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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, 2004
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) 8,100,267 Shares Outstanding May 5, 2004
1
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - March 31, 2004 and
December 31, 2003 Page 3
Consolidated Statement of Income - Three Months Ended
March 31, 2004 and 2003 Page 4
Consolidated Statement of Cash Flows - Three Months
Ended March 31, 2004 and 2003 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 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk Pages 24 through 26
Item 4. Controls and Procedures Page 26
Part II. Other Information Page 27
Signatures Page 28
Exhibit 31.1. Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Chief Executive Officer Page 29
Exhibit 31.2. Certification Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 - Chief Financial Officer Page 30
Exhibit 32. Certifications Pursuant to 18 U.S.C. Section 1350
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Page 31
2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET MARCH 31, DECEMBER 31,
(In Thousands Except Share Data) 2004 2003
(UNAUDITED) (NOTE)
ASSETS
Cash and due from banks:
Noninterest-bearing $ 13,077 $ 13,938
Interest-bearing 1,072 1,233
- --------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 14,149 15,171
Available-for-sale securities 526,985 483,032
Held-to-maturity securities 448 560
Loans, net 525,561 518,800
Bank-owned life insurance 17,632 17,473
Accrued interest receivable 6,167 5,632
Bank premises and equipment, net 14,397 12,482
Foreclosed assets held for sale 53 101
Other assets 15,735 13,650
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,121,127 $ 1,066,901
================================================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing $ 75,898 $ 75,616
Interest-bearing 575,022 582,449
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 650,920 658,065
Dividends payable 1,786 1,763
Short-term borrowings 47,882 37,763
Long-term borrowings 257,184 235,190
Accrued interest and other liabilities 33,113 8,777
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 990,885 941,558
- --------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 10,000,000
shares; issued 8,307,305 in 2004 and 8,226,033 in 2003 8,307 8,226
Stock dividend distributable - 2,164
Paid-in capital 22,422 20,104
Retained earnings 86,860 84,940
- --------------------------------------------------------------------------------------------------------------------------------
Total 117,589 115,434
Accumulated other comprehensive income 14,612 12,037
Unamortized stock compensation (121) (54)
Treasury stock, at cost:
188,127 shares at March 31, 2004 (1,838)
211,408 shares at December 31, 2003 (2,074)
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 130,242 125,343
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,121,127 $ 1,066,901
================================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 2003 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,
2004 2003
INTEREST INCOME
Interest and fees on loans $ 8,235 $ 7,862
Interest on balances with depository institutions 3 2
Interest on loans to political subdivisions 214 167
Interest on federal funds sold 1 3
Income from available-for-sale and
held-to-maturity securities:
Taxable 3,264 3,946
Tax-exempt 1,935 1,742
Dividends 363 208
- ------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 14,015 13,930
- ------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 3,343 3,916
Interest on short-term borrowings 123 142
Interest on long-term borrowings 2,237 2,185
- ------------------------------------------------------------------------------------------------------------------------
Total interest expense 5,703 6,243
- ------------------------------------------------------------------------------------------------------------------------
Interest margin 8,312 7,687
Provision for loan losses 350 350
- ------------------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 7,962 7,337
- ------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service charges on deposit accounts 421 409
Service charges and fees 76 69
Trust and financial management revenue 457 378
Insurance commissions, fees and premiums 109 80
Increase in cash surrender value of life insurance 159 193
Fees related to credit card operation 184 162
Other operating income 219 249
- ------------------------------------------------------------------------------------------------------------------------
Total other income before realized gains on securities, net 1,625 1,540
Realized gains on securities, net 964 1,721
- ------------------------------------------------------------------------------------------------------------------------
Total other income 2,589 3,261
- ------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and wages 2,671 2,448
Pensions and other employee benefits 984 864
Occupancy expense, net 377 340
Furniture and equipment expense 336 332
Pennsylvania shares tax 212 196
Other operating expense 1,648 1,352
- ------------------------------------------------------------------------------------------------------------------------
Total other expenses 6,228 5,532
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,323 5,066
Income tax provision 617 994
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,706 $ 4,072
========================================================================================================================
PER SHARE DATA:
Net income - basic $ 0.46 $ 0.50
Net income - diluted $ 0.45 $ 0.50
- ------------------------------------------------------------------------------------------------------------------------
Dividend per share $ 0.22 $ 0.21
- ------------------------------------------------------------------------------------------------------------------------
Number of shares used in computation - basic 8,112,061 8,087,124
Number of shares used in computation - diluted 8,168,162 8,115,839
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,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,706 $ 4,072
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 350 350
Realized gains on securities, net (964) (1,721)
Loss (gain) on sale of foreclosed assets, net 6 (28)
Depreciation expense 322 295
Accretion and amortization, net 127 313
Increase in cash surrender value of life insurance (159) (194)
Amortization of restricted stock 24 26
Increase in accrued interest receivable and other assets (1,270) (962)
Increase in accrued interest payable and other liabilities 936 2,137
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,078 4,288
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 110 112
Proceeds from sales of available-for-sale securities 11,526 26,566
Proceeds from calls and maturities of available-for-sale securities 36,802 45,219
Purchase of available-for-sale securities (65,445) (51,780)
Purchase of Federal Home Loan Bank of Pittsburgh stock (2,463) (225)
Redemption of Federal Home Loan Bank of Pittsburgh stock 1,090 -
Net increase in loans (7,111) (15,458)
Purchase of premises and equipment (2,237) (376)
Proceeds from sale of foreclosed assets 42 71
- ----------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Investing Activities (27,686) 4,129
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (7,145) 8,053
Net increase (decrease) in short-term borrowings 10,119 (21,022)
Proceeds from long-term borrowings 41,767 14,800
Repayments of long-term borrowings (19,773) (1,806)
Purchase of treasury stock - (174)
Sale of treasury stock 407 19
Dividends paid (1,789) (1,614)
- ----------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 23,586 (1,744)
- ----------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,022) 6,673
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,171 14,900
- ----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,149 $ 21,573
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of available-for-sale securities $ 22,096 $ -
Assets acquired through foreclosure of real estate loans $ - $ 39
Interest paid $ 4,274 $ 4,960
Income taxes paid $ 150 $ 960
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, 2003, 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, 2004 might not be
indicative of the results for the year ending December 31, 2004.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common
stock outstanding. The number of shares used in calculating net income and cash
dividends per share reflect the retroactive effect of stock splits and dividends
for all periods presented. The following data show the amounts used in computing
net income per share and the weighted average number of shares of dilutive stock
options. As shown in the table that follows, diluted earnings per share is
computed using weighted average common shares outstanding, plus weighted-average
common shares available from the exercise of all dilutive stock options, less
the number of shares that could be repurchased with the proceeds of stock option
exercises based on the average share price of the Corporation's common stock
during the period.
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
QUARTER ENDED MARCH 31, 2004
Earnings per share - basic $ 3,706,000 8,112,061 $0.46
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 8,168,162 $0.45
====================================================================================================
QUARTER ENDED MARCH 31, 2003
Earnings per share - basic $ 4,072,000 8,087,124 $0.50
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 182,635
Hypothetical share repurchase at $20.60 (153,920)
- ----------------------------------------------------------------------------------------------------
Earnings per share - diluted $ 4,072,000 8,115,839 $0.50
====================================================================================================
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
3. STOCK COMPENSATION PLANS
As permitted by Accounting Principles Board Opinion No. 25, the Corporation uses
the intrinsic value method of accounting for stock compensation plans. Utilizing
the intrinsic value method, compensation cost is measured by the excess of the
quoted market price of the stock as of the grant date (or other measurement
date) over the amount an employee or director must pay to acquire the stock.
Stock options issued under the Corporation's stock option plans have no
intrinsic value, and accordingly, no compensation cost is recorded for them.
The Corporation has also made awards of restricted stock. Compensation cost
related to restricted stock is recognized based on the market price of the stock
at the grant date over the vesting period.
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," to stock options.
(NET INCOME IN THOUSANDS)
3 MONTHS ENDED
MARCH 31,
2004 2003
Net income, as reported $3,706 $4,072
Deduct: Total stock option compensation
expense determined under fair value
method for all awards, net of tax effects (49) (59)
- --------------------------------------------------------------------------------
Pro forma net income $3,657 $4,013
================================================================================
Earnings per share-basic
As reported $0.46 $0.50
Pro forma $0.45 $0.49
Earnings per share-diluted
As reported $0.45 $0.50
Pro forma $0.45 $0.49
4. COMPREHENSIVE INCOME
U.S. generally accepted accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available-for-sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income.
7
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
The components of comprehensive income, and the related tax effects, are as
follows:
QUARTERS ENDED
MARCH 31,
(IN THOUSANDS) 2004 2003
Net income $ 3,706 $ 4,072
Unrealized holding gains on available-for-sale securities 4,865 3,171
Less: Reclassification adjustment for gains realized in income (964) (1,721)
- -----------------------------------------------------------------------------------------------
Other comprehensive income before income tax 3,901 1,450
Income tax related to other comprehensive income (1,326) (493)
- -----------------------------------------------------------------------------------------------
Other comprehensive income 2,575 957
- -----------------------------------------------------------------------------------------------
Comprehensive income $ 6,281 $ 5,029
===============================================================================================
5. SECURITIES
Amortized cost and fair value of securities at March 31, 2004 are summarized as
follows:
MARCH 31, 2004
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 57,184 892 (332) 57,744
Obligations of states and political subdivisions 163,071 5,672 (1,202) 167,541
Other securities 55,508 2,672 (377) 57,803
Mortgage-backed securities 199,091 2,678 (285) 201,484
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 474,854 11,914 (2,196) 484,572
Marketable equity securities 29,992 12,857 (436) 42,413
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 504,846 $ 24,771 $ (2,632) $ 526,985
==============================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 318 $ 38 $ - $ 356
Obligations of other U.S. Government agencies 98 19 - 117
Mortgage-backed securities 32 2 - 34
- ------------------------------------------------------------------------------------------------------------------------------
Total $ 448 $ 59 $ - $ 507
==============================================================================================================================
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, 2004.
(IN THOUSANDS) LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
VALUE LOSSES VALUE LOSSES VALUE LOSSES
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ - $ - $ - $ -
Obligations of other U.S. Government agencies 9,656 (332) - - 9,656 (332)
Obligations of states and political subdivisions 40,354 (1,175) 1,822 (27) 42,176 (1,202)
Other securities 7,207 (302) 5,025 (75) 12,232 (377)
Mortgage-backed securities 47,983 (285) - - 47,983 (285)
- ---------------------------------------------------------------------------------------------------------------------------------
Total debt securities 105,200 (2,094) 6,847 (102) 112,047 (2,196)
Marketable equity securities 5,454 (369) 876 (67) 6,330 (436)
- ---------------------------------------------------------------------------------------------------------------------------------
Total temporarily impaired available-for-sale
Securities $110,654 $ (2,463) $ 7,723 $ (169) $118,377 $ (2,632)
=================================================================================================================================
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, 2004 were not
other-than-temporarily impaired.
Of the total $436,000 unrealized losses on equity securities at March 31, 2004,
$285,000 was from a preferred stock issued by an U.S. Government agency.
Management believes this security's fair value is affected primarily by
volatility in interest rates, and that there is very little credit risk
associated with this security. For the remaining equity securities for which
fair value was less than cost at March 31, 2004, management believes the
financial condition and near-term prospects of those issuers indicate those
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 within the final ten years of employment.
Also, 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.
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:
(IN THOUSANDS)
PENSION POSTRETIREMENT
BENEFITS BENEFITS
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
Service cost $ 119 $ 99 $ 11 $ 8
Interest cost 155 148 16 15
Expected return on plan assets (187) (154) - -
Amortization of transition (asset) obligation (6) (6) 9 9
Recognized net actuarial loss 16 22 1 -
- -------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 97 $ 109 $ 37 $ 32
=================================================================================================
The Corporation funded its total defined benefit pension contribution for 2004
of $328,000 in April 2004. In the first quarter 2004, the Corporation funded
postretirement contributions totaling $13,000. The estimated total (annual)
amount of 2004 postretirement contributions is $60,000.
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 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, "believe", "expect",
"intend", "anticipate", "estimate", "project", and similar expressions. These
forward-looking statements are subject to risks and uncertainties that are
difficult to predict, may be beyond management's control and could cause results
to differ materially from those currently anticipated. Factors which could have
a material adverse impact on the operations and future prospects of the
Corporation include, but are not limited to, the following:
- - 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 2004 AND 2003
Unless otherwise noted, all references to "2004" in the following discussion of
operating results are intended to mean the three months ended March 31, 2004,
and similarly, references to "2003" are intended to mean the three months ended
March 31, 2003.
EARNINGS OVERVIEW
Net income in 2004 was $3,706,000, or $.46 per share - basic and $.45 per share
- - diluted. This represents a decrease of 9.0% in net income compared to 2003.
Return on average assets was 1.38% in 2004, down from 1.62% in 2003. Return on
average equity decreased to 11.45% in 2004 from 13.83% in 2003.
The most significant income statement changes between 2004 and 2003 were as
follows:
- - Net realized gains on securities were $964,000 in 2004, compared to
$1,721,000 in 2003. 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 $926,000 in 2004 and $1,286,000
in 2003.
- - Other (noninterest) expenses increased $696,000, or 12.6%, in 2004 compared
to 2003. The increase reflects increases in payroll costs and employee
benefits, and other expenses. Increases in other expenses are described in
more detail in the "Noninterest Expense" section of Management's Discussion
and Analysis.
- - The interest margin increased $625,000, or 8.1%, to $8,312,000 in 2004 from
$7,687,000 in 2003. The Corporation has experienced significant growth in
loans, and has identified opportunities to borrow funds and invest the
proceeds in securities at positive spreads. Also, average interest rates on
deposits and borrowed funds have been lower in 2004. Changes in the net
interest margin are discussed in more detail later in Management's
Discussion and Analysis.
- - The income tax provision decreased to $617,000 in the first quarter of 2004
from $994,000 in the first quarter of 2003. The Corporation's effective tax
rate fell to 14.3% in 2004 from 19.6% in 2003. This lower effective tax
rate resulted mainly from lower pre-tax income and management's decision to
increase the weighting of tax-exempt obligations of states and political
subdivisions, as a percentage of total assets.
TABLE I - QUARTERLY FINANCIAL DATA
(IN THOUSANDS)
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2004 2003 2003 2003 2003
Interest income $14,015 $13,797 $13,553 $13,943 $13,930
Interest expense 5,703 5,550 5,655 6,089 6,243
- -----------------------------------------------------------------------------------------------------------------
Interest margin 8,312 8,247 7,898 7,854 7,687
Provision for loan losses 350 250 250 250 350
- -----------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 7,962 7,997 7,648 7,604 7,337
Other income 1,625 1,722 1,705 1,628 1,540
Securities gains 964 1,510 660 908 1,721
Other expenses 6,228 5,890 5,336 5,356 5,532
- -----------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,323 5,339 4,677 4,784 5,066
Income tax provision 617 992 759 864 994
- -----------------------------------------------------------------------------------------------------------------
Net income $ 3,706 $ 4,347 $ 3,918 $ 3,920 $ 4,072
=================================================================================================================
Net income per share - basic $ 0.46 $ 0.54 $ 0.48 $ 0.48 $ 0.50
=================================================================================================================
Net income per share - diluted $ 0.45 $ 0.53 $ 0.48 $ 0.48 $ 0.50
=================================================================================================================
The number of shares used in calculating net income per share for each quarter
presented in Table I reflects the retroactive effect of stock splits and
dividends.
11
PROSPECTS FOR THE REMAINDER OF 2004
Overall, management expects financial results for the remainder of 2004 to be
relatively comparable to 2003. Loan growth is expected to continue, although
perhaps not at the +15% pace enjoyed for the last three years. As you can see in
Table I, the interest margin has grown slightly in each of the last 5 quarters,
to $8,312,000 in the first quarter of 2004 from $7,687,000 in the 1st quarter
2003. Recently, interest rates have risen quite rapidly. As of April 27, 2004,
for example, closing yields on U.S. Treasury Bonds with terms of 2, 3, 5, and 10
years had all risen 50 basis points or more from their levels one month earlier.
Management anticipates continued rising rates over much of 2004, including
increases in short-term rates in the last half of the year. The impact of rising
rates would likely be a slight "squeeze" on the net interest margin, as (on
average) deposits and borrowings would be expected to reprice slightly faster
than loans and debt securities. The Corporation's interest rate risk is
discussed in more detail in Item 3 of Form 10-Q.
The other major variable that could affect 2004 earnings is securities gains and
losses. The Corporation's management makes decisions regarding the sales of
securities based on a variety of factors, with an overall goal of maximizing
portfolio return over a long-term horizon. Therefore, it is difficult to
predict, with any degree of precision, the amounts of securities gains and
losses that may be realized over the remainder of 2004.
Total capital purchases for 2004 are estimated to range from $5 million to $8
million. Included in this amount are estimated costs related to two significant
projects that are currently in progress: (1) renovation of the facility on
Market Street in Williamsport, and (2) implementation of a new core banking
computer system.
Trust and Financial Management, Commercial Lending and a few other personnel
moved into the Williamsport facility in February 2004, and the branch is
expected to open before the end of the second quarter 2004. Total capitalized
costs incurred related to the Williamsport renovation through March 31, 2004
amounted to $2,238,000 with estimated additional cost to be incurred on the
project of $300,000.
In March 2004, management selected a new core processing system from Open
Solutions, Inc., and made a substantial initial payment of almost $1.5 million.
Management expects the core system to be completed by year-end 2004 at a total
capitalized cost of approximately $2.5 million.
Although the amount of capital spending expected for 2004 is high by the
Corporation's normal historical standards, it is not expected to have a
material, adverse impact on the Corporation's financial position or results of
operations in 2004.
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 2004 and 2003.
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 $9,321,000 in 2004, an
increase of $746,000, or 8.7%, over 2003. As reflected in Table IV, the increase
in net interest margin was caused by the growth in volume. Increased interest
income from higher volumes of earning assets exceeded increases in interest
expense attributable to higher volumes of interest-bearing liabilities by
$837,000 in the first quarter 2004 compared to the first quarter 2003. Table IV
also shows that interest rate changes had the effect of decreasing net interest
income $91,000 in 2004 as compared to 2003. 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 3.39% for
the first quarter 2004, compared to 3.31% for the year ended December 31, 2003
and 3.30% for the first quarter 2003.
INTEREST INCOME AND EARNING ASSETS
Interest income increased 1.3% to $15,024,000 in 2004 from $14,818,000 in 2003.
Income from available-for-sale securities decreased $233,000, or 3.5%, while
interest from loans increased $443,000 or 5.5%. Overall, the majority of the
increase in interest income resulted from higher volumes of loans, which more
than offset the effect of lower interest rates.
As indicated in Table III, average available-for-sale securities in the first
quarter 2004 amounted to $467,945,000, a decrease of 2.0% from the first quarter
2003. The average rate of return on available-for-sale securities was 5.56% for
first quarter 2004, lower than the 5.69% level in the first quarter 2003, but
higher than the rate of return for the year ended December 31, 2003 of 5.43%.
Table III also shows changes in the composition of the available-for-sale
securities portfolio. The average balance of mortgage-backed securities dropped
to $171,334,000 in the first quarter 2004 from $194,678,000 in the first quarter
2003. The rapidly falling interest rate environment during most of the second
and third quarters of 2003 led to very high amounts of prepayments on
mortgage-backed securities.
Municipal bonds were a larger portion of the portfolio in the first quarter 2004
than in the first quarter 2003. The average balance of municipal bonds grew to
$160,624,000, or 34% of the portfolio, in the first quarter 2004 from
$133,468,000, or 28% of the portfolio, in the first 3 months of 2003. 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, and Collateralized Mortgage
Obligations (CMOs). 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 decreased to $47,265,000 in the first quarter 2004 from
$60,702,000 for the first 3 months of 2003, primarily as a result of principal
payments received on CMOs.
The average balance of gross loans increased 15.4% in the first quarter 2004
over the first 3 months of 2003, to $529,155,000 from $458,392,000. The largest
area of growth was real estate secured loans, with substantial increases in both
residential and commercial mortgages. The average rate of return on loans fell
to 6.50% in the first quarter 2004 from 7.17% in the first 3 months of 2003, due
to lower market rates.
13
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $540,000, or 8.6%, to $5,703,000 in 2004 from $6,243,000
in 2003. Overall, the impact to interest expense of lower interest rates was
more than twice the impact of higher volumes of interest-bearing liabilities. In
Table IV, you can see the impact of lower interest rates on the Corporation's
major categories of interest-bearing deposits - principally, CDs and money
market accounts. In contrast, interest expense on Individual Retirement Accounts
(IRAs) increased $126,000. The Corporation's 18-month "Passbook" IRA rate (which
pays interest at a variable rate, re-set at the beginning of each calendar
quarter) changed from 5% to 3.5% on the majority of IRA s, effective for the
second quarter 2004. The change in IRA rate will reduce interest expense
approximately $350,000 in the second quarter 2004 as compared to the first
quarter 2004.
As you can calculate from Table III, total average deposits (interest-bearing
and noninterest-bearing) increased to $652,398,000 in the first three months of
2004 from $640,500,000 in the first three months of 2003. This represents an
increase of 1.9%. Of the increase in average deposits, the largest growth
categories were demand deposits of $9,116,000, or 13.9% and IRA's of
$12,732,000, or 12.5%. Average Certificates of Deposit fell 7.0% to $182,735,000
in 2004 from $196,532,000 in 2003. Overall, deposit growth has been very low in
recent months. Management believes the return to positive U.S. stock market
performance in 2003 has motivated some customers to move funds out of the Bank
to mutual funds and other equity securities. Also, deposits from a few of the
Corporation's Municipal and not-for-profit customers have fallen over the last
several months due to the customers' use of the funds for building projects.
Table III reflects the downward trend in interest rates incurred on liabilities,
as the overall cost of funds on interest-bearing liabilities fell to 2.66% for
the first quarter 2004, from 2.84% for the year ended December 31, 2003 and
3.10% for the first quarter 2003.
Average total short-term and long-term borrowed funds increased $42,985,000 to
$285,127,000 in the first quarter 2004 from $242,142,000 in the first quarter
2003. The Corporation has utilized borrowings to fund security purchases and to
help fund loan growth during this period of low deposit growth.
14
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
THREE MONTHS ENDED
MARCH 31, INCREASE/
(IN THOUSANDS) 2004 2003 (DECREASE)
INTEREST INCOME
Available-for-sale securities:
U.S. Treasury securities $ - $ - $ -
Securities of other U.S. Government agencies
and corporations 675 796 (121)
Mortgage-backed securities 1,863 2,272 (409)
Obligations of states and political subdivisions 2,844 2,553 291
Equity securities 363 208 155
Other securities 719 868 (149)
- -----------------------------------------------------------------------------------------------------------
Total available-for-sale securities 6,464 6,697 (233)
- -----------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 4 4 -
Securities of other U.S. Government agencies
and corporations 2 5 (3)
Mortgage-backed securities 1 1 -
- -----------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 7 10 (3)
- -----------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 3
2 1
Federal funds sold 1 3 (2)
Loans:
Real estate loans 7,053 6,555 498
Consumer 614 737 (123)
Agricultural 47 49 (2)
Commercial/industrial 511 502 9
Other 9 17 (8)
Political subdivisions 314 244 70
Leases 1 2 (1)
- -----------------------------------------------------------------------------------------------------------
Total loans 8,549 8,106 443
- -----------------------------------------------------------------------------------------------------------
Total Interest Income 15,024 14,818 206
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest checking 57 75 (18)
Money market 575 799 (224)
Savings 68 127 (59)
Certificates of deposit 1,270 1,668 (398)
Individual Retirement Accounts 1,371 1,245 126
Other time deposits 2 2 -
Federal funds purchased 29 15 14
Other borrowed funds 2,331 2,312 19
- -----------------------------------------------------------------------------------------------------------
Total Interest Expense 5,703 6,243 (540)
- -----------------------------------------------------------------------------------------------------------
Net Interest Income $ 9,321 $ 8,575 $ 746
===========================================================================================================
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
(DOLLARS IN THOUSANDS) 3 MONTHS YEAR 3 MONTHS
ENDED RATE OF ENDED RATE OF ENDED RATE OF
3/31/2004 RETURN/ 12/31/2003 RETURN/ 3/31/2003 RETURN/
AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF
BALANCE FUNDS% BALANCE FUNDS% BALANCE FUNDS%
EARNING ASSETS
Available-for-sale securities, at amortized cost:
U.S. Treasury securities $ - 0.00% $ - 0.00% $ - 0.00%
Securities of other U.S. Government
agencies and corporations 58,733 4.62% 67,218 4.72% 63,936 5.05%
Mortgage-backed securities 171,334 4.37% 176,800 4.20% 194,678 4.73%
Obligations of states and political subdivisions 160,624 7.12% 146,371 7.36% 133,468 7.76%
Equity securities 29,989 4.87% 28,084 4.16% 24,937 3.38%
Other securities 47,265 6.12% 52,980 5.76% 60,702 5.80%
- ----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 467,945 5.56% 471,453 5.43% 477,721 5.69%
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 318 5.06% 320 5.31% 321 5.05%
Securities of other U.S. Government
agencies and corporations 148 5.44% 220 5.00% 272 7.46%
Mortgage-backed securities 38 10.58% 64 4.69% 82 4.95%
- ----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 504 5.59% 604 5.13% 675 6.01%
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 965 1.25% 1,669 0.60% 1,849 0.44%
Federal funds sold 357 1.13% 680 1.18% 982 1.24%
Loans:
Real estate loans 438,034 6.48% 399,353 6.79% 375,802 7.07%
Consumer 33,436 7.39% 32,386 8.75% 32,471 9.20%
Agricultural 2,933 6.45% 2,924 6.81% 2,782 7.14%
Commercial/industrial 35,405 5.80% 32,909 6.15% 32,030 6.36%
Other 608 5.95% 851 6.58% 1,056 6.53%
Political subdivisions 18,674 6.76% 16,649 6.87% 14,159 6.99%
Leases 65 6.19% 78 6.41% 92 8.82%
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 529,155 6.50% 485,150 6.88% 458,392 7.17%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 998,926 6.05% 959,556 6.15% 939,619 6.40%
Cash 13,268 13,583 12,398
Unrealized gain/loss on securities 21,693 20,296 19,271
Allowance for loan losses (6,166) (5,908) (5,864)
Bank premises and equipment 12,805 11,090 10,444
Other assets 36,835 36,103 31,541
- -----------------------------------------------------------------------------------------------------------------------
Total Assets $1,077,361 $1,034,720 $1,007,409
=======================================================================================================================
INTEREST-BEARING LIABILITIES
Interest checking $37,934 0.60% $37,647 0.71% $35,707 0.85%
Money market 186,375 1.24% 190,161 1.43% 187,697 1.73%
Savings 54,997 0.50% 54,789 0.78% 51,633 1.00%
Certificates of deposit 182,735 2.80% 190,019 3.14% 196,532 3.44%
Individual Retirement Accounts 114,686 4.81% 106,216 4.88% 101,954 4.95%
Other time deposits 1,057 0.76% 1,666 1.02% 1,479 0.55%
Federal funds purchased 9,614 1.21% 7,033 1.29% 4,229 1.44%
Other borrowed funds 275,513 3.40% 242,358 3.67% 237,913 3.94%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 862,911 2.66% 829,889 2.84% 817,144 3.10%
Demand deposits 74,614 70,528 65,498
Other liabilities 10,396 12,032 6,965
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 947,921 912,449 889,607
- ----------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity, excluding
other comprehensive income/loss 115,123 108,876 105,055
Other comprehensive income/loss 14,317 13,395 12,747
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 129,440 122,271 117,802
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $1,077,361 $1,034,720 $1,007,409
==================================================================================================================================
Interest Rate Spread 3.39% 3.31% 3.30%
Net Interest Income/Earning Assets 3.75% 3.70% 3.70%
(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 3/31/04 VS. 3/31/03
CHANGE IN CHANGE IN TOTAL
VOLUME RATE CHANGE
EARNING ASSETS
Available-for-sale securities:
U.S. Treasury securities $ -- $ -- $ --
Securities of other U.S. Government agencies
and corporations (59) (62) (121)
Mortgage-backed securities (251) (158) (409)
Obligations of states and political subdivisions 508 (217) 291
Equity securities 49 106 155
Other securities (196) 47 (149)
- ----------------------------------------------------------------------------------------------
Total available-for-sale securities 51 (284) (233)
- ----------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities -- -- --
Securities of other U.S. Government agencies
and corporations (2) (1) (3)
Mortgage-backed securities (1) 1 --
- ----------------------------------------------------------------------------------------------
Total held-to-maturity securities (3) -- (3)
- ----------------------------------------------------------------------------------------------
Interest-bearing due from banks
(1) 2 1
Federal funds sold (2) -- (2)
Loans:
Real estate loans 1,070 (572) 498
Consumer 22 (145) (123)
Agricultural 3 (5) (2)
Commercial/industrial 53 (44) 9
Other (6) (2) (8)
Political subdivisions 78 (8) 70
Leases (1) -- (1)
- ----------------------------------------------------------------------------------------------
Total loans 1,219 (776) 443
- ----------------------------------------------------------------------------------------------
Total Interest Income 1,264 (1,058) 206
- ----------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 5 (23) (18)
Money market (6) (218) (224)
Savings 8 (67) (59)
Certificates of deposit (108) (290) (398)
Individual Retirement Accounts 162 (36) 126
Other time deposits (1) 1 --
Federal funds purchased 16 (2) 14
Other borrowed funds 351 (332) 19
- ----------------------------------------------------------------------------------------------
Total Interest Expense 427 (967) (540)
- ----------------------------------------------------------------------------------------------
Net Interest Income $ 837 $ (91) $ 746
==============================================================================================
(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,
2004 2003
Service charges on deposit accounts $ 421 $ 409
Service charges and fees 76 69
Trust and financial management revenue 457 378
Insurance commissions, fees and premiums 109 80
Increase in cash surrender value of life insurance 159 193
Fees related to credit card operation 184 162
Other operating income 219 249
- --------------------------------------------------------------------------
Total other operating income, before realized
gains on securities, net 1,625 1,540
Realized gains on securities, net 964 1,721
- --------------------------------------------------------------------------
Total Other Income $2,589 $3,261
==========================================================================
Total noninterest income decreased $672,000, or 20.6%, in 2004 compared to 2003.
The most significant change - the decrease 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:
- - Trust and financial management revenue increased $79,000, or 20.9%, for
2004 versus 2003. Trust and financial management revenue is affected
significantly by the market value of assets under management. As of March
31, 2004, the value of trust assets under management amounted to
$353,762,000, an increase of $75,214,000 or 27.0% from $278,548,000 as of
March 31, 2003.
- - Insurance commissions and fees rose $29,000, or 36.3%, for 2004 compared to
2003. The increase in insurance-related revenues had 2 components: (1) an
increase in the revenues of $20,000 from Bucktail Life Insurance Company
("Bucktail"), a subsidiary of the Corporation that reinsures credit and
mortgage life and accident and health insurance, and (2) an increase in
revenues of $9,000 from the insurance division of C & N Financial Services
Corporation ("C&NFSC"). C&NFSC, a subsidiary or Citizens & Northern Bank,
began its insurance agency operations in 2002, with limited activity to
date. C&NFSC insurance revenues amounted to $39,000 in 2004 and $30,000 in
2003. Management continues to explore opportunities to expand insurance
related revenues.
- - Credit card fee income has increased mainly due to the formation of a
"Reward Card Program" which pays users a rebate for using their credit
card. This program was started in April 2003 and has had the desired effect
of raising card usage. This, along with an increased rate on interchange
fees, has raised overall credit card fees 13.6%.
- - The increase in cash surrender value of life insurance fell $34,000 to
$159,000 in 2004 from $193,000 for 2003. The Corporation's policy return is
determined, in part, by the earnings generated from a pooled separate
investment trust held by the life insurance company. In 2004, the earnings
on that pooled separate trust fund have been lower than in 2003, which is
reflective of lower market yields on debt securities.
18
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VI- COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS)
3 MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
Salaries and wages $ 2,671 $ 2,448
Pensions and other employee benefits 984 864
Occupancy expense, net 377 340
Furniture and equipment expense 336 332
Pennsylvania shares tax 212 196
Other operating expense 1,648 1,352
- ---------------------------------------------------------------------------------------------------
Total Other Expense $ 6,228 $ 5,532
===================================================================================================
Salaries and wages increased $223,000, or 9.1%, for 2004 compared to 2003. The
increase is the result of annual merit raises generally ranging from 2%-5% and
an increase in the number of employees. The number of full-time equivalent
employees increased 10.6% to 293 as of March 31, 2004 from 265 as of March 31,
2003.
Pensions and other employee benefits increased $120,000, or 13.9%, in 2004 over
2003. The largest expense increases within this category were increases of
$32,000 in Savings & Retirement (401(k)) expense, $27,000 in health insurance
expense and $18,000 in unemployment compensation expense. In addition to the
impact of more employees and a higher salary base, health care and unemployment
rates were higher in 2004 than in 2003.
Occupancy Expense rose $37,000, or 10.9%, in 2004 compared to 2003. The majority
of this increase is directly related to the general overall increase in utility
rates, coupled with the addition of the Williamsport facility. Light, fuel and
water rose $24,000, or 33.7%, in 2004 over 2003.
Other Operating Expense increased $296,000 or 21.9% in 2004 compared to 2003.
Overall, the increase in Other Operating Expense resulted from higher volumes of
loans and other transactions, start-up of the Williamsport facility and other
activities that have resulted in more expenses incidental to personnel and
technology. The largest increases in expenses within this category were as
follows:
- Expenses related to Bucktail, $45,000
- Telephone services, $42,000
- Office supplies, $31,000
- Postage, $21,000
- PC software, $17,000
- Employee tuition and education, $16,000.
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. The allowance for loan losses
and stockholders' equity are discussed in separate sections of Management's
Discussion and Analysis. The following are significant changes in the
Corporation's consolidated balance sheet as of March 31, 2004 compared to
December 31, 2003, other than the items addressed in those discussions:
- - As reflected in the consolidated balance sheet, the carrying value of
available-for-sale securities rose to $526,985,000 at March 31, 2004 from
$483,032,000 at December 31, 2003. Much of the increase is in
mortgage-backed securities. Management has identified investment
opportunities and entered into long-term repurchase agreements to fund
them.
- - Also reflected in the consolidated balance sheet, accrued interest and
other liabilities rose to $33,113,000 at March 31, 2004 from $8,777,000 at
December 31, 2003, an increase of $24,336,000. A major portion of this
increase, $22,096,000, is attributable to an accrued purchase of
mortgage-backed securities, which settled early in the second quarter.
19
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 and historical
loss experience, as modified for identified trends and concerns, for each loan
category. The historical loan loss experience element is determined based on the
ratio of net charge-offs to average loan balances over a five-year period, for
each significant type of loan, modified for risk adjustment factors identified
by management for each type of loan. The charge-off ratio, 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 $6,370,000 at March 31, 2004, an increase of
$273,000 from the balance at December 31, 2003. As you can see in Table VII, net
charge-offs were relatively low by historical standards during the first quarter
2004, totaling $77,000. The provision for loan losses was $350,000 in the first
quarters of 2004 and 2003. 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 allowance for impaired loans
increased $125,000, to $1,667,000 at March 31, 2004 from $1,542,000 at December
31, 2003. Table VIII also shows an increase in the unallocated portion of the
allowance of $121,000, to $2,238,000 at March 31, 2004 from $2,117,000 at
December 31, 2003.
Table IX presents information concerning past due and impaired loans. Total
impaired loans increased substantially, to $8,722,000 as of March 31, 2004 from
$4,621,000 at December 31, 2003. Table IX also shows that total loans past due
more than 90 days and still accruing interest increased to $5,591,000 at March
31, 2004 from $2,546,000 at December 31, 2003. These increases resulted mainly
from one commercial loan relationship, with total outstanding loan balances of
approximately $3.8 million as of March 31, 2004. Currently, management estimates
that payment in full will be received on these loans, including principal and
all interest that has been accrued. Accordingly, the Corporation's allowance
calculations reflect no estimated loss as of March 31, 2004, and the
relationship has not been moved into nonaccrual status. Management continues to
closely monitor this situation, and will adjust its estimates of loss and
decision concerning nonaccrual status, if appropriate.
Tables VII, VII, 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.
20
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) QUARTER QUARTER YEARS ENDED DECEMBER 31,
ENDED ENDED
MARCH 31, MARCH 31,
2004 2003 2003 2002 2001 2000 1999
Balance, beginning of year $ 6,097 $ 5,789 $ 5,789 $ 5,265 $ 5,291 $ 5,131 $ 4,820
- ------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate loans 20 57 168 123 144 272 81
Installment loans 27 187 326 116 138 77 138
Credit cards and related plans 50 48 171 190 200 214 192
Commercial and other loans - 183 303 123 231 53 219
- ------------------------------------------------------------------------------------------------------------------------
Total charge-offs 97 475 968 552 713 616 630
- ------------------------------------------------------------------------------------------------------------------------
Recoveries:
Real estate loans 2 15 75 30 6 26 81
Installment loans 7 4 52 30 27 23 60
Credit cards and related plans 7 7 17 18 20 28 30
Commercial and other loans 4 3 32 58 34 23 10
- ------------------------------------------------------------------------------------------------------------------------
Total recoveries 20 29 176 136 87 100 181
- ------------------------------------------------------------------------------------------------------------------------
Net charge-offs 77 446 792 416 626 516 449
Provision for loan losses 350 350 1,100 940 600 676 760
- ------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 6,370 $ 5,693 $ 6,097 $ 5,789 $ 5,265 $ 5,291 $ 5,131
========================================================================================================================
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
(IN THOUSANDS)
AS OF
MARCH 31, AS OF DECEMBER 31,
2004 2003 2002 2001 2000 1999
Commercial $ 1,606 $ 1,578 $ 1,315 $ 852 $ 441 $ 2,081
Consumer mortgage 460 456 460 188 187 834
Impaired loans 1,667 1,542 1,877 1,736 2,393 609
Consumer 399 404 378 302 287 437
All other commitments - - - - - 150
Unallocated 2,238 2,117 1,759 2,187 1,983 1,020
- --------------------------------------------------------------------------------------------------------------
Total Allowance $ 6,370 $ 6,097 $ 5,789 $ 5,265 $ 5,291 $ 5,131
==============================================================================================================
TABLE IX - PAST DUE AND IMPAIRED LOANS
(IN THOUSANDS)
MARCH 31, DEC. 31,
2004 2003
Impaired loans without a valuation allowance $ 3,861 $ 114
Impaired loans with a valuation allowance 4,861 4,507
- -------------------------------------------------------------------------------------
Total impaired loans $ 8,722 $ 4,621
=====================================================================================
Valuation allowance related to impaired loans $ 1,667 $ 1,542
Total nonaccrual loans $ 1,359 $ 1,145
Total loans past due 90 days or more and
still accruing $ 5,591 $ 2,546
21
TABLE X - SUMMARY OF LOANS BY TYPE
(IN THOUSANDS)
AS OF
MARCH 31, AS OF DECEMBER 31,
2004 2003 2002 2001 2000 1999
Real estate - construction $ 4,061 $ 2,856 $ 103 $ 1,814 $ 452 $ 649
Real estate - mortgage 437,494 431,047 370,453 306,264 263,325 247,604
Consumer 33,647 33,977 31,532 29,284 28,141 29,140
Agricultural 2,832 2,948 3,024 2,344 1,983 1,899
Commercial 34,145 34,967 30,874 24,696 20,776 18,050
Other 1,914 1,183 2,001 1,195 948 1,025
Political subdivisions 17,773 17,854 13,062 13,479 12,462 12,332
Lease receivables 65 65 96 152 218 222
- -------------------------------------------------------------------------------------------------------------------
Total 531,931 524,897 451,145 379,228 328,305 310,921
Less: unearned discount -- -- -- -- -- (29)
- -------------------------------------------------------------------------------------------------------------------
531,931 524,897 451,145 379,228 328,305 310,892
Less: allowance for loan
Losses (6,370) (6,097) (5,789) (5,265) (5,291) (5,131)
- -------------------------------------------------------------------------------------------------------------------
Loans, net $ 525,561 $ 518,800 $ 445,356 $ 373,963 $ 323,014 $ 305,761
===================================================================================================================
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes derivative financial instruments related to a
certificate of deposit product called the "Index Powered Certificate of Deposit"
(IPCD). IPCDs have a term of 5 years, with interest paid at maturity based on
90% of the appreciation (as defined) in the S&P 500 index. There is no
guaranteed interest payable to a depositor of an IPCD - however, assuming an
IPCD is held to maturity, a depositor is guaranteed the return of his or her
principal, at a minimum.
Statement of Financial Accounting Standards No. 133 requires the Corporation to
separate the amount received from each IPCD issued into 2 components: (1) an
embedded derivative, and (2) the principal amount of each deposit. Embedded
derivatives are derived from the Corporation's obligation to pay each IPCD
depositor a return based on appreciation in the S&P 500 index. Embedded
derivatives are carried at fair value, and are included in other liabilities in
the consolidated balance sheet. Changes in fair value of the embedded derivative
are included in other expense in the consolidated income statement. The
difference between the contractual amount of each IPCD issued, and the amount of
the embedded derivative, is recorded as the initial deposit (included in
interest-bearing deposits in the consolidated balance sheet). Interest expense
is added to principal ratably over the term of each IPCD at an effective
interest rate that will increase the principal balance to equal the contractual
IPCD amount at maturity.
In connection with IPCD transactions, the Corporation has entered into Equity
Indexed Call Option (Swap) contracts with the Federal Home Loan Bank of
Pittsburgh (FHLB-Pittsburgh). Under the terms of the Swap contracts, the
Corporation must pay FHLB-Pittsburgh quarterly amounts calculated based on the
contractual amount of IPCDs issued times a negotiated rate. In return,
FHLB-Pittsburgh is obligated to pay the Corporation, at the time of maturity of
the IPCDs, an amount equal to 90% of the appreciation (as defined) in the S&P
500 index. If the S&P 500 index does not appreciate over the term of the related
IPCDs, the FHLB-Pittsburgh would make no payment to the Corporation. The effect
of the Swap contracts is to limit the Corporation's cost of IPCD funds to the
market rate of interest paid to FHLB-Pittsburgh. (In addition, the Corporation
pays a fee of 0.75% to a consulting firm at inception of each deposit. This fee
is amortized to interest expense over the term of the IPCDs.) Swap liabilities
are carried at fair value, and included in other liabilities in the consolidated
balance sheet. Changes in fair value of swap liabilities are included in other
expense in the consolidated income statement.
22
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Amounts recorded as of March 31, 2004 and December 31, 2003, and for the first
quarters of 2004 and 2003, related to IPCDs are as follows (in thousands):
MARCH 31, DEC. 31,
2004 2003
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $3,903 $3,593
Carrying value of IPCDs 3,490 3,160
Carrying value of embedded derivative liabilities 360 298
Carrying value of Swap contract liabilities 35 130
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003
Interest expense $ 34 $ 29
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 the Federal Home Loan Bank of Pittsburgh, secured by
mortgage loans and various investment securities. At March 31, 2004, the
Corporation had unused borrowing availability with correspondent banks and the
Federal Home Loan Bank of Pittsburgh totaling approximately $118,073,000.
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.
Historically, one of the tools used to monitor a bank's longer-term liquidity
situation has been the loan-to-deposit ratio. As of March 31, 2004, this ratio
was 81%, which is a moderate-to-low ratio by banking industry standards, but
much higher than the Corporation's position has been in many years. The higher
than historical level of loans-to-deposits reflects the Corporation's very
strong loan growth over the past few years. The loan-to-deposit ratio was 79% at
December 31, 2003, 70% at December 31, 2002 and 65% at December 31, 2001.
Management believes the current, higher loan-to-deposit ratio is an indicator
that some of the Corporation's historical liquidity "cushion" has been reduced;
however, the current position continues to provide sufficient funds for
maintenance of a substantial investment securities portfolio. If required to
raise cash in an emergency situation, the Corporation could sell non-pledged
investment securities to meet its obligations. At March 31, 2004, the carrying
value of non-pledged securities was $344,084,000.
Management believes the combination of its strong capital position (discussed in
the next section), ample available borrowing facilities and low loan to deposit
ratio have placed the Corporation in a position of minimal short-term and
long-term liquidity risk.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. For many years, the
Corporation and the Bank have maintained strong capital positions. The
Corporation's consolidated capital ratios at March 31, 2004 are as follows:
23
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Total capital to risk-weighted assets 20.00%
Tier 1 capital to risk-weighted assets 18.12%
Tier 1 capital to average total assets 10.73%
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 "Earnings Overview" section of Management's Discussion and
Analysis) 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. 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.
The Bank's Board of Directors has established policy guidelines for acceptable
levels of interest rate risk, based on an immediate increase or decrease in
interest rates of 200 basis points. The policy limit for fluctuation in net
interest income is minus 20% from the baseline one-year scenario. The policy
limit for market value variance is minus 30% from the baseline one-year
scenario. The most sensitive scenario presented in Table XI below is the "+200
basis points" scenario. As Table XI shows, as of March 31, 2004, 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 38.0%, which exceeds the policy threshold. Management
continues to 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.
24
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
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
PERIOD ENDING MARCH 31, 2005
(IN THOUSANDS)
MARCH 31, 2004 DATA
CURRENT PLUS 200 MINUS 200
INTEREST BASIS BASIS
RATES POINTS POINTS
SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 55,251 $ 58,802 $ 50,352
Interest expense 20,902 25,663 16,733
- --------------------------------------------------------------------------------- ----------
Net Interest Income $ 34,349 $ 33,139 -3.5% $ 33,619 -2.1%
====================================================================================================================
Market Value of Portfolio Equity at Mar. 31, 2004 $ 127,722 $ 79,200 -38.0% $ 158,129 23.8%
====================================================================================================================
PERIOD ENDING DECEMBER 31, 2004
(IN THOUSANDS)
DECEMBER 31, 2003 DATA
CURRENT PLUS 200 MINUS 200
INTEREST BASIS BASIS
RATES POINTS POINTS
SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 54,126 $ 58,319 $ 48,386
Interest expense 20,676 26,047 16,343
- ------------------------------------------------------------------------------- ------------
Net Interest Income $ 33,450 $ 32,272 -3.5% $ 32,043 -4.2%
====================================================================================================================
Market Value of Portfolio Equity at Dec. 31, 2003 $ 123,499 $ 79,649 -35.5% $ 152,462 23.5%
====================================================================================================================
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 $9,919,000 at March 31, 2004 and
$11,347,000 at December 31, 2003.
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, 2004 and December 31, 2003 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, 2004 COST VALUE VALUE VALUE
Banks and bank holding companies $ 16,470 $ 28,610 $ (2,861) $ (5,722)
Other equity securities 13,522 13,803 (1,380) (2,761)
- ---------------------------------------------------------------------------------------------------------------
Total $ 29,992 $ 42,413 $ (4,241) $ (8,483)
===============================================================================================================
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT DECEMBER 31, 2003 COST VALUE VALUE VALUE
Banks and bank holding companies $ 16,375 $ 29,288 $ (2,929) $ (5,858)
Other equity securities 13,576 13,400 (1,340) (2,680)
- ---------------------------------------------------------------------------------------------------------------
Total $ 29,951 $ 42,688 $ (4,269) $ (8,538)
===============================================================================================================
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 4. CONTROLS AND PROCEDURES
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 as defined in Rule 13a-15(e) and Rule
15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period
covered by this report. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the evaluation date, the
Corporation's disclosure controls and procedures are effective to ensure that
information required to be disclosed in reports the Corporation files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There were no changes in the Corporation's internal control over financial
reporting that occurred during the period covered by this report that have
materially affected, or that are reasonably likely to materially 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. Not Applicable
Item 3. Not Applicable
Item 4. Not Applicable
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8 - K
a. Exhibits:
Page
----
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Executive Officer 29
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Financial Officer 30
Exhibit 32 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 31
b. A Current Report on Form 8-K under Items 7 and 12, dated January 9,
2004, was furnished to report the Corporation's consolidated earnings
results for the three-month and annual periods ended December 31, 2003.
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 6, 2004 By: Craig G. Litchfield /s/
- ----------- -----------------------
Date Chairman, President and Chief Executive Officer
May 6, 2004 By: Mark A. Hughes /s/
- ----------- ------------------
Date Treasurer and Chief Financial Officer
28