-----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, VNwXvgx8IwHppaZI/KVbp71NBUdnrzvLjL2/cZUZ/MZHlEeoGbYqjviQEluu9JKj fyjgOHFoCJwZOQpt1apY4Q== 0000950152-05-004219.txt : 20050510 0000950152-05-004219.hdr.sgml : 20050510 20050510110149 ACCESSION NUMBER: 0000950152-05-004219 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050510 DATE AS OF CHANGE: 20050510 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: 05814465 BUSINESS ADDRESS: STREET 1: 90-92 MAIN ST CITY: WELLSBORO STATE: PA ZIP: 16901 BUSINESS PHONE: 7172656171 MAIL ADDRESS: STREET 1: 90-92 MAIN ST CITY: WELLSBORO STATE: PA ZIP: 16901 10-Q 1 l13284ae10vq.txt CITIZENS & NORTHERN COPRORATION FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (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, 2005 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) 8,210,321 Shares Outstanding May 4, 2005 1 CITIZENS & NORTHERN CORPORATION - FORM 10-Q Index Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheet - March 31, 2005 and December 31, 2004 Page 3 Consolidated Statement of Income - Three Months Ended March 31, 2005 and 2004 Page 4 Consolidated Statement of Cash Flows - Three Months Ended March 31, 2005 and 2004 Page 5 Notes to Consolidated Financial Statements Pages 6 through 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 10 through 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk Pages 23 through 26 Item 4. Controls and Procedures Page 26 Part II. Other Information Page 27 Signatures Page 28 Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer Page 29 Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer Page 30 Exhibit 32. Section 1350 Certifications Page 31
2 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET (In Thousands Except Share Data)
MARCH 31, DECEMBER 31, 2005 2004 (UNAUDITED) (NOTE) ASSETS Cash and due from banks: Noninterest-bearing $ 11,818 $ 14,845 Interest-bearing 1,467 4,108 ----------- ----------- Total cash and cash equivalents 13,285 18,953 Available-for-sale securities 465,074 475,085 Held-to-maturity securities 429 433 Loans, net 592,118 572,826 Bank-owned life insurance 18,222 18,083 Accrued interest receivable 5,459 5,094 Bank premises and equipment, net 17,130 16,725 Foreclosed assets held for sale 653 497 Other assets 17,291 15,306 ----------- ----------- TOTAL ASSETS $ 1,129,661 $ 1,123,002 =========== =========== LIABILITIES Deposits: Noninterest-bearing $ 83,656 $ 80,378 Interest-bearing 600,963 596,167 ----------- ----------- Total deposits 684,619 676,545 Dividends payable 1,888 1,864 Short-term borrowings 50,167 34,178 Long-term borrowings 257,394 270,827 Accrued interest and other liabilities 6,768 8,003 ----------- ----------- TOTAL LIABILITIES 1,000,836 991,417 ----------- ----------- STOCKHOLDERS' EQUITY Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 8,389,418 in 2005 and 8,307,305 in 2004 8,390 8,307 Stock dividend distributable - 2,188 Paid-in capital 24,755 22,456 Retained earnings 91,891 90,484 ----------- ----------- Total 125,036 123,435 Accumulated other comprehensive income 5,950 10,535 Unamortized stock compensation (124) (46) Treasury stock, at cost: 180,097 shares at March 31, 2005 (2,037) 204,659 shares at December 31, 2004 (2,339) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 128,825 131,585 ----------- ----------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 1,129,661 $ 1,123,002 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. Note: The balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all the information and notes required by U.S. 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, 2005 2004 INTEREST INCOME Interest and fees on loans $ 9,006 $ 8,235 Interest on balances with depository institutions 4 3 Interest on loans to political subdivisions 247 214 Interest on federal funds sold 8 1 Income from available-for-sale and held-to-maturity securities: Taxable 3,661 3,264 Tax-exempt 1,472 1,935 Dividends 295 363 ---------- ---------- Total interest and dividend income 14,693 14,015 ---------- ---------- INTEREST EXPENSE Interest on deposits 3,426 3,343 Interest on short-term borrowings 225 123 Interest on long-term borrowings 2,306 2,237 ---------- ---------- Total interest expense 5,957 5,703 ---------- ---------- Interest margin 8,736 8,312 Provision for loan losses 375 350 Interest margin after provision for loan losses 8,361 7,962 ---------- ---------- OTHER INCOME Service charges on deposit accounts 342 421 Service charges and fees 87 76 Trust and financial management revenue 479 457 Insurance commissions, fees and premiums 98 109 Increase in cash surrender value of life insurance 139 159 Fees related to credit card operation 210 184 Other operating income 348 219 ---------- ---------- Total other income before realized gains on securities, net 1,703 1,625 Realized gains on securities, net 1,066 964 ---------- ---------- Total other income 2,769 2,589 ---------- ---------- OTHER EXPENSES Salaries and wages 2,875 2,671 Pensions and other employee benefits 1,032 984 Occupancy expense, net 464 377 Furniture and equipment expense 648 336 Pennsylvania shares tax 215 212 Other operating expense 1,894 1,648 ---------- ---------- Total other expenses 7,128 6,228 ---------- ---------- Income before income tax provision 4,002 4,323 Income tax provision 707 617 ---------- ---------- NET INCOME $ 3,295 $ 3,706 ========== ========== PER SHARE DATA: Net income - basic $ 0.40 $ 0.45 Net income - diluted $ 0.40 $ 0.45 ---------- ---------- Dividend per share $ 0.23 $ 0.22 ---------- ---------- Number of shares used in computation - basic 8,193,240 8,193,182 Number of shares used in computation - diluted 8,264,288 8,249,283
The accompanying notes are an integral part of these consolidated financial statements. 4 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS, EXCEPT PER SHARE DATA)(UNAUDITED)
3 MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,295 $ 3,706 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 375 350 Realized gains on securities, net (1,066) (964) (Gain) loss on sale of foreclosed assets, net (50) 6 Depreciation expense 548 322 Accretion and amortization, net 67 127 Increase in cash surrender value of life insurance (139) (159) Amortization of restricted stock 21 24 Increase in accrued interest receivable and other assets (2,444) (1,270) Increase in accrued interest payable and other liabilities 1,151 936 -------- -------- Net Cash Provided by Operating Activities 1,758 3,078 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturity of held-to-maturity securities 3 110 Proceeds from sales of available-for-sale securities 31,488 11,526 Proceeds from calls and maturities of available-for-sale securities 18,204 36,802 Purchase of available-for-sale securities (45,628) (65,445) Purchase of Federal Home Loan Bank of Pittsburgh stock (1,832) (2,463) Redemption of Federal Home Loan Bank of Pittsburgh stock 1,902 1,090 Net increase in loans (19,832) (7,111) Purchase of premises and equipment (953) (2,237) Proceeds from sale of foreclosed assets 59 42 -------- -------- Net Cash Used in Investing Activities (16,589) (27,686) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 8,074 (7,145) Net increase in short-term borrowings 15,989 10,119 Proceeds from long-term borrowings 13,000 41,767 Repayments of long-term borrowings (26,433) (19,773) Sale of treasury stock 423 407 Dividends paid (1,890) (1,789) -------- -------- Net Cash Provided by Financing Activities 9,163 23,586 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (5,668) (1,022) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,953 15,171 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,285 $ 14,149 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Accrued purchase of available-for-sale securities $ - $ 22,096 Assets acquired through foreclosure of real estate loans $ 165 $ - Interest paid $ 5,421 $ 4,274 Income taxes paid $ 420 $ 150
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, 2004, is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. Results reported for the three months ended March 31, 2005 might not be indicative of the results for the year ending December 31, 2005. This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency. 2. PER SHARE DATA Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflect the retroactive effect of stock dividends for all periods presented. The following data show the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options. 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, 2005 Earnings per share - basic $3,295,000 8,193,240 $0.40 Dilutive effect of potential common stock arising from stock options: Exercise of outstanding stock options 241,417 Hypothetical share repurchase at $29.99 (170,369) ---------- --------- ----- Earnings per share - diluted $3,295,000 8,264,288 $0.40 ========== ========= ===== QUARTER ENDED MARCH 31, 2004 Earnings per share - basic $3,706,000 8,193,182 $0.45 Dilutive effect of potential common stock arising from stock options: Exercise of outstanding stock options 198,006 Hypothetical share repurchase at $26.24 (141,905) ---------- --------- ----- Earnings per share - diluted $3,706,000 8,249,283 $0.45 ========== ========= =====
6 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q 3. STOCK COMPENSATION PLANS The Corporation uses the intrinsic value method of accounting for stock compensation plans, under Accounting Principles Board Opinion No. 25 (APB Opinion 25), and as permitted by Statement of Financial Accounting Standards (SFAS) No. 123. 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 SFAS No. 123 to stock options. (NET INCOME IN THOUSANDS)
3 MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 Net income, as reported $ 3,295 $ 3,706 Deduct: Total stock option compensation expense determined under fair value method for all awards, net of tax effects (35) (49) --------- --------- Pro forma net income $ 3,260 $ 3,657 ========= ========= Earnings per share-basic As reported $ 0.40 $ 0.45 Pro forma $ 0.40 $ 0.45 Earnings per share-diluted As reported $ 0.40 $ 0.45 Pro forma $ 0.39 $ 0.44
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB Opinion 25. SFAS No. 123R will require the Corporation to record stock option expense based on estimated fair value calculated using an option valuation model. As issued, SFAS No. 123R would have applied to new awards granted, and to modifications of existing awards, on or after July 1, 2005. In April 2005, however, the Securities and Exchange Commission extended the date for mandatory implementation of SFAS No. 123R, effectively requiring the Corporation to apply SFAS No. 123R in the first quarter 2006. The Corporation does not plan early implementation of the provisions of SFAS No. 123R. 4. COMPREHENSIVE INCOME U.S. generally accepted accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although unrealized gains and losses on available-for-sale securities are reported as a separate component of the equity section of the balance sheet, changes in unrealized gains and losses on available-for-sale securities, along with net income, are components of comprehensive income. 7 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q The components of comprehensive income, and the related tax effects, are as follows:
QUARTERS ENDED MARCH 31, (IN THOUSANDS) 2005 2004 Net income $ 3,295 $ 3,706 Unrealized holding (losses) gains on available-for-sale securities (5,881) 4,865 Less: Reclassification adjustment for gains realized in income (1,066) (964) -------- -------- Other comprehensive (loss) income before income tax (6,947) 3,901 Income tax related to other comprehensive income/loss 2,362 (1,326) -------- -------- Other comprehensive (loss) income (4,585) 2,575 -------- -------- Comprehensive (loss) income $ (1,290) $ 6,281 ======== ========
5. SECURITIES Amortized cost and fair value of securities at March 31, 2005 are summarized as follows:
MARCH 31, 2005 GROSS GROSS UNREALIZED UNREALIZED AMORTIZED HOLDING HOLDING FAIR (IN THOUSANDS) COST GAINS LOSSES VALUE AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ - $ - $ - $ - Obligations of other U.S. Government agencies 46,014 24 (1,012) 45,026 Obligations of states and political subdivisions 120,804 3,105 (1,030) 122,879 Other securities 94,704 1,722 (679) 95,747 Mortgage-backed securities 172,754 534 (3,484) 169,804 --------- ---------- ---------- -------- Total debt securities 434,276 5,385 (6,205) 433,456 Marketable equity securities 21,783 10,175 (340) 31,618 --------- ---------- ---------- -------- Total $ 456,059 $ 15,560 $ (6,545) $465,074 ========= ========== ========== ======== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ 315 $ 15 $ - $ 330 Obligations of other U.S. Government agencies 98 11 - 109 Mortgage-backed securities 16 1 - 17 --------- ---------- ---------- -------- Total $ 429 $ 27 $ - $ 456 ========= ========== ========== ========
8 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2005.
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED (IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES AVAILABLE-FOR-SALE SECURITIES: Obligations of the U.S. Treasury $ - $ - $ - $ - $ - $ - Obligations of other U.S. Government agencies 33,574 (426) 9,403 (586) 42,977 (1,012) Obligations of states and political subdivisions 27,987 (571) 11,268 (459) 39,255 (1,030) Other securities 47,810 (644) 5,063 (35) 52,873 (679) Mortgage-backed securities 118,043 (2,543) 28,842 (941) 146,885 (3,484) --------- ---------- -------- ---------- --------- ---------- Total debt securities 227,414 (4,184) 54,576 (2,021) 281,990 (6,205) Marketable equity securities 5,000 (202) 766 (138) 5,766 (340) --------- ---------- -------- ---------- --------- ---------- Total temporarily impaired available-for-sale securities $ 232,414 $ (4,386) $ 55,342 $ (2,159) $ 287,756 $ (6,545) ========= ========== ======== ========== ========= ========== HELD-TO-MATURITY SECURITIES: Obligations of the U.S. Treasury $ - $ - $ - $ - $ - $ - Obligations of other U.S. Government agencies - - - - - - Mortgage-backed securities - - - - - - --------- ---------- -------- ---------- --------- ---------- Total temporarily impaired held-to-maturity securities $ - $ - $ - $ - $ - $ - ========= ========== ======== ========== ========= ==========
The unrealized losses on debt securities are primarily the result of volatility in interest rates. Based on the credit worthiness of the issuers, which are almost exclusively U.S. Government agencies or state and political subdivisions, management believes the Corporation's debt securities at March 31, 2005 were not other-than-temporarily impaired. Management also believes, based on the financial condition and near-term prospects of the issuers, the Corporation's marketable equity securities were not other-than-temporarily impaired. 6. DEFINED BENEFIT PLANS The Corporation has a noncontributory defined benefit pension plan for all employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years. In addition, the Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not affect the liability balance and will not affect the Corporation's future expenses. Similarly, such feature will minimize the impact, if any, of the Medicare Prescription Drug, Improvement and Modernization Act (the "Act"), signed into law in December 2003. The Corporation has not yet determined whether benefits provided under the postretirement plan are actuarially equivalent to benefits that will be available under Medicare Part D. Accordingly, the financial statement amounts and disclosures related to the postretirement benefits plan do not reflect the effects of the Act. The Corporation uses a December 31 measurement date for its plans. 9 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q The components of net periodic benefit costs from these defined benefit plans are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS 3 MONTHS ENDED 3 MONTHS ENDED MARCH 31, MARCH 31, (IN THOUSANDS) 2005 2004 2005 2004 Service cost $ 119 $ 119 $ 12 $ 11 Interest cost 155 155 17 16 Expected return on plan assets (198) (187) - - Amortization of transition (asset) obligation (6) (6) 9 9 Recognized net actuarial loss (gain) 10 16 1 1 -------- -------- --------- ---------- Net periodic benefit cost (benefit) $ 80 $ 97 $ 39 $ 37 ======== ======== ========= ==========
The Corporation fully funded its 2005 defined benefit pension contribution of $178,000 in April 2005. In the first quarter of 2005, the Corporation funded postretirement contributions totaling $13,000, with estimated annual postretirement contributions of $60,000 expected in 2005 for the full year. 7. 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 this quarterly report on 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 not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", "likely", "expect", "plan", "anticipate", "target", "forecast", and "goal". 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 expressed or implied by such forward-looking statements. 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: - - changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates - - changes in general economic conditions - - legislative or regulatory changes - - downturn in demand for loan, deposit and other financial services in the Corporation's market area - - increased competition from other banks and non-bank providers of financial services - - technological changes and increased technology-related costs - - changes in accounting principles, 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. 10 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q REFERENCES TO 2005 AND 2004 Unless otherwise noted, all references to "2005" in the following discussion of operating results are intended to mean the three months ended March 31, 2005, and similarly, references to "2004" are intended to mean the three months ended March 31, 2004. EARNINGS OVERVIEW Net income in 2005 was $3,295,000, or $.40 per share - basic and diluted. This represents a decrease of 11.1% in net income compared to 2004. Return on average assets was 1.17% in 2005, as compared to 1.38% in 2004. Return on average equity was 9.87% in 2005, as compared to 11.45% in 2004. The most significant income statement changes between 2005 and 2004 were as follows: - The interest margin increased $424,000, or 5.1%, to $8,736,000 in 2005 from $8,312,000 in 2004, mainly as a result of growth in loans. Changes in the net interest margin are discussed in more detail later in Management's Discussion and Analysis. - Net realized gains on securities were $1,066,000 in 2005, compared to $964,000 in 2004. In 2005, net gains from sales of equity securities amounted to $406,000. Also in 2005, the Corporation sold a Trust Preferred security for a gain of $445,000, and had net gains from sales of municipal bonds of $262,000. In 2004, gains from sales of equity securities amounted to $926,000. - Other (noninterest) expenses increased $900,000, or 14.5%, in 2005 compared to 2004. The increase reflects depreciation and maintenance costs associated with the new core banking software system, which was implemented in the fourth quarter 2004, as well as higher payroll costs from additional employees, including several new employees added due to the expansion into Williamsport and South Williamsport in 2004, and increases in several other categories of expenses. Increases in other expenses are described in more detail in the "Noninterest Expense" section of Management's Discussion and Analysis. - The income tax provision increased to $707,000 in 2005 from $617,000 in 2004. The Corporation's effective tax rate rose to 17.7% in 2005 from 14.3% in 2004. This higher effective tax rate resulted mainly from management's decision to decrease the weighting of tax-exempt obligations of states and political subdivisions, as a percentage of total assets, to avoid or reduce what would have otherwise been a substantial alternative minimum tax liability. TABLE I - QUARTERLY FINANCIAL DATA (IN THOUSANDS)
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31, 2005 2004 2004 2004 2004 Interest income $ 14,693 $ 14,991 $ 14,573 $ 14,343 $ 14,015 Interest expense 5,957 5,745 5,665 5,493 5,703 -------- -------- --------- -------- -------- Interest margin 8,736 9,246 8,908 8,850 8,312 Provision for loan losses 375 350 350 350 350 -------- -------- --------- -------- -------- Interest margin after provision for loan losses 8,361 8,896 8,558 8,500 7,962 Other income 1,703 1,815 1,627 1,855 1,625 Securities gains 1,066 1,133 459 321 964 Other expenses 7,128 6,746 6,738 6,289 6,228 -------- -------- --------- -------- -------- Income before income tax provision 4,002 5,098 3,906 4,387 4,323 Income tax provision 707 1,035 501 698 617 -------- -------- --------- -------- -------- Net income $ 3,295 $ 4,063 $ 3,405 $ 3,689 $ 3,706 ======== ======== ========= ======== ======== Net income per share - basic $ 0.40 $ 0.50 $ 0.42 $ 0.45 $ 0.45 ======== ======== ========= ======== ======== Net income per share - diluted $ 0.40 $ 0.49 $ 0.41 $ 0.45 $ 0.45 ======== ======== ========= ======== ========
11 The number of shares used in calculating net income per share for each quarter presented in Table I reflects the retroactive effect of stock dividends. CITIZENS & NORTHERN CORPORATION - FORM 10 - Q PROSPECTS FOR THE REMAINDER OF 2005 Management expects 2005 to be a year of expansion. Construction is currently underway in Jersey Shore, with opening of our 20th branch location expected by the third quarter of this year, and we anticipate construction of a branch in Old Lycoming Township to begin at or near the time the Jersey Shore project is completed. We have filed regulatory applications for the acquisition of Canisteo Valley Corporation, the holding company for First State Bank of Canisteo, NY, with total assets of approximately $43 million at March 31, 2005. We expect to close the transaction by the 3rd quarter of this year. Finally, construction has begun on a new administrative building in Wellsboro, within 2 blocks of the main office. Management expects the investments in new markets to provide future, continuing opportunities for earnings growth. Expansion into Williamsport has contributed to growth in commercial lending volume over the last half of 2004 and first quarter 2005, and management expects continuing opportunities in the Lycoming County market. However, as evidenced by our lower earnings performance in the 1st quarter, it will be difficult to achieve earnings for the year 2005 comparable to 2004's annual results. Short-term interest rates have been rising faster than long-term rates, and further increases in short-term rates are expected over the remainder of 2005. As reflected in Table I above, the net interest margin in the first quarter 2005 of $8,736,000 was down from $9,246,000 in the fourth quarter 2004. Management expects rising short-term interest rates to continue to have a negative effect on the Corporation's net interest margin throughout much of 2005. The Corporation's exposure to interest rate risk is discussed in more detail in Item 3. Consistent with the first quarter results discussed above, noninterest expense in 2005 is expected to be up significantly, mainly due to payroll and other start-up costs related to the new branches, as well as costs from the planned administrative facility and a full year of depreciation and maintenance from the core computer system that was placed in service in October 2004. Another major variable that affects the Corporation's earnings is securities gains and losses. Management's decisions regarding sales of securities are based on a variety of factors, with the overall goal of maximizing portfolio return over a long-term horizon. It is difficult to predict, with much precision, the amount of net securities gains and losses that will be realized in 2005. CRITICAL ACCOUNTING POLICIES The presentation of financial statements in conformity with U.S. 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. 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). 12 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q NET INTEREST MARGIN The Corporation's primary source of operating income is represented by the net interest margin. The net interest margin is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation's net interest margin for 2005 and 2004. 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 $9,546,000 in 2005, an increase of $225,000, or 2.4%, over 2004. As reflected in Table IV, the increase in net interest margin was caused mainly by growth in volume of loans. Overall, increased interest income from higher volumes of earning assets exceeded increases in interest expense attributable to higher volumes of interest-bearing liabilities by $246,000 in 2005 compared to 2004. Table IV also shows that interest rate changes had the effect of decreasing net interest income $21,000 in 2005 as compared to 2004. 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) was 3.32% for the first quarter 2005, compared to 3.43% for the year ended December 31, 2004 and 3.39% for the first quarter 2004. INTEREST INCOME AND EARNING ASSETS Interest income increased 3.2%, to $15,503,000 in 2005 from $15,024,000 in 2004. Interest and fees from loans increased $818,000, or 9.6%, while income from available-for-sale securities decreased $346,000, or 5.4%. Overall, the majority of the increase in interest income resulted from higher volumes of loans, which more than offset the effect of lower average interest rates and a reduction in available-for-sale securities. As indicated in Table III, average available-for-sale securities in the first quarter 2005 amounted to $454,517,000, a decrease of 2.9% from the first quarter 2004. Proceeds from sales and maturities of securities have been used, in part, to help fund the substantial growth in loans. Also, because short-term interest rates have been rising faster than long-term rates, there have been few opportunities to purchase mortgage-backed securities or other bonds at spreads sufficient to justify the applicable interest rate risk. The average rate of return on available-for-sale securities was 5.46% for first quarter 2005, lower than the 5.56% level in the first quarter 2004, but slightly higher than the rate of return for the year ended December 31, 2004 of 5.41%. Tax-exempt securities (municipal bonds) were a smaller portion of the available-for-sale securities portfolio in the first quarter 2005 than in the first quarter 2004. The average balance of municipal bonds shrunk to $122,536,000, or 27% of the portfolio, in the first quarter 2005 from $160,624,000, or 34% of the portfolio, in the first 3 months of 2004. On a taxable equivalent basis, municipal bonds are the highest yielding category of available-for-sale security. Management decided to reduce the Corporation's investment in municipal bonds during the fourth quarter 2004, in order to reduce or eliminate the alternative minimum tax liabilities incurred in 2004, and that would otherwise have been expected for 2005. The average balance of gross loans increased 12.7% in the first quarter 2005 over the first 3 months of 2004, to $596,513,000 from $529,155,000. The largest growth was in commercial loans, due in part to new personnel and relationships in Williamsport and throughout Lycoming County, as well as from growth in staffing and an increased emphasis on commercial lending throughout the Corporation's market area over the last few years. The average rate of return on loans fell to 6.37% in the first quarter 2005 from 6.50% in the first 3 months of 2004. The decrease in average rate was affected, in part, by substantial competition for commercial loan relationships with high credit quality, particularly in Lycoming County. 13 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense rose $254,000, or 4.5%, to $5,957,000 in 2005 from $5,703,000 in 2004. Table III reflects the current trend in interest rates incurred on liabilities, as the overall cost of funds on interest-bearing liabilities rose to 2.65% for the first quarter 2005, from 2.53% for the year ended December 31, 2004 and down slightly from 2.66% for the first quarter 2004. In Table III, you can see the impact of rising short-term interest rates on some of the Corporation's largest sources of funds: (1) money market accounts, which increased to an average rate of 1.82% in 2005 from 1.24% in the first quarter 2004, (2) certificates of deposit, which increased to an average rate of 3.07% from 2.80%, and (3) short-term borrowings, which rose to an average rate of 2.08% from 1.24%. Helping to offset some of the impact of rising short-term market rates were IRAs, for which the average rate fell to 3.49% from 4.81%, and long-term borrowings, for which the average rate fell to 3.44% from 3.67%. In the first quarter 2004, the average rate paid on the majority of the Corporation's IRAs was 5%, which was the "floor" on 18-month passbook IRAs that existed prior to October 1, 2003. Effective April 1, 2004, the floor on those IRAs fell to 3%, and the Corporation's passbook IRA rate has ranged from 3.25% to 3.50% thereafter. The decrease in average rate incurred on long-term borrowings resulted from repayment of borrowings originated in earlier interest rate cycles at higher rates, with replacements in either short-term instruments or long-term instruments at lower rates, mostly during the second and third quarters of 2004. As you can calculate from Table III, total average deposits (interest-bearing and noninterest-bearing) increased to $671,165,000 in the first three months of 2005 from $652,398,000 in the first three months of 2004. This represents an increase of 2.9%. Of the increase in average deposits, the largest growth categories were money market deposits of $11,483,000, or 6.2% and IRA's of $6,776,000, or 5.9%. Average total short-term and long-term borrowed funds increased $30,656,000 to $315,783,000 in the first quarter 2005 from $285,127,000 in the first quarter 2004. In 2004, the Corporation utilized borrowings to fund security purchases and to help fund loan growth. In the first quarter 2005, this trend has changed, as management has begun to use proceeds from the securities portfolio to help fund loan growth, has allowed total borrowings to remain approximately stagnant, and in an attempt to contain the amount of growth in interest expense, has rolled over maturing long-term borrowings into overnight or short-term borrowings. This change in trend is reflected in the consolidated balance sheet, as total short-term borrowings increased to $50,167,000 at March 31, 2005 from $34,178,000 at December 31, 2004, and total long-term borrowings decreased to $257,394,000 at March 31, 2005 from $270,827,000 at December 31, 2004. 14 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
THREE MONTHS ENDED MARCH 31, INCREASE/ (IN THOUSANDS) 2005 2004 (DECREASE) INTEREST INCOME Available-for-sale securities: Taxable $ 3,950 $ 3,620 $ 330 Tax-exempt 2,168 2,844 (676) ---------- ------- ---------- Total available-for-sale securities 6,118 6,464 (346) ---------- ------- ---------- Held-to-maturity securities, Taxable 6 7 (1) Interest-bearing due from banks 4 3 1 Federal funds sold 8 1 7 Loans: Taxable 9,006 8,235 771 Tax-exempt 361 314 47 ---------- ------- ---------- Total loans 9,367 8,549 818 ---------- ------- ---------- Total Interest Income 15,503 15,024 479 ---------- ------- ---------- INTEREST EXPENSE Interest checking 58 57 1 Money market 887 575 312 Savings 70 68 2 Certificates of deposit 1,365 1,270 95 Individual Retirement Accounts 1,045 1,371 (326) Other time deposits 1 2 (1) Short-term borrowings 225 123 102 Long-term borrowings 2,306 2,237 69 ---------- ------- ---------- Total Interest Expense 5,957 5,703 254 ---------- ------- ---------- Net Interest Income $ 9,546 $ 9,321 $ 225 ========== ======= ==========
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%. 15 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
3 MONTHS YEAR 3 MONTHS ENDED RATE OF ENDED RATE OF ENDED RATE OF 3/31/2005 RETURN/ 12/31/2004 RETURN/ 3/31/2004 RETURN/ AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF (DOLLARS IN THOUSANDS) BALANCE FUNDS % BALANCE FUNDS % BALANCE FUNDS % EARNING ASSETS Available-for-sale securities, at amortized cost: Taxable $ 331,981 4.83% $ 331,447 4.65% $ 307,321 4.74% Tax-exempt 122,536 7.18% 151,049 7.09% 160,624 7.12% ----------- ---- ---------- ---- ----------- ---- Total available-for-sale securities 454,517 5.46% 482,496 5.41% 467,945 5.56% ----------- ---- ---------- ---- ----------- ---- Held-to-maturity securities, Taxable 431 5.65% 460 5.87% 504 5.59% Interest-bearing due from banks 856 1.90% 1,449 0.76% 965 1.25% Federal funds sold 1,514 2.14% 778 1.29% 357 1.13% Loans: Taxable 573,140 6.37% 530,045 6.46% 510,481 6.49% Tax-exempt 23,373 6.26% 21,307 6.58% 18,674 6.76% ----------- ---- ---------- ---- ----------- ---- Total loans 596,513 6.37% 551,352 6.47% 529,155 6.50% ----------- ---- ---------- ---- ----------- ---- Total Earning Assets 1,053,831 5.97% 1,036,535 5.96% 998,926 6.05% Cash 9,011 14,273 13,268 Unrealized gain/loss on securities 15,627 16,182 21,693 Allowance for loan losses (6,909) (6,523) (6,166) Bank premises and equipment 17,036 14,953 12,805 Other assets 42,571 38,621 36,835 ----------- ---------- ----------- Total Assets $ 1,131,167 $1,114,041 $ 1,077,361 =========== ========== =========== INTEREST-BEARING LIABILITIES Interest checking $ 37,276 0.63% $ 39,188 0.59% $ 37,934 0.60% Money market 197,858 1.82% 192,450 1.31% 186,375 1.24% Savings 56,976 0.50% 57,439 0.49% 54,997 0.50% Certificates of deposit 180,510 3.07% 180,332 2.85% 182,735 2.80% Individual Retirement Accounts 121,462 3.49% 116,622 3.75% 114,686 4.81% Other time deposits 950 0.43% 1,275 0.39% 1,057 0.76% Short-term borrowings 43,774 2.08% 39,458 1.37% 39,945 1.24% Long-term borrowings 272,009 3.44% 268,211 3.55% 245,182 3.67% ----------- ---- ---------- ---- ----------- ---- Total Interest-bearing Liabilities 910,815 2.65% 894,975 2.53% 862,911 2.66% Demand deposits 76,133 82,001 74,614 Other liabilities 10,725 8,691 10,396 ----------- ---------- ----------- Total Liabilities 997,673 985,667 947,921 ----------- ---------- ----------- Stockholders' equity, excluding other comprehensive income/loss 123,180 117,695 115,123 Other comprehensive income/loss 10,314 10,679 14,317 ----------- ---------- ----------- Total Stockholders' Equity 133,494 128,374 129,440 ----------- ---------- ----------- Total Liabilities and Stockholders' Equity $ 1,131,167 $1,114,041 $ 1,077,361 =========== ========== =========== Interest Rate Spread 3.32% 3.43% 3.39% Net Interest Income/Earning Assets 3.67% 3.78% 3.75%
(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. 16 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES (IN THOUSANDS)
YTD ENDED 3/31/05 VS. 3/31/04 CHANGE IN CHANGE IN TOTAL VOLUME RATE CHANGE EARNING ASSETS Available-for-sale securities: Taxable $ 268 $ 62 $ 330 Tax-exempt (696) 20 (676) --------- --------- ------- Total available-for-sale securities (428) 82 (346) --------- --------- ------- Held-to-maturity securities, Taxable (1) - (1) Interest-bearing due from banks - 1 1 Federal funds sold 5 2 7 Loans: Taxable 927 (156) 771 Tax-exempt 72 (25) 47 --------- --------- ------- Total loans 999 (181) 818 --------- --------- ------- Total Interest Income 575 (96) 479 --------- --------- ------- INTEREST-BEARING LIABILITIES Interest checking (1) 2 1 Money market 36 276 312 Savings 2 - 2 Certificates of deposit (16) 111 95 Individual Retirement Accounts 74 (400) (326) Other time deposits - (1) (1) Short-term borrowings 13 89 102 Long-term borrowings 221 (152) 69 --------- --------- ------- Total Interest Expense 329 (75) 254 --------- --------- ------- Net Interest Income $ 246 $ (21) $ 225 ========= ========= =======
(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. 17 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE V - COMPARISON OF NONINTEREST INCOME (IN THOUSANDS)
3 MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 Service charges on deposit accounts $ 342 $ 421 Service charges and fees 87 76 Trust and financial management revenue 479 457 Insurance commissions, fees and premiums 98 109 Increase in cash surrender value of life insurance 139 159 Fees related to credit card operation 210 184 Other operating income 348 219 -------- -------- Total other operating income, before realized gains on securities, net 1,703 1,625 Realized gains on securities, net 1,066 964 -------- -------- Total Other Income $ 2,769 $ 2,589 ======== ========
Total noninterest income increased $180,000, or 7.0%, in 2005 compared to 2004, including an increase in net realized gains on securities of $102,000. Securities gains are discussed in the Earnings Overview section of Management's Discussion and Analysis. Other items of significance are as follows: - - Service charges on deposit accounts fell $79,000, or 18.8%, in 2005 as compared to 2004. Changes in deposit account processing resulting from the new core banking system have resulted in overdraft and other charges no longer being assessed for some transactions that would have generated charges with the former system. Management is currently working with the core system vendor to reestablish as many of the former overdraft and service charge routines as possible. - - Other operating income increased $129,000, or 58.9%, in 2005 over 2004. Included in this category were inceases in gains from sales of other real estate properties, dividend income on Federal Home Loan Bank of Pittsburgh stock and debit card fees. TABLE VI- COMPARISON OF NONINTEREST EXPENSE (IN THOUSANDS)
3 MONTHS ENDED MARCH 31, MARCH 31, 2005 2004 Salaries and wages $ 2,875 $ 2,671 Pensions and other employee benefits 1,032 984 Occupancy expense, net 464 377 Furniture and equipment expense 648 336 Pennsylvania shares tax 215 212 Other operating expense 1,894 1,648 --------- --------- Total Other Expense $ 7,128 $ 6,228 ========= =========
Salaries and wages increased $204,000, or 7.6%, for 2005 compared to 2004. The increase in salaries expense is primarily a reflection of a greater number of employees, as the number of full-time equivalent employees increased 9.2%, to 320 as of March 31, 2005 from 293 as of March 31, 2004. The increased number of employees resulted from expansion into new branches in Williamsport and South Williamsport in 2004, as well as additional employees hired for support functions, such as Finance, Training and Compliance. 18 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Occupancy Expense rose $87,000, or 23.1%, in 2005 compared to 2004. With the addition of facilities in Williamsport and South Williamsport, depreciation, real estate taxes, building maintenance and other building-related costs have increased in 2005. Other Operating Expense increased $246,000 or 14.9% in 2005 compared to 2004. The increase in other expenses included an increase in attorney fees of $121,000, mainly related to collection activities on a large commercial credit; an increase of $88,000 in expenses associated with maintaining and preparing other real estate properties for sale; costs associated with NASDAQ Small Cap registration and annual fees totaling $51,000, and an increase in Directors' compensation of $29,000. Within other expenses, professional fees dropped $56,000, as 2004's results included payment of fees related to a system conversion for the credit card operation. 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. Also included in the Net Interest Margin section is a discussion of a change in trend regarding short-term and long-term borrowings. The allowance for loan losses and stockholders' equity are discussed in separate sections of Management's Discussion and Analysis. As discussed in the "Prospects for the Remainder of 2005" section of Management's Discussion and Analysis, the Corporation is expected to complete construction of a new branch in Jersey Shore in 2005, as well as a new administrative building in Wellsboro, and begin (and perhaps, complete, depending on how quickly construction activity proceeds) another branch in Old Lycoming Township. In addition to the building projects, the Corporation will need to purchase furniture, equipment and computer-related items on an ongoing basis for its existing and new operations. In total, management expects 2005 capital purchases to range between $6 and $8.5 million. As discussed in the Earnings Overview section of Management's Discussion and Analysis, management expects the initial depreciation and start-up costs associated with the new locations to have a negative impact on 2005 earnings; however, in light of the Corporation's strong capital position, the overall impact of 2005 capital purchases is not expected to be materially adverse to the Corporation's financial condition. 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: (1) the analysis of estimated probable losses from individual loans, and (2) historical loss experience, as modified for identified trends and concerns, for each loan risk category. The historical loss experience-based portion of the allowance is calculated by determining 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, as modified, 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 $6,925,000 at March 31, 2005, an increase of $138,000 from the balance at December 31, 2004. As you can see in Table VII, net charge-offs totaled $237,000 during the first quarter 2005. The provision for loan losses was $375,000 in the first quarter 2005, up from $350,000 in the first quarter 2004. 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. Table VIII presents a summary of the allocated allowance by loan type, as well as the unallocated portion of the allowance. The unallocated portion of the allowance was $2,504,000 at March 31, 2005, down slightly from $2,578,000 at December 31, 2004. 19 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q As indicated in Table IX, total impaired loans amounted to $8,663,000 at March 31, 2005, up from $8,261,000 at December 31 2004 and $4,621,000 at December 31, 2003. Table IX also shows that the amount of loans classified as nonaccrual increased to $8,429,000 at March 31, 2005 from $7,796,000 at December 31, 2004 and $1,145,000 at December 31, 2003. The growth in 2004 in past due and nonaccrual loans resulted mainly from certain large commercial loan relationships, including one commercial loan relationship with total outstanding loan balances of approximately $3.7 million as of March 31, 2005 and December 31, 2004. In 2004, management moved most of the loans outstanding related to this large relationship, as well as certain other commercial loans, into nonaccrual status, and most of these loans remained in nonaccrual status as of March 31, 2005. Also, in the first quarter 2005, a large ($600,000) residential mortgage loan to the principal owner of the $3.7 million relationship was moved to nonaccrual. As of March 31, 2005 and December 31, 2004, the valuation allowance related to this large relationship amounted to $173,000. In total, the valuation allowance related to impaired loans amounted to $1,340,000 at March 31, 2005 and $1,378,000 at December 31, 2004. Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss and nonaccrual status. However, the actual losses realized from these relationships could vary materially from the allowances calculated as of March 31, 2005. Management continues to closely monitor these commercial loan relationships, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate. Tables VII, VIII, IX and X present an analysis of the allowance for loan losses, the allocation of the allowance, information concerning impaired and past due loans and a five-year summary of loans by type. TABLE VII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)
QUARTER QUARTER ENDED ENDED MARCH 31, MARCH 31, YEARS ENDED DECEMBER 31, 2005 2004 2004 2003 2002 2001 2000 Balance, beginning of year $ 6,787 $ 6,097 $ 6,097 $ 5,789 $ 5,265 $ 5,291 $ 5,131 --------- --------- ------- ------- ------- ------- ------- Charge-offs: Real estate loans 100 20 375 168 123 144 272 Installment loans 56 27 217 326 116 138 77 Credit cards and related plans 65 50 178 171 190 200 214 Commercial and other loans 61 - 16 303 123 231 53 --------- --------- ------- ------- ------- ------- ------- Total charge-offs 282 97 786 968 552 713 616 --------- --------- ------- ------- ------- ------- ------- Recoveries: Real estate loans 12 2 3 75 30 6 26 Installment loans 24 7 32 52 30 27 23 Credit cards and related plans 4 7 23 17 18 20 28 Commercial and other loans 5 4 18 32 58 34 23 --------- --------- ------- ------- ------- ------- ------- Total recoveries 45 20 76 176 136 87 100 --------- --------- ------- ------- ------- ------- ------- Net charge-offs 237 77 710 792 416 626 516 Provision for loan losses 375 350 1,400 1,100 940 600 676 --------- --------- ------- ------- ------- ------- ------- Balance, end of year $ 6,925 $ 6,370 $ 6,787 $ 6,097 $ 5,789 $ 5,265 $ 5,291 ========= ========= ======= ======= ======= ======= =======
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE (IN THOUSANDS)
AS OF MARCH 31, AS OF DECEMBER 31, 2005 2004 2003 2002 2001 2000 Commercial $ 2,165 $ 1,909 $ 1,578 $ 1,315 $ 1,837 $ 1,612 Consumer mortgage 512 513 456 460 674 952 Impaired loans 1,340 1,378 1,542 1,877 73 273 Consumer 404 409 404 378 494 471 Unallocated 2,504 2,578 2,117 1,759 2,187 1,983 --------- ------- ------- ------- ------- ------- Total Allowance $ 6,925 $ 6,787 $ 6,097 $ 5,789 $ 5,265 $ 5,291 ========= ======= ======= ======= ======= =======
20 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q TABLE IX - PAST DUE AND IMPAIRED LOANS (IN THOUSANDS)
MAR. 31, DEC. 31, DEC. 31, DEC. 31, 2005 2004 2003 2002 Impaired loans without a valuation allowance $ 3,945 $ 3,552 $ 114 $ 675 Impaired loans with a valuation allowance 4,718 4,709 4,507 3,039 -------- -------- -------- -------- Total impaired loans $ 8,663 $ 8,261 $ 4,621 $ 3,714 ======== ======== ======== ======== Valuation allowance related to impaired loans $ 1,340 $ 1,378 $ 1,542 $ 1,877 Total nonaccrual loans $ 8,429 $ 7,796 $ 1,145 $ 1,252 Total loans past due 90 days or more and still accruing $ 2,021 $ 1,307 $ 2,546 $ 2,318
TABLE X - SUMMARY OF LOANS BY TYPE (IN THOUSANDS)
MARCH 31, AS OF DECEMBER 31, 2005 2004 2003 2002 2001 2000 Real estate - construction $ 3,627 $ 4,178 $ 2,856 $ 103 $ 1,814 $ 452 Real estate - residential mortgage 341,959 347,705 330,807 292,136 245,997 207,100 Real estate - commercial mortgage 133,510 128,073 100,240 78,317 60,267 56,225 Consumer 32,305 31,702 33,977 31,532 29,284 28,141 Agricultural 2,688 2,872 2,948 3,024 2,344 1,983 Commercial 61,681 43,566 34,967 30,874 24,696 20,776 Other 1,951 1,804 1,183 2,001 1,195 948 Political subdivisions 21,322 19,713 17,854 13,062 13,479 12,462 Lease receivables - - 65 96 152 218 --------- ---------- ---------- --------- --------- --------- Total 599,043 579,613 524,897 451,145 379,228 328,305 Less: allowance for loan losses (6,925) (6,787) (6,097) (5,789) (5,265) (5,291) --------- ---------- ---------- --------- --------- --------- Loans, net $ 592,118 $ 572,826 $ 518,800 $ 445,356 $ 373,963 $ 323,014 ========= ========== ========== ========= ========= =========
DERIVATIVE FINANCIAL INSTRUMENTS The Corporation has utilized 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. In 2004, the Corporation stopped originating new IPCDs, but continues to maintain and account for IPCDs and the related derivative contracts entered into between 2001 and 2004. 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. 21 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q 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 paid a fee of 0.75% to a consulting firm at inception of each deposit. These fees are being 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. Amounts recorded as of March 31, 2005 and December 31, 2004, and for the first quarters of 2005 and 2004, related to IPCDs are as follows (in thousands):
MARCH 31, DEC. 31, 2005 2004 Contractual amount of IPCDs (equal to notional amount of Swap contracts) $ 3,970 $ 4,045 Carrying value of IPCDs 3,641 3,695 Carrying value of embedded derivative liabilities 444 297 Carrying value of Swap contract (assets) liabilities (127) 42
3 MOS. ENDED 3 MOS. ENDED MARCH 31, MARCH 31, 2005 2004 Interest expense $ 40 $ 34 Other expense - 1
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 FHLB - Pittsburgh, secured by mortgage loans and various investment securities. At March 31, 2005, the Corporation had unused borrowing availability with correspondent banks and the Federal Home Loan Bank of Pittsburgh totaling approximately $137,939,000. 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. Further, if required to raise cash in an emergency situation, the Corporation could sell non-pledged investment securities to meet its obligations. At March 31, 2005, the carrying value of non-pledged securities was $273,705,000. Management believes the combination of its strong capital position (discussed in the next section), ample available borrowing facilities and substantial non-pledged securities portfolio have placed the Corporation in a position of minimal short-term and long-term liquidity risk. 22 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q 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 Corporation's consolidated capital ratios at March 31, 2005 are as follows: Total capital to risk-weighted assets 18.73% Tier 1 capital to risk-weighted assets 17.15% Tier 1 capital to average total assets 10.86%
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 (discussed in the "Financial Position" section of Management's Discussion and Analysis) during the next 12 months, though expected to be substantial, are not expected to have a significantly detrimental effect on capital ratios. As reflected in the consolidated balance sheet, Accumulated Other Comprehensive Income fell to $5,950,000 at March 31, 2005 from $10,535,000 at December 31, 2004. The balance in Accumulated Other Comprehensive Income represents unrealized gains and losses on available-for-sale securities, net of deferred income tax. Rising interest rates, which reduced the market prices of debt securities, were the major cause of the decline in Accumulated Other Comprehensive Income at March 31, 2005 compared to December 31, 2004. INFLATION Over the last several years, direct inflationary pressures on the Corporation's payroll-related and other noninterest costs have been modest. 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. 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. 23 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q 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. The Bank's policy provides limits at +/- 100, 200 and 300 basis points from current rates for fluctuations in net interest income from the baseline (flat rates) one-year scenario. The policy also limits acceptable market value variances from the baseline values based on current rates. The most sensitive scenario presented in Table XI presented below is the "+300 basis points" scenario. As the table shows, as of March 31, 2005, if interest rates were to immediately rise 300 basis points, the Bank's calculations based on the model show that although the change in net interest income is within the policy threshold, the market value of portfolio equity would decrease 51.1%, which exceeds the policy limit of 45%. Similarly, at December 31, 2004, the change in net interest income was within the policy threshold, but the market value of portfolio equity decrease of 49.2% exceeded the policy threshold. Management will continue to evaluate whether to make any changes to asset or liability holdings in an effort to reduce exposure to decline in market value or net interest income 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 XI - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES MARCH 31, 2005 DATA (IN THOUSANDS) 12 MOS. ENDING MAR. 31, 2006
INTEREST INTEREST NET INTEREST NII NII BASIS POINT CHANGE IN RATES INCOME EXPENSE INCOME (NII) % CHANGE RISK LIMIT +300 64,048 36,494 27,554 -17.2% 20.0% +200 62,351 32,796 29,555 -11.2% 15.0% +100 60,588 29,098 31,490 -5.4% 10.0% 0 58,691 25,400 33,291 0.0% 0.0% -100 56,011 22,113 33,898 1.8% 10.0% -200 53,179 19,398 33,781 1.5% 15.0% -300 50,565 17,784 32,781 -1.5% 20.0%
MARKET VALUE OF PORTFOLIO EQUITY AT MARCH 31, 2005
PRESENT PRESENT PRESENT VALUE VALUE VALUE BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT +300 65,884 -51.1% 45.0% +200 88,280 -34.5% 35.0% +100 111,664 -17.1% 25.0% 0 134,696 0.0% 0.0% -100 148,133 10.0% 25.0% -200 155,056 15.1% 35.0% -300 165,510 22.9% 45.0%
24 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q DECEMBER 31, 2004 DATA (IN THOUSANDS) 12 MOS. ENDING DEC. 31, 2005
INTEREST INTEREST NET INTEREST NII NII BASIS POINT CHANGE IN RATES INCOME EXPENSE INCOME (NII) % CHANGE RISK LIMIT +300 62,724 34,583 28,141 -16.8% 20.0% +200 61,066 30,840 30,226 -10.7% 15.0% +100 59,327 27,098 32,229 -4.7% 10.0% 0 57,343 23,510 33,833 0.0% 0.0% -100 54,581 20,676 33,905 0.2% 10.0% -200 51,800 17,924 33,876 0.1% 15.0% -300 49,090 16,850 32,240 -4.7% 20.0%
MARKET VALUE OF PORTFOLIO EQUITY AT DECEMBER 31, 2004
PRESENT PRESENT PRESENT VALUE VALUE VALUE BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT +300 71,244 -49.2% 45.0% +200 94,088 -32.9% 35.0% +100 117,491 -16.2% 25.0% 0 140,168 0.0% 0.0% -100 153,026 9.2% 25.0% -200 162,400 15.9% 35.0% -300 171,463 22.3% 45.0%
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. Included in "Other Equity Securities" in the table that follows are preferred stocks issued by U.S. Government agencies with a fair value of $1,988,000 at March 31, 2005 and $6,130,000 at December 31, 2004. 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. 25 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Equity securities held as of March 31, 2005 and December 31, 2004 are presented in Table XII. TABLE XII - EQUITY SECURITIES (IN THOUSANDS)
HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT MARCH 31, 2005 COST VALUE VALUE VALUE Banks and bank holding companies $ 17,798 $ 27,385 $ (2,739) $ (5,477) Other equity securities 3,985 4,233 (423) (847) -------- -------- ------------ ------------ Total $ 21,783 $ 31,618 $ (3,162) $ (6,324) ======== ======== ============ ============
HYPOTHETICAL HYPOTHETICAL 10% 20% DECLINE IN DECLINE IN FAIR MARKET MARKET AT DECEMBER 31, 2004 COST VALUE VALUE VALUE Banks and bank holding companies $ 17,426 $ 29,880 $ (2,988) $ (5,976) Other equity securities 8,962 8,383 (838) (1,677) -------- -------- ------------ ------------ Total $ 26,388 $ 38,263 $ (3,826) $ (7,653) ======== ======== ============ ============
PART I - FINANCIAL INFORMATION (CONTINUED) ITEM 4. CONTROLS AND PROCEDURES The Corporation's management, under the supervision of and with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation's disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation's disclosure controls and procedures are effective to ensure that all material 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 were no significant changes in the Corporation's internal control over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to affect, our internal control over financial reporting. 26 CITIZENS & NORTHERN CORPORATION - FORM 10 - Q 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. Unregistered Sales of Equity Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits 3. (i) Articles of Incorporated by reference to the Incorporation exhibits filed with the Corporation's registration statement on Form S-4 on March 27, 1987. 3. (ii) By-laws Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed August 25, 2004 11. Statement re: computation Information concerning the computation of per share earnings of earnings per share is provided in Note 2 to the Consolidated Financial Statements, which is included in Part I, Item 1 of Form 10-Q 31. Rule 13a-14(a)/15d-14(a) certifications: 31.1 Certification of Chief Executive Officer Filed herewith 31.2 Certification of Chief Financial Officer Filed herewith 32. Section 1350 certifications Filed herewith 27 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 10, 2005 By: /s/ Craig G. Litchfield - ------------ ----------------------------------------------- Date Chairman, President and Chief Executive Officer May 10, 2005 By: /s/ Mark A. Hughes - ------------ ------------------------------------- Date Treasurer and Chief Financial Officer 28 EX-31.1 2 l13284aexv31w1.txt EX-31.1 CERTIFICATION 302-CEO CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Exhibit 31.1 CERTIFICATION 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 10, 2005 By: /s/ Craig G. Litchfield - ------------ ------------------------------------------- Date Chairman, President and Chief Executive Officer 29 EX-31.2 3 l13284aexv31w2.txt EX-31.2 CERTIFICATION 302-CFO CITIZENS & NORTHERN CORPORATION - FORM 10 - Q Exhibit 31.2 CERTIFICATION 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-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. May 10, 2005 By: /s/ Mark A. Hughes - ------------ --------------------------------- Date Treasurer and Chief Financial Officer 30 EX-32 4 l13284aexv32.txt EX-32 CERTIFICATIONS-CEO & CFO CITIZENS & NORTHERN CORPORATION - FORM 10 - Q EXHIBIT 32 SECTION 1350 CERTIFICATIONS In connection with the Quarterly Report of Citizens & Northern Corporation (the "Corporation") on Form 10-Q for the quarterly period ended March 31, 2005, 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 and belief: (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 10, 2005 By: /s/ Craig G. Litchfield - ------------ ----------------------------------------------- Date Chairman, President and Chief Executive Officer May 10, 2005 By: /s/ Mark A. Hughes - ------------ ------------------------------------- Date Treasurer and Chief Financial Officer These certifications accompany this report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Corporation specifically incorporates them by reference. A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request. 31 -----END PRIVACY-ENHANCED MESSAGE-----