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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 nine-month period ended September 30, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ___________
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2451943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 Main Street
Wellsboro, Pa. 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes /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) 5,285,122 Shares Outstanding November 12, 2002
1
CITIZENS & NORTHERN CORPORATION
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2002 and
December 31, 2001 Page 3
Consolidated Statement of Income - Three Months
and Nine Months Ended September 30, 2002 and 2001 Page 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 2002 and 2001 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 20
Item 3. Information About Market Risk Pages 20 through 23
Item 4. Controls and Procedures Page 23
Part II. Other Information Page 24
Signatures Page 25
Certifications Pages 26 and 27
Exhibit 99.1 Certification Pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 Page 28
2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS EXCEPT SHARE DATA) 2002 2001
(UNAUDITED) (NOTE)
ASSETS
Cash and due from banks:
Noninterest-bearing $ 17,293 $ 14,055
Interest-bearing 696 1,981
- ---------------------------------------------------------------------------------------------------
Total cash and cash equivalents 17,989 16,036
Available-for-sale securities 497,161 433,969
Held-to-maturity securities 823 1,448
Loans, net 425,315 373,963
Bank-owned life insurance 16,553 15,905
Accrued interest receivable 5,806 4,871
Bank premises and equipment, net 10,254 9,967
Foreclosed assets held for sale 164 179
Other assets 10,747 10,661
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 984,812 $ 866,999
===================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 66,710 $ 63,858
Interest-bearing 569,769 512,416
- ---------------------------------------------------------------------------------------------------
Total deposits 636,479 576,274
Dividends payable 1,586 1,466
Short-term borrowings 38,683 58,064
Long-term borrowings 180,720 125,584
Accrued interest and other liabilities 12,546 5,424
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 870,014 766,812
- ---------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 10,000,000
shares; issued 5,431,021 in 2002 and 5,378,212 in 2001 5,432 5,378
Stock dividend distributable - 1,369
Paid-in capital 21,149 19,758
Retained earnings 77,182 70,352
- ---------------------------------------------------------------------------------------------------
Total 103,763 96,857
Accumulated other comprehensive income 13,181 5,284
Unamortized stock compensation (71) (17)
Treasury stock, at cost:
145,999 shares at September 30, 2002 (2,075)
143,412 shares at December 31, 2001 (1,937)
- ---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 114,798 100,187
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 984,812 $ 866,999
===================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 2001 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
3 MONTHS ENDED FISCAL YEAR TO DATE
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) SEPTEMBER 30, SEPTEMBER 30, 9 MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
INTEREST INCOME (CURRENT) (PRIOR YEAR) (CURRENT) (PRIOR YEAR)
Interest and fees on loans $ 7,864 $ 7,315 $ 22,663 $ 21,227
Interest on balances with depository institutions 5 12 18 42
Interest on loans to political subdivisions 143 186 435 534
Interest on federal funds sold 16 33 30 159
Income from available-for-sale and
held-to-maturity securities:
Taxable 4,810 4,971 14,598 14,980
Tax-exempt 1,523 1,172 4,291 3,132
Dividends 314 273 805 811
- ------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 14,675 13,962 42,840 40,885
- ------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 4,383 4,982 13,008 15,933
Interest on short-term borrowings 221 887 735 3,367
Interest on long-term borrowings 2,071 1,168 5,993 2,507
- ------------------------------------------------------------------------------------------------------------------------------
Total interest expense 6,675 7,037 19,736 21,807
- ------------------------------------------------------------------------------------------------------------------------------
Interest margin 8,000 6,925 23,104 19,078
Provision for loan losses 280 150 640 450
- ------------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 7,720 6,775 22,464 18,628
- ------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 453 365 1,260 991
Service charges and fees 61 62 194 189
Trust and financial management income 413 375 1,358 1,189
Insurance commissions, fees and premiums 108 190 448 443
Increase in cash surrender value of life insurance 213 230 648 681
Fees related to credit card operation 168 132 450 408
Other operating income 226 246 652 649
- ------------------------------------------------------------------------------------------------------------------------------
Total other income before realized gains on securities, net 1,642 1,600 5,010 4,550
Realized gains on securities, net 489 520 2,496 1,717
- ------------------------------------------------------------------------------------------------------------------------------
Total other income 2,131 2,120 7,506 6,267
- ------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and wages 2,467 2,108 7,056 6,178
Pensions and other employee benefits 716 520 1,975 1,623
Occupancy expense, net 229 247 815 756
Furniture and equipment expense 358 332 1,199 1,030
Expenses related to credit card operation 78 67 214 205
Pennsylvania shares tax 184 198 550 592
Other operating expense 1,278 1,103 3,855 3,369
- ------------------------------------------------------------------------------------------------------------------------------
Total other expenses 5,310 4,575 15,664 13,753
- ------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,541 4,320 14,306 11,142
Income tax provision 831 914 2,938 2,282
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,710 $ 3,406 $ 11,368 $ 8,860
==============================================================================================================================
PER SHARE DATA:
Net income - basic $ 0.70 $ 0.64 $ 2.15 $ 1.67
Net income - diluted $ 0.70 $ 0.64 $ 2.14 $ 1.67
- ------------------------------------------------------------------------------------------------------------------------------
Dividend per share $ 0.30 $ 0.26 $ 0.86 $ $0.78
- ------------------------------------------------------------------------------------------------------------------------------
Number shares used in computation - basic 5,284,582 5,287,147 5,287,034 5,298,985
Number shares used in computation - diluted 5,301,740 5,287,991 5,300,728 5,299,393
The accompanying notes are an integral part of these consolidated financial
statements.
4
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,368 $ 8,860
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 640 450
Realized gains on securities, net (2,496) (1,717)
Gain on sale of foreclosed assets, net (26) (69)
Depreciation expense 1,054 933
Accretion and amortization, net (508) (1,584)
Increase in cash surrender value of life insurance (648) (681)
Amortization of restricted stock 62 17
Increase in accrued interest receivable and other assets (956) (1,008)
Increase in accrued interest payable and other liabilities 3,148 3,871
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 11,638 9,072
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 616 916
Purchase of held-to-maturity securities - (626)
Proceeds from sales of available-for-sale securities 25,650 9,094
Proceeds from maturities of available-for-sale securities 110,099 95,310
Purchase of available-for-sale securities (183,963) (153,610)
Purchase of restricted stock (125) (481)
Net increase in loans (52,428) (36,712)
Purchase of premises and equipment (1,341) (1,280)
Proceeds from sale of foreclosed assets 477 434
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (101,015) (86,955)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 60,205 15,830
Net decrease in short-term borrowings (19,381) (20,780)
Proceeds from long-term borrowings 75,153 105,000
Repayments of long-term borrowings (20,017) (15)
Purchase of treasury stock (238) (521)
Sale of treasury stock 60 -
Dividends paid (4,452) (4,081)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 91,330 95,433
- -----------------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,953 17,550
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,036 13,824
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 17,989 $ 31,374
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans $ 436 $ 388
Interest paid $ 16,422 $ 18,585
Income taxes paid $ 3,599 $ 2,028
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, 2001, is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods.
Results reported for the three-month and nine-month periods ended September 30,
2002 might not be indicative of the results for the year ending December 31,
2002.
Certain 2001 amounts have been reclassified to conform to the 2002 presentation.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of
common stock outstanding. The number of shares used in calculating net income
and cash dividends per share reflect the retroactive effect of stock dividends
for all periods presented. The following data show the amounts used in
computing net income per share and the weighted average number of shares of
dilutive stock options. The dilutive effect of stock options is computed as the
weighted-average common shares available from the exercise of all dilutive
stock options, less the number of shares that could be repurchased with the
proceeds of stock option exercises based on the average share price of the
Corporation's common stock during the period.
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
9 MONTHS ENDED SEPTEMBER 30, 2002
Earnings per share - basic $11,368,000 5,287,034 $2.15
Dilutive effect of stock options 13,694
- -------------------------------------------------------------------------------------------------------
Earnings per share - diluted $11,368,000 5,300,728 $2.14
=======================================================================================================
9 MONTHS ENDED SEPTEMBER 30, 2001
Earnings per share - basic $ 8,860,000 5,298,985 $1.67
Dilutive effect of stock options 408
- -------------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 8,860,000 5,299,393 $1.67
=======================================================================================================
QUARTER ENDED SEPTEMBER 30, 2002
Earnings per share - basic $ 3,710,000 5,284,582 $0.70
Dilutive effect of stock options 17,158
- -------------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 3,710,000 5,301,740 $0.70
=======================================================================================================
QUARTER ENDED SEPTEMBER 30, 2001
Earnings per share - basic $ 3,406,000 5,287,147 $0.64
Dilutive effect of stock options 844
- -------------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 3,406,000 5,287,991 $0.64
=======================================================================================================
6
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
3. COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
Comprehensive income is calculated as follows:
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 2002 2001 2002 2001
Net income $ 3,710 $ 3,406 $11,368 $ 8,860
Other comprehensive income:
Unrealized holding gains on available-for-sale securities:
Gains arising during the period 6,387 6,891 14,461 13,643
Reclassification adjustment for realized gains (489) (520) (2,496) (1,717)
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income before income tax 5,898 6,371 11,965 11,926
Income tax related to other comprehensive income (2,005) (2,166) (4,068) (4,055)
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 3,893 4,205 7,897 7,871
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 7,603 $ 7,611 $19,265 $16,731
===============================================================================================================================
4. DERIVATIVE FINANCIAL INSTRUMENTS
In June 2001, the Corporation began to utilize 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.
7
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Amounts recorded related to IPCDs are as follows (in thousands):
SEPTEMBER 30, DECEMBER 31,
2002 2001
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $2,911 $1,410
Carrying value of IPCDs 2,449 1,154
Carrying value of embedded derivative liabilities 119 233
Carrying value of Swap contract liabilities 349 31
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 2002 2001 2002 2001
Interest expense $24 $ 6 61 7
Other expense (4) 10 1 10
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this section and elsewhere in Form 10-Q are
forward-looking statements. Citizens & Northern Corporation and its
wholly-owned subsidiaries (collectively, the Corporation) intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995. Forward-looking statements, which are based on certain assumptions and
describe future plans, business objectives and expectations, are generally
identifiable by the use of words such as, "believe", "expect", "intend",
"anticipate", "estimate", "project", and similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or occurrences
is inherently uncertain. Factors which could have a material adverse effect on
the operations and future prospects of the Corporation include, but are not
limited to, the following:
- - changes in monetary and fiscal policies of the U.S. Treasury and
the Federal Reserve Board, particularly related to changes in
interest rates
- - changes in general economic conditions
- - legislative or regulatory changes
- - downturn in demand for loan, deposit and other financial services
in the Corporation's market area
- - increased competition from other banks and non-bank providers of
financial services
- - technological changes and increased technology-related costs
- - changes in accounting principles.
These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
REFERENCES TO 2002 AND 2001
Unless otherwise noted, all references to "2002" in the following discussion of
operating results are intended to mean the nine months ended September 30,
2002, and similarly, references to "2001" are intended to mean the nine months
ended September 30, 2001.
8
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
EARNINGS OVERVIEW
Net income for 2002 was $11,368,000, or $2.15 per share - basic and $2.14 per
share - diluted. This represents an increase of 28.1% in net income per share -
diluted over 2001. Return on average assets, excluding unrealized gains and
losses on securities, increased 10.0%, to 1.65% in 2002 compared to 1.50% in
2001. Including the effects of unrealized gains and losses on securities,
return on average assets increased to 1.64% in 2002 from 1.50% in 2001. Return
on average equity, excluding unrealized gains and losses on securities, rose
18.6%, to 15.47% in 2002 from 13.04% in 2001. Including unrealized gains and
losses on securities, return on average equity increased 14.5%, to 14.43% in
2002 from 12.60% in 2001.
The most significant income statement changes between 2002 and 2001 were as
follows:
- The interest margin increased significantly ($4,026,000,
or 21.1%), to $23,104,000 in 2002 from $19,078,000 in 2001. The
Corporation has experienced significant growth in deposits and
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 lower in
2002, as the Corporation's average rates were more fully impacted
by the Federal Reserve Board's lowering of the federal funds target
rate several times throughout 2001. Changes in the net interest
margin are discussed in more detail later in Management's
Discussion and Analysis.
- Net realized gains on securities were $2,496,000 in 2002, compared
to $1,717,000 in 2001. 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 $1,789,000 in 2002 and $1,837,000 in 2001. In
addition to bank stocks, the Corporation also realized gains and
losses from sales and calls of other securities. The main reasons
for the increase in net realized gains in 2002 over 2001 were that
gains from sales and calls of municipal bonds increased to $461,000
in 2002 from $56,000 in 2001, and the Corporation sold a corporate
bond for a loss of $354,000 in 2001.
- Other (noninterest) expenses increased $1,911,000, or 13.9%, in 2002
compared to 2001. The increase reflects increases in payroll costs,
depreciation and maintenance agreements associated with computer
hardware and software. These types of costs have increased as a
result of the need to add personnel and supplement existing systems
to keep up with expansion of services and growth in lending activity
over the last few years.
- The income tax provision increased to $2,938,000 in 2002 from
$2,282,000 in 2001, because pre-tax income is higher.
THIRD QUARTER 2002
Net income for the third quarter 2002 was $3,710,000, or 8.9% higher than net
income for the third quarter 2001 of $3,406,000. The major changes between
periods are described as follows:
- The interest margin increased $1,075,000 for the third quarter 2002
compared to the third quarter 2001, while noninterest expenses
increased $735,000 between the periods. The major reasons for these
changes are the same as described in the comparison of the nine
months ended September 30, 2002 and 2001 operating results above.
- The provision for loan losses increased $130,000, to $280,000 for
the third quarter 2002 compared to $150,000 for the third quarter
2001. The increase in loan loss expense resulted mainly from higher
allowances calculated on "Watch List" loans (mainly commercial and
residential mortgage loans). Accounting for loan losses is described
in more detail in the "Provision and Allowance for Loan Losses"
section of Management's Discussion and Analysis.
- The income tax provision fell to $831,000 (18.3% of pre-tax income)
for the third quarter from $914,000 (20.5% of pre-tax income) for
the third quarter 2001. The lower tax rate for the third quarter
2002 resulted mainly from tax deductions arising from contributions
of appreciated securities, and from a higher level of investments in
tax-exempt securities (municipal bonds).
9
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Net income for the third quarter 2002 is slightly less than the $3,820,000
reported in the second quarter 2002 and $3,838,000 reported in the first
quarter 2002. As you can see in Table I, the interest margin increased
$222,000 in the thir d quarter over the second quarter, and $452,000 in the
second quarter over the first quarter. However, net securities gains were
$292,000 lower in the third quarter than the second quarter, and $445,000 lower
in the second quarter than in the first quarter.
TABLE I - QUARTERLY FINANCIAL DATA
(IN THOUSANDS) (UNAUDITED)
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2002 2002 2002 2001 2001 2001 2001
Interest income $14,675 $14,523 $13,642 $13,776 $13,962 $13,830 $13,093
Interest expense 6,675 6,745 6,316 6,549 7,037 7,278 7,492
- ---------------------------------------------------------------------------------------------------------------------------------
Interest margin 8,000 7,778 7,326 7,227 6,925 6,552 5,601
Provision for loan losses 280 180 180 150 150 150 150
- ---------------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan
losses 7,720 7,598 7,146 7,077 6,775 6,402 5,451
Other income 1,642 1,681 1,687 1,570 1,600 1,516 1,434
Securities gains 489 781 1,226 203 520 742 455
Other expenses 5,310 5,248 5,106 4,918 4,575 4,580 4,598
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,541 4,812 4,953 3,932 4,320 4,080 2,742
Income tax provision 831 992 1,115 740 914 891 477
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,710 $ 3,820 $ 3,838 $ 3,192 $ 3,406 $ 3,189 $ 2,265
=================================================================================================================================
Net income per share - basic $ 0.70 $ 0.72 $ 0.73 $ 0.60 $ 0.64 $ 0.60 $ 0.43
=================================================================================================================================
Net income per share - diluted $ 0.70 $ 0.72 $ 0.72 $ 0.60 $ 0.64 $ 0.60 $ 0.43
=================================================================================================================================
The number of shares used in calculating net income per share for each quarter
of 2001 reflects the retroactive effect of a 1% stock dividend declared in
December 2001 and issued in January 2002.
PROSPECTS FOR THE 4TH QUARTER 2002
Management believes prospects for the fourth quarter of 2002 continue to be
very good. Net loans are up 18.5% as of September 30, 2002 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 and customer repurchase agreements have also grown substantially (up
16.1% as of September 30, 2002 compared to one year earlier), and there
continues to be significant customer demand in recent months. The largest
categories of deposit growth in recent months have been CDs, money market
accounts and IRAs. It appears that investors have moved funds out of, or are
not investing new dollars in, the U.S. stock market. 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. Also, the Corporation has developed some new, innovative
CD products over the last 18 months. In June 2001, the Corporation began to
offer Index Powered CDs, which are described in more detail in Note 4 to the
consolidated financial statements. Effective in May 2002, the Corporation
began to offer "Roll-up" CDs. Roll-up CDs allow the investor to increase the
interest rate, to the Corporation's current CD rate for the same term, once
during a 3-year, 4-year or 5-year term, subject to limitations. This roll-up
feature permits the investor an opportunity to receive a higher rate of
return, if rates increase, without risk of reduction in rate over the term of
the CD.
On November 6, 2002, the Federal Reserve lowered its Federal funds target rate
by 50 basis points, to 1.25%. In response to this change, most U.S. financial
institutions (including Citizens & Northern Bank) have lowered their prime
rates on commercial loans. Also, management expects to decrease rates on some
other loan and deposit products. At this historically low level of interest
rates, management expects a great deal of refinancing activity to continue,
resulting in mortgage-backed securities and mortgage loans continuing to repay
at rapid rates. Overall (net), the recent action of the Fed is not expected to
have a major impact on the Corporation's operating results for the fourth
quarter 2002.
10
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
The other major variable that could affect 2002 earnings is securities gains and
losses. The Corporation had net realized gains of approximately $300,000 in the
month of October 2002. However, 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 2002.
CRITICAL ACCOUNTING POLICIES
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, a task force of the American Institute of Certified Public
Accountants is working on detailed implementation guidance for calculating the
allowance for loan losses. Implementation of that detailed implementation
guidance could result in an adjustment to the allowance; however, based on the
latest targeted effective date, that guidance would not affect the Corporation
until 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 2002 and 2001.
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 $25,820,000 in 2002, an
increase of $4,568,000, or 22.1%, over 2001. As reflected in Table IV, the
increase in net interest margin was caused by a combination of growth in volume
and lower average interest rates. Increased interest income from higher volumes
of earning assets exceeded increases in interest expense attributable to higher
volumes of interest-bearing liabilities by $2,896,000 in 2002. Table IV also
shows that interest rate changes had the effect of increasing net interest
income $1,672,000 in 2002 over 2001. 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) widened to 3.43% for the
first 9 months of 2002. The Interest Rate Spread was 3.17% for the year ended
December 31, 2001, and 3.08% for the first 9 months of 2001.
11
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
INTEREST INCOME AND EARNING ASSETS
Interest income increased 5.9% to $45,016,000 in 2002 from $42,519,000 in 2001.
Income from available-for-sale securities increased $1,381,000, or 6.8%, and
interest from loans increased $1,301,000 or 5.9%. Overall, the increase in
interest income resulted from higher volumes of securities and loans, which more
than offset the effect of lower interest rates.
As indicated in Table III, average available-for-sale securities in 2002
amounted to $462,103,000, an increase of 18.3% over the first 9 months of 2001.
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. 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 2001 and the first 9 months of 2002. The average
rate of return on available-for-sale securities was 6.26% for 2002, considerably
lower than the 6.93% level in the first half of 2001.
Table III also shows that the composition of the available-for-sale securities
portfolio has changed significantly. The average balance of U.S. Government
agency securities fell to 17% of the average balance of the total portfolio in
2002 from 32% in the first 9 months of 2001. In contrast, the average balance of
mortgage-backed securities increased to 46% of the total portfolio in 2002 from
35% in the first 9 months of 2001. In the third and fourth quarters of 2001, as
a result of declining interest rates, substantial amounts of U.S. Government
agency securities were called. The Corporation reinvested much of the proceeds
in mortgage-backed securities. Also, much of the leveraged security purchases
described above consisted of mortgage-backed securities. The portfolio's
increased weighting in mortgage-backed securities is designed to provide
increased cash flow, in the form of monthly principal and interest payments.
This increased level of cash inflows will be available to be reinvested at
higher rates when interest rates rise.
Obligations of state and political subdivisions (municipal bonds) also were a
larger portion of the portfolio in 2002 than in 2001. The average balance of
municipal bonds grew to $109,556,000, or 24% of the portfolio, in 2002 from
$74,849,000, or 19% of the portfolio, in the first 9 months of 2001. 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 $38,481,000 in 2002
from $28,714,000 for the first 9 months of 2001, primarily as a result of
purchases of Trust Preferred Securities.
The average balance of gross loans increased 18.2% in 2002 over the first 9
months of 2001, to $401,302,000 from $339,484,000. The largest area of growth
was real estate secured loans, with substantial increases in both residential
and commercial mortgages. Among the factors that helped create the growth in
loans was the opening of the Muncy, PA office in October 2000. The Corporation
also increased its lending staff in Bradford and Tioga (PA) Counties during the
second half of 2001. The average rate of return on loans fell to 7.76% in 2002
from 8.66% in the first 9 months of 2001, due to lower market rates. The
Corporation experienced a great deal of refinancing and rate modification
activity in 2001, which has impacted loan yields in 2002, and probably will
continue to impact returns for the next few years.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $2,071,000, or 9.5%, to $19,736,000 in 2002 from
$21,807,000 in 2001. Overall, the impact of lower interest rates more than
offset higher volumes of interest-bearing liabilities in 2002 compared to 2001.
In Table IV, you can see the impact of lower interest rates on the Corporation's
major categories of interest-bearing deposits - principally, CDs, money market
accounts and savings accounts. Table IV also shows that interest expense from
other borrowed funds increased in 2002 by $968,000 over 2001. This increase was
attributable to higher average balances, related to borrowings 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 $604,677,000 in 2002 from $539,796,000 in
the first 9 months of 2001. This represents an increase of 12.1%. Of the
increase in average deposits, the largest growth categories were CDs (growth in
average balance of $26,036,000, or 15.6%), money market accounts ($16,914,000,
or 11.1%), IRAs ($10,096,000, or 12.7%) and demand deposits ($7,206,000, or
13.0%). 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 3.50% for 2002, from 4.40% for the year ended December 31, 2001 and 4.61% for
the first 9 months of 2001.
12
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
NINE MONTHS ENDED
SEPTEMBER 30, INCREASE/
(IN THOUSANDS) 2002 2001 (DECREASE)
INTEREST INCOME
Available-for-sale securities:
U.S. Treasury securities $ 75 $ 113 $ (38)
Securities of other U.S. Government agencies
and corporations 3,696 6,453 (2,757)
Mortgage-backed securities 8,768 6,654 2,114
Obligations of states and political subdivisions 6,266 4,529 1,737
Equity securities 805 811 (6)
Other securities 2,014 1,683 331
- ------------------------------------------------------------------------------------------------------
Total available-for-sale securities 21,624 20,243 1,381
- ------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 23 30 (7)
Securities of other U.S. Government agencies
and corporations 16 34 (18)
Mortgage-backed securities 6 13 (7)
- ------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 45 77 (32)
- ------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 18 42 (24)
Federal funds sold 30 159 (129)
Loans:
Real estate loans 18,830 17,327 1,503
Consumer 2,186 2,291 (105)
Agricultural 148 143 5
Commercial/industrial 1,440 1,401 39
Other 50 53 (3)
Political subdivisions 636 771 (135)
Leases 9 12 (3)
- ------------------------------------------------------------------------------------------------------
Total loans 23,299 21,998 1,301
- ------------------------------------------------------------------------------------------------------
Total Interest Income 45,016 42,519 2,497
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest checking 330 529 (199)
Money market 3,008 4,368 (1,360)
Savings 380 785 (405)
Certificates of deposit 5,933 7,157 (1,224)
Individual Retirement Accounts 3,331 3,064 267
Other time deposits 26 30 (4)
Federal funds purchased 33 147 (114)
Other borrowed funds 6,695 5,727 968
- ------------------------------------------------------------------------------------------------------
Total Interest Expense 19,736 21,807 (2,071)
- ------------------------------------------------------------------------------------------------------
Net Interest Income $25,280 $20,712 $ 4,568
======================================================================================================
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) 9 MONTHS YEAR 9 MONTHS
ENDED RATE OF ENDED RATE OF ENDED RATE OF
9/30/2002 RETURN/ 12/31/2001 RETURN/ 9/30/2001 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 $ 1,659 6.04% $ 2,506 6.03% $ 2,507 6.03%
Securities of other U.S. Government agencies and
corporations 77,348 6.39% 113,186 6.82% 125,822 6.86%
Mortgage-backed securities 213,752 5.48% 150,838 6.29% 137,353 6.48%
Obligations of states and political subdivisions 109,556 7.65% 78,741 7.89% 74,849 8.09%
Equity securities 21,307 5.05% 21,062 5.18% 21,343 5.08%
Other securities 38,481 7.00% 29,577 7.59% 28,714 7.84%
- ----------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 462,103 6.26% 395,910 6.80% 390,588 6.93%
- ----------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 566 5.43% 742 5.39% 742 5.41%
Securities of other U.S. Government agencies and
corporations 342 6.25% 680 6.32% 713 6.38%
Mortgage-backed securities 142 5.65% 205 7.80% 217 8.01%
- ----------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 1,050 5.73% 1,627 6.08% 1,672 6.16%
- ----------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 1,513 1.59% 2,659 3.08% 1,997 2.81%
Federal funds sold 2,455 1.63% 5,064 3.63% 5,224 4.07%
Loans:
Real estate loans 329,870 7.63% 279,828 8.37% 273,584 8.47%
Consumer 29,286 9.98% 28,062 10.89% 27,790 11.02%
Agricultural 2,520 7.85% 2,070 9.18% 2,043 9.36%
Commercial/industrial 27,765 6.93% 22,212 8.24% 21,991 8.52%
Other 982 6.81% 892 7.62% 906 7.82%
Political subdivisions 10,751 7.91% 13,108 7.96% 12,981 7.94%
Leases 128 9.40% 181 9.39% 189 9.20%
- ----------------------------------------------------------------------------------------------------------------------
Total loans 401,302 7.76% 346,353 8.56% 339,484 8.66%
- ----------------------------------------------------------------------------------------------------------------------
Total Earning Assets 868,423 6.93% 751,613 7.57% 738,965 7.69%
Cash 13,531 11,871 11,735
Unrealized gain/loss on securities 10,703 6,639 4,707
Allowance for loan losses (5,386) (5,370) (5,384)
Bank premises and equipment 10,218 9,602 9,508
Other assets 31,591 30,874 30,947
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $929,080 $805,229 $790,478
======================================================================================================================
INTEREST-BEARING LIABILITIES
Interest checking $ 37,934 1.16% $ 37,192 1.75% $ 36,626 1.93%
Money market 169,615 2.37% 153,738 3.49% 152,701 3.82%
Savings 49,735 1.02% 46,750 2.16% 46,284 2.27%
Certificates of deposit 193,322 4.10% 169,275 5.48% 167,286 5.72%
Individual Retirement Accounts 89,344 4.98% 79,482 5.12% 79,248 5.17%
Other time deposits 2,112 1.65% 1,916 1.83% 2,242 1.79%
Federal funds purchased 2,255 1.96% 4,012 4.01% 4,560 4.31%
Other borrowed funds 208,785 4.29% 151,615 5.13% 143,775 5.33%
- ----------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 753,102 3.50% 643,980 4.40% 632,722 4.61%
Demand deposits 62,615 56,226 55,409
Other liabilities 8,055 9,002 8,349
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 823,772 709,208 696,480
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity, excluding other comprehensive
income/loss 98,239 91,703 90,833
Other comprehensive income/loss 7,069 4,318 3,165
- ----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 105,308 96,021 93,998
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 929,080 $805,229 $790,478
======================================================================================================================
Interest Rate Spread 3.43% 3.17% 3.08%
Net Interest Income/Earning Assets 3.89% 3.80% 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.
14
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
(IN THOUSANDS) NINE MONTHS ENDED 9/30/02 VS. 9/30/01
CHANGE IN CHANGE IN TOTAL
VOLUME RATE CHANGE
EARNING ASSETS
Available-for-sale securities:
U.S. Treasury securities $ (38) $ - $ (38)
Securities of other U.S. Government agencies
and corporations (2,342) (415) (2,757)
Mortgage-backed securities 3,257 (1,143) 2,114
Obligations of states and political subdivisions 1,997 (260) 1,737
Equity securities (1) (5) (6)
Other securities 526 (195) 331
- ----------------------------------------------------------------------------------------------------------
Total available-for-sale securities 3,399 (2,018) 1,381
- ----------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities (7) - (7)
Securities of other U.S. Government agencies
and corporations (17) (1) (18)
Mortgage-backed securities (3) (4) (7)
- ----------------------------------------------------------------------------------------------------------
Total held-to-maturity securities (27) (5) (32)
- ----------------------------------------------------------------------------------------------------------
Interest-bearing due from banks (9) (15) (24)
Federal funds sold (61) (68) (129)
Loans:
Real estate loans 3,326 (1,823) 1,503
Consumer 119 (224) (105)
Agricultural 30 (25) 5
Commercial/industrial 328 (289) 39
Other 4 (7) (3)
Political subdivisions (132) (3) (135)
Leases (3) - (3)
- ----------------------------------------------------------------------------------------------------------
Total loans 3,672 (2,371) 1,301
- ----------------------------------------------------------------------------------------------------------
Total Interest Income 6,974 (4,477) 2,497
- ----------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 18 (217) (199)
Money market 442 (1,802) (1,360)
Savings 55 (460) (405)
Certificates of deposit 1,002 (2,226) (1,224)
Individual Retirement Accounts 379 (112) 267
Other time deposits (2) (2) (4)
Federal funds purchased (55) (59) (114)
Other borrowed funds 2,239 (1,271) 968
- ----------------------------------------------------------------------------------------------------------
Total Interest Expense 4,078 (6,149) (2,071)
- ----------------------------------------------------------------------------------------------------------
Net Interest Income $ 2,896 $ 1,672 $ 4,568
==========================================================================================================
(1) Changes in income on tax-exempt securities and loans are presented on a
fully taxable-equivalent basis, using the Corporation's marginal federal income
tax rate of 34%.
(2) The change in interest due to both volume and rates has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amount of the change in each.
15
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE IV - COMPARISON OF NONINTEREST INCOME
(IN THOUSANDS) 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
Service charges on deposit accounts $1,260 $ 991
Service charges and fees 194 189
Trust and financial management revenue 1,358 1,189
Insurance commissions, fees and premiums 448 443
Increase in cash surrender value of life insurance 648 681
Fees related to credit card operation 450 408
Other operating income 652 649
- ------------------------------------------------------------------------------------------------
Total other operating income, before realized
gains on securities, net 5,010 4,550
Realized gains on securities, net 2,496 1,717
- ------------------------------------------------------------------------------------------------
Total Other Income $7,506 $6,267
================================================================================================
Total noninterest income increased $1,239,000, or 19.8%, in 2002 compared to
2001. 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:
- - Service charges on deposit accounts increased $269,000, or 27.1%. This
increase resulted from growth in deposits, as well as fee increases
implemented in the second half of 2001 on certain types of services.
- - Trust and financial management revenue increased $169,000, or 14.2%.
This increase resulted from fee increases implemented in the latter
part of 2001, and from receipt of certain fees for services provided
prior to 2002. Trust revenue is recorded on a cash basis, which does
not vary materially from the accrual basis.
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS)
9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001
Salaries and wages $ 7,056 $ 6,178
Pensions and other employee benefits 1,975 1,623
Occupancy expense, net 815 756
Furniture and equipment expense 1,199 1,030
Expenses related to credit card operation 214 205
Pennsylvania shares tax 550 592
Other operating expense 3,855 3,369
- ----------------------------------------------------------------------------------------------
Total Other Expense $15,664 $13,753
==============================================================================================
Salaries and wages increased $878,000, or 14.2%, in 2002 compared to 2001. The
increase is the result of annual merit raises ranging from 2%-5%, an increase in
the number of employees and an increase in incentive bonus expense. Increases in
staff during the last half of 2001 and first 9 months of 2002 included the
addition of new positions in branch and commercial lending, branch
administration, compliance and marketing. The incentive bonus plan provides for
compensation to be paid to certain key officers early in the following year,
with the payment amounts based on a combination of personal and corporate
performance in the current year. The estimate of such expense for 2002 increased
$275,000 over 2001.
16
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Pensions and other employee benefits increased $352,000, or 21.7%, in 2002 over
2001. 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 $181,000 in 2002 over 2001. Although the defined benefit pension
plan remains adequately funded, a decline in the market value of plan assets was
the main cause of the increase in expense in 2002.
Furniture and equipment expense increased $169,000, or 16.4%, in 2002 compared
to 2001. The largest increase within this category was in depreciation expense,
which increased $94,000. There were several substantial capital expenditures
over the last half of 2001 and first 9 months of 2002 that produced higher
depreciation expense in 2002. The most significant items were new proof of
deposit software, a new phone system and ongoing purchases of PCs and software
required to maintain and upgrade the computer network. Repairs and maintenance
expense increased $43,000, primarily from maintenance contracts associated with
computer hardware and software.
Other expense increased $486,000, or 14.4%, in 2002 over 2001. This category
includes many different types of expenses. Some of the overall increase in this
category was caused by increases in number of transactions processed and number
of employees. The most significant individual change within this category was an
increase of $89,000 in expenses from Bucktail Life Insurance Company, which
resulted mainly from a larger amount of life insurance claims incurred. Other
increases in other expenses included: (1) marketing research and training
materials of $48,000, to $99,000, (2) restricted stock amortization of $45,000,
to $62,000, (3) attorney and other professional fees of $40,000, to $305,000,
(4) office supplies of $35,000, to $343,000, (5) fees to the Federal Reserve and
other financial institutions of $27,000, to $77,000, and (6) public relations
expense of $25,000, to $177,000.
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. There are no significant
changes in the Corporation's consolidated balance sheet as of September 30, 2002
compared to December 31, 2001, other than the items addressed in that
discussion. Table VII provides a summary of investment securities held at
September 30, 2002 and December 31, 2001. The allowance for loan losses and
stockholders' equity are discussed in separate sections of Management's
Discussion and Analysis.
TABLE VII - INVESTMENT SECURITIES
(IN THOUSANDS)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ 2,503 $ 2,557
Obligations of other U.S. Government agencies 71,312 72,224 75,295 75,172
Obligations of states and political subdivisions 121,694 126,765 95,835 95,261
Other securities 50,045 51,135 34,315 34,532
Mortgage-backed securities 211,742 217,447 198,269 198,975
- ------------------------------------------------------------------------------------------------------
Total debt securities 454,793 467,571 406,217 406,497
Marketable equity securities 22,395 29,590 19,745 27,472
- ------------------------------------------------------------------------------------------------------
Total $477,188 $497,161 $425,962 $433,969
======================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 422 $ 462 $ 726 $ 735
Obligations of other U.S. Government agencies 297 323 547 561
Mortgage-backed securities 104 109 175 181
- ------------------------------------------------------------------------------------------------------
Total $ 823 $ 894 $ 1,448 $ 1,477
======================================================================================================
17
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses includes two components, allocated and
unallocated. The allocated component of the allowance for loan losses reflects
probable losses resulting from the analysis of individual loans, specific
allowances for loans in certain industries and historical loss experience for
each loan category. The historical loan loss experience element is determined
based on the ratio of net charge-offs to average loan balances over a five-year
period, for each significant type of loan. The charge-off ratio is then applied
to the current outstanding loan balance for each type of loan (net of other
loans that are individually evaluated).
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the market area. This determination inherently involves a higher degree of
uncertainty and considers current risk factors that may not have yet manifested
themselves in the Bank's historical loss factors used to determine the allocated
component of the allowance, and it recognizes that knowledge of the portfolio
credit risk may be incomplete.
The allowance for loan losses was $5,495,000 at September 30, 2002, an increase
of $230,000 over the balance of $5,265,000 at December 31, 2001. As noted in
Table IX, the unallocated portion of the allowance for loan losses was
$1,798,000 at September 30, 2002, down from $2,187,000 at December 31, 2001. The
unallocated allowance balance as of September 30, 2002 was very consistent with
the unallocated allowance balance of $1,790,000 at June 30, 2002 (not shown in
the table). The unallocated allowance balance reflects management's concern
related to possible adverse changes in the local economy.
The decline in unallocated allowance since last year-end is offset by increases
in allocated allowances on commercial loans and consumer mortgages. The increase
in allocated allowance balances reflects management's evaluation of impairment
arising from several commercial loan relationships, as well as growth in
mortgage loans (resulting in larger allowance amounts calculated based on
average historical net charge-offs). Management believes it has been
conservative, but reasonable, in its commercial loan impairment calculations.
However, the actual losses realized, if any, from these relationships could
differ materially from the allowances calculated as of September 30, 2002.
Despite the increase in allocated allowances, overall delinquency data has not
changed significantly in 2002. Total 90 day or more past due loans, plus
nonaccrual loans, amounted to $3,030,000 as of September 30, 2002, compared to
$3,117,000 at December 31, 2001.
The provision for loan losses increased to $640,000 in 2002 from $450,000 in
2001. 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 2002, the higher provision for loan losses resulted, in
part, from the increase in allocated allowance balances.
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.
18
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VIII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) 9 MONTHS 9 MONTHS
ENDED ENDED
SEPT. 30, SEPT. 30, YEARS ENDED DECEMBER 31,
2002 2001 2001 2000 1999 1998 1997
Balance, beginning of year $5,265 $5,291 $5,291 $5,131 $4,820 $4,913 $4,776
- --------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate loans 102 144 144 272 81 257 246
Installment loans 100 109 138 77 138 144 230
Credit cards and related plans 156 150 200 214 192 264 305
Commercial and other loans 123 129 231 53 219 301 3
- --------------------------------------------------------------------------------------------------------------------------
Total charge-offs 481 532 713 616 630 966 784
- --------------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate loans 17 5 6 26 81 12 21
Installment loans 26 21 27 23 60 43 64
Credit cards and related plans 14 17 20 28 30 40 30
Commercial and other loans 14 33 34 23 10 15 9
- --------------------------------------------------------------------------------------------------------------------------
Total recoveries 71 76 87 100 181 110 124
- --------------------------------------------------------------------------------------------------------------------------
Net charge-offs 410 456 626 516 449 856 660
Provision for loan losses 640 450 600 676 760 763 797
- --------------------------------------------------------------------------------------------------------------------------
Balance, end of year $5,495 $5,285 $5,265 $5,291 $5,131 $4,820 $4,913
==========================================================================================================================
TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
(IN THOUSANDS)
AT SEPT. 30, AT DECEMBER 31:
2002 2001 2000 1999 1998 1997
Commercial $2,217 $1,837 $1,612 $2,081 $ 650 $ 625
Consumer mortgage 956 674 952 834 97 350
Impaired loans 110 73 273 609 290 274
Consumer 414 494 471 437 702 375
All other commitments - - - 150 202 343
Unallocated 1,798 2,187 1,983 1,020 2,879 2,946
- ------------------------------------------------------------------------------------------------------------------
Total Allowance $5,495 $5,265 $5,291 $5,131 $4,820 $4,913
==================================================================================================================
TABLE X - SUMMARY OF LOANS BY TYPE
(IN THOUSANDS)
SEPT. 30, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2002 2001 2000 1999 1998 1997
Real estate - construction $ 1,541 $ 1,814 $ 452 $ 649 $ 1,004 $ 406
Real estate - mortgage 353,472 306,264 263,325 247,604 230,815 219,952
Consumer 31,059 29,284 28,141 29,140 30,924 33,094
Agricultural 2,639 2,344 1,983 1,899 1,930 2,424
Commercial 28,786 24,696 20,776 18,050 17,630 17,176
Other 1,984 1,195 948 1,025 1,062 6,260
Political subdivisions 11,220 13,479 12,462 12,332 7,449 5,895
Lease receivables 109 152 218 222 218 256
- ------------------------------------------------------------------------------------------------------------------
Total 430,810 379,228 328,305 310,921 291,032 285,463
Less: unearned discount - - - (29) (29) (37)
- ------------------------------------------------------------------------------------------------------------------
430,810 379,228 328,305 310,892 291,003 285,426
Less: allowance for loan losses (5,495) (5,265) (5,291) (5,131) (4,820) (4,913)
- ------------------------------------------------------------------------------------------------------------------
Loans, net $425,315 $373,963 $323,014 $305,761 $286,183 $280,513
==================================================================================================================
19
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate
liquidity position permits the Corporation to pay creditors, compensate for
unforeseen deposit fluctuations and fund unexpected loan demand. The Corporation
maintains overnight borrowing facilities with several correspondent banks that
provide a source of day-to-day liquidity. Also, the Corporation maintains
borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by
mortgage loans and mortgage-backed securities. At September 30, 2002, the
Corporation had unused borrowing availability with correspondent banks and the
Federal Home Loan Bank of Pittsburgh totaling approximately $183,091,000.
Additionally, the Corporation uses repurchase agreements placed with brokers to
borrow short-term funds secured by investment assets, and uses "RepoSweep"
arrangements to borrow funds from commercial banking customers on an overnight
basis.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. For many years, the
Corporation and the Bank have maintained strong capital positions. The following
table presents consolidated capital ratios at September 30, 2002:
TABLE XI - CAPITAL RATIOS
9/30/2002
CITIZENS & REGULATORY STANDARDS:
NORTHERN
CORPORATION WELL MINIMUM
(ACTUAL) CAPITALIZED STANDARD
- -------------------------------------------------------------------------------------------------
Total capital to risk-weighted assets 20.95% 10% 8%
Tier 1 capital to risk-weighted assets 19.29% 6% 4%
Tier 1 capital to average total assets 10.55% 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. However, the
Corporation is significantly affected by the Federal Reserve Board's efforts to
control inflation through changes in interest rates. Management monitors the
impact of economic trends, including any indicators of inflationary pressure, in
managing interest rate and other financial risks.
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.
20
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 interest. The model
measures and projects potential changes in net interest income, and calculates
the discounted present value of anticipated cash flows of financial instruments,
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.
In the 3rd quarter 2002, the Bank changed to a different simulation (software)
model, and also changed some of the key methodologies and assumptions. These
changes were made in an effort to improve the accuracy and relevance of the
Bank's interest rate risk measurements. The more significant changes are as
follows:
- The new model permits more precise measurements, in that the
estimated impact of interest rate changes is calculated for each
individual investment security and for each individual loan and
deposit instrument. In contrast, the old model required management
to make assumptions regarding contractual cash flows for fairly
broad categories of investment securities, loans and deposits.
- Using the new model, the average principal repayment term for
callable investment securities has been substantially lengthened.
This change has increased the calculated impact of interest rate
changes on the present value of investment securities.
- Prior to the model change, management assumed no difference between
book value and fair value of nonmaturity deposits and borrowings,
such as money market accounts, NOW accounts, savings, customer
repurchase agreements and checking accounts. Using the new model,
management has estimated the "run-off" of nonmaturity deposits and
borrowings, and has calculated the fair value of these liabilities
using market interest rates consistent with the estimated terms.
The effect of this change was to increase the market value of
portfolio equity in all interest rate scenarios.
- Also related to nonmaturity deposits and borrowings, management has
changed its assumptions regarding the impact of rate changes on
interest expense. In the past, management estimated the impact of
a rate change based on 100% of the "shock" amount - e.g., the rate
paid on savings accounts would be assumed to increase from 1% to
3% in a "+200 basis point" calculation. Using the new model,
management has limited the estimated impact of rate changes on
interest expense. For example, in a +200 basis point calculation,
the rate paid on savings accounts would be assumed to increase 50%
of 200 basis points, or 1%, resulting in an increase in rate from
1% to 2%. The effect of this change was to decrease the impact of
rate changes on net interest income in all interest rate scenarios.
- In the past, the Bank's interest rate shock calculations compared
"Base Most Likely" values to amounts calculated assuming an
immediate increase or decrease in rates. In developing the Base
Most Likely calculations, management made assumptions regarding
growth in loans and deposits, and other balance sheet changes.
Also, management used an interest rate forecast to estimate
changes in interest rates on a monthly basis throughout the period
of net interest income calculations. Using the new model,
management's baseline calculation assumes a "flat" balance sheet,
and uses current interest rates with no forecasted changes in
rates. Management believes this change in methodology provides a
measurement of interest rate risk that is more consistent with the
majority of the financial institutions industry.
21
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 of 200 basis points. The policy limit for fluctuation in net
interest income is minus 20% from the base most likely one-year scenario. The
policy limit for market value variance is minus 30% from the base most likely
one-year scenario. The most sensitive scenario presented in Table XII below is
the "+200 basis points" scenario. As Table XII shows, as of September 30, 2002,
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 36.5%, which exceeds the policy
threshold. Over the next several months, management will evaluate 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 models described above.
The models make 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 models do 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
PERIOD ENDING SEPTEMBER 30, 2003
(IN THOUSANDS)
SEPTEMBER 30, 2002 DATA
CURRENT PLUS 200 MINUS 200
INTEREST BASIS BASIS
RATES POINTS POINTS
SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 56,284 $ 60,575 $ 50,013
Interest expense 25,057 30,151 19,875
- ---------------------------------------------------------------------------- ---------
Net Interest Income $ 31,227 $ 30,424 -2.6% $ 30,138 -3.5%
==================================================================================================================
Market Value of Portfolio Equity at Sept. 30, 2002 $ 114,221 $ 72,508 -36.5% $ 132,782 16.3%
==================================================================================================================
PERIOD ENDING DECEMBER 31, 2002
(IN THOUSANDS)
DECEMBER 31, 2001 DATA
MOST PLUS 200 MINUS 200
LIKELY BASIS BASIS
FORECAST POINTS POINTS
AMOUNT AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 56,943 $ 60,192 $ 52,767
Interest expense 26,652 35,633 17,827
- ----------------------------------------------------------------------------- ---------
Net Interest Income $ 30,291 $ 24,559 -18.9% $ 34,940 15.3%
====================================================================================================================
Market Value of Portfolio Equity at Dec. 31, 2002 $ 97,585 $ 69,980 -28.3% $ 118,667 21.6%
====================================================================================================================
22
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
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 September 30, 2002 and December 31, 2001 are
presented in Table XIII.
TABLE XIII - EQUITY SECURITIES
(IN THOUSANDS) HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT SEPTEMBER 30, 2002 COST VALUE VALUE VALUE
Banks and bank holding companies $20,480 $28,137 $(2,814) $(5,627)
Other equity securities 1,915 1,453 (145) (291)
- --------------------------------------------------------------------------------------------
Total $22,395 $29,590 $(2,959) $(5,918)
============================================================================================
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT DECEMBER 31, 2001 COST VALUE VALUE VALUE
Banks and bank holding companies $18,922 $26,636 $(2,664) $(5,327)
Other equity securities 823 836 (84) (167)
- --------------------------------------------------------------------------------------------
Total $19,745 $27,472 $(2,748) $(5,494)
============================================================================================
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 of the Securities Exchange Act of 1934. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that 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.
23
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Corporation nor any of its subsidiaries is a party to any
material pending legal proceedings.
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Other Information
a. None
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits:
Page
----
99.1 Certification Pursuant to U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 28
b. On July 11, 2002, a Current Report on Form 8-K was filed to report
the Corporation's consolidated earnings results for the second quarter
2002.
24
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Signature Page
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
November 13, 2002 By: Craig G. Litchfield /s/
- ----------------- -----------------------
Date Chairman, President and Chief Executive Officer
November 13, 2002 By: Mark A. Hughes /s/
- ----------------- ------------------
Date Treasurer and Chief Financial Officer
25
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
CERTIFICATIONS
I, Craig G. Litchfield, Chairman, Chief Executive Officer and President, 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 officers 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 officers 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 officers 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.
November 13, 2002 By: Craig G. Litchfield /s/
- ----------------- -----------------------
Date Chairman, President and Chief Executive Officer
26
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
I, Mark A. Hughes, Treasurer and Chief Financial Officer, 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 officers 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 officers 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 officers 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.
November 13, 2002 By: Mark A. Hughes /s/
- ----------------- ------------------
Date Treasurer and Chief Financial Officer
27