, as described above, as well as pay-offs received in April 2003 on loans that had been a concern, and improved prospects related to another commercial loan relationship. Table IX also shows an increase in the unallocated portion of the allowance, to $2,212,000 at March 31, 2003 from $1,759,000 at December 31, 2002. Management believes a higher unallocated allowance is appropriate at March 31, 2003, because of concerns related to the high level of charge-offs in the first quarter 2003 (although management has not identified a significant amount of new impaired loans during the first quarter 2003). Further, although loans 90 days or more past due and nonaccrual loans have improved to $3,068,000 at March 31, 2003 from $3,570,000 at December 31, 2002, total loans 30-89 days past due increased to $9,937,000 at March 31, 2003 from $8,853,000 at December 31, 2002. 18 CITIZENS & NORTHERN CORPORATION - FORM 10-Q The provision for loan losses increased to $350,000 in the first quarter 2003 from $180,000 in the first quarter 2002. 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. In 2003, the higher provision for loan losses resulted, in part, from the increase in the unallocated portion of the allowance. 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. TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) QUARTER QUARTER ENDED ENDED YEARS ENDED DECEMBER 31, MARCH 31, MARCH 31, ------------------------------------------------ 2003 2002 2002 2001 2000 1999 1998 --------- ---------- ------ ------ ------ ------ ------ Balance, beginning of year ... $5,789 $5,265 $5,265 $5,291 $5,131 $4,820 $4,913 - ----------------------------------------------------------------------------------------------------------------------- Charge-offs: Real estate loans ............ 57 13 123 144 272 81 257 Installment loans ............ 187 42 116 138 77 138 144 Credit cards and related plans 48 63 190 200 214 192 264 Commercial and other loans ... 183 -- 123 231 53 219 301 - ----------------------------------------------------------------------------------------------------------------------- Total charge-offs ............ 475 118 552 713 616 630 966 - ----------------------------------------------------------------------------------------------------------------------- Recoveries: Real estate loans ............ 15 -- 30 6 26 81 12 Installment loans ............ 4 7 30 27 23 60 43 Credit cards and related plans 7 2 18 20 28 30 40 Commercial and other loans ... 3 1 58 34 23 10 15 - ----------------------------------------------------------------------------------------------------------------------- Total recoveries ............. 29 10 136 87 100 181 110 - ----------------------------------------------------------------------------------------------------------------------- Net charge-offs .............. 446 108 416 626 516 449 856 Provision for loan losses .... 350 180 940 600 676 760 763 - ----------------------------------------------------------------------------------------------------------------------- Balance, end of year ......... $5,693 $5,337 $5,789 $5,265 $5,291 $5,131 $4,820 =======================================================================================================================
TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE (IN THOUSANDS)
AS OF (In Thousands) MARCH 31, AS OF DECEMBER 31, ----------------- --------------------------------------- 2003 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------- ------ Commercial ............. $1,398 $1,315 $1,837 $1,612 $2,081 $ 650 Consumer mortgage ...... 467 460 674 952 834 97 Impaired loans ......... 1,256 1,877 73 273 609 290 Consumer ............... 360 378 494 471 437 702 All other commitments... -- -- -- -- 150 202 Unallocated ............ 2,212 1,759 2,187 1,983 1,020 2,879 - ------------------------------------------------------------------------------------------ Total Allowance ........ $5,693 $5,789 $5,265 $5,291 $5,131 $4,820 ==========================================================================================
19 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE X - SUMMARY OF LOANS BY TYPE
(IN THOUSANDS) AS OF AS OF DECEMBER 31, MARCH 31, --------------------------------------------------------------------- 2003 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- ---------- Real estate - construction $ 131 $ 103 $ 1,814 $ 452 $ 649 $ 1,004 Real estate - mortgage ... 379,547 370,453 306,264 263,325 247,604 230,815 Consumer ................. 32,465 31,532 29,284 28,141 29,140 30,924 Agricultural ............. 2,813 3,024 2,344 1,983 1,899 1,930 Commercial ............... 32,812 30,874 24,696 20,776 18,050 17,630 Other .................... 1,725 2,001 1,195 948 1,025 1,062 Political subdivisions ... 16,540 13,062 13,479 12,462 12,332 7,449 Lease receivables ........ 85 96 152 218 222 218 - -------------------------------------------------------------------------------------------------------------------- Total .................... 466,118 451,145 379,228 328,305 310,921 291,032 Less: unearned discount .. -- -- -- -- (29) (29) - -------------------------------------------------------------------------------------------------------------------- 466,118 451,145 379,228 328,305 310,892 291,003 Less: allowance for loan losses ................. (5,693) (5,789) (5,265) (5,291) (5,131) (4,820) - -------------------------------------------------------------------------------------------------------------------- Loans, net ............... $ 460,425 $ 445,356 $ 373,963 $ 323,014 $ 305,761 $ 286,183 ====================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS The Corporation utilizes derivative financial instruments related to a certificate of deposit product called the "Index Powered Certificate of Deposit" (IPCD). IPCDs have a term of 5 years, with interest paid at maturity based on 90% of the appreciation (as defined) in the S&P 500 index. There is no guaranteed interest payable to a depositor of an IPCD - however, assuming an IPCD is held to maturity, a depositor is guaranteed the return of his or her principal, at a minimum. Statement of Financial Accounting Standards No. 133 requires the Corporation to separate the amount received from each IPCD issued into 2 components: (1) an embedded derivative, and (2) the principal amount of each deposit. Embedded derivatives are derived from the Corporation's obligation to pay each IPCD depositor a return based on appreciation in the S&P 500 index. Embedded derivatives are carried at fair value, and are included in other liabilities in the consolidated balance sheet. Changes in fair value of the embedded derivative are included in other expense in the consolidated income statement. The difference between the contractual amount of each IPCD issued, and the amount of the embedded derivative, is recorded as the initial deposit (included in interest-bearing deposits in the consolidated balance sheet). Interest expense is added to principal ratably over the term of each IPCD at an effective interest rate that will increase the principal balance to equal the contractual IPCD amount at maturity. In connection with IPCD transactions, the Corporation has entered into Equity Indexed Call Option (Swap) contracts with the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh). Under the terms of the Swap contracts, the Corporation must pay FHLB-Pittsburgh quarterly amounts calculated based on the contractual amount of IPCDs issued times a negotiated rate. In return, FHLB-Pittsburgh is obligated to pay the Corporation, at the time of maturity of the IPCDs, an amount equal to 90% of the appreciation (as defined) in the S&P 500 index. If the S&P 500 index does not appreciate over the term of the related IPCDs, the FHLB-Pittsburgh would make no payment to the Corporation. The effect of the Swap contracts is to limit the Corporation's cost of IPCD funds to the market rate of interest paid to FHLB-Pittsburgh. (In addition, the Corporation pays a fee of 0.75% to a consulting firm at inception of each deposit. This fee is amortized to interest expense over the term of the IPCDs.) Swap liabilities are carried at fair value, and included in other liabilities in the consolidated balance sheet. Changes in fair value of swap liabilities are included in other expense in the consolidated income statement. 20 CITIZENS & NORTHERN CORPORATION - FORM 10-Q Amounts recorded as of March 31, 2003 and December 31, 2002, and for the first quarters of 2003 and 2002, related to IPCDs are as follows (in thousands):
MARCH 31, DEC. 31, 2003 2002 --------- --------- Contractual amount of IPCDs (equal to notional amount of Swap contracts) ....................................... $3,295 $3,028 Carrying value of IPCDs ....................................................... 2,821 2,572 Carrying value of embedded derivative liabilities ............................. 149 156 Carrying value of Swap contract liabilities ................................... 328 309
3 MONTHS ENDED 3 MONTHS ENDED MARCH 31 MARCH 31, 2003 2002 --------------- --------------- Interest expense ............................................................ $ 29 $16 Other expense ............................................................... -- 4
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 various investment securities. At March 31, 2003, the Corporation had unused borrowing availability with correspondent banks and the Federal Home Loan Bank of Pittsburgh totaling approximately $203,000,000. Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets, and uses "RepoSweep" arrangements to borrow funds from commercial banking customers on an overnight basis. On a longer-term basis, one of the tools used to measure liquidity is the loan to deposit ratio. As of December 31, 2002, this ratio was 70%, which (by banking industry standards) is a relatively low ratio (which indicates a relatively high level of liquidity). This low loan to deposit ratio permits the Corporation to utilize "excess" funds to purchase investment securities. If required to raise cash in an emergency situation, the Corporation could sell non-pledged investment securities to meet its obligations. Management believes the combination of its strong capital position (discussed in the next section), ample available borrowing facilities and low loan to deposit ratio have placed the Corporation in a position of minimal short-term and long-term liquidity risk. 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, 2003: 21 CITIZENS & NORTHERN CORPORATION - FORM 10-Q TABLE XI - CAPITAL RATIOS
3/31/2003 CITIZENS & REGULATORY STANDARDS: NORTHERN ------------------------ CORPORATION WELL MINIMUM (ACTUAL) CAPITALIZED STANDARD ----------- ----------- -------- Total capital to risk-weighted assets ........................... 20.25% 10% 8% Tier 1 capital to risk-weighted assets .......................... 18.58% 6% 4% Tier 1 capital to average total assets .......................... 10.52% 5% 4%
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. INFLATION Over the last several years, direct inflationary pressures on the Corporation's payroll-related and other noninterest costs have been modest. In fact, some economists (and indirectly, the Federal Reserve Board in its commentary related to its May 6, 2003 meeting) have warned of the risk of deflationary pressures. 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 or deflationary pressure, in managing interest rate and other financial risks. 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 a significant 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. 22 CITIZENS & NORTHERN CORPORATION - FORM 10-Q 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 expenses. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 50-300 basis points of current 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 baseline one-year scenario. The policy limit for market value variance is minus 30% from the baseline one-year scenario. The most sensitive scenario presented in Table XII below is the "+200 basis points" scenario. As Table XII shows, as of March 31, 2003, the result of the Bank's net interest income calculation is well within the policy threshold. However, if interest rates were to immediately increase 200 basis points, the Bank's calculations based on the model show that the market value of portfolio equity would decrease 31.0%, which exceeds the policy threshold. Management continually evaluates whether to make any changes to asset or liability holdings in an effort to reduce exposure to decline in market value in a rising interest rate environment. 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. TABLE XII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
(IN THOUSANDS) PERIOD ENDING MARCH 31, 2004 MARCH 31, 2003 DATA --------------------------------------------------------- CURRENT PLUS 200 MINUS 200 INTEREST BASIS BASIS RATES POINTS POINTS SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE --------- --------- --------- ---------- -------- Interest income ............................................ $ 53,022 $57,631 $ 47,310 Interest expense ........................................... 23,645 28,545 18,934 - ------------------------------------------------------------------------------------ -------- Net Interest Income ........................................ $ 29,377 $29,086 -1.0% $ 28,376 -3.4% ========================================================================================================================= Market Value of Portfolio Equity at Mar. 31, 2003 .......... $103,613 $71,460 -31.0% $128,702 24.2% ========================================================================================================================= Market Value of Portfolio Equity at Dec. 31, 2002 .......... $108,144 $71,117 -34.2% $130,764 20.9% =========================================================================================================================
23 CITIZENS & NORTHERN CORPORATION - FORM 10-Q
(IN THOUSANDS) PERIOD ENDING DECEMBER 31, 2003 DECEMBER 31, 2002 DATA ----------------------------------------------------------- CURRENT PLUS 200 MINUS 200 INTEREST BASIS BASIS RATES POINTS POINTS SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE -------- --------- --------- --------- -------- Interest income ......................................... $ 54,989 $59,608 $ 49,607 Interest expense ........................................ 24,132 29,320 19,083 - ------------------------------------------------------------------------------------ -------- Net Interest Income ..................................... $ 30,857 $30,288 -1.8% $ 30,524 -1.1% ======================================================================================================================= Market Value of Portfolio Equity at Dec. 31, 2002 ....... $108,144 $71,117 -34.2% $130,764 20.9% =======================================================================================================================
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 some other stocks and mutual funds. 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, because of the concentration of bank and bank holding companies located 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, 2003 and December 31, 2002 are presented in Table XIII. TABLE XIII - EQUITY SECURITIES
(IN THOUSANDS) HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT MARCH 31, 2003 COST VALUE VALUE VALUE ------- ------- ------------ ------------ Banks and bank holding companies ................ $23,241 $32,310 $(3,231) $(6,462) Other equity securities ......................... 2,005 1,532 (153) (306) - ----------------------------------------------------------------------------------------------------- Total ...................................... $25,246 $33,842 $(3,384) $(6,768) =====================================================================================================
HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT DECEMBER 31, 2002 COST VALUE VALUE VALUE ------- ------- ------------ ------------ Banks and bank holding companies ................ $22,936 $31,508 $(3,151) $(6,302) Other equity securities ......................... 1,950 1,572 (157) (314) - ----------------------------------------------------------------------------------------------------- Total ...................................... $24,886 $33,080 $(3,308) $(6,616) =====================================================================================================
24 CITIZENS & NORTHERN CORPORATION - FORM 10-Q PART I - FINANCIAL INFORMATION (CONTINUED) ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the filing date of this report, the Corporation's Chief Executive Officer and Chief Financial Officer carried out an evaluation of the design and effectiveness of the Corporation's disclosure controls and procedures pursuant to Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the evaluation date, the Corporation's disclosure controls and procedures are effective to ensure that information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect these controls subsequent to the date of the Chief Executive Officer's and Chief Financial Officer's most recent evaluation, and therefore, there were no corrective actions taken. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation's financial condition or results of operations. 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:
Page ---- 99.1 Certifications Pursuant to U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 29
b. On January 10, 2003, a Current Report on Form 8-K was filed to report the Corporation's consolidated earnings results for the fourth quarter 2002. c. On February 28, 2003, a Current Report on Form 8-K was filed to report the resignation of director F. David Pennypacker for medical reasons. d. On March 28, 2003, a Current Report on Form 8-K was filed to report the Corporation's first quarter cash dividend declaration and announce the 3-for-2 stock split of April 21, 2003. 25 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 14, 2003 By: /s/ Craig G. Litchfield - ------------ ----------------------------------------------- Date Chairman, President and Chief Executive Officer May 14, 2003 By: /s/ Mark A. Hughes - ------------ ------------------------------------- Date Treasurer and Chief Financial Officer 26 CITIZENS & NORTHERN CORPORATION - FORM 10-Q CERTIFICATIONS I, Craig G. Litchfield, Chairman, Chief Executive Officer and President of Citizens & Northern Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 14, 2003 By: /s/ Craig G. Litchfield - ------------ ----------------------------------------------- Date Chairman, President and Chief Executive Officer 27 CITIZENS & NORTHERN CORPORATION - FORM 10-Q I, Mark A. Hughes, Treasurer and Chief Financial Officer of Citizens & Northern Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. May 14, 2003 By: /s/ Mark A. Hughes - ------------ ------------------------------------- Date Treasurer and Chief Financial Officer 28 EX-99.1 3 l00351aexv99w1.txt EXHIBIT 99.1 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q EXHIBIT 99.1 CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Citizens & Northern Corporation (the Corporation) on Form 10-Q for the three month period ended March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to each of the undersigned's best knowledge: (a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and (b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. May 14, 2003 By: Craig G. Litchfield /s/ - ------------ ----------------------- Date Chairman, President and Chief Executive Officer May 14, 2003 By: Mark A. Hughes /s/ - ------------ ------------------ Date Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----