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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended DECEMBER 31, 1999 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK Par Value $1.00
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 5,205,266 shares March 1, 2000
The Aggregate Market value of the registrant's common stock held by
non-affiliates at
March 1, 2000: $131,432,967. (a date within 60 days of the date hereof)
- - ------------- --------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Excerpts from the Registrants Annual report to shareholders are incorporated
herein by reference in response to Part II, hereof. The Registrant's definitive
Proxy statement to be used in connection with the 1999 Annual Meeting of
shareholders to be held April 18, 2000 is incorporated herein by reference in
partial response to Part III.
Location in Form 10-K Incorporated Information
- - --------------------- ------------------------
Part II
Item 5. Market for Registrant's Common Page 45 of the Annual Report
Stock and Related Stockholder Matters
Item 6. Selected Financial Data Pages 46 and 47 of the Annual Report
Item 7. Management's Discussion and Analysis Pages 29 through 48 of the Annual
of Financial Condition and Results Report
Of Operations
Item 7A. Quantitative and Qualitative Pages 41 through 43 of the Annual
Disclosures Report
About Market Risk
Item 8. Financial Statements and Pages 7 through 10 and 45 through
Supplementary Data 48 of the Annual Report
Part III
Item 10. Directors and Executive Officers Pages 1 through 5 of the Proxy
of the Registrant Statement
Item 11. Executive Compensation Pages 6 through 9 of the Proxy
Statement
Item 12. Security Ownership of Certain Pages 2 through 6 of the Proxy
Beneficial Owners and Management Statement
Item 13. Certain Relationships and Related Page 24 of the Annual Report
Transactions Page 12 of the Proxy Statement
2
PART I
ITEM 1. BUSINESS
The information appearing in the Annual Report under the caption
"Description of Business" on page 49 is herein incorporated by reference.
Regulation and Supervision
The Corporation
The Corporation is a one-bank holding company formed under the provisions of
Section 3 of the Federal Reserve Act. The Corporation is under the direct
supervision of the Federal Reserve board and must comply with the reporting
requirements of the Federal Bank Holding Company Act.
The Bank
The Bank is a state chartered nonmember bank, supervised by and under
the reporting requirements of the Pennsylvania Department of Banking and the
Federal Deposit Insurance Corporation.
Investment Corporation
Citizens & Northern Investment Corporation is chartered in the state of
Delaware and is under the direct supervision of the Federal Reserve Board.
Bucktail Life Insurance Company
The corporation is also the parent company of Bucktail Life Insurance
Company. Bucktail Life Insurance Company is a credit life and accident and
health insurance provider for credit facilities issued by Citizens & Northern
Bank. The Insurance Company is incorporated in the state of Arizona and is
supervised by the Arizona Department of Insurance.
ITEM 2. PROPERTIES
Information relating to the location of banking offices is located on
page 50 of the Annual Report.
There are no encumbrances against any of the properties owned by the
Bank.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
3
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDERS MATTERS
The information appearing in the Annual Report under the caption
"Quarterly Share Data" on page 45 and the "Summary of Quarterly Financial Data"
on page 47 is herein incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
The "Five-Year Summary of Operations" on page 46 of the Annual Report is
herein incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information appearing in the Company's annual Report under the
caption "Management's Discussion and Analysis of Financial Condition and results
of Operations" on pages 29 through 48, is herein incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk appears on pages 41 through 43 of the
Annual Report and is herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA
The Consolidated Financial Statements ( and notes thereto) found on
pages 7 through 26 and the Summary of Quarterly Financial Data presented on page
47 are herein incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors. The information appearing under the
caption "Election of Directors" on pages 1 through 4 of the
Corporation's Proxy Statement dated March 20, 2000, is herein
incorporated by reference.
(b) Identification of Executive Officers. The information appearing under
the caption "Corporation's and Bank's Executive Officers" on pages 5
and 6 of the Corporation's Proxy Statement dated March 20, 2000, is
herein incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
4
Information appearing under the caption "Executive Compensation" on
pages 7 through 9 of the Corporation's Proxy Statement dated March 20, 2000, is
herein incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Election of Directors" on pages
2 and 3 and under the caption "Corporation's and Bank's Executive Officers" on
pages 5 through 7 of the Corporation's proxy statement dated March 20, 2000, is
herein incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing in note 13 to the Consolidated Financial
Statements on page 24 in the Annual Report is herein incorporated by reference.
Information appearing under the caption "Certain Transactions" on page
12 of the Corporation's Proxy statement dated March 20, 2000, is herein
incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(a)(1).The following consolidated financial statements and reports are set
forth in Item 8.
Page
----
Independent Auditors'Report 27
Financial Statements:
Consolidated Balance Sheet - December 31, 1999 and 1998 7
Consolidated Statement of Income - Years Ended
December 31, 1999, 1998, and 1997 8
Consolidated Statement of Changes in Stockholders' Equity -
Years Ended December 31, 1999, 1998 and 1997 9
Consolidated Statement of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997 10
Notes to Consolidated Financial Statements 11-26
(2) Financial statement schedules are either omitted because inapplicable
or included in the financial statements or related notes. Individual financial
statements of Bucktail Life Insurance Company and Citizens & Northern Investment
Corporation, consolidated subsidiaries, have been omitted, as neither the assets
nor the income from continuing operations before tax exceeded ten percent of the
consolidated totals.
(3) Exhibits (numbered as in Item 601 of Regulation S-K)
2. Plan of Acquisition, Reorganization,
Arrangement Liquidation or Succession. Not applicable
3. (i) Articles of Incorporation *
5
3. (ii) Bylaws of the Registrant *
4. Articles of Incorporation of the
Registrant as Currently in effect *
9. Voting Trust Agreement Not applicable
10. Material Contracts Not applicable
11. Statement re Computation of
Per share earnings Not applicable
12. Statements re Computation of Ratios Not applicable
13. Annual Report to Shareholders Page 11
16. Letter re Change in Certifying
Accountant Not applicable
18. Letter re Change in Accounting
Principles Not applicable
21. List of Subsidiaries Page 10
22. Published Report Regarding Matters
Submitted to Vote of Security Holders Not Applicable
23. Consent of Independent Auditors Page 12
24. Power of Attorney Not applicable
27. Financial Data Schedules None
28. Information from Reports Furnished
to State Insurance Regulatory
Authorities Not applicable
99. Additional Exhibits
* Omitted in the interest of brevity
(b) No reports on form 8-K were filed during the quarter ended December 31,
1999.
(c) Exhibits - The required exhibits are included under 14 (a) (3) of Form
10-K
(d) Financial Statement schedules are omitted because the required
information is not applicable or is included elsewhere herein.
SIGNATURES
6
Pursuant to the requirements of Section 13 or 15(d) 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
Mar 24, 2000 By: Craig G. Litchfield /s/
- - ------------- ---------------------------
Date Craig G. Litchfield
Chairman, President and Chief Executive Officer
March 24, 2000 By: James W. Seipler /s/
- - -------------- ------------------------
Date Treasurer
7
BOARD OF DIRECTORS
Dennis F Beardslee /s/ Craig G Litchfield /s/
- - -------------------------------- --------------------------------
Dennis F. Beardslee Craig G Litchfield
J Robert Bower /s/ Lawrence F Mase /s/
- - -------------------------------- --------------------------------
J Robert Bower Lawrence F Mase
R Robert DeCamp /s/ Robert J Murphy /s/
- - -------------------------------- --------------------------------
R Robert DeCamp Robert J Murphy
Adelbert E Eldridge /s/ Edward H Owlett, III /s/
- - -------------------------------- --------------------------------
Adelbert E Eldridge Edward H Owlett, III
R Bruce Haner /s/ F David Pennypacker /s/
- - -------------------------------- --------------------------------
R Bruce Haner F David Pennypacker
Susan E Hartley /s/ Leonard Simpson /s/
- - -------------------------------- --------------------------------
Susan E Hartley Leonard Simpson
Karl W. Kroeck /s/ Donald E Treat /s/
- - -------------------------------- --------------------------------
Karl W. Kroeck Donald E Treat
Edward L. Learn /s/
- - --------------------------------
Edward L. Learn
8
EXHIBIT INDEX
3. (i) Articles of Incorporation of the Registrant as currently in effect are
herein incorporated by
reference to Exhibit D to Registrant's Form S-4, Registration
Statement dated March 27, 1987.
3. (ii) Bylaws of the Registrant as currently in effect are herein
incorporated by reference to Exhibit E to Registrant's Form S-4,
Registration Statement dated March 27, 1987.
4. Articles of Incorporation of the Registrant as currently in effect are
herein incorporated by Reference to Exhibit D to Registrant's Form
S-4, Registration Statement dated March 27, 1987.
10. Page 29 of Registrant's Form S-4, Registration Statement dated March
27, 1987, is herein incorporated by reference.
13. Annual Report to Shareholders
21. List of Subsidiaries
23. Consent of Parente Randolph, PC, Independent Auditors.
1999 Annual Report CEO Letter to Shareholders
To our shareholders:
Thanks to the support of our customers, employees and shareholders, Citizens &
Northern has completed another record year. While the primary purpose of this
letter is to review the accomplishments and achievements of 1999, the
management, employees and directors of Citizens & Northern are intently focused
on the future. We are at the beginning of a significant evolutionary change in
the financial services industry. With the enactment of the Federal Financial
Modernization Act in November 1999, banks are now provided entry into other
financial service sectors that have been denied for decades. We intend to use
the new regulatory freedom to offer a full range of financial services to meet
our local customers' needs. We have the respect and trust of our customers and
communities because we earn it every day.
We believe all banking is local and personal. As a community bank, Citizens &
Northern Bank is committed to serving each of our customers as they wish to be
served. For years, we have been the premier community bank in our market. In the
future, we will be the premier financial service provider. Our vision for
Citizens & Northern Bank is to be recognized by the people in our market area as
the provider of all their financial services: banking, investment and asset
management, retirement planning, estate planning, and insurance needs. We
believe that our vision for the future is captured and projected in the
following: "Professionals dedicated to meeting your lifetime financial needs,
with a personal touch."(TM)
1999 Financial Highlights
Net income for 1999 set a new record of nearly $11.5 million. Most of the
increase in Net Income is due to income from general operating activities.
Securities Gains are substantially identical from 1998 to 1999. The net interest
margin increased by over 4.7% and other operating income before realized
securities gains, increased 5.9%. Our operating expenses have increased by
nearly 7.6%, over $1.2 million. The boost in operating expenses is due to our
desire to expand our opportunities for future business. Since mid-1998 we have
added our first 12 twelve ATMs, opened the Mansfield office, added three trust
officers to the Trust and Financial Services Division, and established our
Internet Banking site. Each of these new endeavors adds to our expenses and
creates current and future income prospects.
The Corporation's Assets increased by 9.22%. Investment Securities increased by
nearly 9% and loans by 6.8%. Total Deposits and Repurchase Sweep balances
increased by over 5.5%. Shareholder Equity before adjustment for Accumulated
Other Comprehensive Income rose by over 8.5%. Accumulated Other Comprehensive
Income expresses the net unrealized gain or loss of Investment Securities and is
a reflection of the interest rate sensitivity of the investment portfolio. The
substantial reduction in Accumulated Other Comprehensive Income from the end of
1998 to the end of 1999 occurred due to a significant rise in long-term interest
rates.
Shareholder dividends declared for the 1999 year increased 10.77% from 1998,
representing a nearly 41% pay out of Net Income. Since 1998, the market value of
our stock has suffered, as have other regional bank stock prices. The last trade
in 1999 was at a price of $27.25, which is down over 23% from the last trade
price in 1998.
For a more detailed description of our financial performance, please read
Management's Discussion and Analysis of Financial Condition and Results of
Operations found later in this report.
Trust and Financial Services
With $320.4 million in Assets Under Management, our Trust and Financial Services
Division continues to grow at a double-digit rate, 13.1% for 1999. Additionally,
Trust Department Income also increased by13%. The excellent sales and business
development efforts coupled with good investment returns are responsible for the
increases.
With the addition of three more experienced financial services professionals, we
anticipate substantial additional growth in this area. Our goal is to be the
foremost provider of asset management, retirement planning and estate planning
services in our market. We invite our shareholders to contact our Trust and
Financial Services Division for a free consultation to show what we can do for
you. Call 1-800-4TRUST4 to speak with one of our financial service
professionals.
C&Now(R) Internet Banking - www.cnbankpa.com
Our Internet Banking System has been online since June 28th. As of the end of
1999, we had nearly 1,300 consumer users and over 100 commercial user of this
cutting-edge service. We believe that the Internet provides another
customer-convenient method for us to deliver our financial services. We will be
adding to and enhancing our Internet presence for the years to come. Visit our
web site at the above address and try one of our Internet Banking Demos.
C&Now(R) Visa Check Card
In October, we began offering our customers the C&Now(R) Visa Check Card as an
alternative to their ATM card. The advantages of the Visa Check Card are that
the card can be used as an ATM card and it can be used as a point-of-sale debit
card for purchase with any merchant that accepts Visa, Plus, NYCE, MAC or The
Exchange cards. The check card is a very popular new product.
Insurance Marketing and Sales
In January 2000, we formed a new corporate subsidiary of the bank, Citizens &
Northern Financial Services Corporation. This new subsidiary will be licensed as
an insurance agency, and will permit us to begin marketing insurance products.
We believe that the sales of insurance products is a natural fit with banking
services; and moves us closer to our vision of being a complete financial
services provider. You will be hearing more about our initiative in coming
months.
Technology
We continue to upgrade our management information systems to improve our ability
to serve our customers better. Our mainframe was upgraded during the fourth
quarter of 1999 to a new system that is 4 to 5 times faster. Our branch network
system is being upgraded to provide more bandwidth for faster access. It came as
no surprise to us that our staff of dedicated computer professionals handled the
Y2K preparations in a very expert way. We are all thankful to them for their
hard work.
New Branch Office Plans
We have just received regulatory approval to establish an new branch office in
Muncy Creek Township less than 1 mile east of Muncy borough. At this writing, we
are in the process of obtaining the necessary local permits and authorizations
to build our seventeenth full service office. Eastern Lycoming County is a
rapidly growing area, and we have existing relationships with many business
located in the area. We believe that the area presents a terrific opportunity
for us to deliver banking, trust and financial services. The location we have
selected is less than an eighth of a mile from I-180 and on heavily traveled
State Route 405. We hope to begin building in the spring and open before the end
of summer.
Retirements
At the end of 1999, seven long time employees retired. Their years of service
ran from 21 to 40 years for combined total years of service of 210 years. We
will miss their daily contributions, but we wish them many happy and fulfilling
years of retirement. Retiring from our Athens office are Sylvia Fay, Shirley
Matthew, Keith Ferguson, Rita Fisk and Beverly Hill. Retiring from our Knoxville
and Towanda offices are Barbara Mullican and Charmaine Stempel, respectively.
Our thanks go to each of them for their hard work and commitment toward making
Citizens & Northern Bank what it is today.
Commitment
The employees, officers and directors of Citizens & Northern Bank and Citizens
& Northern Corporation are dedicated to meeting the financial needs of our
customers. It is that dedication, which will continue to build long term value
for our shareholders. In the future, we will have many challenges and
opportunities. We embrace the possibilities with open and willing arms. Thank
you for your continuing support.
2
Consolidated Balance Sheet
(In Thousands Except Per Share Data) December 31, December 31,
1999 1998
ASSETS
Cash & Due From Banks:
Noninterest-Bearing $15,337 $15,428
Interest-Bearing 2,726 700
- - --------------------------------------------------------------------------------------------------------------------------------
Total Cash and Cash Equivalents 18,063 16,128
Available-for-Sale Securities 358,929 329,275
Held-to-Maturity Securities
(Estimated fair value of $1,830 and $1,931 in 1999 and 1998, Respectively) 1,880 1,908
Loans, Net 305,761 286,183
Bank Premises and Equipment, Net 7,992 7,416
Foreclosed Assets Held for Sale 310 652
Accrued Interest Receivable 5,066 4,109
Other Assets 7,897 627
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $705,898 $646,298
================================================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $67,200 $57,871
Interest-Bearing 433,274 418,647
- - --------------------------------------------------------------------------------------------------------------------------------
Total Deposits 500,474 476,518
Dividends Payable 1,237 1,123
Short-Term Borrowings 89,036 12,080
Long-Term Borrowings 35,025 60,044
Accrued Interest and Other Liabilities 3,503 5,966
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 629,275 555,731
STOCKHOLDERS' EQUITY
Common Stock, Par Value $ 1.00 per Share 5,272 5,220
Authorized 10,000,000; Issued 5,272,239 and 5,220,038 in 1999 and 1998, Respectively
Stock Dividend Distributable 1,437 1,931
Paid in Capital 17,355 15,468
Retained Earnings 62,886 57,477
- - --------------------------------------------------------------------------------------------------------------------------------
Total 86,950 80,096
Accumulated Other Comprehensive Income (8,884) 11,922
Less: Treasury Stock at Cost
118,510 shares at December 31, 1999 (1,443)
118,010 shares at December 31, 1998 (1,451)
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 76,623 90,567
- - --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $705,898 $646,298
================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
3
Consolidated Statement of Income
(In Thousands Except Per Share Data)
Years Ended December 31,
1999 1998 1997
INTEREST INCOME
Interest and Fees on Loans $ 25,642 $ 25,819 $ 26,033
Interest on Balances with Depository Institutions 30 37 54
Interest on Loans to Political Subdivisions 541 380 391
Interest on Federal Funds Sold 42 229 334
Income from Available-for-Sale and
Held-to-Maturity Securities:
Taxable 16,421 14,062 14,361
Tax Exempt 4,534 3,982 3,595
Dividends 1,205 950 874
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 48,415 45,459 45,642
- - ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 19,053 18,252 18,292
Interest on Short-Term Borrowings 2,454 824 755
Interest on Long-Term Borrowings 3,064 3,617 4,265
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 24,571 22,693 23,312
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin 23,844 22,766 22,330
Provision for Possible Loan Losses 760 763 797
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 23,084 22,003 21,533
- - ----------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Charges on Deposit Accounts 1,113 1,039 1,076
Service Charges and Fees 274 288 281
Trust Department Income 1,456 1,288 1,004
Insurance Commissions, Fees and Premiums 438 405 462
Fees Related to Credit Card Operation 3,064 2,969 2,627
Other Operating Income 99 94 384
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income Before Realized Gains on Securities, Net 6,444 6,083 5,834
Realized Gains on Securities, Net 3,043 3,001 1,001
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income 9,487 9,084 6,835
- - ----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and Wages 6,926 6,621 5,975
Pensions and Other Employee Benefits 1,831 1,760 1,691
Occupancy Expense, Net 896 827 726
Furniture and Equipment Expense 1,078 792 723
Expenses related to Credit Card Operation 2,597 2,732 2,395
Pennsylvania Shares Tax 723 656 596
Other Operating Expense 3,681 3,095 2,989
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 17,732 16,483 15,095
- - ----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 14,839 14,604 13,273
Income Tax Provision 3,354 3,527 3,166
- - ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME 11,485 11,077 10,107
==================================================================================================================================
NET INCOME PER SHARE - BASIC $ 2.21 $ 2.13 $ 1.94
==================================================================================================================================
NET INCOME PER SHARE DILUTED 2.20 2.12 1.94
==================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
4
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands Except Per Share Data)
Consolidated Statement of Changes in Stockholders' Accumulated
Equity
Common Stock Other
(In Thousands Except Per Share Data) Stock Dividend Paid In Retained Comprehensive Treasury
Shares Amount Distributable Capital Earnings Income Stock Total
------ ------ ------------- ------- -------- ------ ----- -----
Balance December 31, 1996 5,117 5,117 1,305 12,539 47,862 5,767 (997) 71,593
Comprehensive Income:
Net Income 10,107 10,107
Unrealized Gain on Securities, Net of
Reclassification Adjustment and Tax 7,568 7,568
Effects
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 17,675
- - ------------------------------------------------------------------------------------------------------------------------------------
Stock Dividend Issued 51 51 (1,305) 1,254
Cash Dividends Declared $.72 Per Share (3,744) (3,744)
Stock Dividend Declared, 1% 1,706 (1,706)
Shares Issued from Treasury Related to
Exercise of Stock Options 6 5 11
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 5,168 5,168 1,706 13,799 52,519 13,335 (992) 85,535
- - ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 11,077 11,077
Unrealized Loss on Securities, Net of
Reclassification Adjustment and Tax (1,413) (1,413)
Effects
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income 9,664
- - ------------------------------------------------------------------------------------------------------------------------------------
Stock Dividend Issued 52 52 (1,706) 1,654
Cash Dividends Declared $.80 Per Share (4,188) (4,188)
Stock Dividend Declared, 1% 1,931 (1,931)
Shares Issued from Treasury Related to
Exercise of Stock Options 15 9 24
Shares Purchased for Treasury (468) (468)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 5,220 $5,220 $1,931 $15,468 $57,477 $11,922 ($1,451) $90,567
- - ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income:
Net Income 11,485 11,485
Unrealized Loss on Securities, Net of
Reclassification Adjustment and Tax (20,806) (20,806)
Effects
- - ------------------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (9,321)
- - ------------------------------------------------------------------------------------------------------------------------------------
Stock Dividend Issued 52 52 (1,931) 1,879
Cash Dividends Declared $.89 Per Share (4,639) (4,639)
Stock Dividend Declared, 1% 1,437 (1,437)
Shares Issued from Treasury Related to
Exercise of Stock Options 8 8 16
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 5,272 5,272 1,437 17,355 62,886 (8,884) (1,443) $76,623
====================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
5
Consolidated Statement of Cash Flows
(In Thousands)
Years Ended December 31,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 11,485 $ 11,077 $ 10,107
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Possible Loan Losses 760 763 797
Realized Gain on Securities, Net (3,043) (3,001) (1,001)
(Gain) Loss on Sale of Foreclosed Assets, Net 44 (26) 97
Provision for Depreciation 971 806 723
Accretion and Amortization (1,837) (455) 773
Deferred Income Tax 423 63 10
Decrease (Increase) in Accrued Interest
Receivable and Other Assets (2,282) 717 163
( Decrease) Increase in Accrued Interest Payable and
Other Liabilities 2,003 653 (848)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,524 10,597 10,821
- - --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturity of Held-to-Maturity Securities 372 178 755
Purchase of Held-to-Maturity Securities (354) (498) (781)
Proceeds from Sales of Available-for-Sale Securities 30,027 83,888 134,157
Proceeds from Maturities of Available-for-Sale Securities 33,436 127,670 64,768
Purchase of Available-for-Sale Securities (119,753) (232,922) (186,798)
Net Increase in Loans (20,503) (7,231) (7,652)
Purchase of Premises and Equipment (1,547) (1,502) (834)
Sale of Foreclosed Assets 463 402 419
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities (77,859) (30,015) 4,034
- - --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 23,956 34,262 11,945
Net Increase (Decrease) in Short-Term Borrowings 76,956 (2,920) (13,850)
Proceeds from Long-Term Borrowings - 34,400 10,074
Repayments of Long-Term Borrowings (25,019) (39,817) (20,013)
Proceeds from the Sale of Treasury Stock 16 24 11
Purchase of Treasury Stock - (468) -
Dividends Declared (4,639) (4,188) (3,744)
- - --------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Financing Activities 71,270 21,293 (15,577)
- - --------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,935 1,875 (722)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,128 14,253 14,975
- - -------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $18,063 $16,128 $ 14,253
================================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest Paid $24,006 $22,615 $22,380
================================================================================================================================
Income Taxes Paid $2,973 $ 3,172 $3,512
================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION - The consolidated financial statements include the
accounts of Citizens and Northern Corporation ("Corporation"), and its
subsidiaries, Citizens & Northern Bank ("Bank"), Bucktail Life Insurance Company
and Citizens & Northern Investment Corporation. All material intercompany
balances and transactions have been eliminated in consolidation.
NATURE OF OPERATIONS - The Corporation is primarily engaged in providing a full
range of banking and mortgage services to individual and corporate customers in
Northcentral Pennsylvania. Lending activity includes commercial loans, mortgage
loans, consumer installment loans, credit cards, lease financing as well as
specialized instruments such as commercial letters-of-credit. Deposit services
provided include various types of checking accounts, passbook and statement
savings, money market accounts, interest checking accounts, internet banking,
individual retirement accounts and certificates of deposit. The Corporation also
offers non-insured Repo Sweep accounts and originates secondary market consumer
mortgages.
The Corporation provides Trust Department services, including the administration
of trusts and estates, retirement plans, and other employee benefit plans.
The Corporation is subject to competition from other financial institutions. It
is also subject to regulation by certain federal and state agencies and
undergoes periodic examination by those regulatory authorities.
USE OF ESTIMATES - The presentation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
the valuation of foreclosed assets held for sale, management relies on
appraisals of its internal certified appraiser.
Management believes that the allowance for losses on loans and the valuation of
foreclosed assets held for sale are adequate. While management uses available
information to recognize losses on loans and foreclosed assets held for sale,
changes in economic conditions may necessitate revisions of these estimates in
future years. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Corporation's allowance for
losses on loans and valuation of foreclosed assets held for sale. Such agencies
may require the Corporation to recognize adjustments to allowances based on
their judgments of information available to them at the time of their
examination.
INVESTMENT SECURITIES - Investment securities are accounted for as follows:
HELD-TO-MATURITY SECURITIES - includes debt securities that the Corporation has
the positive intent and ability to hold to maturity. These securities are
reported at cost adjusted for amortization of premiums and accretion of
discounts, computed using a method approximating the level-yield basis.
AVAILABLE-FOR-SALE SECURITIES - includes debt securities not classified as
held-to-maturity and both restricted and unrestricted equity securities. Such
securities, except for restricted equity securities, are reported at fair value,
with unrealized gains and losses excluded from earnings and reported, separately
through accumulated other comprehensive income, net of tax. The restricted
equity securities consist primarily of Federal Home Loan Bank stock, which are
carried at cost and evaluated for impairment. Amortization of premiums and
accretion of discounts on available-for-sale securities are recorded using the
level yield method over the remaining contractual life of the securities,
adjusted for actual prepayments.
Realized gains and losses on the sale of available-for-sale securities are
computed on the basis of specific identification of the adjusted cost of each
security.
7
The fair values of the majority of the Corporation's investments are estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instruments being valued. The carrying values of restricted equity securities
approximate fair values.
LOANS AND LEASE FINANCE RECEIVABLES ("LOANS") - Loans are stated at unpaid
principal balances, less the allowance for loan losses and net deferred loan
fees and unearned discounts.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using the interest method. Amortization of deferred loan fees is
discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual status when, in the opinion of management,
collection of interest is doubtful. Any unpaid interest previously accrued on
those loans is reversed from income. Interest income is generally not recognized
on specific impaired loans unless the likelihood of further loss is remote.
Interest payments received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is recognized only
to the extent of interest payments received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost
less accumulated depreciation. Repair and maintenance expenditures, which extend
the useful life of an asset, are capitalized and other repair expenditures are
expensed as incurred.
When premises or equipment are retired or sold the remaining cost and
accumulated depreciation are removed from the account and any gain or loss is
credited or charged to income. Depreciation expense is computed using the
straight-line method.
FORECLOSED ASSETS HELD FOR SALE - Foreclosed assets held for sale consist of
real estate acquired by foreclosure and are carried at the lower of fair value
minus estimated cost to sell or cost. The book value of foreclosed assets held
for sale at December 31, 1999 and December 31, 1998 was $310,000 and $652,000,
respectively. Foreclosed assets held for sale amounting to $165,000, $798,000
and $163,000 were acquired from the foreclosure of real estate loans during
1999, 1998 and 1997, respectively.
INCOME TAXES - Provisions for deferred income taxes are made as a result of
temporary differences in financial and income tax methods of accounting. These
differences relate principally to provisions for possible loan losses,
amortization of loan origination fees and costs, pension expense, depreciation
of bank premises and equipment, and postretirement benefits.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business,
the Corporation has entered into off-balance sheet financial instruments
consisting of commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they become
payable.
CASH FLOWS - The Corporation utilizes the net reporting of cash receipts and
cash payments for certain deposit and lending activities. The Corporation
considers all cash and amounts due from depository institutions,
interest-bearing deposits in other banks, and federal funds sold to be cash
equivalents for purposes of the statement of cash flows.
TRUST ASSETS AND INCOME - Assets held by the Corporation in a fiduciary or
agency capacity for its customers are not included in the financial statements
since such items are not assets of the Corporation. Trust income is recorded on
a cash basis, which is not materially different from the accrual basis.
RECLASSIFICATION - Certain 1998 and 1997 amounts have been reclassified to
conform to the 1999 presentation.
8
2. COMPREHENSIVE INCOME
Effective January 1, 1998, the Corporation adopted SFAS No. 130, "Reporting
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. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or stockholders' equity. As required by SFAS No.
130, the consolidated financial statements for 1997 have been reclassified to
reflect application of this pronouncement.
The components of other comprehensive income and the related tax effects are as
follows:
Years Ended December 31,
(In Thousands)
1999 1998 1997
Unrealized holding gains (losses) on
available-for-sale securities $ (28,481) $860 $12,468
Less: Reclassification adjustment for
gains realized in income (3,043) (3,001) (1,001)
-----------------------------------------------
Net unrealized gains (losses) (31,524) (2,141) 11,467
Tax effect 10,718 728 (3,899)
-----------------------------------------------
Net-of-tax amount $(20,806) $ (1,413) $ 7,568
===============================================
3. 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 declared
in the fourth quarter of each year presented, payable in the first quarter of
the following year. 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
1999
Earnings per share - basic $11,485,000 5,205,140 $2.21
Dilutive effect of stock options 5,809
- - ------------------------------------------------------------------------------------------
Earnings per share - diluted $11,485,000 5,210,949 $2.20
- - ------------------------------------------------------------------------------------------
1998
Earnings per share - basic $11,077,000 5,209,640 $2.13
Dilutive effect of stock options 9,604
- - ------------------------------------------------------------------------------------------
Earnings per share - diluted $11,077,000 5,219,244 $2.12
- - ------------------------------------------------------------------------------------------
1997
Earnings per share - basic $10,107,000 5,215,775 $1.94
Dilutive effect of stock options 4,850
- - ------------------------------------------------------------------------------------------
Earnings per share - diluted $10,107,000 5,220,625 $1.94
- - ------------------------------------------------------------------------------------------
9
4. CASH AND DUE FROM BANKS
Banks are required to maintain reserves consisting of vault cash and deposit
balances with the Federal Reserve Bank in their district. The reserves are based
on deposit levels during the year and account activity and other services
provided by the Federal Reserve Bank. Average daily currency, coin, and cash
balances with the Federal Reserve Bank needed to cover reserves against deposits
for 1999 ranged from $1,078,000 to $6,546,000. For 1998, these balances ranged
from $4,467,000 to $5,679,000. Average daily cash balances with the Federal
Reserve Bank required to cover services provided to the Bank ranged from $25,000
to $425,000 during 1999 and amounted to $425,000 throughout 1998. Total balances
restricted at December 31, 1999 and December 31, 1998 were $1,695,000 and
$5,744,000, respectively.
Deposits with one financial institution are insured up to $100,000. The
Corporation maintains cash and cash equivalents with certain financial
institutions in excess of the insured amount.
5. SECURITIES
Amortized cost and the fair value of securities at December 31, 1999, 1998 and
1997 are summarized as follows:
December 31, 1999
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITES:
Obligations of the U.S. Treasury $ 2,514 $ - $ (16) $ 2,498
Obligations of Other U.S. Government Agencies 128,494 - (11,803) 116,691
Obligations of States and Political 81,219 571 (5,042) 76,748
Subdivisions
Other Securities 22,829 140 (1,262) 21,707
Mortgage-backed Securities 111,605 396 (4,185) 107,816
- - ---------------------------------------------------------------------------------------------------------------
Total Debt Securities 346,661 1,107 (22,308) 325,460
Marketable Equity Securities 25,730 8,921 (1,182) 33,469
- - ---------------------------------------------------------------------------------------------------------------
Total $372,391 $10,028 $(23,490) $358,929
===============================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 617 $ - $ (8) $ 609
Obligations of Other U.S. Government Agencies 949 - (39) 910
Mortgage-backed Securities 314 4 (7) 311
- - ---------------------------------------------------------------------------------------------------------------
Total $ 1,880 $ 4 $ (54) $ 1,830
===============================================================================================================
December 31, 1998
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,512 $ 44 $ - $ 2,556
Obligations of Other U.S. Government Agencies 61,998 237 (394) 61,841
Obligations of States and Political 78,434 3,167 (178) 81,423
Subdivisions
Other Securities 16,713 92 (338) 16,467
Mortgage-backed Securities 130,189 1,043 (186) 131,046
- - ---------------------------------------------------------------------------------------------------------------
Total Debt Securities 289,846 4,583 (1,096) 293,333
Marketable Equity Securities 21,365 14,788 (211) 35,942
- - ---------------------------------------------------------------------------------------------------------------
Total $311,211 $19,371 $ (1,307) $329,275
===============================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 630 $ 4 $ 634
$ -
Obligations of Other U.S. Government Agencies 849 4 (1) 852
Mortgage-backed Securities 429 19 (3) 445
- - ---------------------------------------------------------------------------------------------------------------
Total $1,908 $27 $ (4) $ 1,931
===============================================================================================================
10
December 31, 1997
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,520 $ 18 $ 2,538
$ -
Obligations of Other U.S. Government Agencies 74,188 312 (51) 74,449
Obligations of States and Political 62,009 2,606 (1) 64,614
Subdivisions
Other Securities 3,851 29 (107) 3,773
Mortgage-backed Securities 127,664 1,585 (59) 129,190
- - ---------------------------------------------------------------------------------------------------------------
Total Debt Securities 270,232 4,550 (218) 274,564
Marketable Equity Securities 16,149 15,875 (1) 32,023
- - ---------------------------------------------------------------------------------------------------------------
Total $286,381 $ 20,425 $ (219) $306,587
===============================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 632 $ - $ (2) $ 630
Obligations of Other U.S. Government Agencies 350 8 - 358
Mortgage-backed Securities 615 28 (8) 635
- - ---------------------------------------------------------------------------------------------------------------
Total $1,597 $ 36 $ (10) $ 1,623
===============================================================================================================
The amortized cost and fair value of investment debt securities at December 31,
1999 follow. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Maturities of mortgage-backed securities have been
estimated based on the contractual maturity.
December 31, 1999
(In Thousands) Amortized Fair
Cost Value
AVAILABLE-FOR-SALE SECURITIES:
Due in one year or less $ 750 $ 757
Due after one year through five years 11,525 11,653
Due after five through ten years 20,892 20,623
Due after ten years 313,494 292,427
- - ---------------------------------------------------------------------------------------------------------
Total $346,661 $325,460
=========================================================================================================
HELD-TO-MATURITY SECURITIES:
Due in one year or less
$ - $ -
Due after one year through five years 1,023 1,006
Due after five through ten years 767 737
Due after ten years 90 87
- - ---------------------------------------------------------------------------------------------------------
Total $1,880 $1,830
=========================================================================================================
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1999:
Within One - Five Five - Ten After Ten
One Year Yield Years Yield Years Yield Years Yield Total Yield
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - - $ 2,514 5.76 $ - - $ - - $ 2,514 5.76
Obligations of Other U.S. - - - - - - - - - -
Government Agencies - - - - 16,984 7.61 111,510 6.94 128,494 7.03
Obligations of States and - - - - - - - - -
Political Subdivisions $750 7.04 3,436 6.29 2,926 6.45 74,107 5.42 81,219 5.51
Other Securities - - 1,000 9.25 550 8.75 21,279 7.36 22,829 7.47
Mortgage-backed Securities - - 4,575 7.45 432 7.48 106,598 6.81 111,605 6.84
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $750 7.04 $11,525 6.89 $20,892 7.48 $313,494 6.56 $346,661 6.63
===================================================================================================================================
HELD-TO-MATURITY SECURITIES
Obligations of the U.S. Treasury $ 617 5.60 $ - - $ - - $ 617 5.60
Obligations of Other U.S. $ - - - - - - - - - -
Government Agencies 400 6.32 549 6.59 - 0.00 949 6.48
Mortgage-backed Securities - - 6 9.20 218 7.31 90 6.41 314 7.09
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $ - - $1,023 5.90 $ 767 6.80 $ 90 6.41 $1,880 6.29
===================================================================================================================================
Investment securities carried at approximately $50,755,000 and $57,424,000 at
December 31, 1999 and 1998, respectively, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law.
In 1999, gross realized gains from the sale of available-for-sale securities
were $3,186,000 and gross realized losses were $143,000. Gross realized gains
from the sale of available-for-sale securities in 1998 were $3,423,000, while
gross realized losses for that year were $422,000. In 1997, gross realized gains
from the sale of available-for-sale securities amounted to $2,883,000 and gross
realized losses were $1,882,000. The income tax provision applicable to net
realized gains amounted to $1,035,000, $1,020,000 and $340,000, for 1999, 1998
and 1997, respectively.
11
6. NET LOANS AND LEASE FINANCE RECEIVABLES
Major categories of loans and leases included in the loan portfolio are
summarized as follows:
At December 31,
(In Thousands) % of % of
1999 Total 1998 Total
Real Estate - Construction $ 649 0.21% $ 1,004 0.35%
Real Estate - Mortgage 247,604 79.64% 230,815 79.30%
Consumer 29,140 9.37% 30,924 10.63%
Agriculture 1,899 0.61% 1,930 0.66%
Commercial 18,050 5.80% 17,630 6.06%
Other 1,025 0.33% 1,062 0.37%
Political Subdivisions 12,332 3.97% 7,449 2.56%
Lease Receivables 222 0.07% 218 0.07%
- - -----------------------------------------------------------------------------------------------------------------------------
Total 310,921 100.00% 291,032 100.00%
Less Unearned Discount (29) (29)
- - -----------------------------------------------------------------------------------------------------------------------------
310,892 291,003
Less Allowance for Possible Loan Losses (5,131) (4,820)
- - -----------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease Finance Receivables $305,761 $286,183
=============================================================================================================================
At December 31, 1999 and 1998, net unamortized loan fees and costs of $1,761,000
and $1,875,000, respectively, have been offset against the carrying value of
loans.
There is no concentration of loans to borrowers engaged in similar businesses or
activities that exceeds 10% of total loans at December 31, 1999.
The Corporation grants commercial, residential and personal loans to customers
primarily in Tioga, Bradford, Sullivan and Lycoming counties. Although the
Corporation has a diversified loan portfolio, a significant portion of its
debtors' ability to honor their contracts is dependent on the local economic
conditions within the region.
Loan Maturity Distribution
December 31, 1999
Over One
Year but After
(In Thousands) One Year Less than Five
Or Less Five Years Years Total
Real Estate - Construction $ 649 $ - $ - $ 649
Real Estate - Mortgage 64,704 65,504 117,396 247,604
Consumer 10,731 13,244 5,165 29,140
Agriculture 724 1,069 106 1,899
Commercial 9,241 6,101 2,708 18,050
Other 243 283 499 1,025
Political Subdivisions 692 2,919 8,721 12,332
Lease Receivables 21 83 118 222
- - ------------------------------------------------------------------------------------------------------------------------------
Total $87,005 $89,203 $134,713 $310,921
==============================================================================================================================
Loans in the preceding table with maturities over one year but less than five
years and over five years are all fixed rate loans. All loans due on demand or
at a variable rate are shown as one year or less.
Loans on which the accrual of interest has been discontinued or reduced amounted
to $1,956,000 at December 31, 1999 and $1,135,000 at December 31, 1998. Interest
income on such loans is recorded only as received.
12
Loans on which the original terms have been restructured totaled $143,000 and
$156,000 at December 31, 1999 and December 31, 1998, respectively. None of the
loans on which the original terms were changed were past due at December 31,
1999
Loans which were more than 90 days past due and still accruing interest at
December 31, 1999 and December 31, 1998 totaled $1,797,000 and $1,628,000,
respectively.
Transactions in the allowance for possible loan losses were as follows:
Years Ended December 31,
(In Thousands) 1999 1998 1997
Balance at Beginning of Year $4,820 $4,913 $4,776
Provision Charged to Operations 760 763 797
Loans Charged Off (630) (966) (784)
Recoveries 181 110 124
- - ------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $5,131 $4,820 $4,913
==============================================================================================================================
Information related to impaired loans as of December 31, 1999 and 1998 is as
follows:
(In Thousands) 1999 1998
Balance of impaired loans $1,956 $1,135
===============================
Specific allowance related to impaired $956 $290
Loans
The average balance of impaired loans amounted to $1,582,000, $1,397,000 and
$1,208,000 for 1999, 1998 and 1997, respectively.
The following is a summary of cash receipts on impaired loans and how they were
applied.
(In Thousands) 1999 1998 1997
Cash receipts applied to reduce principal balance $233 $154 $ 79
Cash receipts recognized as interest income 35 67 86
- - ---------------------------------------------------------------------------------------------------------------
Total cash receipts $268 $221 $165
===============================================================================================================
13
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
December 31,
(In Thousands) 1999 1998
Land $ 559 $ 497
Buildings and Improvements 9,562 9,300
Furniture and Equipment 6,623 5,430
- - -------------------------------------------------------------------------------------------------------------------
Total 16,744 15,227
Less Accumulated Depreciation 8,752 7,811
- - -------------------------------------------------------------------------------------------------------------------
Net $ 7,992 $ 7,416
===================================================================================================================
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprised of the following:
Years Ended December 31,
(In Thousands) 1999 1998 1997
Building and Improvements $362 $340 $296
Furniture and Equipment 609 466 427
- - --------------------------------------------------------------------------------------------------------------------------------
Total $971 $806 $723
================================================================================================================================
8. DEPOSITS
The following table reflects time deposits included in total deposits and their
remaining maturities.
December, 31, 1999
(In Thousands) 2000 2001 2002 2003 2004 Thereafter Total
Certificates of Deposit $ 90,867 $33,564 $9,058 $6,815 $2,765 $ 63 $143,132
Yield 5.20% 5.54% 5.71% 5.53% 5.26% 5.60% 5.33%
Individual Retirement Accounts 47,218 30,416 - - - - 77,634
Yield 6.03% 6.03% - - - - 6.03%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits $138,085 $63,980 $9,058 $6,815 $2,765 $ 63 $220,766
- - -----------------------------------------------------------------------------------------------------------------------------------
Yield 5.46% 5.74% 5.71% 5.53% 5.26% 5.60% 5.55%
===================================================================================================================================
December 31, 1998
(In Thousands) 1999 2000 2001 2002 2003 Thereafter Total
Certificates of Deposit $ 80,445 $33,422 $12,240 $6,369 $4,983 $16 $137,475
Yield 5.17% 5.76% 5.82% 5.88% 5.67% 4.90% 5.42%
Individual Retirement Accounts 51,000 25,977 - - - - 76,977
Yield 5.00% 5.00% - - - - 5.00%
- - -----------------------------------------------------------------------------------------------------------------------------------
Total time deposits $131,445 $59,399 $12,240 $6,369 $4,983 $16 $214,452
- - -----------------------------------------------------------------------------------------------------------------------------------
Yield 5.10% 5.43% 5.82% 5.88% 5.67% 4.90% 5.27%
===================================================================================================================================
Included in interest-bearing deposits are time deposits issued in the amount of
$100,000 or more. These certificates and their remaining maturities are as
follows:
14
At December 31, 1999
(In Thousands) 2000 2001 2002 2003 2004 Total
Certificates of Deposit $23,244 $4,265 $1,316 $1,101 $100 $30,026
Yield 5.47% 5.64% 6.02% 5.61% 5.25% 5.52%
Individual Retirement Accounts 6,819 2,820 - - - 9,639
Yield 6.03% 6.03% - - - 6.03%
- - ---------------------------------------------------------------------------------------------------------------
Total time deposits $30,063 $7,085 $1,316 $1,101 $100 $39,665
- - ---------------------------------------------------------------------------------------------------------------
Yield 5.60% 5.80% 6.02% 5.61% 5.25% 5.65%
===============================================================================================================
At December 31, 1998
(In Thousands) 1999 2000 2001 2002 2003 Total
Certificates of Deposit $13,141 $11,390 $1,228 $1,066 $852 $27,677
Yield 5.32% 5.70% 5.96% 6.13% 5.75% 5.55%
Individual Retirement Accounts 5,634 3,902 - - - 9,536
Yield 5.00% 5.00% - - - 5.00%
- - ---------------------------------------------------------------------------------------------------------------
Total $18,775 $15,292 $1,228 $1,066 $852 $37,213
- - ---------------------------------------------------------------------------------------------------------------
Yield 5.22% 5.52% 5.96% 6.13% 5.75% 5.41%
===============================================================================================================
The interest paid on deposits of $100,000 or more amounted to $1,760,000,
$1,047,000 and $898,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
9. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings include the following:
(In Thousands) At December 31,
1999 1998
Federal Funds Purchased (a) $ - $ -
Flexline(b) - -
Federal Home Loan Bank Borrowings (c) 58,000 10,000
Customer Repurchase Agreements (d) 4,705 2,080
Repurchase Agreements (e) 26,331 -
- - --------------------------------------------------------------------------------------------------------
Total Short-Term Borrowings $89,036 $12,080
========================================================================================================
(a) Federal Funds Purchased generally represent overnight federal funds
borrowings from correspondent banks. The maximum month-end amount of such
borrowing in 1999, 1998 and 1997 was $14,500,000, $2,000,000 and $10,000,000,
respectively. The average amount of such borrowings was $6,085,000, $2,801,000
and $663,000 in 1999, 1998 and 1997, respectively, and the weighted average
interest rates were 4.91% in 1999, 4.75% in 1998 and 4.98% in 1997.
(b) Flexline is a line of credit with the Federal Home Loan Bank of Pittsburgh
used overnight. The line was discontinued on December 31, 1998. The weighted
average interest rate for 1998 and 1997 was 4.75% and 4.98%, respectively. The
maximum outstanding balance was $16,500,000 in 1998 and $20,000,000 in 1997.
(c) Federal Home Loan Bank loans included in Short-Term Borrowings are as
follows:
At December 31,
(In Thousands) 1999 1998
Fixed Rate 5.75% maturing February 14, 2000 $10,000 $ -
Fixed Rate 5.72% maturing February 26, 2000 5,000 -
Fixed Rate 6.14% maturing March 20, 2000 10,000 -
Fixed Rate 6.12% maturing April 21, 2000 10,000 -
Fixed Rate 6.08% maturing June 7, 2000 10,000 -
Fixed Rate 5.91% maturing August 26, 2000 5,000 -
Variable Rate 5.825% maturing December 22, 2004, callable 5,000 -
In 2000
Variable rate Open Repo Plus maturing overnight 3,000 10,000
- - --------------------------------------------------------------------------------
Total Short-Term Federal Home Loan Bank Borrowings $58,000 $10,000
================================================================================
15
Collateral for Federal Home Loan Bank loans is described below under long-term
borrowings.
d) Customer repurchase agreements included in Short-Term Borrowings amounted to
$4,705,000 as of December 31, 1999 and $2,080,000 at December 31, 1998. These
repurchase agreements mature overnight, and are collateralized by securities
with a carrying value of $4,705,000 at December 31, 1999 and $2,080,000 at
December 31, 1998.
(e) Repurchase Agreements included in Short-Term borrowings are as follows:
At December 31,
(In Thousands) 1999 1998
Fixed Rate 5.18% maturing March 31, 2000 $16,881 $ -
Fixed Rate 5.50% maturing June 19, 2000 9,450 -
- - -------------------------------------------------------------------------
Total Repurchase Agreements $26,331 $ -
=========================================================================
LONG-TERM BORROWINGS
Long-term borrowings are as follows:
(In Thousands) At December 31,
1999 1998
Federal Home Loan Bank Borrowings (f) $25,625 $35,644
Repurchase Agreements (g) 9,400 24,400
- - -------------------------------------------------------------------------------
Total Long Term Borrowings $35,025 $60,044
===============================================================================
(f) Federal Home Loan Bank Loans included in Long-Term Borrowings are as
follows:
(In Thousands) At December 31,
1999 1998
Variable rate at 4.74%, maturing October 26, 2000 $ 5,000 $ 5,000
Variable rate at 5.60%, maturing July 11, 2002 10,000 10,000
Variable rate at 5.19%, maturing July 22, 2003 - 10,000
Variable rate at 4.32%, maturing October 20, 2003 10,000 10,000
Fixed rate at 6.86%, maturing December 30, 2016 555 571
Fixed rate at 6.83%, maturing June 5, 2017 70 73
- - -----------------------------------------------------------------------------------------------
Total Federal Home Loan Bank Borrowings $25,625 $35,644
===============================================================================================
All Federal Home Loan Bank loans are collateralized by Federal Home Loan Bank
Stock, mortgage-backed securities and first mortgage loans with a book value
totaling $292,759,000 at December 31, 1999.
(g) Repurchase Agreements included in Long-Term Borrowings are as follows:
(In Thousands) At December 31,
1999 1998
Morgan Stanley fixed rate at 5.68% maturing January 30, 2000 $9,400 $ 9,400
Morgan Stanley fixed rate at 5.57% maturing December 18, 2001 - 15,000
- - ------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements $9,400 $24,400
============================================================================================================
Securities sold under repurchase agreements were delivered to the broker-dealers
who arrange the transactions. The broker-dealers may have sold, loaned or
otherwise disposed of such securities to other parties in the normal course of
their operations, and have agreed to resell to the Corporation substantially
identical securities at the maturities of the agreements. The respective
carrying value of the underlying securities at December 31, 1999 and 1998 was
$32,512,000 and $25,967,000. Average daily repurchase agreement borrowings for
the years ended December 31, 1999, 1998, and 1997 amounted to $46,059,000,
$28,967,000 and $37,481,000, respectively. The weighted average interest rate on
repurchase agreements for 1999, 1998 and 1997 was 5.70%, 5.40% and 5.77%,
respectively. During 1999, 1998 and 1997 the maximum outstanding borrowings were
$53,731,000, $39,200,000 and $44,650,000.
16
10. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Corporation's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions can significantly affect the estimates. Estimated fair
values have been determined by the Corporation using historical data, and an
estimation methodology suitable for each category of financial instruments. The
method for determining the estimated fair value of the Corporation's investment
securities is described in Note 1. The Corporation's fair value estimates,
methods and assumptions are set forth below for the Corporation's other
financial instruments.
CASH AND DUE FROM BANKS - The carrying amounts for cash and due from banks
reported in the consolidated balance sheet approximates these assets' fair
values.
LOANS - Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial, commercial
real estate, residential mortgage, credit card and other consumer. Each loan
category is further segmented into fixed and adjustable rate interest terms and
by performing and nonperforming categories. The fair value of performing loans,
except residential mortgage and credit card loans, is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
loans. The estimate of maturity is based on the Corporation's historical
experience with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions. For
performing residential mortgage loans, fair value is estimated by discounting
contractual cash flows adjusted for prepayment estimates based on historical
experience. For credit card loans, cash flows and maturities are estimated based
on contractual interest rates and historical experience. Fair value of
nonperforming loans is based on recent appraisals or estimates prepared by the
Corporation's lending officers.
The following tables present information on loans.
December 31, 1999
(In Thousands) Book Current Discount Fair
Value Yield Rate (1) Value
Real Estate:
Real Estate Fixed $201,246 8.71 8.75 $201,229
Real Estate Variable 45,444 8.42 7.50 45,808
- - ---------------------------------------------------------------------------------------------------------------------
Total Real Estate 246,690 247,037
- - ---------------------------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 20,632 10.06 10.50 20,648
Consumer Variable 369 8.91 9.00 369
Credit Cards 7,524 14.90 14.90 7,524
Key Loans 582 18.00 18.00 582
- - ---------------------------------------------------------------------------------------------------------------------
Total Consumer 29,107 29,123
- - ---------------------------------------------------------------------------------------------------------------------
Agriculture 1,899 9.43 9.50 1,880
- - ---------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial Fixed 11,648 9.41 9.50 11,627
Commercial Variable 6,013 9.24 9.50 6,012
- - ---------------------------------------------------------------------------------------------------------------------
Total Commercial 17,661 17,639
- - ---------------------------------------------------------------------------------------------------------------------
Other Loans 1,025 7.70 8.00 1,026
Political Subdivisions 12,332 5.70 6.00 12,331
Leases 222 6.31 8.00 201
Nonperforming 1,956 1,956
- - ---------------------------------------------------------------------------------------------------------------------
Total Loans 310,921 311,193
Allowance for Possible Loan Losses (5,131) (5,131)
Net Loans $305,761 $306,062
17
December 31, 1998
Book Current Discount Fair
Value Yield Rate(1) Value
Real Estate:
Real Estate Fixed $176,206 8.58 7.69 $179,542
Real Estate Variable 48,539 8.01 7.18 48,558
- - ----------------------------------------------------------------------------------------------------------------------
Total Real Estate 224,745 228,100
- - ----------------------------------------------------------------------------------------------------------------------
Consumer:
Consumer Fixed 21,824 9.14 8.77 21,930
Consumer Variable 548 8.50 8.27 548
Credit Cards 7,863 14.90 14.90 7,863
Key Loans 660 18.00 18.00 660
- - ----------------------------------------------------------------------------------------------------------------------
Total Consumer 30,895 31,001
- - ----------------------------------------------------------------------------------------------------------------------
Agriculture 1,903 10.00 8.75 1,928
- - ----------------------------------------------------------------------------------------------------------------------
Commercial:
Commercial Fixed 10,106 9.06 8.75 10,150
Commercial Variable 7,524 8.59 8.75 7,505
- - ----------------------------------------------------------------------------------------------------------------------
Total Commercial 17,630 17,655
- - ----------------------------------------------------------------------------------------------------------------------
Other Loans 7,028 7.81 7.75 7,047
Political Subdivisions 7,449 6.05 5.00 7,616
Leases 218 7.93 8.00 207
Nonperforming 1,135 1,135
- - ----------------------------------------------------------------------------------------------------------------------
Total Loans 286,183 294,689
Allowance for Possible Loan Losses (4,820) (4,820)
- - ----------------------------------------------------------------------------------------------------------------------
Total Loans $281,363 $ 289,869
(1) Management has made estimates of fair value discount rates that it believes
to be reasonable. However, because there is no market for many of these
financial instruments, management has no basis to determine whether the fair
value presented above would be indicative of the value negotiated in an actual
sale.
DEPOSITS - The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, money market and interest checking
accounts, is equal to the amount payable on demand at December 31, 1999 and
1998. The fair value of all other deposit categories is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates
currently offered for deposits of similar remaining maturities.
December 31, 1999
Book Market
(In Thousands) Value Value
- - ------------------------------------------------------------------------------------------------------
Noninterest-bearing Demand Deposits $ 67,200 $ 67,200
- - ------------------------------------------------------------------------------------------------------
Interest-bearing Deposits:
Money Market 126,994 126,994
Interest Checking 39,077 39,077
Savings 45,420 45,420
Certificates of Deposit 143,132 142,581
Other Time 78,651 77,257
- - ------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 433,274 431,329
- - ------------------------------------------------------------------------------------------------------
Total Deposits $500,474 $498,529
======================================================================================================
18
December 31, 1998
Book Market
(In Thousands) Value Value
- - ------------------------------------------------------------------------------------------------------
Noninterest-bearing Demand Deposits $ 57,871 $ 57,871
- - ------------------------------------------------------------------------------------------------------
Interest-bearing Deposits:
Money Market 121,082 121,082
Interest Checking 36,751 36,751
Savings 45,301 45,301
Certificates of Deposit 137,475 142,673
Other Time 78,038 78,040
- - ------------------------------------------------------------------------------------------------------
Total Interest-bearing Deposits 418,647 423,847
- - ------------------------------------------------------------------------------------------------------
Total Deposits $476,518 $481,718
======================================================================================================
The fair value estimates above do not include the benefit that results from the
low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market, commonly referred to as the core deposit
intangible.
BORROWED FUNDS - Rates currently available to the Corporation for borrowed funds
with similar terms and remaining maturities are used to estimate the fair value
of existing borrowed funds.
December 31, 1999
(In Thousands) Book Market
Value Value
Borrowings:
Short-Term $ 89,036 $ 88,933
Long-Term 35,025 34,934
- - ------------------------------------------------------------------------------------------------------
Total Borrowings $124,061 $123,867
======================================================================================================
December 31, 1998
(In Thousands) Book Fair
Value Value
Borrowings:
Short -Term $12,080 $12,071
Long -Term 60,044 59,999
- - ------------------------------------------------------------------------------------------------------
Total Borrowings $72,124 $72,070
======================================================================================================
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT - There is no
material difference between the notional amount and the fair value of
off-balance sheet items which totaled $65,272,000 at December 31, 1999 and
$54,010,000 at December 31, 1998 and are primarily comprised of unfunded loan
commitments which are generally priced at market at the time of funding.
11. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS
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 at December 31,
1999 and will not affect the Corporation's future expenses.
The following tables show the funded status and components of net periodic
benefit cost from these defined benefit plans:
19
Postretirement
Pension Benefits Benefits
(In Thousands) 1999 1998 1999 1998
CHANGE IN BENEFIT
OBLIGATION:
Benefit obligation at beginning of year $6,870 $6,059 $ 732 $715
Service cost 302 267 28 25
Interest cost 460 424 50 42
Plan participants' contributions 44 54
Actuarial (gain) loss (199) 384 15 -
Benefits paid (292) (264) (98) (104)
- - -----------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $7,141 $6,870 $ 771 $732
=============================================================================================================================
Postretirement
(In Thousands) Pension Benefits Benefits
1999 1998 1999 1998
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
Beginning of year $8,378 $7,628 $ - $ -
Actual return on plan assets 1,151 1,014 - -
Employer contribution 54 50
Plan participants' contributions 44 54
Benefits paid (292) (264) (98) (104)
-----------------------------------------------------------
Fair value of plan assets at end of year $9,237 $8,378 $ $ -
-
===========================================================
Funded status $ 2,096 $1,508 $(771) $(732)
Unrecognized net actuarial (gain) loss (1,391) (790) (96) (111)
Unrecognized transition obligation (251) (274) 475 511
Prepaid (accrued) benefit cost $ 454 $ 444 $(392) $(332)
============================================================
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
WEIGHTED-AVERAGE
ASSUMPTIONS AS OF
DECEMBER 31:
Discount rate 7.00% 6.75% 7.00% 6.75%
Expected return on plan assets 8.50% 8.50% N/A N/A
Rate of compensation increase 5.00% 5.00% N/A N/A
Pension Benefits Postretirement Benefits
(In Thousands) 1999 1998 1997 1999 1998 1997
COMPONENTS OF NET
PERIODIC BENEFIT COST:
Service cost $302 $ 267 $ 234 $ 28 $ 25 $19
Interest cost 460 424 400 50 42 48
Expected return on plan assets (749) (640) (550) - - -
Amortization of transition obligation (23) (23) (23) 36 36 36
Amortization of prior service cost - - - - - -
Recognized net actuarial (gain) loss - - - - (2) (7)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (benefit) $(10) $ 28 $ 61 $114 $101 $96
====================================================================================================================================
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the deferred salary
savings provisions of Section 401(k) of the Internal Revenue Code. The
Corporation's matching contributions to the plan depend upon the tax deferred
contributions of employees. The Corporation's basic and matching contributions
for 1999, 1998 and 1997 were $513,000, $477,000 and $436,000, respectively.
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1999, 1998 and 1997 amounted to $54,000, $42,000 and
$35,000, respectively.
STOCK OPTION PLANS
The Corporation established a Stock Incentive Plan for a selected group of
senior officers. Approximately 180,000 shares of common stock may be issued
under the Stock Incentive Plan. The recipients' rights to exercise these options
vest ratably over a 5-year period and each option has a contractual expiration
of 10 years. Also, the Corporation established an Independent Directors Stock
Option Plan which allows the issuance of approximately 25,000 shares of common
stock to non-employee directors. The recipients' rights to exercise these
options expire 10 years from the date of grant. The exercise prices of all stock
options awarded under the plans are equal to fair market value as of the date of
the grant
20
The Corporation applies Accounting Principles Board Opinion 25 and related
interpretations in accounting for stock options. Accordingly, no compensation
expense has been recognized for the stock options. Had compensation cost for the
stock options been determined based on the fair value at the grant dates for
awards consistent with the method of SFAS No. 123, the effect on the
Corporation's net income and earnings per share for 1999, 1998 and 1997 would
have been adjusted to the pro forma amounts indicated below.
(Net Income in Thousands)
1999 1998 1997
Net income
As reported $11,485 $11,077 $10,107
Pro forma $11,428 $11,048 $10,096
Earnings per share-basic
As reported $2.21 $2.13 $1.94
Pro forma $2.20 $2.12 $1.94
For purposes of the calculations of SFAS No. 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions.
1999 1998 1997
Volatility 18% 18% 19%
Expected option lives 6 Years 6 Years 6 Years
Risk-free interest rate 6.46% 5.05% 5.78%
Dividend yield 3.76% 3.78% 4.05%
A summary of the status of the Corporation's stock option plans as of December
31, 1999, 1998, and 1997, and changes during the years then ended, is presented
below:
1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-----------------------------------------------------------------------------------------------
Outstanding, beginning of year 58,850 $30.38 39,360 $27.09 22,850 $22.65
Granted 25,550 $27.67 20,500 $36.40 17,800 $32.27
Exercised (680) $24.06 (1,010) $24.03 (590) $20.00
Forfeited (1,300) $27.89 - - (700) $20.00
- - -----------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 82,420 $29.63 58,850 $30.38 39,360 $27.09
===================================================================================================================================
Options exercisable at year-end 30,700 $28.69 17,990 $26.99 8,720 $23.65
Fair value of options granted $ 5.27 $ 5.85 $ 5.88
21
The following table summarizes information about stock options outstanding as of
December 31, 1999:
Outstanding Exercisable
At Remaining At
December 31, Contractual December 31,
1999 Life in Years 1999
Exercise
Prices
$20.00 9,220 6 7,080
$25.50 - $27.84 13,100 7 8,980
$33.25 - $36.50 16,850 8 8,300
$33.13 - $36.38 20,500 9 6,340
$27.00 22,750 10 -
- - -------------------------------------------------------------------------------------------------------------------
82,420 30,700
===================================================================================================================
12. INCOME TAXES
The following temporary differences gave rise to the net deferred tax asset at
December 31, 1999 and liability at December 31, 1998: (In Thousands) 1999 1998
Deferred Tax Liabilities:
Bond Accretion $15 $ 23
Depreciation 241 148
Realized Gains on Equity Investments ( Per EITF 91-5) 432 -
Pension Expense 156 153
Unrealized Holding Gains on Available-for Sale Securities 6,142
- - ----------------------------------------------------------------------------------------------------------
Total 844 6,466
Deferred Tax Assets:
Loan Fees and Costs (134) (199)
SERP Plan (111) (92)
Postretirement and Sick Benefits (163) (129)
Unrealized Holding Gains on Available-for Sale Securities (4,577)
Allowance for Loan Losses (1,796) (1,687)
Write down of Other Real Estate Owned (7) (7)
- - ----------------------------------------------------------------------------------------------------------
Total (6,788) (2,114)
- - ----------------------------------------------------------------------------------------------------------
Deferred Tax (Asset) Liability, Net $(5,944) $4,352
==========================================================================================================
The federal income tax provision is comprised of the following components:
(IN THOUSANDS) 1999 1998 1997
Currently Payable $2,931 $3,464 $3,156
Deferred Provision 423 63 10
- - ------------------------------------------------------------------------------------------------------------------------
Total Provision $3,354 $3,527 $3,166
========================================================================================================================
The following tabulation is a reconciliation of the expected provision for
federal income taxes determined by application of the statutory rates at which
income is expected to be taxed and the actual income tax provision.
Years Ended
December 31,
1999 1998 1997
(IN THOUSANDS) Amount % Amount % Amount %
Expected Provision $ 5,194 35.00 $ 5,111 35.00 $ 4,646 35.00
Nontaxable Bond Interest (1,538) (10.36) (1,375) (9.40) (1,249) (9.40)
Nontaxable Loan Interest (189) (1.28) (133) (0.90) (137) (1.00)
Nondeductible Interest Expense 232 1.56 192 1.30 167 1.30
Dividends Received Deduction (203) (1.37) (165) (1.10) (161) (1.20)
Surtax (102) (0.69) (108) (0.70) (112) (0.80)
Exemption
Other, Net (40) (0.26) 5 - 12 -
- - -----------------------------------------------------------------------------------------------------------------------------
Effective Income Tax and Rates $3,354 22.60 $3,527 24.20 $3,166 23.90
=============================================================================================================================
22
13. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiary and
any associates of the foregoing persons are as follows:
(In Thousands)
Beginning New Other Ending
Name of Borrower Balance Loans Repayments Changes Balance
15 Directors, 6 Executive Officers 1999 $4,709 $2,551 $ (1,056) $ 169 $6,373
15 Directors, 5 Executive Officers 1998 5,578 1,487 (1,647) (709) 4,709
15 Directors, 2 Executive Officers 1997 5,441 736 (2,096) 1,497 5,578
The above transactions were made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and do not
involve more than normal risks of collectibility. Other changes represent
transfers in and out of the related party category.
14. OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit, interest rate or liquidity risk in excess of the amount recognized in
the consolidated balance sheet. The contract amounts of these instruments
express the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation's exposure to credit loss from nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of these instruments.
The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Financial instruments whose contract amounts represent credit risk at December
31, 1999 and 1998 are as follows:
(In Thousands) 1999 1998
Commitments to extend credit $59,215 $48,610
Standby letters of credit $ 6,057 $ 5,400
Commitments to extend credit are legally binding agreements to lend to
customers. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of fees. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future liquidity requirements.
The Corporation evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Corporation, for extensions of credit is based on management's credit assessment
of the counterparty.
Standby letters of credit are conditional commitments issued by the Corporation
guaranteeing performance by a customer to a third party. Those guarantees are
issued primarily to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
15. REGULATORY MATTERS
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory -
and possibly additional discretionary - actions by regulators that, if
undertaken could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Bank's capital amount and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets ( as defined), and of Tier I capital (as defined), to
average assets (as defined). Management believes, as of December 31, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.
23
To be categorized as well capitalized, a bank must maintain minimum total risk
based, Tier I risk based and Tier I leverage ratios as set forth in the table.
The Corporation's actual capital amounts and ratios are presented in the
following table.
At December 31,
1999 1998
Tier I Capital $85,507 $78,645
Tier II Supplemental Capital (1) 8,763 11,096
- - ---------------------------------------------------------------------------
Total Capital 94,270 89,741
===========================================================================
Average Assets (2) $588,071 $614,598
Risk Weighted Assets:
Balance Sheet 362,410 333,783
Off-Balance Sheet 37,111 29,054
- - ---------------------------------------------------------------------------
Total Risk Weighted Assets $399,521 $362,837
===========================================================================
Minimum Well
Actual Requirements Capitalized
- - ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Total Capital to Risk Weighted Assets 23.60% >= 8% >=10%
Tier I Capital to Risk Weighted Assets 21.40% >= 4% >= 6%
Tier I to Average Assets 14.54% >= 4% >= 5%
As of December 31, 1998
Total Capital to Risk Weighted Assets 24.73% >= 8% >=10%
Tier I Capital to Risk Weighted Assets 21.68% >= 4% >= 6%
Tier I to Average Assets 12.80% >= 4% >= 5%
(1) Inclusion of the allowance for possible loan losses is allowed up to 1.25%
of "Risk Adjusted Assets" and 45 percent of the unrealized gain on unrestricted
equity securities is allowed. (2) Includes 45 percent of the unrealized gain or
loss on equity securities. Otherwise, unrealized gains or (losses) on
available-for-sale securities are excluded.
Restrictions imposed by Federal Reserve Regulation H limit dividend payments in
any year to the current year's net income plus the retained net income of the
prior two years without approval of the Federal Reserve Board. Accordingly,
Company dividends in 2000 may not exceed $13,735,000, plus Company net income
for 1999. Additionally, banking regulators limit the amount of dividends that
may be paid by the Bank to the Corporation. Retained earnings against which
dividends may be paid without prior approval of the banking regulators amounted
to approximately $61,996,000 at December 31, 1999, subject to the minimum
capital ratio requirements noted above.
Restrictions imposed by federal law prohibit the Corporation from borrowing from
the Bank unless the loans are secured in specific amounts. Such secured loans to
the Corporation are generally limited to 10% of the Bank's stockholder's equity
(excluding unrealized gains on available-for-sale-securities) or $7,202,000 at
December 31, 1999.
24
16. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern
Corporation.
CONDENSED BALANCE SHEET
December 31,
(In Thousands) 1999 1998
ASSETS
Cash $1,381 $ 89
Available-for-Sale Securities 9,270
Subsidiary Investments
Citizens and Northern Bank 60,981 81,000
Citizens & Northern Investment Corporation 13,585
Bucktail Life Insurance Company 1,913 1,796
- - -----------------------------------------------------------------------------------------------------------------------
Total Subsidiary Investments 76,479 82,796
Dividend Receivable 1,300
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $77,860 $93,455
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowed Funds and Other Liabilities $ - $1,765
Dividend Payable 1,237 1,123
Stockholders' Equity 76,623 90,567
- - -----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $77,860 $93,455
=======================================================================================================================
CONDENSED INCOME STATEMENT
(In Thousands) Years Ended December 31,
1999 1998 1997
Dividend from Subsidiary $7,000 $5,500 $3,980
Other Dividend Income 224 218 186
Available-for-Sale Securities Gains 159 822 74
Expenses (184) (356) (77)
- - -----------------------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Earnings of Subsidiaries 7,199 6,184 4,163
Equity in Undistributed Earnings of Subsidiaries 4,286 4,893 5,944
- - -----------------------------------------------------------------------------------------------------------------------
NET INCOME $11,485 $11,077 $10,107
=======================================================================================================================
CONDENSED STATEMENT OF CASH FLOWS
Years Ended
December 31,
(In Thousands) 1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $11,485 $11,077 $10,107
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Equity Securities Gains (159) (822) (74)
Equity in Undistributed Net Income of Subsidiaries (4,285) (4,893) (5,944)
(Increase) Decrease in Other Assets 1,300 (200) (150)
Increase (Decrease) in Other Liabilities (145) 372 111
- - ---------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,196 5,534 4,050
- - ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Investment in (1,888) -- --
Subsidiary
Purchase of Available-for-Sale Securities (753) (2,257) (602)
Proceeds from Sale of Available-for-Sale Securities 360 1,441 187
- - ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,281) (816) (415)
- - ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Sale of Treasury Stock 16 24 11
Purchase of Treasury Stock (468)
Dividends Declared (4,639) (4,188) (3,744)
- - ---------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (4,623) (4,632) (3,733)
- - ---------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,292 86 (98)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 89 3 101
- - ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,381 $ 89 $ 3
=====================================================================================================================
25
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Citizens & Northern Corporation:
We have audited the accompanying consolidated balance sheets of Citizens &
Northern Corporation and subsidiaries ("Corporation") as of December 31, 1999
and 1998, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens & Northern
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
Parente Randolph, PC
Williamsport, Pennsylvania
February 10, 2000
26
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
February 3, 2000
To the Stockholders and Board of Directors of Citizens & Northern Corporation
Management of Citizens & Northern Corporation and its subsidiaries has prepared
the consolidated financial statements and other information in the "Annual
Report and Form 10-K" in accordance with generally accepted accounting
principles and is responsible for its content and accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities and
programs of internal audit. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
Company affairs are conducted with the highest ethical standards. The Company's
Code of Conduct, furnished to each employee and director, addresses the
importance of open internal communications, potential conflicts of interest,
compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with management and
the independent accountants to discuss audit, financial reporting and related
matters. Parente Randolph, PC, and the Company's internal auditors have direct
access to the Audit Committee.
Craig G. Litchfield James W. Seipler
President & CEO Treasurer
CAUTIONARY STATEMENT
- - --------------------------------------------------------------------------------
This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. Citizens &
Northern Corporation and its subsidiaries wish to caution readers that the
following important factors, among others, may have affected and could in the
future affect the Corporation's actual results and could cause the Corporation's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Corporation herein:
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Corporation must comply, and the
associated cost of compliance with such laws and regulations either currently or
in the future as applicable; the effects of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as the Financial
Accounting Standards Board; changes in the Corporation's organization,
compensation and benefit plans; the effect of increasing consolidation within
the banking and financial services industries, including the increased
competition from the larger regional banking organizations as well as nonbank
providers of various financial services; the effect of changes in interest
rates; and the effect of changes in the business cycle and downturns in the
local, regional or national economies.
- - --------------------------------------------------------------------------------
27
GLOSSARY OF FREQUENTLY USED TERMS
AVAILABLE-FOR-SALE SECURITIES - Debt and equity securities that are reported at
fair value, with unrealized gains and losses excluded from earnings and reported
separately through accumulated other comprehensive income, net of tax.
ALLOWANCE FOR POSSIBLE LOAN LOSSES - A reserve created by a periodic charge to
earnings that represents an estimate of the potential credit loss inherent in
the loan portfolio as of a point in time.
AMORTIZATION - The systematic charge to earnings to reduce the premium paid for
an investment security.
CAPITAL RATIOS and COMPONENTS:
1. Capital Ratios
a. Leverage ratio - The ratio of total equity to total liabilities.
b. Return on equity - Net income divided by equity.
c. Risk-based capital ratio - Ratio of equity to risk weighted
assets.
2. Components of Capital
a. Capital Stock - Investor ownership of common stock in the
Corporation stated as par value.
b. Paid-in-Capital - Value of common stock in excess of the par
value.
c. Retained Earnings - Accumulated earnings less dividends paid to
common shareholders.
d. Stock Dividend Distributable - Non-cash dividend payable in common
stock of the Corporation.
e. Tier I Capital or Equity - Sum of common stock, paid-in-capital
and retained earnings.
f. Tier II Capital - Sum of subordinated debt, preferred stock,
convertible debt securities, a calculated portion of the allowance
for loan losses and 45 percent of unrealized gains on unrestricted
equity securities.
g. Total Capital - Sum of Tier I and Tier II Capital
COMPREHENSIVE INCOME - The change in equity during a period from transactions
and other events and circumstances from nonowner sources. It includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. For the Corporation it means net income and
unrealized gains and losses on available-for-sale securities.
CORE DEPOSITS - A subjective dollar value of deposits that management feels will
be unaffected by interest rates.
DEMAND DEPOSIT - A noninterest-bearing deposit with no stated maturity and
requires no notice of withdrawal.
EARNING ASSETS - Interest-bearing assets owned by the Corporation consisting
predominantly of investments and loans.
HELD-TO-MATURITY SECURITIES - Securities purchased with the intent and ability
to be held to maturity; carried on the books at cost.
INTEREST-BEARING LIABILITIES - All interest-bearing deposits and borrowings of
the Corporation.
INTEREST RATE RISK - The risk that changes in interest rates could adversely
affect the value of the Corporation or its future earnings.
MORTGAGE-BACKED SECURITIES - A pool of mortgages sold on the secondary market.
The interest rate paid is the weighted average coupon rate of the underlying
mortgages.
MVPE- MARKET VALUE OF PORTFOLIO EQUITY - The market value of assets less the
market value of liabilities. The market value of assets and liabilities are the
present value of all future cash flows at current market rates. This amount does
not include assets and liabilities that are not financial instruments, such as
premises and equipment, accrued interest receivable or payable, deferred taxes,
etc.
NIM - Net Interest Margin - Total interest income less total interest expense.
NONPERFORMING LOANS - Impaired loans classified as nonaccrual due to
nonperformance of borrowers.
OTHER REAL ESTATE - Real estate acquired through a deed in lieu of foreclosure
or foreclosure proceedings against a debtor.
RISK ADJUSTED ASSETS - The sum of the Corporation's assets deemed to be at risk.
Calculation of risk assets is performed using percentages supplied by the
regulators.
SENDERO MODEL - A PC based simulation model purchased from the Sendero
Corporation which simulates interest income and market value ehavior under
various interest rate scenarios using a variety of asset and liability mixes.
WATCH LIST - A list of loans in the portfolio that have been isolated for a
variety of reasons: delinquency, collateral, cash flow, documentation, etc.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
1999 PERFORMANCE REVIEW
Citizens and Northern Corporation ("Corporation") and its major subsidiary,
Citizens and Northern Bank ("Bank"), recorded basic per share earnings of $2.21,
$2.13 and $1.94, respectively, for the years ended December 31, 1999, 1998 and
1997. Diluted earnings per share amounted to $2.20, $2.12 and $1.94 for the
years ended December 31, 1999, 1998 and 1997, respectively. Return on the
Corporation's average equity, excluding the net unrealized gain or loss on
available-for-sale securities, for the years ended 1999, 1998 and 1997 amounted
to 14.05 percent, 14.81 percent and 14.56 percent, respectively.
Net income for the years ended 1999, 1998 and 1997 amounted to $11,485,00,
$11,077,000 and $10,107,000, respectively. Net securities gains included in
income for the same periods, respectively, amounted to $3,043,000, $3,001,000
and $1,001,000. During 1998 the Corporation recorded an unusual security gain.
Stock that had been acquired as the result of a defaulted loan in 1919 and
carried on the Corporation books at $1.00 was sold for an approximate gain of
$1,766,000. Net income exclusive of securities gains net of tax for the years
ended December 31, 1999, 1998 and 1997 amounted to $9,477,000, $9,097,000 and
$9,446,000, respectively.
During 1999, the Corporation added fully transactional internet banking to the
menu of services provided. The new product has been well accepted by the
Corporation's customer base. Also Citizens & Northern Investment Corporation, a
Delaware corporation, was formed to hold equity investments. The new corporation
will offer tax advantages that are not available in Pennsylvania.
A great deal of 1999 was spent getting ready for Y2K and because of the efforts
of the data processing department, the audit department and the compliance
department, 1999 rolled into 2000 without a glitch. The Corporation did install
a new gas generator at its Wellsboro location, just in case. The new generator
should prove quite useful during times of power outages. The mainframe computer
system was also upgraded to enhance processing speed.
OUTLOOK FOR 2000
The Corporation's Board of Directors and management team look ahead to 2000 with
optimism and with good reason: your Corporation has an excellent earning asset
base, capable personnel, a well established and managed branch network, an
increasingly large deposit base and a package of services that continues to
grow.
A new branch will be opened in Muncy, Pennsylvania during the third or fourth
quarter of 2000, and beginning January 2000 the Corporation will be offering a
wide range of insurance products through its new insurance subsidiary. The goal
of your Corporation is to provide its customers with a complete line of
financial services.
The year 2000 will be a year of challenge for the Corporation. The challenge
will be to continue to provide excellent earnings in an increasingly volatile
interest rate environment. Interest rates have risen steadily during the past
year and are expected to continue rising well into 2000 before pulling back.
When interest rates increase net interest margins narrow and erode earnings.
However, at this time your Corporation remains optimistic about the coming year
and continues to position the Corporation to provide the highest possible return
to its shareholders and remain a strong independent community bank serving the
people, the businesses and the communities of its market area.
NET INTEREST MARGIN
1999/1998/1997
The primary source of operating income for the Corporation is the net interest
margin. The net interest margin is the difference between total interest income
generated by interest-bearing assets and the interest expense incurred on
interest-bearing liabilities.
INTEREST INCOME
Interest income generated by the Corporation comes primarily from two earning
asset sources: investments and loans. The investment portfolio has traditionally
comprised about half of the base of earning assets. Nearly all of the
Corporation's investments are classified as available-for-sale, excluding
approximately $1,800,000 held by the Corporation's insurance subsidiary,
Bucktail Life Insurance Company. The investment portfolio is funded primarily by
deposits and borrowed funds.
The average balance of the available-for-sale investment portfolio during 1999,
1998 and 1997, on a cost basis amounted to $345,823,000, $294,121,000 and
$287,553,000, respectively. The portfolio consists of U. S. Treasury securities,
U. S. Agency securities, municipal bonds, pools of mortgage-backed instruments
and equity investments of banks and bank holding companies located primarily in
Pennsylvania.
29
The rate of return on the investment portfolio declined slightly during 1999
when compared to the prior two years. The return for the years ended December
31, 1999, 1998 and 1997, respectively was 6.37 percent, 6.42 percent and 6.51
percent, respectively. The decline during the current year can be attributed to
the prepayments associated with the mortgage-backed investments in 1998 and the
call of several U. S. Agency Securities during that year. The large cash flow
generated was invested in lower rate investments available at that time. The
portfolio is primarily a long-term investment vehicle and does not have a great
deal of turnover with the exception of mortgage-backed securities that provide a
monthly flow of payments. The portfolio is, however, monitored continuously for
long-term profit maximization, especially during periods of interest rate
volatility, and at such times the Corporation may sell selected securities from
the available-for-sale category.
During 1998 and 1999 changes in interest rates caused the mix of portfolio
assets to change. Low interest rates during 1998 increased the amount of monthly
payments received on mortgage-backed instruments as consumers exercised their
option to refinance mortgages. Also in 1998 government agencies refinanced debt
held by the Corporation amounting to about $74,000,000. The increased cash flow
of debt refinancing was reinvested in U. S. Agency issues; primarily Federal
National Mortgage Association and Federal Home Loan Bank zero coupon bonds.
During 1999 the trend in interest rates reversed and prepayments of
mortgage-backed instruments slowed dramatically. Average balances carried in
mortgage-backed pools during 1999 amounted to $117,902,000 and $121,466,000
during 1998. The average balance of mortgage-backed pools during 1997 was
$163,942,000. The average balance of U. S. Agencies for the respective
three-year periods was $101,205,000, $68,512,000 and $41,968,000.
Also during 1999 and 1998 municipal bonds, because of their nontaxable income
and the Corporation's tax position, provided respectable yields. The average
balance of municipal securities in 1999 increased to $80,970,000; this compares
to $68,942,000 for 1998 and $59,554,000 for 1997. At their current level they
provide the Corporation a significant tax benefit without incurring an
Alternative Minimum Tax liability.
Additional equity securities purchased during 1999 increased the average
balances carried to $22,288,000. Average balances carried during 1998 and 1997
were $18,725,000 and $15,039,000, respectively. Several equity investments were
sold for a before tax profit of $2,476,000. Included in realized gains were two
stocks that were party to mergers during 1999. Accounting rules require that the
stock received from the acquiring company be recorded at market value on the
date of the merger with the difference between our cost basis in the acquired
company's stock and the market value of the acquiring company stock received be
realized as a gain or loss in the income statement. The pre-tax amount of gains
realized as a result of these mergers was $1,271,000.
The equity portfolio is monitored continuously for stocks that management feels
are fully valued. It is the practice of the Corporation to sell certain stocks
each year and realize gains, which comprise a substantial portion of the overall
yield of equity investments. Traditionally equity securities average an annual
return of between 2 to 4 percent. Approximately 21 percent of the historical
cost basis of the equity portfolio consists of Federal Home Loan Bank stock
which carries a substantially higher return than the rest of the equity
portfolio. During the last 3 years the Federal Home Loan Bank stock has posted
an annual return of about 6.60 percent. Membership in The Federal Home Loan Bank
requires stock ownership and the amount of stock varies according to the amount
of outstanding loans made to the Corporation.
The average balance of other securities was $20,948,000, $13,960,000 and
$4,536,000 during 1999, 1998 and 1997, respectively. Other securities consist of
corporate bonds or notes normally of other large financial service providers.
The loan portfolio makes up most of the balance of the earning asset base and is
the largest contributor to total interest income. The Corporation's market area
consists of several small rural communities, which surround three or four more
heavily populated towns. Consequently, the loan portfolio is retail oriented,
consisting mostly of real estate secured mortgages on one to four family
dwellings. Total average real estate secured mortgage loans to customers in our
market area made up approximately 80 percent of the loan portfolio during 1999,
1998 and 1997 and contributed approximately 78 percent of the total interest
income derived from the loan portfolio. The balance of the loan portfolio
includes consumer installment loans and commercial loans. The Corporation also
has an extensive credit card operation, which provides credit cards to the
Corporation's customer base and 48 other agent banks in Pennsylvania. The return
on the Corporation's total loan portfolio for the years ended December 31,1999,
1998 and 1997 amounted to 8.68 percent, 9.18 percent and 9.25 percent,
respectively.
Other interest income producing assets included federal funds sold and
interest-bearing deposits held with correspondent banks. The balances held and
income produced were considered insignificant for discussion purposes.
30
INTEREST EXPENSE
The liability and equity side of the balance sheet is made up of stockholders'
equity, interest-bearing liabilities and noninterest-bearing demand deposits and
other liabilities. The return on the Corporation's assets and equity are
dependent on the spread between rates paid on earning assets and the rate of
interest paid on interest-bearing liabilities. Interest-bearing liabilities are
made up of deposits and borrowed funds. Average total deposits, including demand
deposits, increased 7.9 percent during 1999. This compares to growth rates of
3.2 percent and 1.4 percent for 1998 and 1997, respectively. Deposit growth
during 1999 can be attributed to the introduction of new deposit products, the
success of a new office and extensive marketing efforts. The Corporation
introduced internet banking during the second quarter of 1999 and to date over
1,300 customers have taken advantage of the service. Also very popular is the
municipal Money Market Account that was introduced late in 1998. The interest
rate paid on the account is tied to the overnight federal funds rate. The
account is very popular with local school districts and municipalities.
During the fourth quarter of 1998 the Corporation introduced a new type of
account called the "RepoSweep". Although linked to deposit activity, "RepoSweep"
balances are classified as Short-term Borrowings on the Corporation's balance
sheet. The accounts are monitored each day and excess funds above a
predetermined level are swept to an interest-bearing account. The rate paid is
indexed to the 91-day Treasury Bill rate. Though the FDIC does not insure the
accounts, they are secured by investment securities pledged specifically for
them and held at a correspondent bank. Balances in the accounts during 1998
ranged from $1.5 million to $3 million and during 1999 average balances exceeded
$4 million on a daily basis.
Certificates of Deposit and Individual Retirement Accounts are considered core
deposits and are the largest single source of deposits. The maturity schedule of
certificates ranges from one month to five years. Average balances carried in
certificates of deposit for the years ended December 31, 1999, 1998 and 1997
were $139,916,000, $126,902,000 and $119,226,000, respectively. The average rate
paid for those deposits for the same periods, respectively, was 5.24 percent,
5.50 percent and 5.49 percent. At year-end 1999 total Certificates of Deposit
amounted to approximately $143,132,000. Individual Retirement Accounts are the
other source of long term funding. These accounts carry an eighteen-month
maturity schedule and the rate changes quarterly. The Corporation had in the
past been successful in growing the balances in these accounts by paying higher
than market rates. However, due to mutual fund competition and competition from
the Corporation's Trust Department for the balances carried in Individual
Retirement Accounts we have witnessed a small decline during the past three
years. Average balances and rates paid on Individual Retirement Accounts during
the years ended December 31, 1999, 1998 and 1997 were, respectively, $75,882,000
at 5.21 percent, $76,557,000 at 5.42 percent and $78,662,000 at 5.99 percent.
Short term deposits (deposits that reprice more frequently) consist of Money
Market accounts, Interest Checking accounts and Savings accounts. Money Market
accounts are the Corporation's second largest source of deposits. The
Corporation has paid higher than the market rate for these deposits and has been
successful in attracting and maintaining large average balances. Average
balances carried for the years ended December 31, 1999, 1998 and 1997,
respectively, were $131,741,000, $115,143,000 and $107,287,000. Average rates
paid for those same periods were, respectively, 4.34 percent, 4.42 percent and
4.55 percent. The Interest Checking accounts allow normal checking activity but
earn a lesser rate of interest. Average balances and rates paid on these
accounts for the years ended December 31, 1999, 1998 and 1997 were,
respectively, $37,248,000 at 2.27 percent, $36,556,000 at 2.33 percent and
$38,334,000 at 2.47 percent. Finally, the last short term interest-bearing
accounts carried by the Corporation are the Regular Savings accounts. Regular
Savings come in two forms, passbook and statement, and both pay the same rate of
interest. Regular Savings have traditionally been the backbone of the
Corporation's core deposit base. Average balances for the years ended December
31, 1999, 1998 and 1997 were $46,643,000, $45,207,000 and $46,338,000,
respectively. The rate paid for each of the three years was approximately 2.50
percent.
The Corporation also carries noninterest-bearing Demand Deposits; average
balances for the past three years, respectively, were $50,787,000, $46,336,000
and $42,780,000. The increase in average balances during 1999 is due to internet
banking, municipal accounts, the growth of a new branch opened late in 1998 and
other factors.
The final type of interest-bearing liability found on the Corporation balance
sheet is borrowed funds, both short and long-term. The Corporation normally uses
short term borrowing for liquidity purposes, i.e., deposit fluctuations, loan
demand etc. This may be in the form of overnight Federal Funds borrowed from a
correspondent bank or a repurchase agreement arranged through the Federal Home
Loan Bank of Pittsburgh or a broker. Long-term borrowing is used to leverage the
Corporation's strong capital base to enhance earnings. Long-term borrowings may
be in the form of repurchase agreements or secured borrowing, also through the
Federal Home Loan Bank of Pittsburgh or a broker. Short-term borrowing is
defined as having an original maturity of overnight to one year. Long-term
borrowed funds have a maturity of one year or more.
Average balances carried as short and long-term borrowing and RepoSweep accounts
for the years ended December 31, 1999, 1998 and 1997 amounted to $97,585,000,
$76,040,000 and $88,548,000, respectively. Average rates for the same periods,
respectively, were 5.35 percent, 5.67 percent and 5.63 percent. Average balances
carried in overnight federal funds for the years ended December 31, 1999. 1998,
and 1997 were $6,085,000, $2,801,000 and $663,000, respectively. The average
rate paid for the same periods respectively, was 4.91 percent, 4.75 percent and
4.98 percent.
31
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
(In Thousands) Years Ended December 31, Increase (Decrease)
1999 1998 1997 99/98 98/97
INTEREST INCOME Available-for-Sale Securities:
U. S. Treasury Securities $ 148 $ 151 $ 139 $ (3) $ 12
Securities of Other U. S. Government Agencies and Corporations 7,007 4,842 3,002 2,165 1,840
Mortgage Backed Securities 7,791 7,992 11,060 (201) (3,068)
Obligations of States and Political Subdivisions 4,533 3,982 3,595 551 387
Stock 1,207 950 874 257 76
Other Securities 1,355 961 52 394 909
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 22,041 18,878 18,722 3,163 156
- - ----------------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 34 37 34 (3) 3
Securities of Other U. S. Government Agencies and Corporations 58 41 22 17 19
Mortgage backed Securities 27 38 52 (11) (14)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 119 116 108 3 8
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 30 37 54 (7) (17)
Federal Funds Sold 42 229 334 (187) (105)
Loans:
Real Estate Loans 20,620 20,371 20,218 249 153
Consumer 3,170 3,529 3,857 (359) (328)
Agricultural 194 223 272 (29) (49)
Commercial/Industrial 1,590 1,621 1,606 (31) 15
Other 55 55 62 - (7)
Political Subdivisions 541 380 391 161 (11)
Leases 13 20 18 (7) 2
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Loan Income 26,183 26,199 26,424 (16) (225)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 48,415 45,459 45,642 2,956 (183)
==================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking 844 853 945 (9) (92)
Money Market 5,723 5,093 4,879 630 214
Savings 1,157 1,121 1,150 36 (29)
Certificates of Deposit 7,328 6,984 6,549 344 435
Individual Retirement Accounts 3,956 4,152 4,713 (196) (561)
Other Time Deposits 44 49 56 (5) (7)
Federal Funds Purchased 299 133 33 166 100
Other Borrowed Funds 5,220 4,308 4,987 912 (679)
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 24,571 22,693 23,312 1,878 (619)
==================================================================================================================================
Net Interest Income $23,844 $22,766 $22,330 $1,078 $ 436
==================================================================================================================================
(1) Net interest income, if reflected on a fully tax equivalent basis, would
have amounted to $26,026,000, $27,621,000, and $26,773,000 for 1999, 1998, and
1997, respectively.
(2) Fees on loans are included with interest on loans and amounted to $720,000,
$710,000 and $612,000 for the years ended 1999, 1998 and 1997, respectively.
32
Table I I - Analysis of Average Daily Balances and Rates
Rate of Rate of Rate of
(In Thousands) Return/ Return/ Return/
Cost of Cost of Cost of
Funds Funds Funds
EARNING ASSETS 12/31/99 % %
12/31/98 % 12/31/97
Available-for-Sale Securities *:
U. S. Treasury Securities $ 2,510 5.90 $ 2,516 6.00 $ 2,514 5.53
Securities of Other U.S. Government Agencies and Corporations 101,205 6.92 68,512 7.07 41,968 7.15
Mortgage Backed Securities 117,902 6.61 121,466 6.58 163,942 6.75
Obligations of States and Political Subdivisions 80,970 5.58 68,942 5.78 59,554 6.04
Stock 22,288 5.42 18,725 5.07 15,039 5.81
Other Securities 20,948 6.47 13,960 6.88 4,536 1.15
- - -------------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 345,823 6.37 294,121 6.42 287,553 6.51
- - -------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 615 5.53 626 5.91 601 5.66
Securities of Other U. S. Government Agencies and 895 6.48 629 6.52 297 7.41
Corporations
Mortgage backed Securities 368 7.34 507 7.50 689 7.55
- - -------------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 1,878 6.34 1,762 6.58 1,587 6.81
- - -------------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks 566 5.30 671 5.66 795 6.79
Federal Funds Sold 866 4.85 4,139 5.53 6,132 5.45
Loans **:
Real Estate Loans 240,951 8.56 227,845 8.94 223,510 9.05
Consumer 28,982 10.94 30,366 11.62 32,293 11.94
Agricultural 1,961 9.89 2,219 10.05 2,689 10.12
Commercial/Industrial 19,271 8.25 17,698 9.16 16,743 9.59
Other 714 7.70 707 7.78 754 8.22
Political Subdivisions 9,499 5.70 6,227 6.10 6,355 6.15
Leases 206 6.31 214 9.35 236 7.63
- - -------------------------------------------------------------------------------------------------------------------------
Total Loans 301,584 8.68 285,276 9.18 282,580 9.35
- - -------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 650,717 7.44 585,969 7.76 578,647 7.89
Cash 14,028 12,694 12,228
Securities Valuation Reserve 7,865 19,939 9,907
Allowance for Possible Loan Losses (5,083) (4,822) (4,844)
Other Assets 5,509 5,337 5,745
Bank Premises & Equipment 7,828 6,985 6,594
- - -------------------------------------------------------------------------------------------------------------------------
Total Assets $680,864 $626,102 $608,277
=========================================================================================================================
INTEREST-BEARING LIABILITIES
Interest Checking $ 37,248 2.27 $36,556 2.33 $38,334 2.47
Money Market 131,741 4.34 115,143 4.42 107,287 4.55
Savings 46,643 2.48 45,207 2.48 46,338 2.48
Certificates of Deposit 139,916 5.24 126,902 5.50 119,226 5.49
Individual Retirement Accounts 75,882 5.21 76,557 5.42 78,662 5.99
Other Time Deposits 1,641 2.68 1,900 2.58 2,223 2.52
Federal Funds Purchased 6,085 4.91 2,801 4.75 663 4.98
Other Borrowed Funds 97,585 5.35 76,040 5.67 88,548 5.63
- - -------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 536,741 4.58 481,106 4.72 481,281 4.84
Demand Deposits 50,787 46,336 42,780
Other Liabilities 6,193 10,663 8,211
- - -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 593,721 538,105 532,272
Stockholders' Equity 81,767 74,810 69,440
- - -------------------------------------------------------------------------------------------------------------------------
Securities Valuation Reserve 5,376 13,187 6,565
- - -------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $680,864 $626,102 $608,277
=========================================================================================================================
Interest Rate Spread 2.86 3.04 3.05
(*) Average balances do not include unrealized gains and losses on
Available-for-Sale Securities.
(**) Nonaccrual loans have been included with loans for the purpose of analyzing
net interest earnings.
33
TABLE III - ANALYSIS OF THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME
AND INTEREST EXPENSE
Years Ended December 31, 1999/1998
(In Thousands) Change in Change in Total
Volume Rate Change
EARNING ASSETS Available-for-Sale Securities:
U. S. Treasury Securities $ - $ (3) $ (3)
Securities of Other U.S. Government Agencies and Corporations 2,261 (96) 2,165
Mortgage Backed Securities (238) 37 (201)
Obligations of States and Political Subdivisions 669 (118) 551
Stock 192 65 257
Other Securities 448 (54) 394
- - --------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 3,332 (169) 3,163
Held-to-Maturity Securities
U. S. Treasury Securities (1) (2) (3)
Securities of Other U.S. Government Agencies and Corporations 17 - 17
Mortgage Backed Securities (10) (1) (11)
- - --------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 6 (3) 3
Interest -bearing Due from Banks (4) (3) (7)
Federal Funds Sold (162) (25) (187)
Loans:
Real Estate Loans 975 (726) 249
Consumer (157) (202) (359)
Agricultural (26) (3) (29)
Commercial/Industrial 267 (298) (31)
Other - - -
Political Subdivisions 184 (23) 161
Leases (1) (6) (7)
- - --------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------
Total Loans 1,242 (1,258) (16)
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Income 4,414 (1,458) 2,956
- - --------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Checking 17 (26) (9)
Money Market 719 (89) 630
Savings 36 - 36
Certificates of Deposit 651 (307) 344
Individual Retirement Accounts (36) (160) (196)
Other Time Deposits (7) 2 (5)
Federal Funds Purchased 161 5 166
Other Borrowed Funds 1,136 (224) 912
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 2,677 (799) 1,878
- - --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $1,737 $ (659) $1,078
====================================================================================================================
Years Ended December 31, 1998/1997
(In Thousands) Change in Change in Total
Volume Rate Change
EARNING ASSETS Available-for-Sale Securities:
U. S. Treasury Securities $ - $ 12 $ 12
Securities of Other U.S. Government Agencies and Corporations 1,876 (36) 1,840
Mortgage Backed Securities (2,800) (268) (3,068)
Obligations of States and Political Subdivisions 533 (146) 387
Stock 158 (82) 76
Other Securities 267 642 909
- - --------------------------------------------------------------------------------------------------------------------
Total Available-for-Sale Securities 34 122 156
- - --------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities:
U. S. Treasury Securities 1 2 3
Securities of Other U.S. Government Agencies and Corporations 19 - 19
Mortgage backed Securities (14) - (14)
- - --------------------------------------------------------------------------------------------------------------------
Total Held-to-Maturity Securities 6 2 8
- - --------------------------------------------------------------------------------------------------------------------
Interest -bearing Due from Banks (9) (8) (17)
Federal Funds Sold (110) 5 (105)
Loans:
Real Estate Loans 383 (230) 153
Consumer (227) (101) (328)
Agricultural (47) (2) (49)
Commercial/Industrial 72 (57) 15
Other (4) (3) (7)
Political Subdivisions (8) (3) (11)
Leases (1) 3 2
- - --------------------------------------------------------------------------------------------------------------------
Total Loans 168 (393) (225)
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Income 89 (272) (183)
- - --------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Interest Checking (43) (49) (92)
Money Market 342 (128) 214
Savings (28) (1) (29)
Certificates of Deposit 422 13 435
Individual Retirement Accounts (123) (438) (561)
Other Time Deposits (8) 1 (7)
Federal Funds Purchased 101 (1) 100
Other Borrowed Funds (709) 30 (679)
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Expense (46) (573) (619)
- - --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 135 $ 301 $ 436
====================================================================================================================
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
amounts of the change in each.
35
NONINTEREST INCOME
1999/1998/1997
Noninterest income is composed of seven major components: Service Charges on
Deposit Accounts, Service Charges and Fees, Trust Department Income, Insurance
Commissions, Fees and Premiums, Fees Related to the Credit Card Operations Other
Operating Income and Realized Net Gains on Available-for-Sale Securities. The
percentages cited below in the discussion of the components of Noninterest
Income are derived using Noninterest Income Before Gains on Securities, Net.
Overall, Noninterest Income increased $361,000, or 5.9 percent, in 1999 compared
to 1998 and $610,000 or 10.5 percent when compared to 1997. A comparison of 1998
to 1997reflects an increase of 4.3 percent; however, noninterest income for 1997
includes a gain of $301,000 from the sale of a copyrighted logo. Exclusive of
this gain, other noninterest income would have increased 7.2 percent during 1998
when compared to 1997.
Income generated from Service Charges on Deposit Accounts is from fees assessed
on checking accounts for monthly service charges, per-check charges for checks
drawn and checks deposited and for charges assessed for checking account
overdrafts. For each of the three years presented service charges amounted to 55
percent of the total and the remainder, overdraft fees. Service Charges on
Deposit Accounts for the years ended December 31, 1999, 1998 and 1997 accounted
for 17 percent of total Noninterest Income. Because of increased account
activity and the introduction of internet banking service charge income has
increased during 1999 when compared to 1998 and 1997. The Corporation does offer
free deposit accounts to a large number of its account holders including senior
citizens and accounts using direct deposit of payroll.
Other Service Charges and Fees are derived from debit card fees, credit card
annual fees, fees for bank customer data processing services and a variety of
other services such as check cashing for noncustomers, bank money orders,
cashier checks, traveler's checks, etc. Annually, Other Service Charges and Fees
contributed approximately 4 percent of the total Noninterest Income in each of
the three years presented.
Trust Department Income has become the large source of noninterest income. For
the years ended December 31, 1999, 1998 and 1997, respectively, Trust Department
Income amounted to 23 percent, 21 percent and 17 percent of total noninterest
income. Trust Department Income has increased approximately 13 percent when
comparing the years ended December 31, 1999 and 1998 and 28 percent when
comparing 1998 to 1997. The increase can be attributed to an increase in the
number of trust accounts and the amount of trust assets. Assets under management
as of December 31, 1999, 1998 and 1997, respectively, were $320,385,000,
$283,262,000 and $230,149,000. The increase in trust assets can be attributed to
the highly qualified and technical staff employed by the Trust Department and
the record levels posted on various stock markets.
Insurance Commissions, Fees and Premiums generated by the Corporation's
subsidiary, Bucktail Life Insurance Company, accounted for about 7 percent of
Noninterest Income for the years ended December 31, 1999,1998 and 1997.
Insurance Commissions, Fees and Premiums did decline slightly when comparing
1998 to 1997. The fees did increase slightly during 1999, however, they were
still below levels attained during 1997. The Corporation will be adding a new
insurance subsidiary in 2000 that will offer a wide range of insurance products
to its customers. Bucktail Life Insurance Company only offers insurance products
that are tied to credit arrangements.
Fees related to the Credit Card Operation are derived from merchant fees and
agent bank fees. Merchant fees are the charge to merchants for processing sales
and agent bank fees are generated from processing the credit card program for
agent banks. The Corporation currently processes for 48 agent banks. The fees
earned during 1999 increased 3.2 percent compared to 1998. The fees earned
during 1998 when compared to 1997 were up 13.2 percent. The 1998/1997 increase
was because of an increase in activity in some of the agent banks' programs.
During 1999 the increase was not as large because of the loss of two large agent
banks due to mergers.
35
Net realized gains on Available-for-Sale Securities in 1999 amounted to
$3,043,000, gross gains were $3,186,000 and gross losses amounted to $143,000.
Included in net realized gains were two stocks owned by the Corporation that
were party to mergers. Accounting rules require that the difference between the
original cost of the acquired company's stock and the market value of the
acquiring company's stock be recognized as current income. The amount of
recognized gain attributable to those stocks amounted to $1,271,000. Prior to
the merger the difference between the original cost and the current market value
was recorded as Other Accumulated Comprehensive Income. Gross gains on
Available-for-Sale-Securities for 1998 amounted to $3,422,000, while gross
losses recognized amounted to $421,000 for a net gain of $3,001,000. Included in
1998 gains was the sale of a stock that had been acquired in 1919 as collateral
on a defaulted loan. The stock had been carried on the Corporation books at
$1.00. The company represented by the stock was sold in 1998 and the Corporation
recognized a gain of $1,766,000. Net realized gains on available-for-sale
securities for the year ended December 31, 1997 amounted to $1,001,000. Gross
gains and gross losses realized during 1997, respectively, amounted to
$2,883,000 and $1,882,000, resulting in a net gain of $1,001,000. During recent
years it has been the practice of the Corporation's management and Board of
Directors to sell certain equity investments that it feels are overpriced and
use the realized gains to increase the return on the equity investment portion
of the portfolio to a level consistent with the remainder of the portfolio.
Years Ended December 31,
TABLE IV - COMPARISON OF NONINTEREST INCOME % %
(In Thousands) 1999 Change 1998 Change 1997
Service Charges on Deposit Accounts $1,113 7.12 $1,039 (3.44) 1,076
Service Charges and Fees 274 (4.86) 288 2.49 281
Trust Department Income 1,456 13.04 1,288 28.29 1,004
Insurance Commissions, Fees and Premiums 438 8.15 405 (12.34) 462
Fees Related to Credit Card Operation 3,064 3.20 2,969 13.02 2,627
Other Operating Income 99 5.32 94 (75.52) 385
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Other Operating Income before Realized Securities Gains, Net 6,444 5.93 6,083 4.27 5,834
Realized Gains on Securities, Net 3,043 1.40 3,001 199.80 1,001
- - -----------------------------------------------------------------------------------------------------------------------------------
Total Other Income $9,487 4.44 $9,084 32.90 $6,835
===================================================================================================================================
OTHER NONINTEREST EXPENSE
1999/1998/1997
Other Noninterest Expense is made up of Salaries and Wages, Pension and Other
Employee Benefit Expenses, Occupancy Expense, Furniture and Equipment Expense,
Expenses Related to Credit Card Operations, Pennsylvania Shares Tax and Other
Operating Expense. Other Noninterest Expense for the year ended December 31,
1999 increased 8 percent when compared to the year ended December 31, 1998 and 9
percent when comparing 1998 to the year 1997.
Salaries and Wages for the year ended December 31, 1999 when compared to 1998
increased $305,000. The increase is attributable to an increase in the number of
full time equivalent employees from 209 at year-end 1998 to 213 at year-end
1999. The increase in the number of employees can be attributed to the addition
of internet banking. Merit raises of about 4.5 percent also contributed to the
increase. A comparison of salary expense for the years ended December 31, 1998
and 1997 reflects an increase of $646,000 or 11 percent. The 1998 increase
reflects the addition of a new branch and a marketing department , as well as
merit increases.
Pension and Other Employee Benefits for the year ended December 31, 1999
increased about 4 percent when compared to 1998. A large portion of the increase
can be attributed to the expense of funding the Corporation's 401 (k) Plan due
to an increase in employee contributions that were matched by the Corporation.
The Corporation matches dollar for dollar employee contributions up to 3 percent
of an employee's salary, and $.50 per dollar of contribution up to 5 percent of
salary. There was also a substantial increase in the cost of group
hospitalization insurance in 1999. A comparison of 1998 and 1997 pension and
benefit costs also reflects an increase of 4 percent or $69,000. Again the
increase is primarily an increase in the cost of funding the Corporations 401
(k) Plan and an increase in group hospitalization costs.
Occupancy Expense increased 8 percent or $69,000 during 1999 when compared to
1998 and 14 percent or $101,000 when comparing 1998 to 1997. Nearly all of the
increase in 1999 can be attributed to depreciation and increased insurance costs
related to the new office opened in late 1998. The increase that occurred in
1998 can be attributed in part to the expenses associated with the opening of
the new office. Also, the janitors in two of the larger offices were replaced
with cleaning services which had the effect of lowering salaries and wages and
increasing occupancy expense.
36
A comparison of Furniture and Equipment Expense for the years 1999 and 1998
reflects an increase of 36 percent or $286,000. The increase can be attributed
to depreciation and maintenance costs associated with the ATM system and
internet banking. The approximate depreciation basis of the ATM network and the
internet banking systems , respectively, was $450,000 and $250,000, maintenance
costs for the systems is also very high, however, both systems are an essential
part of the service provided by the Corporation. A comparison of Furniture and
Fixtures cost between 1998 and 1997 reflects an increase of $69,000. This
increase is related to the installation and maintenance of the ATM system in
1998. During 1998 and 1999 the Corporation also upgraded by replacement a
substantial portion of the personal computers in use to be Y2K compliant and
thin clients (personal computers connected to a server) installed in branches
that were introduced into the branch system to complement internet banking.
Expenses Related to Credit Card Operations declined 5 percent or $135,000 during
1999. The decrease can be attributed to the loss of 2 merchant banks and the
related expense due to conversions. A comparison of 1998 and 1997 costs reflects
an increase during 1998 of 14 percent or $337,000 over 1997. Nearly all of the
increase is related to an increase in interchange transaction fees (those are
fees paid to networks of which we are not a member) and the growing number of
credit card transactions. The Corporation is a major credit card processor for
48 banks in Pennsylvania.
Pennsylvania Shares Tax is also a substantial Noninterest Expense amounting to
$723,000, $656,000 and $596,000 for the years ended December 31, 1999, 1998 and
1997, respectively. The tax is based on the Bank's six-year average capital
excluding U. S. Treasury and qualifying U. S. Government agency securities, at a
rate of 1.25 percent.
Other Operating Expense, whose major components are educational expense,
supplies, directors' fees, advertising, examination charges and legal fees,
increased 19 percent or $586,000 in 1999 over 1998 and increased 4 percent in
1998 when compared to 1997. The increase in 1999 was substantial, but was
essential as internet banking was implemented and Y2K was at the forefront. A
substantial part of the increased expense was related to Y2K as software had to
be replaced, also the internet banking system made it essential that thin
clients (and the related servers) be placed in the branch system, which entailed
software and educational costs. Also included in Other Operating Expense during
1999 were the costs of introducing a new Visa debit card. Other Operating
Expense did not increase substantially between 1998 and 1997.
Years Ended December 31,
TABLE V- COMPARISON OF NONINTEREST EXPENSE % %
(In Thousands) 1999 Change 1998 Change 1997
Salaries and Wages $ 6,926 4.61 $ 6,621 10.81 $ 5,975
Pensions and Other Employee Benefits 1,831 4.03 1,760 4.08
1,691
Occupancy Expense, Net 896 8.34 13.91
827 726
Furniture and Equipment Expense 1,078 36.11 9.54
792 723
Expenses Related to Credit Card Operation 2,597 (4.94) 2,732 14.07 2,395
Pennsylvania Shares Tax 723 10.21 656 10.07 596
Other Operating Expense 3,681 18.93 3,095 3.55 2,989
- - ------------------------------------------------------------------------------------------------------------------------------
Total Other Expense $ 17,732 7.58 $ 16,483 9.20 $ 15,095
==============================================================================================================================
INCOME TAXES
The Corporation's Income Tax Provision reflected as a per share cost to
stockholders amounted to $.64, $.68 and $.61, respectively, for 1999, 1998 and
1997. The amount of income tax payable per common share for those years was
$.56, $.61 and $.61, respectively. The per share tax payable for 1999 is a
reasonable estimate as the return has not been prepared as of the date of this
analysis.
The difference between the amount of income tax currently payable and the amount
reflected in the Corporation's income statement is caused by temporary
differences. Generally, temporary differences occur when an item of income or
expense is included in taxable income during different accounting periods for
financial statement and tax return purposes.
The most significant items creating temporary differences are accretion on
bonds, depreciation, realized gains on investments, loan loss expense, loan fees
and expense and employee benefit plans.
There are items included in the income statement that are not fully taxable,
including dividends received from certain domestic corporations and a portion of
interest received on municipal bonds and loans.
37
The reader should refer to Note 12 of the "Notes to the Consolidated Financial
Statements" for a more complete analysis of income tax expense.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Credit risk is the risk to earnings or capital arising from an obligor's failure
to meet the terms of a contract with the Corporation. Management's
responsibility for maintaining an adequate allowance for loan losses is clearly
identified by the banking regulatory agencies in the Interagency Policy
Statement on the Allowance for Loan and Lease Losses (The Interagency Policy)
and in generally accepted accounting principles (GAAP). The Interagency Policy
states: "Federally insured depository institutions must maintain an Allowance
for Loan Losses at a level that is adequate to absorb estimated credit losses
associated with the loan and lease portfolio, including all binding commitments
to lend."
An assessment of the allowance is performed quarterly. The purpose of the
quarterly assessment is to determine the adequacy of the reserve and to estimate
the allocated and unallocated components that make up the reserve. The
assessment of the allowance balance is performed by management and reviewed by
The Board of Directors each quarter. The Board of Directors also reviews the
Corporation's "Watch List" monthly. The "Watch List" is a collection of loans
that have a history of delinquency, collateral deficiency, cash flow problems,
etc. Total "Watch List" loans at December 31, 1999 were approximately
$13,453,000. All of the watch list loans have the potential of becoming
significant credit risks; however, a substantial portion of the loans are
current as to principal and interest.
The assessment is performed by a loan quality committee which consists of the
President, Treasurer, Executive Vice-presidents in charge of loans and branch
administration and in a review capacity, the Corporation's internal auditor. The
committee reviews all of the risk elements in the loan portfolio; namely, the
"Watch List", past due reports, nonperforming loans, Other Real Estate and
historical information related to charge-offs and recoveries by loan categories.
In the event that a loan becomes 90 to 120 days or more past due, the loan is
reviewed by the loan quality committee and if necessary is classified as an
impaired or nonperforming loan. At the time the loan is classified as impaired,
all accrued interest is written off against earnings or the allowance for loan
losses, whichever is applicable. The collateral value is compared to the
carrying value and any deficiency becomes a specific allocation of the Allowance
for Possible Loan Losses as required by SFAS No. 114, " Accounting by a Creditor
for Impairment of a Loan". Specific allocations for impaired loans at December
31, 1999 and 1998 amounted to $609,000 and $290,000, respectively.
The allowance for loan losses is evaluated based on an assessment of the losses
inherent in the portfolio. This assessment results in an allowance consisting of
two components, allocated and unallocated.
The allocated component of the allowance for loan losses reflects expected
losses resulting from the analysis of individual loans, developed through
specific credit allocations for individual loans and historical loss experience
for each loan category. The specific credit allocations are based on a regular
analysis of all loans and commitments on the Corporation's "Watch List". Also,
the historical loan loss 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 "Watch List" loans that
are individually evaluated).
The Corporation also engages a consulting firm to perform an independent credit
review. Their review is performed annually on loans of $175,000 and higher. The
most recent review was at the close of business June 11, 1999. The loan quality
committee gives substantial consideration to the classifications and
recommendations of the independent credit reviewer in determining the allowance
for loan losses.
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 Corporation's 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 Corporation's historical loss factors used
to determine the allocated component of the allowance, and it recognizes that
knowledge of the portfolio may be incomplete.
The Corporation was examined by the State Department of Banking as of December
31, 1998. The Corporation charges off loans that are recommended by the
examiners unless there are underlying circumstances that management feel will
make the debt collectible. The Corporation also has a policy of charging off
loans, based on management's analysis and The Board of Directors' approval, at
the end of each quarter.
38
Tables VI, VII, VIII and IX present an analysis of the loan portfolio, the
allowance for loan losses, the allocation of the allowance and a five-year
summary of loans by type.
TABLE VI - SIX YEAR HISTORY OF LOAN LOSSES
(In Thousands) 1999 1998 1997 1996 1995 1994 AVERAGE
Net Loans * 310,892 291,003 285,426 278,639 264,182 258,472 281,436
Net Charge offs 449 856 660 504 387 326 530
Allowance for Possible Loan Losses Balance 5,131 4,820 4,913 4,776 4,579 4,229 4,741
Provision for Loan Losses Charged to Earnings 760 763 797 701 737 737 749
Earnings 11,485 11,077 10,107 9,255 7,866 7,494 9,547
Earnings Coverage of Net Charge offs 25.6 X 12.9 X 15.3 X 18.4 x 20.3 X 23.0 x 18.0 x x
Allowance Coverage of Net Charge offs 11.4 X 5.6 X 7.4 X 9.5 x 11.8 X 13.0 x 8.9 x
Loans Ninety Days or More Past Due and
Still Accruing 1,797 1,628 1,986 2,994 2,915 2,743 2,344
Net Charge offs as a Percent of the Provision 59.1 % 112.2% % 82.8 % 71.9 % 52.5 % 44.2 % 70.8%
Year-End Nonperforming Loans** 1,956 1,135 1,412 864 279 624 1,045
Allowance as a Percentage of Gross Loans: *
Bank (1) 1.65 % 1.66 % 1.72 % 1.71 % 1.73 % 1.64 % 1.69%
Peer Group (2) 1.42 % 1.65 % 1.43 % 1.50 % 1.61 % 1.65 % 1.54%
* Gross Loans less Unearned Discount
(1) December 31,
(2) At September 30,
TABLE VII - ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
Years Ended December 31,
1999 1998 1997 1996 1995
Balance at Beginning of Year $ 4,820 $ 4,913 $ 4,776 $ 4,579 $ 4,229
Charge-offs
Real Estate Loans 81 257 246 157 38
Installment Loans 138 144 230 240 236
Credit cards and Related Plans 192 264 305 201 184
Commercial and Other Loans 219 301 3 74 116
- - ---------------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 630 966 784 672 574
- - ---------------------------------------------------------------------------------------------------------------------------------
Recoveries
Real Estate Loans 81 12 21 22 -
Installment Loans 60 43 64 53 60
Credit Card and Related Plans 30 40 30 38 41
Commercial and Other Loans 10 15 9 55 86
- - --------------------------------------------------------------------------------------------------------------------------------
Total Recoveries 181 110 124 168 187
- - --------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs 449 856 660 504 387
Additions Charged to Operations 760 763 797 701 737
- - --------------------------------------------------------------------------------------------------------------------------------
Balance at End of Year $ 5,131 $ 4,820 $ 4,913 $ 4,776 $ 4,579
================================================================================================================================
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES BY TYPE
(In Thousands) 1999 1998 1997 1996 1995 1994
Mortgage 834 97 350 58 38 35
Consumer 437 702 375 303 286 241
Commercial 2,081 650 625 630 604 443
Impaired Loans 609 290 274 113 228 --
All Other Commitments 150 202 343 369 374 386
Unallocated 1,020 2,879 2,946 3,303 3,049 3,124
- - --------------------------------------------------------------------------------------------------------------
Total Allowance 5,131 4,820 4,913 4,776 4,579 4,229
==============================================================================================================
The above allocation is based on estimates and subjective judgments and is not
necessarily indicative of the specific amounts or loan categories in which
losses may occur. The lower unallocated portion of the allowance in 1999 is the
result of a change in the method used to calculate the allocation. The
calculation for years prior to 1999 did not include specific amounts for "Watch
List" and impaired loans. These loans were included in the total population of
loans and historical loss ratios applied. These loans are now segregated from
total loans prior to applying the historical loss ratios.
TABLE IX - Six Year Summary of
Loans by Type
1999 % 1998 % 1997 % 1996 % 1995 % 1994 %
(In Thousands)
Real Estate-Construction 649 0.21 1,004 0.34 406 0.14 1,166 0.42 1,284 0.49 2,539 0.98
Real Estate-Mortgage 247,604 79.64 230,815 79.30 219,952 77.05 213,957 76.79 200,066 75.72 193,095 74.72
Consumer 29,140 9.37 30,924 10.63 33,094 11.59 33,420 11.99 36,351 13.76 37,531 14.52
Agricultural 1,899 0.61 1,930 0.66 2,424 0.85 2,603 0.93 2,815 1.07 3,154 1.22
Commercial 18,050 5.81 17,630 6.06 17,176 6.02 15,751 5.65 14,445 5.47 13,625 5.27
Other 1,025 0.33 1,062 0.37 6,260 2.19 5,014 1.80 2,512 0.95 2,459 0.95
Political Subdivisions 12,332 3.97 7,449 2.56 5,895 2.07 6,464 2.32 6,546 2.48 5,870 2.27
Lease Receivables 222 0.07 218 0.07 256 0.09 264 0.09 189 0.07 168 0.07
- - ----------------------------------------------------------------------------------------------------------------------------
Total 310,921 100.00 291,032 100.00 285,463 100.00 278,639 100.00 264,208 100.00 258,441 100.00
Less Unearned Discount (29) (29) (37) (42) (26) (23)
- - ----------------------------------------------------------------------------------------------------------------------------
310,892 291,003 285,426 278,597 264,182 258,418
Less Allowance for Possible (5,131) (4,820) (4,913) (4,776) (4,579) (4,229)
for Possible Loan Losses
- - ----------------------------------------------------------------------------------------------------------------------------
Net Loans and Lease 305,761 286,183 280,513 273,821 259,603 254,189
Financing Receivables
============================================================================================================================
Certain loans classified as "Other" for the years 1997, 1996, 1995 and 1994 were
reclassified as "Real Estate - Mortgage" in 1999 and 1998. The loans were home
improvement loans that did not have a correct collateral classification prior to
1998.
BALANCE SHEET
Average Total Assets of the Corporation for the year ended December 31, 1999
were $680,864,000. This compares to average total assets for the years ended
December 31, 1998 and December 31, 1997 of $626,102,000 and $608,277,000,
respectively.
Assets of the Corporation consist of earning and nonearning assets. Earning
assets include investments, loans and certain interest-bearing deposits held at
the Federal Home Loan Bank of Pittsburgh and other correspondent banks.
The average balance of the investment portfolio (excluding unrealized gains or
losses) during 1999 amounted to $347,701,000, or about 53 percent of average
earning assets. This compares to average investment s during 1998 and 1997 of
$295,883,000 and $289,140,000, respectively. The investment portfolio amounted
to 50.5 percent of earning assets in 1998 and 50.0 percent in 1997. Investments
are purchased when the Corporation has deposits in excess of its loan demand, or
when leverage opportunities exist and funds are borrowed. Investing borrowed
funds allows the Corporation to leverage its strong capital position. Normally
the leveraged borrowing will produce a spread of about 150 basis points (1.5
percent). During the last two years interest rate spreads have narrowed to
ranges that allow relatively few leveraging opportunities. The average portfolio
balance did increase nearly 18 percent during 1999. The increase was funded by
deposit growth and an increase in average borrowed funds of about $25,000,000.
The investment portfolio consists of U. S. Treasury securities, U. S. agency
securities, municipal bonds, other bonds and equity securities. U. S. Treasury
issues normally make up a small percentage of the total portfolio and
traditionally carry a lower after tax return than the other investments. The
issues that are carried are required as collateral for U. S. Government and
state deposits.
Mortgage-backed securities make up the largest part of the portfolio averaging
34.0 percent, 41.2 percent and 56.9 percent for 1999, 1998, 1997, respectively.
The decline in balances during 1999 and 1998 clearly underscores the prepayment
risk associated with the investments. Mortgage-backed investments are issued by
the Federal National Mortgage Association, the Government National Mortgage
Association and the Federal Home Loan Mortgage Corporation. The investments
represent a share of a pool of mortgages or a bond secured by a pool of
mortgages. The rate of return on the pool depends on the weighted average coupon
or mortgage rate of the individual mortgages in the pool and whether the pool
was purchased at a discount or premium. The pools are used for liquidity
purposes as they normally provide a monthly cash flow of $2,000,000 to
$3,000,000; however, at times during 1998 and 1997 monthly payments amounted to
$4,000,000.
During 1999 the portfolio mix changed somewhat, as U. S. Agency investments
became a larger part of the overall portfolio. Investments in U. S. Agency
securities averaged 29.4 percent of the total portfolio in 1999, average U. S.
Agency securities in 1998 and 1997 amounted to 23.4 percent and 14.6 percent of
the portfolio, respectively. The increase began in late 1997 and carried well
into 1998 when interest rates declined and a significant portion of the
investment in mortgage-backed securities began to prepay. The cash flow from the
mortgage-backed investments was reinvested in U. S. Agency securities, primarily
Federal Home Loan Bank zero coupon bonds.
40
A significant portion of the funds provided by the growth in deposits was
invested in municipal securities. Average municipal holdings during 1999
amounted to $80,970,000. Average municipal holdings during the years ended
December 31, 1998 and 1997 were $68,942,000 and $59,554,000, respectively. The
municipal bonds carry a lower rate of interest; however, a large portion of the
interest is tax exempt, which effectively increases the rate of return. A
portion of the interest paid on deposits used to purchase these bonds, however,
is nondeductible. Tax-exempt interest income from municipal bonds and loans
totaled $4,393,000 in 1999, $4,362,000 in 1998 and $3,986,000 in 1997 while the
amount of nondeductible interest during each of the last three years was
$665,000 in 1999, $549,000 in 1998 and $477,000 in 1997. During 1999, 1998 and
1997 average balances carried in municipal bonds made up 23.3 percent, 23.3
percent and 20.6 percent of the investment portfolio, respectively. Average
balances carried during 1999 increased because of attractive rates and the tax
position of the Corporation.
The remainder of the portfolio consists of other bonds and equity investments.
Other bonds are normally bonds or notes issued by large financial institutions
that carry a slightly higher interest rate because of lower or no rating.
Average Other Securities as a percentage of the total portfolio for years ended
December 31, 1999, 1998 and 1997, respectively, were 6.0 percent, 4.7 percent
and 1.6 percent. The balance of the portfolio is made up of equity investments.
These are equities of banks or bank holding companies. Most of the institutions
are located in Pennsylvania or neighboring states. Average balances carried in
equity investments as a percentage of the investment portfolio form for the
years ended December 31, 1999, 1998 and 1997 were, respectively, 6.4 percent,
6.3 percent and 5.2 percent.
The available-for-sale investment portfolio must be reported at market value, as
such, at the end of each quarterly reporting period the entire portfolio is
repriced to the current market value. The difference between cost and market
value represents unrealized gain or loss and is recorded, net of tax as an
increase or decrease in capital of the Corporation. The net adjustment to
capital as of December 31, 1999, 1998 and 1997 was ($8,884,000), $11,922,000 and
13,335,000,respectively. The sharp decline in appreciation between the years
ended December 31, 1998 and December 31, 1999 is due to an increase in long
interest rates of about 150 plus basis points during 1999. At December 31, 1998
the yield on the 30 Year Treasury was at about 5 percent at December 31, 1999
the yield had risen to 6.7 percent. The effect of such rate increases is to
undermine the underlying market value of the total portfolio, as a substantial
portion of the investments were purchased at less than current market rates.
Average total loans for the years ended December 31, 1999, 1998 and 1997
amounted to $301,584,000, $285,276,000 and $282,580,000, respectively. As a
percentage of average earning assets for those years they were 46.3 percent,
48.7 percent and 48.8 percent, respectively.
Historically, real estate secured loans have made up 70 to 80 percent of the
dollars in the loan portfolio. The mortgages are primarily 1-4 family dwellings
and commercial loans secured by real estate. The commercial side of the
portfolio is weighted heavily in forest and wood product loans because of the
abundance of hard woods natural to our geographic area. The mortgage portfolio
carries with it the same risk of prepayment as the mortgage-backed investments
in a falling interest rate environment.
The structure and nature of the loan portfolio is not expected to change
significantly in the coming years and loan growth for 2000 will probably be
about 5 percent.. The Corporation introduced a new home equity line of credit
during 1997 that has enjoyed a certain amount of success because of the price,
ease and speed with which it is set up.
Approximately 4.0 percent of the Corporation's average assets for 1999, 1998 and
1997 were invested in land, buildings, furniture and fixtures,
noninterest-bearing cash and other assets. The Corporation has 16 banking
offices in Tioga, Bradford, Sullivan and Lycoming counties and is planning the
construction of a new branch in Muncy, Pennsylvania. All of the offices are
modern banking facilities. In February of 2000 the Corporation also purchased an
additional facility in Wellsboro, Pennsylvania to house the credit card
operation. The Corporation has also installed 12 automated teller machines
throughout its market area.
The liability side of the balance sheet is made up of three basic components:
deposits, borrowed funds and capital.
The deposit base is primarily interest-bearing and posted significant growth
during 1999, particularly Certificates of Deposit and Money Market accounts.
Interest-bearing deposit categories include Interest Checking accounts, Money
Market accounts, Regular Savings (passbook and statement), Certificates of
Deposit, Individual Retirement Accounts and other time deposits (Christmas
clubs, Vacation clubs).
Certificates of Deposit provide the major portion of the deposit base for the
Corporation. Average balances, respectively, for the years ended December 31,
1999, 1998 and 1997 amounted to $139,916,000, $126,902,000 and $119,226,000,
making up nearly a third of the deposit base in each of the three years. At
December 31, 1999 the Corporation had approximately 10,283 accounts with a
weighted average interest rate of 5.33 percent.
41
The Corporation's Super Money Fund (Money Market) accounts provide the second
largest source of deposits, providing about 25 percent of deposit funds and
numbered 3,538 accounts at December 31, 1999. The accounts are required to carry
a higher minimum balance and are paid a higher rate of interest than Interest
Checking and Savings accounts. The interest rate is determined utilizing the
91-day treasury bill rate as an index. Monthly activity is restricted by
regulation. The Corporation has been successful in recent years in attracting
Super Money Fund accounts by paying a slightly higher rate than other
institutions in our market area. During 1998 a new Money Market Municipal
account was introduced. The account is paid a rate approximating the overnight
Federal Funds rate and is available to all municipal customers. The account has
been very popular and has had the effect of keeping municipal funds in the
market area. The rate paid is tiered depending on the balance.
Interest Checking accounts make up slightly more than 7 percent of the deposit
base and numbered about 2,227 accounts at December 31, 1999. This type of
account allows unlimited transaction activity and earns a rate of interest
slightly higher than Regular Savings, provided the balance is $2,500 or higher;
when the balance falls below $2,500 the rate paid is less than Regular Savings.
The indicator used to price this account is the 91-day treasury bill auction
rate.
The Corporation also offers the still very popular Regular Savings account. The
account comes in two forms: passbook and statement. The account pays a rate of
2.50 percent, which is very competitive for our market area. The average balance
for this type of account has experienced some erosion during the past three
years, however average balances stabilized at about $45,000,000 during 1998 and
has held at that level during 1999. It is expected that average balances will
decline modestly in 2000 as funds are moved to higher rate instruments and
alternative investments, especially mutual funds. At December 31, 1999, the
Corporation had approximately 19,300 Regular Savings and Statement Savings
accounts.
Demand deposit average balances have remained stable during the past three
years, averaging about 10 percent of the deposit base. The Corporation offers a
variety of checking account types to meet the needs of our market area. The
total number of checking accounts being serviced at December 31, 1999 was
approximately 21,250.
Individual Retirement Accounts are the third largest source of deposit funds for
the Corporation and during the past three years have made up more than 15
percent of the deposit base. The Corporation has aggressively marketed
Individual Retirement Accounts by paying a rate slightly higher than that of the
competition in our market area. During the past three years increased
competition from mutual funds and the Corporation's Trust department have slowed
deposit growth. The number of accounts was about 3,782 at December 31, 1999.
The remaining component of interest-bearing liabilities is borrowed funds.
Borrowed funds may be in the form of unsecured overnight Federal Funds
purchased, fixed term borrowings secured by a blanket floating-lien agreement
and repurchase agreements secured by individual securities through brokers. The
borrowings are classified as either short-term or long-term depending on the
original maturity. Borrowings with an original maturity of one year or less are
classified short-term. Borrowings whose original maturity exceeds one year are
classified long-term. Average borrowed funds for the years ended December 31,
1999, 1998 and 1997 (excluding Federal funds Purchased) amounted to $97,585,000,
$76,040,000 and $88,548,000, Borrowed funds are normally used for liquidity
purposes or to leverage the capital of the Corporation. During 1998 average
borrowed funds declined when compared to 1999 and 1997 as leveraging
opportunities were nonexistent or hard to find because of a flat yield curve. To
successfully leverage Corporation capital there must be a spread of at least 150
basis points between long-term and short-term rates. Average borrowed funds
increased just over $20,000,000 as two leveraging opportunities totaling
$22,000,000 arose during 1999. The spread between the funds borrowed and the
underlying asset acquired was 2.11 percent. The terms for fixed rate borrowings
and Repurchase Agreements range from 3 months to 5 years. The floating-lien
agreement loans are with the Federal Home Loan Bank of Pittsburgh, a major
source of funding for the Corporation. The loans secured by repurchase
agreements are placed with either the Federal Home Loan Bank of Pittsburgh,
Solomon Brothers or Morgan Stanley.
The Capital accounts of the Corporation will be discussed later in Management's
Discussion in the Capital section.
LIQUIDITY
Bank liquidity is the ability to quickly raise cash at a reasonable cost in
order to serve customer needs and to operate efficiently by meeting short-term
obligations on a timely basis. An adequate liquidity position permits the
Corporation to pay creditors, to allow for unforeseen deposit runoffs, to fund
unexpected increases in loan demand and to fund loan growth without making
costly balance sheet adjustments. Normally, day to day deposit decreases do not
vary more than $4,000,000 to $6,000,000 and new loan advances, net of loan
repayments, average less than $100,000 daily.
To accommodate fluctuations in deposits and the funding needed to support loan
growth, the Corporation has several cash sources. Beyond the regular and
on-going liquidity generated by loan repayments, amortization of mortgage-backed
securities, the maturing of bonds and the routine growth in deposits, the
Corporation has several additional sources for meeting its liquidity needs: the
sale of assets (primarily investment securities), short-term or long-term
borrowing (e.g., federal funds purchased and Federal Home Loan Bank borrowings)
and attracting short-term deposits (principally certificates of deposit). When
deposits decline for short periods or when loan demand increases unexpectedly,
the Corporation relies on several credit lines. The Corporation maintains an
"Open-Repo Plus" program with the Federal Home Loan Bank of Pittsburgh, and
overnight borrowing agreements with several of its correspondent banks,
principally Mellon Bank and the Atlantic Central Bankers Bank. The Federal Home
Loan Bank borrowing is secured by the Corporation's mortgage loans and
mortgage-backed securities. Additionally, the Corporation uses repurchase
agreements placed with Solomon Brothers and Morgan Stanley to borrow short-term
funds secured by investment assets.
42
During the fourth quarter of 1998 the Corporation introduced a new
interest-bearing noninsured account called the "Repo Sweep" secured by
investments deposited with a correspondent bank. The account is paid a rate that
is tiered and indexed to the Federal Funds rate. The account looks at checking
account balances during daily processing and transfers balances above a
predetermined level to the "Repo Sweep" account and during processing for the
next business day the balances are transferred back. Average balances carried in
"Repo Sweep" accounts during 1999 exceeded $4,000,000. The Corporation also has
a similar product available to business customers with credit lines. Credit
lines are accessed or paid down automatically depending on predetermined deposit
balances.
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 that exists and arises from changes in interest rates is an
inherent factor in operating a bank. The Corporation's assets are predominantly
composed of long-term bonds, term loans with amortizations over periods up to 20
years and other long-term assets. Funding for these assets comes principally
from short-term deposits: demand deposits (checking accounts), money market
accounts, certificates of deposit with maturities of 1 to 60 months and regular
savings accounts. When short-term funding sources, with interest rates that can
change frequently, are used to fund long-term assets, with rates that change
much less frequently, there is an inherent interest rate and market value risk.
Interest rate fluctuations impact the market values of the Corporation's
investments, which are carried as available-for-sale securities and marked to
the current market values at the end of each quarter. Rising interest rates can
cause significant depreciation in the portfolio. Conversely, falling interest
rates can dramatically increase the value of the portfolio. Interest rate
fluctuations can also affect the loan portfolio and the Corporation's deposit
base. However, those assets and liabilities are considered long-term and not
available for sale, therefore, market value fluctuations are not recorded.
Two important measurements of Interest Rate Risk are the impact on net interest
income and the impact on the market value of the Corporation's portfolio equity.
Quantifying interest rate risk can be achieved using several methods. Many
experts and regulators agree that sophisticated income simulation models provide
the best way to measure and predict the effects of Interest Rate Risk. The
Corporation uses such a model to calculate the Interest Rate Risk and its
potential effect on net interest income and market value of portfolio equity.
The simulation model is used monthly by the Corporation. Applying interest rate
increases and decreases of 100, 200 and 300 basis points to earning assets and
interest-bearing liabilities the model measures and projects potential changes
in net interest income and calculates the discounted present value of
anticipated cash flows of the assets and liabilities to arrive at a net market
value under the base "most likely" and "what if" scenarios. The simulation is
performed using a number of different asset and liability mix scenarios that
allows management to measure on a "what if" basis.
The Corporation's Board of Directors has established parameters within which the
Interest Rate Risk effects on income and market value may fall when interest
rates are simulated to increase or decrease 200 basis points. The acceptable
range for fluctuations in net interest income is minus 20 percent from the base
most likely one-year scenario. The acceptable range for market value variance is
minus 30 percent from the base most likely one-year scenario.
During the months of November and December 1999 the 30 percent parameter
associated with market value variance of the securities portfolio was exceeded
by about 4 percent and 8 percent, respectively. The board of Directors and
management in conjunction with the ALCO committee decided to not take any action
at this time to reduce the variance to acceptable levels. The plan decided upon
was to wait and see if long interest rates would begin to decline between now
and mid-year.
Had the Board and management decided to take corrective action there would only
be two viable options available. The first would be to sell, at a significant
loss, a portion of the portfolio. This option was discounted because the
instruments in the portfolio causing the greatest market value loss provide a
return and a spread to the cost of the underlying liabilitiies that is
43
acceptable. The second option would be to put in place a hedge transaction that
would prevent a further deterioration of market value. This option is currently
being investigated.
The model used by the Corporation, Sendero, has the capability of applying the
embedded options inherent in any balance sheet such as prepayments during a
period of declining interest rates or runoffs of certain deposits during periods
of rising rates. The model is flexible enough to allow several rates to be
applied to several different balance sheet assumptions.
Table X was prepared using the Sendero model described above. The estimated
change in the net interest margin was calculated based on the difference between
the Corporation's estimated interest margin for the year 2000 amounting to
$23,061,000 based on current interest rates as of December 31, 1999, and the
hypothetical interest margin that would result from an increase or decrease in
interest rates of 200 basis points. The market value of portfolio equity
represents the difference between incoming and outgoing cash flows, discounted
to present value, from assets, liabilities and off-balance sheet contracts. The
results presented in Table X indicate that the Corporation exceeded at December
31, 1999 the Board established guideline. In 1999, updated prepayment tables
were used which resulted in a greater negative impact on net interest income in
the rising rate scenario and a less favorable impact on net interest income in
the declining rate scenario.
The model utilized to create Table X 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 X - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
(In Thousands) Period Ending December 31, 2000
December 31, 1999 Data Plus 200 Basis Points Minus 200 Basis Points
Most Likely
Forecast
Amount Amount % Change Amount % Change
Interest Income:
Investments $24,529 $25,289 3.10 $23,694 -3.40
Interest Bearing Due 457 612 33.92 303 -33.70
Loans 27,607 28,791 4.29 25,461 -7.77
Federal Funds Sold 5 4 -20.00 23 360.00
- - ----------------------------------------------------------------------------------------------------------------------
Total Interest Income 52,598 54,696 3.99 49,481 -5.93
Interest Expense:
Interest on Deposits 22,014 27,653 25.62 16,374 -25.62
Interest on Borrowed Funds 7,523 9,594 27.53 5,557 -26.13
- - ----------------------------------------------------------------------------------------------------------------------
Total Interest Expense 29,537 37,247 26.10 21,931 -25.75
- - ----------------------------------------------------------------------------------------------------------------------
Net Interest Income 23,061 17,449 -24.34 27,550 19.47
======================================================================================================================
Market Value of Portfolio Equity at December 31, 1999 $67,619 $41,817 -38.16 $83,250 23.12
======================================================================================================================
(In Thousands) Period Ending December 31, 1999
December 31, 1998 Data Plus 200 Basis Points Minus 200 Basis Points
Most Likely
Forecast
Amount Amount % Change Amount % Change
Interest Income:
Investments $18,753 $20,317 8.34 $18,520 -1.24
Interest Bearing Due 395 279 -29.37 114 -71.14
Loans 26,822 27,311 1.82 23,483 -12.45
Federal Funds Sold 54 44 -18.52 19 -64.81
- - -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 46,024 47,951 4.19 42,136 -8.45
Interest Expense:
Interest on Deposits 18,415 22,197 20.54 13,693 -25.64
Interest on Borrowed Funds 3,591 4,508 25.54 3,177 -11.53
- - -------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 22,006 26,705 21.35 16,870 -23.34
- - -------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $24,018 $21,246 -11.54 $25,266 5.20
===============================================================================================================================
Market Value of Portfolio Equity at December 31, 1998 $88,235 $66,909 -24.17 $110,814 25.59
===============================================================================================================================
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists of restricted stock,
primarily of the Federal Home Loan Bank of Pittsburgh ("FHLB"), and investments
in stocks of other banks and bank holding companies, mainly based in
Pennsylvania.
FHLB stock can only be sold back to the FHLB or to another member institution at
par value. Accordingly, the Corporation's investment in FHLB stock is carried at
cost, which equals par value, and is evaluated for impairment. Factors that
might cause FHLB stock to become impaired (decline in value on an other than
temporary basis) are primarily regulatory in nature and are related to potential
problems in the residential lending market; for example, the FHLB may be
required to make dividend or other payments to the Financing Corporation, the
Resolution Funding Corporation, or other entities, in amounts that could exceed
the FHLB's total equity.
Investments in bank stocks are subject to the risk factors affecting the banking
industry generally, including competition from non-bank entities, credit risk,
interest rate risk and other factors that 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 its holdings in Pennsylvania banks, these investments could
decline in value if there were a downturn in the state's economy.
The Corporation's management monitors its risk associated with its equity
securities holdings by reviewing its holdings on a detailed, individual security
basis, at least monthly, considering all of the factors described above.
Equity securities held as of December 31, 1999, 1998, and 1997 are as follows:
(In Thousands)
Hypothetical Hypothetical
10% 20%
Decline Decline
Fair In Market In Market
At December 31, 1999 Cost Value Value Value
- - -----------------------------------------------------------------------------------------------------------------------------
Bank & Bank Holding Companies $18,482 $26,221 $(2,622) $(5,244)
Federal Home Loan Bank and Other Restricted Stocks 7,248 7,248 (725) (1,450)
- - -----------------------------------------------------------------------------------------------------------------------------
Total $25,730 $33,469 $(3,347) $(6,694)
=============================================================================================================================
Hypothetical Hypothetical
10 % 20 %
Decline Decline
In Market In Market
At December 31, 1998 Cost Fair Value Value Value
- - -----------------------------------------------------------------------------------------------------------------------------
Banks & Bank Holding Companies $16,791 $31,368 $(3,137) $(6,274)
Federal Home Loan Bank and Other Restricted Stocks 4,574 4,574 (457) (915)
- - -----------------------------------------------------------------------------------------------------------------------------
$21,365 $35,942 $(3,594) $(7,189)
=============================================================================================================================
Hypothetical Hypothetical
10 % 20 %
Decline Decline
In Market In Market
At December 31, 1997 Cost Fair Value Value Value
- - -----------------------------------------------------------------------------------------------------------------------------
Banks & Bank Holding Companies $12,035 $27,909 $(2,791) $(5,582)
Federal Home Loan Bank and Other Restricted Stocks 4,114 4,114 (411) (823)
- - -----------------------------------------------------------------------------------------------------------------------------
Total $16,149 $32,023 $(3,202) $(6,405)
=============================================================================================================================
46
CAPITAL ADEQUACY
Under regulations published by the Federal Deposit Insurance Corporation and
other bank regulators, a bank's capital must be divided into two tiers. The
first tier consists primarily of common stock, retained earnings, surplus and
noncumulative perpetual preferred stock, if any. The second tier includes the
allowance for possible loan losses (limited to 1.25 percent of risk-weighted
assets), cumulative preferred stock and subordinated debt and 45 percent of
unrealized gains on equity investments.
Risk-based capital guidelines published in 1990 require banks to maintain a
risk-based capital ratio of 8 percent, 4 percent of which must be tier I; the
remainder may be tier II. The total (tier I and tier II) risk-based capital
ratios at December 31, 1999 and 1998 were 24.73 percent and 24.60 percent,
respectively.
The primary source of capital growth for Citizens and Northern Corporation is
earnings. The growth of capital, excluding unrealized gains or losses on
available-for-sale securities, attributable to earnings, (net of dividends), for
the years ended December 31, 1999, 1998 and 1997 was 9.1 percent, 9.5 percent
and 9.7 percent, respectively.
Return on average assets ( net of unrealized gains or losses on
available-for-sales securities)for the periods ended December 31, 1999, 1998 and
1997, respectively was 1.71 percent, 1.77 percent and 1.66 percent. Return on
average equity (excluding unrealized gains or losses on available-for-sales
securities) for the same respective periods was 14.05 percent, 14.81 percent and
14.56 percent
The total capital of the Corporation at December 31, 1999, excluding net
unrealized gains or losses on Available-for-Sale Securities, amounted to
$85,807,000. This compares to total capital of $78,645,000 and $72,200,000 at
December 31, 1998 and 1997, respectively.
Total capital of the Corporation at December 31, 1999, 1998, and 1997,
respectively, including the adjustment for unrealized gains and losses on
Available-for-Sale Securities, amounted to $76,623,000, $90,567,000 and
$85,535,000. The adjustment is caused by the required implementation of
Statement of Financial Accounting Standards (SFAS) No. 115. This pronouncement
requires that investment securities held as available-for-sale be
marked-to-market on the last day of each accounting period and the adjustment,
net of taxes, be included in shareholders' equity.
The leverage ratio (capital divided by total liabilities), excluding the
adjustment for unrealized gains and losses on available-for-sale securities, at
December 31, 1999 and 1998 was 13.6 percent and 14.2 percent, respectively. The
capital to deposits ratio at the same dates was 17.1 percent and 16.5 percent,
respectively.
Capital expenditures for 2000 are expected to be between $750,000 and
$1,250,000. These expenditures include a satellite location to house the credit
card operation and the construction of a branch in Muncy, Pennsylvania. These
capital expenditures will not have a detrimental effect on the capital ratios or
the results of operations.
COMPREHENSIVE INCOME
Comprehensive Income is a measure of all changes in the equity of a corporation,
excluding transactions with owners in their capacity as owners (such as proceeds
from issuances of stock and dividends). The difference between Net Income and
Comprehensive Income is termed "Other Comprehensive Income". For the
Corporation, Other Comprehensive Income consists of unrealized gains and losses
on available-for-sale securities, net of deferred income tax. Comprehensive
Income should not be construed to be a measure of net income. The effect of
Other Comprehensive Income would only be reflected in the income statement if
the entire portfolio of available-for-sale securities were sold on the statement
date. The amount of unrealized gains or losses reflected in Comprehensive Income
may vary widely at statement dates depending on the markets as a whole and how
the portfolio of available-for-sale securities is affected by interest rate
movements. Other Comprehensive Income (Loss) for the periods ended December 31,
1999, 1998, and 1997 were respectively, ($20,806,000), ($1,413,000) and
$7,568,000.
The substantial decrease in comprehensive income that occurred during 1999 when
compared to 1998 and 1997 is the result of an increase in long-term interest
rates. When long-term securities currently carried in the Corporation's
portfolio are priced in a rising rate economy they will normally be discounted
substantially. This is because they were purchased from accelerated cash flow
generated during periods of lower or declining long-term rates.
47
YEAR 2000
The Year 2000 and the associated problems that could have occurred, came and
went without any discernable problems. The MIS, Audit, and Compliance
departments did a commendable job in readying the Corporation for this event.
The estimated cost to the Corporation to become Y2K compliant was approximately
$750,000. The costs were primarily hardware and software related and were
incurred over a four-year period. Most of these costs have been capitalized and
are being depreciated over 3-5 years. Determining internal programming costs
would be difficult to estimate since programming efforts were spread over a four
year period from 1996 through 1999. To the best of management's knowledge there
are no computer applications critical to the operation of the Corporation that
have not been used successfully and been found to be compliant after January 1,
2000.
INFLATION
Inflation is the increase in the price of goods or services from one period to
the next and is normally measured by the change in the CPI or Consumer Price
Index. Other measures include the PPI or Producer Price Index and GDP, the Gross
Domestic Product. Inflation affects nearly every aspect of banking, primarily
interest rates, which have been discussed in detail earlier under Interest Rate
Risk. The effect of inflation impacts the purchase of goods, such as supplies,
services and labor used to provide banking products to our customers. The
Federal Reserve Open Market Committee raised rates three times during 1999 in an
effort to maintain a noninflationary economy. At the present time the inflation
rate is about 2 percent.
QUARTERLY SHARE DATA
The Corporation's stock is not traded on an established stock exchange. However,
stock transactions are effected through various brokers who maintain a market in
the Corporation's stock or trades are made on a person to person basis. The
following table sets forth the approximate high and low sales prices of the
common stock during 1999, 1997 and 1996 as furnished by brokers and other
sources considered by the Corporation to be reliable.
1999 1998 1997
Dividend Dividend Dividend
Declared Declared Declared
per per per
High Low Quarter High Low Quarter High Low Quarter
- - ------------------------------------------------------------------------------------------------------------
First Quarter 35.50 33.25 0.22 36.75 33.65 0.20 26.50 24.00 0.18
Second Quarter 33.25 31.25 0.22 37.95 36.50 0.20 29.25 27.25 0.18
Third Quarter 32.50 31.00 0.22 38.50 37.00 0.20 32.25 29.50 0.18
Fourth Quarter 30.25 27.00 0.24 36.80 35.35 0.22 33.50 30.75 0.20
plus plus plus
1 % stock 1 % stock 1 % stock
COMMON STOCK AND PER SHARE DATA
- - --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
Net Income - Basic $2.21 $2.13 $1.94 $1.77 $1.51
Net Income - Diluted $2.20 $2.12 $1.94 $1.76 $1.51
Cash Dividends Declared $0.89 $0.80 $0.72 $0.66 $0.62
Cash Dividends Declared on an Historical Basis $0.90 $0.82 $0.74 $0.69 $0.65
Stock Dividend 1 % 1 % 1 % 1 % 1 %
Number of Shares Outstanding(excluding shares held in 5,153,729 5,102,028 5,063,043 5,012,332 4,962,456
treasury)
Number of Shares Used for Computation - Basic 5,205,140 5,209,640 5,215,775 5,215,740 5,215,636
Number of Shares Issued 5,272,239 5,220,038 5,168,354 5,117,182 5,066,516
Number of Shares Authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
Stockholders' Equity Per Share 14.72 17.38 16.40 13.59 12.84
Stockholders' Equity Per Share (*) 16.43 15.10 13.84 12.50 11.51
Number of stockholders at Year End 2,321 2,300 2,182 2,119 2,027
48
(*) Does not include unrealized holding gains or losses on available-for-sale
securities.
(a) For purposes of this computation, the number of shares outstanding,
excluding shares held in treasury has been increased for the effects of the 1%
stock dividend issued in January following each year-end.
Known "market makers" who handle Citizens & Northern Corporation stock
transactions are:
F. J. MORRISSEY & CO., INC. HOPPER SOLIDAY & COMPANY RYAN, BECK & COMPANY
1700 Market Street, Suite 1420 1703 Oregon Pike 3 Parkway
Philadelphia, PA 19103-3913 Lancaster, PA 17601-6401 Philadelphia, PA 19102
(215) 563-8500 (800) 526-6371 (800) 342-2325
FERRIS, BAKER WATTS, INC. MERRILL LYNCH, PIERCE, SANDLER O'NEILL & PARTNERS, LP
6 Bird Cage Walk FENNER & SMITH, INC. Two World Trade Center, 104th Floor
Holidaysburg, PA 16648 One West Third Street New York, NY 10048
(800) 343-5149 Williamsport, PA 17701 (800) 635-6851
(800) 937-0769
INVESTOR INFORMATION INDEPENDENT AUDITORS
ANNUAL MEETING OF General shareholder inquiries PARENTE, RANDOLPH, ORLANDO
SHAREHOLDERS Should be sent to: CAREY & ASSOCIATES
400 Market Street
The Annual Meeting of Shareholders CITIZENS & NORTHERN Williamsport, PA 17701
will be held at the Arcadia Theatre in CORPORATION
Wellsboro, PA, at 2:00 p.m.
Tuesday, April 20, 2000. 90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
STOCK TRANSFER AGENT
Citizens & Northern Bank
90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
(800) 487-8784
49
FIVE YEAR SUMMARY OF OPERATIONS
(In Thousands Except Per Share Data)
INCOME STATEMENT 1999 1998 1997 1996 1995
Interest Income $48,415 $45,459 $45,642 $45,589 $43,114
Interest Expense 24,571 22,693 23,312 23,451 24,477
- - --------------------------------------------------------------------------------------------------------------------------
Interest Margin 23,844 25,766 22,330 22,138 18,637
Provision for Possible Loan Losses 760 763 797 701 737
- - --------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 23,084 22,003 21,533 21,437 17,900
Other Income 6,444 6,083 5,834 5,180 4,863
Securities Gains 3,043 3,001 1,001 475 1,675
Other Expenses 17,732 16,483 15,095 14,686 14,079
- - --------------------------------------------------------------------------------------------------------------------------
Income Before Income Tax Provision 14,839 14,604 13,273 12,406 10,359
Income Tax Provision 3,354 3,527 3,166 3,151 2,493
- - --------------------------------------------------------------------------------------------------------------------------
Net Income $11,485 $11,077 $10,107 $9,255 $7,866
==========================================================================================================================
BALANCE SHEET AT YEAR END
Total Securities (1) 363,535 331,883 $308,988 $310,077 $301,743
Loans (Excluding Unearned Discount) 310,892 291,003 285,426 278,597 264,182
Total Assets 705,898 646,298 615,353 610,172 585,987
Total Deposits 500,474 476,518 442,256 430,311 429,552
Stockholders' Equity Before Adjustment for Unrealized Gain
or Loss on Available-for-Sale Securities 85,507 78,645 72,200 65,826 60,025
Stockholders' Equity 76,623 90,567 85,535 71,593 66,977
AVERAGE BALANCE SHEET
Total Securities (Amortized Cost) (1) 349,133 300,692 296,067 306,680 290,695
Loans (Excluding Unearned Discount) 301,584 285,275 282,580 271,618 259,142
Earning Assets 650,717 585,966 578,647 578,298 549,837
Total Assets 680,864 626,102 608,277 604,408 566,030
Total Assets Excluding Market Value Adjustment for
Unrealized Gain or Loss on Available-for-Sale Securities 672,999 606,163 598,370 598,813 568,700
Total Deposits 483,858 448,601 435,190 429,036 414,958
Stockholders' Equity Before Adjustment for Unrealized Gain
or Loss on Available-for-Sale Securities 81,767 74,810 69,440 62,797 55,961
Stockholders' Equity 87,143 87,997 76,005 66,490 53,727
FINANCIAL RATIOS
Return on Stockholders' Equity (4) 14.05% 14.81% 14.56% 14.74% 14.06%
Return on Stockholders' Equity (3) 13.18% 12.59% 13.30% 13.92% 14.51%
Return on Assets (3) 1.69% 1.77% 1.66% 1.53% 1.39%
Stockholders' Equity to Assets (4) 12.15% 12.34% 11.60% 10.49% 9.84%
Stockholders' Equity to Assets (3) 12.80% 14.05% 12.50% 11.00% 9.58%
Stockholders' Equity to Loans (3) 28.90% 30.85% 26.90% 24.48% 20.91%
Net Income to:
Total Interest Income 23.72% 24.37% 22.14% 20.30% 18.24%
Interest Margin 48.17% 48.66% 45.26% 41.81% 42.21%
Dividend as a % of Net Income 40.39% 37.81% 37.04% 37.36% 41.01%
(1) Includes Interest-Bearing Due from Banks and Fed Funds Sold
(2) Balance Sheet at Year End
(3) Average Balance Sheet, Including Valuation Reserve
(4) Average Balance Sheet, Excluding Valuation Reserve
50
SUMMARY OF QUARTERLY FINANCIAL DATA (Unaudited)
The following table presents summarized quarterly financial data for 1999 and
1998 (In Thousands, Except Per Share Data).
1999 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest Income $11,315 $11,851 $12,536 $12,713
Interest Expense 5,397 5,908 6,420 6,846
- - ---------------------------------------------------------------------------------------------------------------------------------
Interest Margin 5,918 5,943 6,116 5,867
Provision for Loan Losses 225 225 120 190
- - ---------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 5,693 5,718 5,996 5,677
Other Income 1,535 1,654 1,657 1,598
Securities Gains (Losses) 490 568 789 1,196
Other Expense 4,253 4,401 4,564 4,514
- - ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,465 3,539 3,878 3,957
Income Tax Provision 789 751 954 860
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income $2,676 $2,788 $2,924 $3,097
=================================================================================================================================
Net Income Per Share - Basic $0.51 $0.54 $0.56 $0.59
=================================================================================================================================
Net Income Per Share - Diluted $0.51 $0.54 $0.56 $0.59
=================================================================================================================================
1998 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest Income $11,288 $11,293 $11,561 $11,377
Interest Expense 5,724 5,701 5,769 5,499
- - ---------------------------------------------------------------------------------------------------------------------------------
Interest Margin 5,504 5,592 5,792 5,878
Provision for Loan Losses 191 191 191 190
- - ---------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 5,313 5,401 5,601 5,688
Other Income 1,411 1,517 1,617 1,538
Securities Gains (Losses) 754 1,860 235 152
Other Expense 3,937 4,089 4,154 4,303
- - ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 3,541 4,689 3,299 3,075
Income Tax Provision 860 1,227 785 655
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Income $2,681 $3,462 $2,514 $2,420
=================================================================================================================================
Net Income Per Share - Basic $0.51 $0.66 $0.48 $0.46
=================================================================================================================================
Net Income Per Share - Diluted $0.51 $0.66 $0.48 $0.46
=================================================================================================================================
51
TRUST DEPARTMENT
(In Thousands) 1999 1998 1997 1996 1995 1994
Assets $320,385 $283,262 $230,149 $222,541 $181,351 $146,178
Earnings $1,456 $1,288 $1,004 $852 $726 $582
The composition of trust assets and liabilities as of December 31, 1999, 1998
and 1997 are shown in the following table:
(In Thousands) 1999 1998 1997
INVESTMENTS
Bonds $ 85,615 $ 78,442 $70,413
Stock 108,279 100,479 77,356
Savings and Money Market Funds 18,411 19,150 14,835
Mutual Funds 102,635 80,361 65,331
Mortgages 1,003 1,066 425
Real Estate 3,430 3,061 1,156
Miscellaneous 1,012 703 633
- - -------------------------------------------------------------------------------
Total $320,385 $283,262 $230,149
===============================================================================
ACCOUNTS
Estates $ 2,256 $ 2,370 $ 3,537
Trusts 106,279 86,079 62,280
Guardianships 2,642 1,972 1,893
Pension/Profit Sharing 127,769 113,110 86,506
Investment Management 81,439 79,731 75,933
- - -------------------------------------------------------------------------------
Total $320,385 $283,262 $230,149
===============================================================================
STOCKHOLDER INQUIRIES
A copy of the Corporation's Annual Report for the year ended December 31, 1999,
on Form 10-K as required to be filed with the Securities and Exchange
Commission, will be furnished to a stockholder without charge upon written
request to the Corporation's Treasurer at the principal office at P O Box 58,
Wellsboro, PA 16901. The information is also available at the website of the
Securities and Exchange Commission at www.sec.gov.
This statement has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation.
52
DESCRIPTION OF BUSINESS
Citizens & Northern Corporation ("Corporation") is a one-bank holding company
whose principal subsidiary is Citizens & Northern Bank ("Bank").
The Bank is a Pennsylvania banking institution that was formed pursuant to the
consolidation of Northern National Bank of Wellsboro and Citizens National Bank
of Towanda on October 1, 1971. In May of 1972, the Bank merged with the First
National Bank of Ralston and on October 1, 1977, merged with the Sullivan County
National Bank. Then on January 1, 1984 the Bank merged with the Farmers National
Bank of Athens. On May 1, 1990, The First National Bank of East Smithfield
merged with the Bank. The Bank has held its current name since May 6, 1975, at
which time the Bank changed its charter from a National bank to a Pennsylvania
bank. The Bank's principal office is located in Wellsboro, Pennsylvania. On
December 31, 1999 the Bank had total assets of $688,978,000, total deposits of
$500,474,000 and total loans outstanding of $310,921,000.
The Bank provides an extensive range of banking services, including interactive
internet banking, checking accounts, savings accounts, certificates of deposit,
money market accounts, personal, commercial and installment loans and such types
of deposits and other loans that are common to a full service bank of its size
and structure. The Bank also maintains a trust division that provides full range
of financial fiduciary services.
The Corporation also owns two subsidiaries, Bucktail Life Insurance Company,
which provides credit life and accident and health insurance on behalf of the
Bank and Citizens & Northern Investment Corporation whose primary function is to
hold equity investments. The total assets and income generated by Bucktail Life
Insurance Company and Citizens & Northern Investment Corporation is
insignificant in relation to the total business of the Corporation.
The main office of the Bank is located at 90-92 Main Street, Wellsboro,
Pennsylvania. The Bank has a total of sixteen (16) banking offices; all located
in the Pennsylvania counties of Bradford, Lycoming, Sullivan and Tioga. The Bank
owns all such properties. There are no encumbrances against any of the Bank's
properties.
As of December 31, 1999, the Bank had a total of 213 full-time equivalent
employees. The Bank provides a variety of employee benefits and considers its
relationship with its employees to be good.
All phases of the Bank's business are competitive. The Bank primarily competes
in the market area composed of Tioga and Bradford counties and portions of
Lycoming and Sullivan counties. The Bank competes with approximately 15
commercial banks, including local commercial banks headquartered in our market
area as well as other commercial banks with branches in the Bank's market area.
Some of the banks that have branches in the Bank's market area are larger in
overall size than the Bank. The Bank, along with other commercial banks,
competes with respect to its lending activities as well as in attracting demand
and savings deposits with savings banks, savings and loan associations,
insurance companies, regulated small loan companies and credit unions. The Bank
also competes with insurance companies, investment counseling firms, mutual
funds and other business firms and individuals in corporate trust and investment
management services.
The Bank is generally competitive with all financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
2
CITIZENS & NORTHERN CORPORATION
And
CITIZENS & NORTHERN BANK
BOARD OF DIRECTORS DIRECTORS EMERITI
Dennis F. Beardslee Susan E. Hartley Robert J. Murphy R. James Dunham
Owner, Terrace Lanes Attorney at Law Retired, formerly Attorney President,
Bowling Center In law firm of Davis, Murphy, R. J. Dunham, Inc.
Karl W. Kroeck Niemiec & Smith Department Store
J. Robert Bower Farmer
Pharmacist Edward H. Owlett, III William K. Francis
Edward L. Learn Attorney in law firm of Retired, formerly
R. Robert DeCamp Owner of Learn Hardware & Owlett & Lewis , P.C. Chairman of the Board
President of Building Supply
Patterson Lumber Co., Inc. F. David Pennypacker John H. Macafee
Craig G. Litchfield Certified Public Accountant, Retired, formerly operator of
Adelbert E. Eldridge Chairman of the Board, Formerly in firm of Mapoval Farms, Inc.
Retired Regional Director of President and Chief Executive Pennypacker & Gooch, P.C.
Susquehanna Region of Officer
Pennsylvania Electric Co. Leonard Simpson
Lawrence F. Mase Attorney at Law
R. Bruce Haner Retired, formerly
Inventory Control Manager, President of Mase's Inc. Donald E. Treat
Williams Auto Group, Retired, formerly owner
Formerly owner of Haner's Of Treat Hardware
Auto Sales
54
ADVISORY BOARDS
ATHENS & SAYRE ELKLAND MANSFIELD TROY
Terry R. Depew Scott A. Keck Robin K. Carleton Mark C. Griffis
Stephan W. Bowen Eric L. Beard Gary Ray Butters Dennis F. Beardslee
Warren J. Croft John C. Kenyon David Kurzejewski Roy W. Cummings, Jr.
Max P. Gannon Edward L. Learn John F. Wise, Jr. J. Robert Garrison
R. Bruce Haner Gregory W. Powers
Susan E. Hartley KNOXVILLE RALSTON
George D. Howell Mary Rose Sacks Daniel P. Clark WELLSBORO
Wayne E. Lowery Gerald L. Bliss George E. Bittner Richard L. Wilkinson
John H. Macafee Grant Gehman William W. Brooks, III Donald R. Abplanalp
Laurance A. Reagan, Jr. Karl W. Kroeck Richard T. Demitras J. Robert Bower
David Rosenbloom William W. Roosa R. Robert DeCamp
TIOGA R. James Dunham
DUSHORE LAPORTE Lois C. Wood Jan E. Fisher
Helen W. Ferris Randy R. Meckes John E. Brackley Edward H. Owlett, III
Ronald A. Gutosky Kenneth F. Fry C. Frederick LaVancher F. David Pennypacker
Robert P. Henderson, Jr. Marvin L. Higley Leisa L. LaVancher
Leo F. Lambert Walter B. Neidig Donald E. Treat WYSOX
Dennis K. McCarty Leonard Simpson Debra S. Kithcart
Kerry A. Meehan TOWANDA & MONROETON Lucille P. Donovan
LIBERTY James E. Parks Robert L. Fulmer
EAST SMITHFIELD Ann L. Yuscavage Jeffery E. Aeppli Mark W. Smith
Peggy A. Brown Lyle R. Brion James A. Bowen Walter E. Warburton, Jr.
Roy L. Beardslee Gary Dinnison Adelbert E. Eldridge
Laurence R. Kingsley Lawrence F. Mase Robert J. Murphy
Liston D. Pepper Ray E. Wheeland Jeffrey A. Smith
Bennett R. Young James E. Towner
Deborah J. Weisbrod
55
OPERATIONS C & N FINANCIAL SERVICES
90-92 MAIN STREET CORPORATION
WELLSBORO, PA 16901 INSURANCE MARKETING
570-724-3411 DIVISION
90-92 MAIN STREET
Craig G. Litchfield Chairman, President and WELLSBORO, PA 16901
Chief Executive Officer 570-724-3411
Brian L. Canfield Senior Executive Vice
President and
Branch System Administrator Thomas L. Rudy, Jr Vice President
Matthew P. Prosseda Executive Vice President and
Commercial Loan Coordinator MANAGEMENT INFORMATION
SYSTEMS
Kathleen M. Osgood Corporate Secretary 90-92 MAIN STREET
Robert E. Bolt Assistant Vice President WELLSBORO, PA 16901
Jeffrey B. Osgood Assistant Vice President and 570-724-3411
Personnel Officer
Sandra G. Andrews Assistant Cashier Robert W. Anderson Executive Vice President
Sandra A. Parulas Training Officer Management Information System
James H. Shelmire Senior Systems Analyst
Rick J. Cisco Senior Systems Analyst
428 MAIN STREET
TOWANDA, PA 18848 AUDIT and COMPLIANCE
570-265-6171 90-92 MAIN STREET
WELLSBORO, PA 16901
James W. Seipler Executive Vice President and 570-724-3411
Treasurer
Klas G. Anderson Assistant Vice President Russell H. Bauman Vice President and Auditor
Joseph A. Snell Assistant Controller Shawn M. Schreck Assistant Vice President,
Compliance
Joan L. Grenell Assistant Vice President Officer and Security Officer
Harold F. Hoose, III Assistant Vice President Glenda R. Marzo Assistant Auditor
TRUST & FINANCIAL SERVICES
DIVISION
90-92 MAIN STREET BANKCARD SERVICES
WELLSBORO, PA 16901 90-92 MAIN STREET
1-800-487-8784 WELLSBORO, PA 16901
428 MAIN STREET 1-800-676-6639
TOWANDA, PA 18848
1-888-987-8784 Eileen K. Ranck Bankcard Manager
Carl M. Chambers Assistant Vice President
Thomas L. Briggs Executive Vice President and Nathan L. Davis Assistant Cashier, Bankcard
Manager
Senior Trust Officer Sales
Deborah E. Scott Executive Vice President and
Senior Trust Officer BOOKKEEPING DEPARTMENT
Nicholas Helf, Jr Vice President and Employee 90-92 MAIN STREET
Benefit Officer WELLSBORO, PA 16901
Linda L. Kriner Vice President and Trust 1-800-726-2265
Officer
Larry D. Alderson Trust Officer
Darla G. Krotzer Employee Benefit Sales Officer Karen L. Keck Bookkeeping Manager
Rhonda J. Litchfield Trust Investment Officer
Philip A. Prough Trust Officer INTERNET BANKING
Mary J. Wood Trust Officer 90-92 MAIN STREET
James D. Butters Assistant Trust Officer WELLSBORO, PA 16901
570-724-3411
MARKETING DEPARTMENT
90-92 MAIN STREET Shelly L. D'Haene Internet Banking Coordinator
WELLSBORO, PA 16901
570-724-3411
Michelle M. Karas Assistant Vice President and
Marketing Coordinator
56
BRANCH OFFICES
428 S MAIN STREET ROUTE 220
ATHENS, PA 18810 MONROETON, PA 18832
570-888-2291 570-265-2157
Terry R. Depew Vice President THOMPSON STREET
Kathy L. Griffis Assistant Cashier RALSTON, PA 17763
Virginia L. Reap Assistant Cashier 570-995-5421
111 MAIN STREET Daniel P. Clark Assistant Vice President
DUSHORE, PA 18614 William C. Holmes Assistant Cashier
570-928-8124
503 N ELMIRA STREET
Helen W. Ferris Assistant Vice President SAYRE, PA 18840
Brenda B. Whiteley Assistant Cashier 570-888-2220
MAIN STREET Stephan W. Bowen Assistant Vice President
EAST SMITHFIELD, PA 18817 Marcella J. Chaykosky Assistant Cashier
570-596-3131
41 MAIN STREET
Peggy A. Brown Assistant Vice President TIOGA, PA 16946
Sandra J. McNeal Assistant Cashier 570-835-5236
104 MAIN STREET Lois C. Wood Assistant Vice President
ELKLAND, PA 16920 Joan F. Johnson Assistant Cashier
814-258-5111
428 MAIN STREET
Scott A. Keck Vice President TOWANDA, PA 18848
Roberta C. Heck Assistant Cashier 570-265-6171
102 E MAIN STREET James E. Parks Vice President
KNOXVILLE, PA 16928 Valerie W. Kinney Assistant Vice President
814-326-4151
COURTHOUSE SQUARE
Mary Rose Sacks Assistant Vice President TROY, PA 16947
Lynette M. Burrous Assistant Cashier 570-297-2159
MAIN STREET Mark C. Griffis Vice President
LAPORTE, PA 18626 David S. Schucker Assistant Vice President
570-946-4011 Janet R. Ordway Assistant Cashier
Randy R. Meckes Vice President 90-92 MAIN STREET
Linda M. Etzel Assistant Cashier WELLSBORO, PA 16901
570-724-3411
MAIN STREET
LIBERTY, PA 16930 Richard L. Wilkinson Vice President
570-324-2331 Kim L. Miller Vice President
Jan L. Southworth Assistant Vice President
Ann L. Yuscavage Vice President Leonard Mitchell, Iii Assistant Cashier
Joan M. Blackwell Assistant Cashier Donna J. Emmick Assistant Cashier
1085 S MAIN STREET ROUTE 6
MANSFIELD, PA 16933 WYSOX, PA 18854
570-662-1111 570-265-5016
Robin K. Carleton Assistant Vice President Debra S. Kithcart Assistant Vice President
Jeffery E. Aeppli Assistant Vice President
57
CITIZENS & NORTHERN CORPORATION OFFICERS
Craig G. Litchfield James W. Seipler Kathleen M. Osgood
Chairman of the Board, Treasurer Corporate Secretary
President and Chief
Executive Officer
CITIZENS & CORPORATION
Athens/Dushore/East Smithfield/Elkland/Knoxville
Laporte/Liberty/Mansfield/Monroeton/Ralston/Sayre/Tioga
Towanda/Troy/Wellsboro/Wysox/Member FDIC
58
9