FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ ][x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBERDecember 31, 19992002 Commission file number: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
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(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 ValuePAR 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 Marketaggregate market value of the registrant's common stock held by
non-affiliates at March 1, 2000: $131,432,967. (a date within 60 daysFebruary 27, 2003 was $167,270,245.
The number of the date hereof)
- - ------------- --------------------------------------------------------
shares of common stock outstanding at February 27, 2003 was
5,335,574.
DOCUMENTS INCORPORATED BY REFERENCE
Excerpts fromPortions of the Registrants Annual report to shareholders are incorporated
herein by reference in response to Part II, hereof. The Registrant's definitive
Proxyregistrant's proxy statement to be used in connection withfor the 1999 Annual Meetingannual meeting of its
shareholders to be held April 18, 2000 is15, 2003 are incorporated herein by reference in
partial response tointo 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 PagesIII of this report.
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
Citizens & Northern Corporation ("Corporation") is a one-bank holding company
whose principal subsidiary is Citizens & Northern Bank ("Bank"). The
information appearingCorporation's principal office is located in Wellsboro, Pennsylvania. The
Corporation's other wholly-owned subsidiaries are Citizens & Northern Investment
Corporation and Bucktail Life Insurance Company ("Bucktail"). Citizens &
Northern Investment Corporation was formed in 1999 to engage in investment
activities. Bucktail reinsures credit and mortgage life and accident and health
insurance on behalf of the Bank. The operations of Citizens & Northern
Investment Corporation and Bucktail are insignificant in relation to the total
business of the Corporation.
The Bank is a Pennsylvania banking institution that was formed by the
consolidation of Northern National Bank of Wellsboro and Citizens National Bank
of Towanda on October 1, 1971. Subsequent mergers included: First National Bank
of Ralston in May 1972; Sullivan County National Bank in October 1977; Farmers
National Bank of Athens in January 1984; and First National Bank of East
Smithfield in May 1990. 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 provides an extensive range of banking services, including deposit and
loan products for personal and commercial customers. The Bank also maintains a
trust division that provides a wide range of financial services, such as 401(k)
Plans, retirement planning, estate planning, estate settlements and asset
management. In January 2000, the Bank formed a subsidiary, C&N Financial
Services Corporation ("C&NFSC"). C&NFSC is a licensed insurance agency that
provides insurance products to individuals and businesses. In 2001, C&NFSC added
a broker-dealer division, which offers mutual funds, annuities, educational
savings accounts and other investment products through registered agents.
C&NFSC's operations are not significant in relation to the total operations of
the Bank.
All phases of the Bank's business are competitive. The Bank primarily competes
in Tioga, Bradford and Sullivan counties and portions of Lycoming County. The
Bank competes with local commercial banks headquartered in our market area as
well as other commercial banks with branches in our market area. Some of the
banks that have branches in the Annual Report underBank's market area are larger in overall size
than the caption
"DescriptionBank. With respect to lending activities and attracting deposits, the
Bank also competes with savings banks, savings and loan associations, insurance
companies, regulated small loan companies and credit unions. Also, the Bank
competes with mutual funds for deposits. The Bank competes with insurance
companies, investment counseling firms, mutual funds and other business firms
and individuals for trust, investment management, broker dealer and insurance
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. The Bank serves a diverse customer base, and is not economically
dependent on any small group of Business"customers or on page 49 is herein incorporatedany individual industry.
Although there have been no mergers or acquisitions within the last 5 years, the
Bank has engaged in several ventures designed to improve customer service and
generate financial growth. These ventures included the following major
initiatives:
- - expanded trust and financial services capabilities, including investment
management, employee benefits and insurance services;
- - installed 18 automated teller machines, beginning in 1997;
- - created the "customer repurchase agreement" cash management service for
commercial customers in 1998;
- - established internet banking services in 1999; and
- - constructed and opened new branches in Mansfield, PA (1998) and Muncy, PA
(2000).
At December 31, 2002, the Bank had total assets of $996,644,000, total deposits
of $641,164,000 and net loans outstanding of $445,356,000. At December 31, 2002,
the Bank had a total of 265 full-time equivalent employees.
Most of the activities of the Corporation and its subsidiaries are regulated by
reference.
Regulation and Supervisionfederal or state agencies. The Corporationprimary regulatory relationships are described as
follows:
2
- - 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 charteredstate-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- - C&NFSC is a credit lifePennsylvania corporation. The Pennsylvania Department of
Insurance regulates C&NFSC's insurance activities. Through October 31,
2002, the broker dealer division offered brokerage products as an office of
supervisory jurisdiction of Hackett Associates, Inc. Effective November 1,
2002, brokerage products are offered through a third party networking
agreement between the Bank and accident and
health insurance provider for credit facilities issued by Citizens & Northern
Bank. The Insurance CompanyUVEST Financial Services, Inc.
- - Bucktail is incorporated in the state of Arizona and is supervised by the
Arizona Department of Insurance.
ITEM 2. PROPERTIES
Information relating toThe Bank owns each of its properties, except for the location of banking officesfacility located at 68 Main
Street, Wellsboro, which is located on
page 50 of the Annual Report.
There are no encumbrances against anyleased. All of the properties are in good condition.
In 2001, the Bank entered into a lease of the property at 68 Main Street,
Wellsboro. This facility is used for C&NFSC's operations and for training. None
of the owned by the
Bank.properties are subject to encumbrance.
A listing of properties is as follows:
Main administrative office:
90-92 Main Street
Wellsboro, PA 16901
Branch offices:
428 S. Main Street Main Street 41 Main Street
Athens, PA 18810 Liberty, PA 16930 Tioga, PA 16946
111 Main Street 1085 S. Main Street 428 Main Street
Dushore, PA 18614 Mansfield, PA 16933 Towanda, PA 18848
Main Street Route 220 Courthouse Square
East Smithfield, PA 18817 Monroeton, PA 18832 Troy, PA 16947
104 Main Street 3461 Route 405 Highway 90-92 Main Street
Elkland, PA 16920 Muncy, PA 17756 Wellsboro, PA 16901
102 E. Main Street Thompson Street Route 6
Knoxville, PA 16928 Ralston, PA 17763 Wysox, PA 18854
Main Street 503 N. Elmira Street
Laporte, PA 18626 Sayre, PA 18840
Other offices:
Bankcard Services Facilities Management
RR7 Box 503 One Brewery Lane
Wellsboro, PA 16901 Wellsboro, PA 16901
C&N Financial Services Corp. Audit and Compliance
64 Main Street Water Street
Wellsboro, PA 16901 Wellsboro, PA 16901
3
ITEM 3. LEGAL PROCEEDINGS
NoneThe Corporation and the Bank are involved in various legal proceedings
incidental to their business. Management believes the aggregate liability, if
any, resulting from such pending and threatened legal proceedings will not have
a material, adverse effect on the Corporation's financial condition or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted duringDuring the fourth quarter of the fiscal year
covered by this report2002, no matters were submitted to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
3
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
QUARTERLY SHARE DATA
Trades of the Corporation's stock are executed through various brokers who
maintain a market in the Corporation's stock. Information regarding sales prices
of the Corporation's stock is available through the OTC Bulletin Board
(www.otcbb.com). The Corporation's stock is not listed or traded on Nasdaq or a
national securities exchange. As of December 31, 2002, there were 2,406
shareholders of record of the Corporation's common stock.
The following table sets forth the approximate high and low sales prices of the
common stock during 2002 and 2001:
2002 2001
Dividend Dividend
Declared Declared
per per
High Low Quarter High Low Quarter
- ----------------------------------------------------------------------------------------------
First quarter $ 28.50 $ 24.50 $ 0.28 $ 22.00 $ 20.00 $ 0.26
Second quarter 30.00 27.70 0.28 21.75 20.41 0.26
Third quarter 32.00 29.30 0.30 23.45 21.00 0.26
Fourth quarter 33.00 30.15 0.30 26.50 23.10 0.28
plus 1% plus 1%
stock dividend stock dividend
Known "market makers" who handle Citizens & Northern Corporation stock
transactions are:
BAIRD PATRICK & CO. MONROE SECURITIES, INC. SANDLER O'NEILL & PARTNERS, LP
20 Exchange Place 47 State Street 919 Third Avenue
New York, NY 10005 Rochester, NY 14614 New York, NY 10022
(212) 493-6619 (800) 766-5560 (800) 635-6851
F. J. MORRISSEY & CO.
BOENNING & SCATTERGOOD, INC. RBC DAIN RAUSCHER RYAN, BECK & COMPANY
4 Tower Bridge - Suite 300 3 Times Square, 24th Floor 3 Parkway
200 Barr Harbor Drive New York, NY 10036 Philadelphia, PA 19102
West Conshohocken, PA 19428 (866) 835-1422 (800) 342-2325
(800) 842-8928
FERRIS, BAKER WATTS, INC.
6 Bird Cage Walk
Holidaysburg, PA 16648
(800) 343-5149
4
INVESTOR INFORMATION
ANNUAL MEETING OF STOCK TRANSFER AGENT INDEPENDENT AUDITORS
SHAREHOLDERS
The Annual Meeting of Shareholders AMERICAN STOCK TRANSFER &
will be held at the Arcadia Theatre in TRUST CO. PARENTE RANDOLPH, PC
Wellsboro, PA, at 2:00 p.m. on Tuesday, 59 Maiden Lane, Plaza Level 400 Market Street
April 15, 2003. New York, NY 10038 Williamsport, PA 17701
(800) 278-4353
GENERAL SHAREHOLDER INQUIRIES
SHOULD BE SENT TO:
CITIZENS & NORTHERN
CORPORATION
90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
COMMON STOCK AND RELATED SHAREHOLDERS MATTERSPER SHARE DATA
2002 2001 2000 1999 1998
Net income per share - basic $ 2.80 $ 2.25 $ 1.58 $ 2.14 $ 2.06
Net income per share - diluted 2.79 2.25 1.58 2.14 2.06
Cash dividends declared per share 1.16 1.04 0.95 0.87 0.78
Cash dividends declared per share - historical basis 1.16 1.06 0.98 0.90 0.82
Stock dividend 1% 1% 1% 1% 1%
Stockholders' equity per share (a) 21.70 18.76 16.58 14.29 16.89
Stockholders' equity per share, excluding accumulated
other comprehensive income (loss) (a) 19.42 17.77 16.57 15.94 14.67
Weighted average shares outstanding - basic 5,339,449 5,348,963 5,363,232 5,362,861 5,367,497
Weighted average shares outstanding - diluted 5,354,041 5,350,452 5,364,386 5,368,325 5,377,392
Number of shares outstanding at year-end 5,285,606 5,234,800 5,207,244 5,153,729 5,102,028
Number of shares authorized 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000
(a) For purposes of this computation, the number of outstanding shares has been
increased for the effects of 1% stock dividends issued in January following each
year-end.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information appearingconcerning the Stock Incentive Plan
and Independent Directors Stock Incentive Plan, both of which have been approved
by the Corporation's shareholders. The shareholders have approved all of the
Corporation's equity compensation plans. The figures shown are as of December
31, 2002, and do not include awards made in January 2003. More details related
to the Annual Report underCorporation's equity compensation plans are provided in Notes 1 and 12 to
the caption
"Quarterly Share Data" on page 45 and the "Summary of Quarterly Financial Data"
on page 47 is herein incorporated by reference.consolidated financial statements.
NUMBER OF SECURITIES
NUMBER OF SECURITIES REMAINING AVAILABLE
TO BE ISSUED UPON WEIGHTED-AVERAGE FOR FUTURE ISSUANCE
EXERCISE OF EXERCISE PRICE OF UNDER EQUITY
OUTSTANDING OPTIONS OUTSTANDING OPTIONS COMPENSATION PLANS
- ---------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders 120,489 $27.17 96,829
5
ITEM 6. SELECTED FINANCIAL DATA The "Five-Year Summary of Operations"(IN THOUSANDS)
INCOME STATEMENT 2002 2001 2000 1999 1998
Interest income $ 57,285 $54,661 $51,643 $48,036 $45,183
Interest expense 26,315 28,356 30,145 24,571 22,693
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Interest margin 30,970 26,305 21,498 23,465 22,490
Provision for loan losses 940 600 676 760 763
- ---------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 30,030 25,705 20,822 22,705 21,727
Other income 6,624 6,120 5,002 6,823 6,359
Securities gains 2,888 1,920 1,377 3,043 3,001
Other expenses 20,849 18,671 16,906 17,732 16,483
- ---------------------------------------------------------------------------------------------------------------
Income before income tax provision 18,693 15,074 10,295 14,839 14,604
Income tax provision 3,734 3,022 1,819 3,354 3,527
- ---------------------------------------------------------------------------------------------------------------
Net income $ 14,959 $12,052 $ 8,476 $11,485 $11,077
===============================================================================================================
BALANCE SHEET AT YEAR END
Total securities (1) $513,597 $437,398 $343,596 $356,287 $327,309
Gross loans, excluding unearned discount 451,145 379,228 328,305 310,892 291,003
Total assets 1,018,768 866,999 719,335 705,898 646,298
Total deposits 640,304 576,274 528,967 500,474 476,518
Stockholders' equity, excluding accumulated
other comprehensive income 103,691 94,903 88,887 85,507 78,645
Total stockholders' equity 115,837 100,187 88,969 76,623 90,567
AVERAGE BALANCE SHEET
Total securities, at amortized cost (1) 470,764 412,654 371,360 349,133 300,692
Gross loans, excluding unearned discount 410,670 346,353 318,382 301,584 285,275
Earning assets 881,434 759,007 689,743 650,717 585,966
Total assets 943,001 805,229 704,221 680,864 626,102
Total assets, excluding unrealized gains/
Losses 930,539 798,590 717,052 672,999 606,163
Total deposits 613,392 544,579 503,848 483,858 448,601
Stockholders' equity, excluding accumulated
other comprehensive income 99,361 91,703 87,258 81,767 74,810
Stockholders' equity 107,595 96,021 78,792 87,143 87,997
FINANCIAL RATIOS
Return on stockholders' equity, excluding
accumulated other comprehensive income (2) 15.06% 13.14% 9.71% 14.05% 14.81%
Return on stockholders' equity (2) 13.90% 12.55% 10.76% 13.18% 12.59%
Return on assets (2) 1.59% 1.50% 1.20% 1.69% 1.77%
Stockholders' equity to assets, excluding
accumulated other comprehensive income (2) 10.68% 11.48% 12.17% 12.15% 12.34%
Stockholders' equity to assets (2) 11.41% 11.92% 11.19% 12.80% 14.05%
Stockholders' equity to loans (2) 26.20% 27.72% 24.75% 28.90% 30.85%
Net income to:
Total interest income 26.11% 22.05% 16.41% 23.91% 24.52%
Interest margin 48.30% 45.82% 39.43% 48.95% 49.25%
Dividends as a % of net income 41.17% 46.08% 60.19% 40.39% 37.81%
(1) Includes available-for-sale and held-to-maturity securities, and
interest-bearing cash and due from banks
(2) Financial ratios calculated based on page 46 of the Annual Report is
herein incorporated by reference.average balance sheet data
6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information appearingCertain statements in this section and elsewhere in this Annual Report on Form
10-K are forward-looking statements. Citizens & Northern Corporation and its
wholly-owned subsidiaries (collectively, the Corporation) intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Company's annual Report underPrivate Securities Reform Act of
1995. Forward-looking statements, which are not historical facts, are based on
certain assumptions and describe future plans, business objectives and
expectations, and are generally identifiable by the caption "Management'suse of words such as,
"believe", "expect", "intend", "anticipate", "estimate", "project", and similar
expressions. These forward-looking statements are subject to risks and
uncertainties that are difficult to predict, may be beyond management's control
and could cause results to differ materially from those currently anticipated.
Factors which could have a material, adverse impact on the operations and future
prospects of the Corporation include, but are not limited to, the following:
- - changes in monetary and fiscal policies of the Federal Reserve Board and
the U.S. Government, particularly related to changes in interest rates
- - changes in general economic conditions
- - legislative or regulatory changes
- - downturn in demand for loan, deposit and other financial services in the
Corporation's market area
- - increased competition from other banks and non-bank providers of financial
services
- - technological changes and increased technology-related costs
- - changes in accounting principles, or the application of generally accepted
accounting principles (see "Critical Accounting Policies," later in
Management's Discussion and Analysis).
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
EARNINGS OVERVIEW
The Corporation has enjoyed 2 consecutive years with record-high levels of net
income in 2002 and 2001. In 2002, net income was $14,959,000, or $2.80 per share
- - basic and $2.79 per share - diluted. This represents a 24.1% increase over
2001 net income of $12,052,000 ($2.25 per share - basic and diluted). Net income
for 2001 was 42.2% higher than in 2000. In 2000, net income amounted to
$8,476,000 ($1.58 per share - basic and diluted).
The most significant income statement changes between 2002 and 2001, and between
2001 and 2000, are as follows:
- The interest margin (excess of interest income over interest expense)
increased significantly in both 2002 and 2001. The interest margin
increased to $30,970,000 in 2002 from $26,305,000 in 2001, an increase
of $4,665,000 or 17.7%. Further, the interest margin in 2001 was
$4,807,000, or 22.4%, higher in 2001 than in 2000. As discussed in
more detail in the "Net Interest Margin" section of Management's
Discussion and Analysis, growth in the net interest margin over the
last 2 years has resulted from increases in volume of earning assets,
and from falling interest rates paid on deposits and borrowed funds.
For a variety of reasons, including market conditions, the opening of
the Muncy, PA, branch in October 2000, and the hiring of additional
commercial lending staff, the Corporation has achieved significant
growth in loans and deposits in 2002 and 2001. Also, management has
identified opportunities to borrow funds and invest the proceeds in
securities at positive spreads. Changes in interest rates have also
had a dramatic impact on operating results over the last 3 years. As
widely publicized, the Federal Reserve Board lowered its targeted
federal funds rate 11 times during 2001, from 6.5% to 1.75%. The
federal funds target rate remained at 1.75% throughout most of 2002,
until the Fed lowered it to its current level of 1.25% in November
2002. The ripple effects of the Fed's actions throughout the national
and local economy have substantially lowered the Corporation's cost of
funds. In contrast, in 2000, the Fed increased its target rate several
times, which resulted in increases in the Corporation's cost of funds.
- Other (noninterest) income (excluding securities gains) was $6,624,000
in 2002, an increase of $504,000 (8.2%) over 2001. As described in
more detail later in Management's Discussion and Analysis, the major
sources of increased noninterest revenue in 2002 were from Service
Charges on Deposit Accounts and Trust and Financial ConditionManagement
services. Noninterest income increased $1,118,000, or 22.4%, in 2001
over 2000. The major source of this revenue growth in 2001 was from
recognition of an increase in cash surrender value of insurance of
$905,000. In late December 2000, the Corporation purchased bank-owned
life insurance (BOLI) at a cost of $15,000,000. The Corporation
purchased BOLI to help fund future anticipated increases in employee
benefits. Prior to December 2000, the Corporation had no BOLI
holdings.
7
- Net realized securities gains amounted to $2,888,000 in 2002,
$1,920,000 in 2001 and $1,377,000 in 2000. Most of the gains realized
throughout the 3-year period ended December 31, 2002, were from sales
of bank stocks. The amounts of such gains realized in any accounting
period depend on management's evaluation of the specific stocks owned
by the Corporation.
- Other (noninterest) operating expenses increased $2,178,000, or 11.7%,
in 2002 over 2001, and 10.4% in 2001 over 2000. Higher operating
expenses reflect increases in payroll costs, professional fees,
depreciation and maintenance expense associated with computer hardware
and software. These types of costs have increased as a result of the
need to add personnel and supplement existing systems to keep up with
expansions of services and growth in lending activity over the last
few years. Also, in 2001, the Corporation's operating expenses
increased due to the opening of the Muncy branch. Noninterest expenses
are discussed in more detail later in Management's Discussion and
Analysis.
- The income tax provision increased to $3,734,000 in 2002 from
$3,022,000 in 2001 and $1,819,000 in 2000, primarily because pre-tax
income was higher. The income tax provision, as a percentage of
pre-tax income, was 19.98% in 2002, 20.05% in 2001 and 17.67% in 2000.
More details related to the Corporation's income taxes are provided in
Note 13 to the Consolidated Financial Statements (included in Item 8
of this Form 10-K).
OUTLOOK FOR 2003
Looking into the future, management anticipates another year of good financial
performance in 2003. However, management believes it will be difficult to
continue the pace of earnings growth achieved in 2001 and 2002. With interest
rates at historic lows, there is not much farther for them to fall. Most
economists are predicting a rising interest rate environment as the U. S.
economy recovers from the brief recession and when the uncertainty of war with
Iraq is resolved. The Corporation's interest margin will be affected as higher
yielding loans mature or are refinanced and as higher yielding investments
mature or are called. The Corporation began seeing some reduction in the margin
in the last quarter of 2002. If interest rates do begin to rise, the Corporation
will experience some additional stress on the interest margin because its
interest-bearing liabilities (deposits and borrowings) reprice faster than its
earning assets (primarily, loans and investment securities). Management
continues to look for opportunities to increase noninterest revenues, in an
effort to reduce the Corporation's reliance upon interest rates. The
Corporation's interest rate risk is discussed in more detail in Section 7A of
this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect many of the reported amounts and disclosures. Actual results could differ
from these estimates.
A material estimate that is particularly susceptible to significant change is
the determination of Operations"the allowance for loan losses. Management believes that the
allowance for loan losses is adequate and reasonable. The Corporation's
methodology for determining the allowance for loan losses is described in a
separate section later in Management's Discussion and Analysis. Given the very
subjective nature of identifying and valuing loan losses, it is likely that
well-informed individuals could make materially different assumptions, and
could, therefore calculate a materially different allowance value. While
management uses available information to recognize losses on pages 29loans, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses. Such agencies
may require the Corporation to recognize adjustments to the allowance based on
their judgments of information available to them at the time of their
examination. Further, in 2003, the American Institute of Certified Public
Accountants is expected to issue an exposure draft of a statement of position
that would establish detailed implementation guidance for calculating the
allowance for loan losses. This statement of position is expected to call for
implementation of its provisions beginning in 2004. Implementation of that
detailed implementation guidance, if it is approved, could result in an
adjustment to the Corporation's allowance.
8
Another material estimate is the calculation of fair values of the Corporation's
debt securities. The Corporation receives estimated fair values of debt
securities from an independent valuation service, or from brokers. In developing
these fair values, the valuation service and the brokers use estimates of cash
flows, based on historical performance of similar instruments in similar
interest rate environments. Based on experience, management is aware that
estimated fair values of debt securities tend to vary among brokers and other
valuation services. Accordingly, when selling debt securities, management
typically obtains price quotes from more than one source. As described in Notes
1 and 11 of the consolidated financial statements, the large majority of the
Corporation's securities are classified as available-for-sale. Accordingly,
these securities are carried at fair value on the consolidated balance sheet,
with unrealized gains and losses excluded from earnings and reported separately
through 48,accumulated other comprehensive income (included in stockholders'
equity).
NET INTEREST MARGIN
2003/2002/2001
The Corporation's primary source of operating income is herein incorporatedrepresented by reference.the net
interest margin. The net interest margin is equal to the difference between the
amounts of interest income and interest expense. Tables I, II and III include
information regarding the Corporation's net interest margin in 2002, 2001 and
2000. In each of these tables, the amounts of interest income earned on
tax-exempt securities and loans have been adjusted to a fully taxable-equivalent
basis. Accordingly, the net interest margin amounts presented in these tables
exceed the amounts presented in the consolidated financial statements. Also,
dividends from the Corporation's investment in the Federal Home Loan Bank of
Pittsburgh (FHLB - Pittsburgh), which were included in interest and dividend
income in prior years, have been excluded from the amounts included in the
Tables for 2002, 2001 and 2000 in this year's Annual Report on Form 10-K.
Dividends from FHLB - Pittsburgh stock are now included in Other (Noninterest)
Income in the consolidated statement of income. The discussion that follows is
based on amounts in the Tables.
The net interest margin (also referred to as net interest income), on a
taxable-equivalent basis, was $33,963,000 in 2002, an increase of $5,413,000 or
19.0% over 2001. In turn, fully taxable-equivalent net interest income was
$5,038,000, or 21.4% higher in 2001 than in 2000. As described in the "Earnings
Overview" section of Management's Discussion and Analysis, these increases in
net interest margin were caused mainly by increases in volume of earning assets,
and from declining interest rates on the Corporation's deposits and borrowed
funds. Table III shows the effect of volume and rate changes on the
Corporation's major interest earning assets and interest-bearing liabilities.
Table III shows that changes in volume of earning assets and interest-bearing
liabilities resulted in an increase in net interest income of $4,264,000 in
2002, while changes in rates increased net interest income $1,149,000. In 2001,
when (as discussed in the "Earnings Overview" section) short-term interest rates
fell dramatically, rate changes had the effect of increasing net interest income
$4,472,000, and volume changes increased net interest income $566,000. Table II,
which shows average daily balances and rates, shows that the "Interest Rate
Spread" (excess of average rate of return on interest-earning assets over
average cost of funds on interest-bearing liabilities) widened substantially in
2001 over 2000, and widened a bit more in 2002 over 2001. The Interest Rate
Spread was 3.38% in 2002, 3.17% in 2001 and 2.53% in 2000.
INTEREST INCOME AND EARNING ASSETS
The Corporation's major categories of interest-bearing assets are
available-for-sale investment securities and loans. Total interest income
increased $3,372,000, or 5.9%, in 2002 over 2001. Interest and dividends from
available-for-sale securities increased $1,758,000, or 6.5%, and interest and
fees from loans increased $1,864,000, or 6.3%. In Table III, the growth in
interest income is broken down between the impact of volume changes and the
impact of interest rate changes. Higher average balances of available-for-sale
securities and loans in 2002 than in 2001 resulted in increases in interest
income in 2001, despite lower average rates of return.
Similarly, total interest income increased $3,249,000, or 6.1%, in 2001 over
2000, with the effects of increased average volume of earning assets more than
offsetting the impact of lower average rates. Income from available-for-sale
securities increased $1,544,000, or 6.1% in 2001 over 2000. Interest and fees
from loans increased $1,644,000, or 5.9%, in 2001 over 2000.
As shown in Table II, the average balance of the available-for-sale investment
portfolio (at amortized cost) was $465,650,000 in 2002, $395,908,000 in 2001 and
$359,265,000 in 2000. The major components of the portfolio are mortgage-backed
securities, obligations of state and political subdivisions (municipal bonds),
and U. S. Government Agency securities. Also, the Corporation holds other
corporate debt securities and equity securities (primarily stocks of banks and
bank holding companies). In total, available-for-sale securities grew because
management was able to identify opportunities to borrow funds and invest the
proceeds in securities at a positive spread. These opportunities were available
because of the "steep yield curve" (longer-term interest rates much higher than
shorter-term rates) that existed throughout most of 2002 and 2001. The average
rate of return on available-for-sale securities was 6.16% for 2002, considerably
lower than the 2001 (6.80%) and 2000 (6.92%). The average return on
available-for-sale securities was 5.87% in the 4th quarter 2002.
9
Table II also shows that the composition of the available-for-sale securities
portfolio has changed significantly. The average balance of U.S. Government
agency securities fell to 16% of the average balance of the total portfolio in
2002 from 29% in 2001 and 37% in 2000. In contrast, the average balance of
mortgage-backed securities increased to 45% of the total portfolio in 2002 from
38% in 2001 and 28% in 2000. In 2002 and in the latter part of 2001, as a result
of declining interest rates, substantial amounts of U.S. Government agency
securities were called. The Corporation reinvested much of the proceeds in
mortgage-backed securities. Also, much of the leveraged security purchases
described above consisted of mortgage-backed securities. The portfolio's
increased weighting in mortgage-backed securities is designed to provide
increased cash flow, in the form of monthly principal and interest payments.
This increased level of cash inflows will be available to be reinvested at
higher rates when interest rates rise.
Obligations of state and political subdivisions (municipal bonds) also were a
larger portion of the portfolio in 2002 than in 2001 and 2000. The average
balance of municipal bonds grew to $113,540,000, or 24% of the portfolio, in
2002 from 20% of the portfolio in 2001 and 23% of the portfolio in 2000. On a
taxable equivalent basis, municipal bonds are the highest yielding category of
available-for-sale security. The Corporation determines the levels of its
municipal bond holdings based on income tax planning and other considerations.
Other securities consist of corporate obligations, mainly "Trust Preferred
Securities" issued by financial institutions. Trust Preferred Securities are
long-term obligations (usually 20-40 year maturities, often callable at the
issuer's option after 5-10 years) which bear interest at fixed or variable
rates. The average balance of other securities increased to $43,826,000 in 2002
from $29,577,000 in 2001 and $22,572,000, primarily as a result of purchases of
Trust Preferred Securities.
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 small rural communities. 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
made up approximately 80% of the loan portfolio during 2002, 2001 and 2000. In
2002 and 2001, there has been significant growth in lending activities. Average
loans outstanding increased $64,317,000, or 18.6%, in 2002, and $27,971,000, or
8.8%, in 2001. Much of the growth in the loan portfolio in 2002 and 2001 has
been in real estate secured loans, including commercial as well as residential
real estate loans. Lower market interest rates, which have spurred significant
levels of refinancing, and have resulted in many individuals' and businesses'
willingness to take on more debt, have contributed to the Corporation's loan
growth. Also, the Corporation's loan growth is attributable to the opening of
the Muncy office, along with the hiring of several additional lending personnel
in 2002 and 2001. The balance of the loan portfolio includes consumer
installment loans and commercial loans. The Corporation also has a credit card
operation, which is operated for the Corporation's customers and for other
banks.
The average return on the total loan portfolio for 2002 was 7.67%, down from
8.56% in 2001 and 8.79% in 2000. The lower return in 2002 was impacted by
significant levels of mortgage refinancings, and by lower returns on commercial
loans with variable rates. The average return on loans was 7.42% in the 4th
quarter 2002.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell to $26,315,000 in 2002 from $28,356,000 in 2001 and
$30,145,000 in 2000. As reflected in Table III, lower average interest rates had
the effect of lowering expense $7,184,000 in 2002 and $5,994,000 in 2001. The
impact of lower rates more than offset the effects on interest expense of higher
average balances of interest-bearing liabilities. As shown in Table II. average
balances of interest-bearing liabilities increased 18.1%, to $760,738,000 in
2002, and 13.8%, to $643,980,000 in 2001.
As reflected in Table III, lower rates caused interest expense from money market
accounts to fall $1,392,000 in 2002, and $2,518,000 in 2001. Money market
accounts are repriced weekly, and thus are highly rate sensitive. As shown in
Table II, the average cost of money market funds was 2.31% in 2002, 3.49% in
2001 and 5.39% in 2000.
Table III also shows that interest expense from savings accounts declined in
2002 and 2001. Interest expense from savings accounts fell $508,000 in 2002 and
$132,000 in 2001. In 2001, the Corporation's savings rate fell 2 times, from
2.5% to 2%, and then to its current level of 1%. As a result, the average
interest rate incurred on savings accounts fell to 1.01% in 2002 from 2.16% in
2001 and 2.49% in 2000.
10
Interest expense from CDs decreased $1,532,000 in 2002 and increased $1,109,000
in 2001. Because CDs have terms that may range from 3 months to 5 years, they do
not reprice as quickly as money market accounts or IRAs. The average rate
incurred on CDs was 3.97% in 2002, 5.48% in 2001 and 5.64% in 2000.
In contrast to the other major types of deposits, interest expense from
Individual Retirement Accounts (IRAs) increased $455,000 in 2002. As shown in
Table II, in 2002, the average balance of IRAs increased 14.3%, to $90,856,000.
Throughout 2002, the Corporation offered the highest IRA rate in its
marketplace, which was instrumental in this growth. For several years, the
Corporation's IRA product was adjustable rate, repriced quarterly based on an
index, with a floor of 5%. Effective September 1, 2002, the Corporation made
changes to its IRA products, including: (1) for new IRAs, reduced the floor to
4%, and removed the tie to an external index, on the quarterly repricing IRA
product, and (2) began to offer the Index Powered CD as an additional IRA
product. (Index Powered CDs are described in detail in Note 10 to the
consolidated financial statements.) In 2001, interest expense from IRAs fell
$756,000, as falling interest rates gradually caused the Corporation's IRA rate
to fall to the floor of 5%. The average rate incurred on IRAs was 4.98% in 2002,
5.12% in 2001 and 6.32% in 2000.
As you can calculate from Table II, average total deposits (interest-bearing and
noninterest-bearing) increased $68,813,000, or 12.6%, in 2002. In 2001, average
total deposits increased $40,731,000, or 8.1%. In addition to IRAs, as described
above, the other major types of deposits that increased in 2002 and 2001 were
CDs, money market accounts and demand (checking) accounts. Management believes
that deposit growth has resulted, in part, from declines in the U.S stock
market, which has caused some investors to move funds to less volatile
investments. Also, deposit growth has been enhanced by the expansion of the
branch system in recent years, with relatively new offices opened in Mansfield
(1998) and Muncy (2000).
Interest expense on borrowed funds is presented in Table I in 2 categories -
"Overnight borrowings" and "Other borrowed funds." Overnight borrowings include
federal funds purchased from other banks and overnight repurchase agreements
with FHLB - Pittsburgh. Other borrowed funds include overnight repurchase
agreements with customers (the Corporation's "RepoSweep" accounts), borrowings
from FHLB - Pittsburgh and other repurchase agreements.
Interest expense on average other borrowed funds increased $1,278,000 in 2002
and $1,125,000 in 2001. Average other borrowed funds balances increased to
$211,092,000 in 2002 from $151,615,000 in 2001 and $108,581,000 in 2000. As
discussed in the "Interest Income - Earning Assets" section above, the
Corporation borrowed funds in 2002 and 2001 to fund purchases of
available-for-sale securities. Because of a favorable interest rate environment,
the Corporation extended the terms of most of its borrowings from very short
term (as of the end of 2000) to a "ladder" of staggered maturities extending out
(primarily) over 5 years. Note 9 to the consolidated financial statements
provides more details regarding the composition of borrowed funds as of December
31, 2002 and 2001. Average interest rates on other borrowed funds amounted to
4.29% in 2002, 5.13% in 2001 and 6.13% in 2000. Overall, Table III shows that
lower rates had the effect of reducing interest expense associated with other
borrowed funds in 2002 by $1,421,000, while higher average borrowing balances
increased interest expense $2,699,000. In 2001, lower average rates decreased
interest expense $1,208,000, while the increase in average borrowings increased
interest expense by $2,333,000.
11
TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE
YEARS ENDED DECEMBER 31, INCREASE(DECREASE)
(IN THOUSANDS) 2002 2001 2000 02/01 01/00
INTEREST INCOME
Available-for-sale securities:
U.S. Treasury securities $ 75 $ 151 $ 154 $ (76) $ (3)
Securities of other U.S. Government agencies and corporations 4,728 7,718 9,417 (2,990) (1,699)
Mortgage-backed securities 11,097 9,487 6,874 1,610 2,613
Obligations of states and political subdivisions 8,641 6,216 6,342 2,425 (126)
Equity securities 1,148 1,090 851 58 239
Other securities 2,975 2,244 1,724 731 520
- ----------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 28,664 26,906 25,362 1,758 1,544
- ----------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 27 40 37 (13) 3
Securities of other U.S. Government agencies and corporations 20 43 68 (23) (25)
Mortgage-backed securities 9 16 21 (7) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 56 99 126 (43) (27)
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 17 82 114 (65) (32)
Federal funds sold 42 184 64 (142) 120
Loans:
Real estate loans 25,454 23,431 21,895 2,023 1,536
Consumer 2,974 3,055 3,056 (81) (1)
Agricultural 199 190 191 9 (1)
Commercial/industrial 1,934 1,831 1,847 103 (16)
Other 69 68 71 1 (3)
Political subdivisions 858 1,043 909 (185) 134
Leases 11 17 22 (6) (5)
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 31,499 29,635 27,991 1,864 1,644
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 60,278 56,906 53,657 3,372
3,249
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 425 651 1,036 (226) (385)
Money market 3,970 5,362 7,880 (1,392) (2,518)
Savings 504 1,012 1,144 (508) (132)
Certificates of deposit 7,752 9,284 8,175 (1,532) 1,109
Individual Retirement Accounts 4,528 4,073 4,829 455 (756)
Other time deposits 36 35 44 1 (9)
Overnight borrowings 44 161 384 (117) (223)
Other borrowed funds 9,056 7,778 6,653 1,278 1,125
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 26,315 28,356 30,145 (2,041) (1,789)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $33,963 $28,550 $23,512 $ 5,413 $ 5,038
==================================================================================================================================
(1) Interest income from tax-exempt securities and loans has been adjusted to a
fully taxable-equivalent basis, using the Corporation's marginal federal income
tax rate of 34%.
(2) Fees on loans are included with interest on loans and amounted to $1,286,000
in 2002, $1,054,000 in 2001 and $761,000 in 2000.
12
TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
2002 2001 2000
(DOLLARS IN THOUSANDS) RATE OF RATE OF RATE OF
RETURN/ RETURN/ RETURN/
AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF
BALANCE FUNDS BALANCE FUNDS BALANCE FUNDS
% % %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
U.S. Treasury securities $ 1,241 6.04 $ 2,506 6.03 $ 2,512 6.13
Securities of other U.S. Government agencies and
corporations 75,646 6.25 113,186 6.82 133,063 7.08
Mortgage-backed securities 209,539 5.30 150,838 6.29 101,155 6.80
Obligations of states and political subdivisions 113,540 7.61 78,741 7.89 81,312 7.80
Equity securities 21,858 5.25 21,060 5.18 18,651 4.56
Other securities 43,826 6.79 29,577 7.59 22,572 7.64
- ---------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 465,650 6.16 395,908 6.80 359,265 7.06
- ---------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities 511 5.28 742 5.39 685 5.40
Securities of other U.S. Government agencies and
corporations 331 6.04 680 6.32 1,019 6.67
Mortgage-backed securities 131 6.87 205 7.80 283 7.42
- ---------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities 973 5.76 1,627 6.08 1,987 6.34
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks 1,444 1.18 2,659 3.08 1,861 6.13
Federal funds sold 2,698 1.56 5,064 3.63 1,000 6.40
Loans:
Real estate loans 338,133 7.53 279,828 8.37 254,225 8.61
Consumer 29,720 10.01 28,062 10.89 27,760 11.01
Agricultural 2,556 7.79 2,070 9.18 1,963 9.73
Commercial/industrial 28,182 6.86 22,212 8.24 21,336 8.66
Other 1,028 6.71 892 7.62 886 8.01
Political subdivisions 10,929 7.85 13,108 7.96 12,009 7.57
Leases 122 9.02 181 9.39 203 10.84
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 410,670 7.67 346,353 8.56 318,382 8.79
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 881,435 6.84 751,611 7.57 682,495 7.86
Cash 13,318 11,871 10,887
Unrealized gain/loss on securities 12,462 6,639 (12,831)
Allowance for loan losses (5,453) (5,370) (5,233)
Bank premises and equipment 10,246 9,602 8,712
Other assets 30,993 30,876 20,191
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 943,001 $ 805,229 $ 704,221
=================================================================================================================================
INTEREST-BEARING LIABILITIES
Interest checking $ 37,984 1.12 $ 37,192 1.75 $ 36,086 2.87
Money market 171,767 2.31 153,738 3.49 146,209 5.39
Savings 49,779 1.01 46,750 2.16 45,963 2.49
Certificates of deposit 195,099 3.97 169,275 5.48 144,997 5.64
Individual Retirement Accounts 90,856 4.98 79,482 5.12 76,439 6.32
Other time deposits 1,814 1.98 1,916 1.83 1,717 2.56
Overnight borrowings 2,347 1.87 4,012 4.01 5,721 6.71
Other borrowed funds 211,092 4.29 151,615 5.13 108,581 6.13
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing Liabilities 760,738 3.46 643,980 4.40 565,713 5.33
Demand deposits 66,093 56,226 52,437
Other liabilities 8,575 9,002 7,279
- -------------------------------------------------------------------------- --------------- --------------
Total Liabilities 835,406 709,208 625,429
- -------------------------------------------------------------------------- --------------- --------------
Stockholders' equity, excluding other comprehensive
income/loss 99,361 91,703 87,258
Other comprehensive income/loss 8,234 4,318 (8,466)
- -------------------------------------------------------------------------- --------------- --------------
Total Stockholders' Equity 107,595 96,021 78,792
- -------------------------------------------------------------------------- --------------- --------------
Total Liabilities and Stockholders' Equity $ 943,001 $ 805,229 $ 704,221
========================================================================== =============== ==============
Interest Rate Spread 3.38 3.17 2.53
Net Interest Income/Earning Assets 3.85 3.80 3.45
(1) Rates of return on tax-exempt securities and loans are calculated on a
fully-taxable equivalent basis, using the Corporation's marginal federal
income tax rate of 34%.
(2) Nonaccrual loans are included in the loan balances above.
13
TABLE III - THE EFFECT OF VOLUME AND RATE CHANGES ON INTEREST INCOME AND
INTEREST EXPENSE
YEARS ENDED 12/31/02 VS. 01 YEARS ENDED 12/31/01 VS. 00
(IN THOUSANDS) CHANGE IN CHANGE IN TOTAL CHANGE IN CHANGE IN TOTAL
VOLUME RATE CHANGE VOLUME RATE CHANGE
EARNING ASSETS
Available-for-sale securities:
U.S. Treasury securities $ (76) $ - $ (76) $ - $ (3) $ (3)
Securities of other U.S. Government agencies
and corporations (2,389) (601) (2,990) (1,364) (335) (1,699)
Mortgage-backed securities 3,277 (1,667) 1,610 3,158 (545) 2,613
Obligations of states and political
subdivisions 2,655 (230) 2,425 (202) 76 (126)
Equity securities 42 16 58 117 122 239
Other securities 987 (256) 731 531 (11) 520
- ------------------------------------------------------------------------------------------------------------------------------------
Total available-for-sale securities 4,496 (2,738) 1,758 2,240 (696) 1,544
- ------------------------------------------------------------------------------------------------------------------------------------
Held-to-maturity securities:
U.S. Treasury securities (12) (1) (13) 3 - 3
Securities of other U.S. Government agencies
and corporations (21) (2) (23) (21) (4) (25)
Mortgage-backed securities (5) (2) (7) (6) 1 (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Total held-to-maturity securities (38) (5) (43) (24) (3) (27)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing due from banks (27) (38) (65) 38 (70) (32)
Federal funds sold (64) (78) (142) 159 (39) 120
Loans:
Real estate loans 4,550 (2,527) 2,023 2,157 (621) 1,536
Consumer 174 (255) (81) 33 (34) (1)
Agricultural 41 (32) 9 10 (11) (1)
Commercial/industrial 442 (339) 103 74 (90) (16)
Other 9 (8) 1 - (3) (3)
Political subdivisions (171) (14) (185) 86 48 134
Leases (5) (1) (6) (2) (3) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans 5,040 (3,176) 1,864 2,358 (714) 1,644
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 9,407 (6,035) 3,372 4,771 (1,522) 3,249
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest checking 14 (240) (226) 31 (416) (385)
Money market 574 (1,966) (1,392) 388 (2,906) (2,518)
Savings 62 (570) (508) 20 (152) (132)
Certificates of deposit 1,277 (2,809) (1,532) 1,337 (228) 1,109
Individual Retirement Accounts 570 (115) 455 186 (942) (756)
Other time deposits (2) 3 1 5 (14) (9)
Overnight borrowings (51) (66) (117) (95) (128) (223)
Other borrowed funds 2,699 (1,421) 1,278 2,333 (1,208) 1,125
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 5,143 (7,184) (2,041) 4,205 (5,994) (1,789)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 4,264 $ 1,149 $ 5,413 $ 566 $ 4,472 $ 5,038
====================================================================================================================================
(1) Changes in interest income on tax-exempt securities and loans are presented
on a fully taxable-equivalent basis, using the Corporation's marginal federal
income tax rate of 34%.
(2) The change in interest due to both volume and rates has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
14
NONINTEREST INCOME
2002/2001/2000
Total noninterest income increased $1,472,000, or 18.3%, in 2002 compared to
2001. The increase in net realized security gains is discussed in the "Earnings
Overview" section of Management's Discussion and Analysis. Other items of
significance are as follows:
2002 VS. 2001
- - Service charges on deposit accounts increased $349,000, or 25.4%. This
increase resulted from growth in deposits, as well as fee increases
implemented in the second half of 2001 on certain types of services.
- - Trust and financial management revenue increased $179,000, or 11.4%. This
increase resulted from fee increases implemented in the latter part of
2001, and from receipt of certain fees for services provided prior to 2002.
Trust revenue is recorded on a cash basis, which does not vary materially
from the accrual basis.
2001 VS. 2000
Total noninterest income increased $1,661,000, or 26.0%, in 2001 compared to
2000. The most significant changes - the increase in security gains and income
from the (BOLI) life insurance contract - are discussed in the "Earnings
Overview" section of Management's Discussion and Analysis. Other items of
significance are as follows:
- - Service charges on deposit accounts increased $226,000, or 19.7%. This
increase resulted from increased numbers of accounts and higher average
balances, as well as fee increases on certain types of services.
- - Insurance revenue increased $210,000, or 56.5%. This increase is mainly
attributable to revenue from the insurance agency division of C&N Financial
Services Corporation (C&NFSC). C&NFSC began operations in 2000, with
minimal revenues. C&NFSC generated insurance revenue of $216,000 in 2001
and $22,000 in 2000.
- - Noninterest fees from the credit card operation decreased $347,000, or
38.7%. In late 1999, the Corporation sold its merchant processing program,
which dramatically reduced the amount of interchange fees earned and costs
incurred. In the first quarter 2000, the Corporation recorded final
residual fees.
- - Other operating income increased $146,000. In 2001, C&NFSC began operating
a broker dealer division, which offers annuities, mutual funds and other
non-bank investment products. The broker dealer division generated revenue
of $84,000 in 2001. Another significant change within the items included in
other operating income is interchange fees received from the Bank's VISA
check card product. This product was introduced in late 1999, and has grown
in numbers of accounts and usage. These fees increased to $87,000 in 2001
from $42,000 in 2000. Also within other operating income, gains from sales
of other real estate properties increased to $135,000 in 2001 from $104,000
in 2000.
TABLE IV - COMPARISON OF NONINTEREST INCOME
(IN THOUSANDS) 2002 % CHANGE 2001 % CHANGE 2000
Service charges on deposit accounts $ 1,725 25.4 $ 1,376 19.7 $ 1,150
Service charges and fees 258 4.5 247 6.5 232
Trust and financial management revenue 1,755 11.4 1,576 (2.3) 1,613
Insurance commissions, fees and premiums 577 (0.9) 582 56.5 372
Increase in cash surrender value of life
insurance 853 (5.7) 905 N/A -
Fees related to credit card operation 631 14.7 550 (38.7) 897
Other operating income 825 (6.7) 884 19.8 738
- -----------------------------------------------------------------------------------------------------------------
Total other income before realized gains on
securities, net 6,624 8.2 6,120 22.4 5,002
Realized gains on securities, net 2,888 50.4 1,920 39.4 1,377
- -----------------------------------------------------------------------------------------------------------------
Total Other Income $ 9,512 18.3 $ 8,040 26.0 $ 6,379
=================================================================================================================
15
OTHER NONINTEREST EXPENSE
2002/2001/2000
Total noninterest expense increased 11.7% in 2002, to $20,849,000. In 2001,
total noninterest expense was $18,671,000, a 10.4% increase over 2000.
2002 VS. 2001
Salaries and wages increased $925,000, or 10.9%, in 2002 compared to 2001. The
increase is the result of annual merit raises ranging from 2%-5%, an increase in
the number of employees and an increase in incentive bonus expense. Increases in
staff during the last half of 2001 and throughout 2002 included the addition of
new positions in branch and commercial lending, branch administration,
compliance and marketing. The incentive bonus plan provides for compensation to
be paid to certain key officers based on a combination of corporate and personal
performance. Total incentive bonus expense increased $185,000 in 2002.
Pensions and other employee benefits increased $438,000, or 19.8%, in 2002 over
2001. A portion of this increase is directly related to the increase in salaries
and wages. Also, pension expense from the Corporation's defined benefit pension
plan increased $245,000 in 2002 over 2001. A decline in the market value of plan
assets was the main cause of the increase in expense in 2002. Note 12 to the
consolidated financial statements provides more information related to the
defined benefit pension plan.
Other expense increased $704,000, or 15.9%, in 2002 over 2001. This category
includes many different types of expenses. Some of the overall increase in this
category was caused by increases in number of transactions processed and number
of employees. The most significant changes within this category are as follows:
- Expenses of Bucktail Life Insurance Company, increased $111,000, to
$335,000. This increase resulted mainly from a larger amount of life
insurance claims incurred.
- Professional fees increased $101,000, to $276,000. This increase
reflected costs associated with organizational and product
profitability consultants, human resources consultants and other
consultants related to various aspects of the Corporation's
operations.
- Office and other supplies increased $77,000, to $502,000, as a result
of increased volumes of employees and customers.
- Restricted stock amortization increased $58,000, to $80,000. This
category of expense included amortization associated with 2 years of
awards to Directors and certain employees in 2002, compared to only 1
year in 2001 (the first year for which there were restricted stock
awards). Stock-based compensation plans are described in more detail
in Note 12 to the financial statements.
- In 2002, the Corporation wrote off asset-liability reporting software
of $41,000, due to management's decision to change to an outsourcing
provider of asset-liability reports.
2001 VS. 2000
Salaries and wages increased $896,000, or 11.8%, in 2001 compared to 2000. The
increase is the result of annual merit raises ranging from 2%-5%, and an
increase in the number of employees. Higher staffing levels were required for
the Muncy branch, commercial and retail lending, trust and financial management
and insurance sales and service.
Pensions and other employee benefits increased $274,000, or 14.1%, in 2001. In
addition to increased costs resulting from the higher number of employees, the
Corporation experienced an increase in medical insurance premium rates.
Occupancy expense increased $90,000, or 9.7%, in 2001. This increase is mainly
due to additional facilities. In 2000, the Corporation constructed a new branch
in Muncy, purchased a building for credit card operations, and purchased 2
buildings near the Wellsboro branch/administrative building for additional
administrative space.
16
Furniture and equipment expense increased $237,000, or 19.8%, in 2001. The major
categories of furniture and equipment expense that increased in 2001 compared to
2000 were maintenance costs associated with computer hardware and software, and
depreciation. The increase in computer maintenance costs is mainly attributable
to the timing of certain maintenance costs. Increased depreciation expense
resulted primarily from the addition of the Muncy branch, which began operations
in the 4th quarter 2000, and the opening of the new credit card operations
facility in mid-2000.
Credit card expenses decreased in 2001 because of lower interchange fees paid.
This change resulted from the sale of the merchant banking program, as discussed
in the "Noninterest Income" section of Management's Discussion and Analysis.
Other expense increased $346,000, or 8.5%, in 2001. This category includes many
different types of expenses. Some of the overall increase in this category was
caused by increases in number of transactions processed and number of employees.
The most significant fluctuations in individual types of expenses between years
are as follows:
- - Customer support and maintenance charges related to software products
increased $74,000, to $144,000, in 2001. This reflects increased use of
third-party software programs for specialized applications, which are used
as a complement to the Corporation's core, in house programs.
- - In 2001, the Corporation incurred consulting expense of $51,000 related to
sales and service training. This training program is a substantial
undertaking, aimed at improving the sales and service skills of virtually
all employees. The amount of expense noted here does not include costs of
miscellaneous training materials, nor more significantly, any allocation of
internal payroll-related costs associated with sales and service training.
- - Telephone expenses related to data lines increased $47,000, to $254,000, in
2001. These costs are mainly related to the Corporation's computer network
that allows all branches and operating locations to access mainframe and PC
applications. The Corporation's monthly data line costs increased to
approximately the current level starting in the 2nd quarter 2000.
- - Public relations expense increased $45,000, to $189,000, in 2001. This
increase includes new sponsorships of several community-oriented programs
located in the Corporation's market area, as well as costs related to
promotion of the Muncy office.
- - Expenses associated with maintaining other real estate properties increased
$42,000, to $76,000, in 2001.
- - In 2000, the Corporation incurred professional fees of $193,000 related to
a proposed merger with Peoples, Ltd. of Wyalusing, PA. In November 2000,
the vote by Peoples, Ltd.'s shareholders did not result in the 75%
affirmative count required to approve the deal.
TABLE V - COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS) 2002 % CHANGE 2001 % CHANGE 2000
Salaries and wages $ 9,418 10.9 $ 8,493 11.8 $ 7,597
Pensions and other employee benefits 2,651 19.8 2,213 14.1 1,939
Occupancy expense, net 1,094 7.5 1,018 9.7 928
Furniture and equipment expense 1,532 7.1 1,431 19.8 1,194
Expenses related to credit card operation 285 (3.4) 295 (27.5) 407
Pennsylvania shares tax 734 (7.1) 790 4.5 756
Other operating expense 5,135 15.9 4,431 8.5 4,085
- ------------------------------------------------------------------------------------------------------------------
Total Other Expense $ 20,849 11.7 $ 18,671 10.4 $ 16,906
==================================================================================================================
17
FINANCIAL CONDITION
Significant changes in the average balances of the Corporation's earning assets
and interest-bearing liabilities are described in the "NET INTEREST MARGIN"
section of Management's Discussion and Analysis. In particular, the discussion
of changes in available-for-sale securities, loans, deposits and borrowed funds
in 2002 is sufficient to explain the overall change in the year-end balances in
2002 compared to 2001. Other significant balance sheet items - the allowance for
loan losses and stockholders' equity - are discussed in separate sections of
Management's Discussion and Analysis.
Table VI shows the composition of the investment portfolio at December 31, 2002,
2001 and 2000.
Premises and equipment, net of accumulated depreciation, increased to
$10,333,000 at December 31, 2002 from $9,967,000 at December 31, 2001. The total
cost of premises and equipment purchases was $1,712,000 in 2002, $1,935,000 in
2001 and $2,426,000 in 2000. In 2002, the most significant capital purchases
included renovations of the Tioga and Athens offices, and completion of
renovations to the leased facility on Main Street in Wellsboro. Other major
categories of capital purchases in 2002 included purchases of computer hardware
and software, and purchase and demolition of property adjacent to the Wysox
office. In 2001, the most significant capital purchases were for new proof of
deposit software, renovations to branches and a new telephone system. The most
significant capital investment in 2000 was the addition of the Muncy branch, for
which land, building construction and initial furniture and equipment cost
slightly more than $1,000,000. Depreciation expense amounted to $1,346,000 in
2002, $1,300,000 in 2001 and $1,086,000 in 2000.
The total cost of capital expenditures for 2003 is expected to be in the range
of the amounts spent in 2000-2002. Capital expenditures will not have a
detrimental effect on the Corporation's financial condition in 2003.
TABLE VI - INVESTMENT SECURITIES
AS OF DECEMBER 31,
2002 2001 2000
(IN THOUSANDS)
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ 2,503 $ 2,557 $ 2,509 $ 2,533
Obligations of other U.S. Government agencies 71,657 72,348 75,295 75,172 132,713 128,883
Obligations of states and political subdivisions 127,690 130,879 95,835 95,261 68,236 69,065
Other securities 62,296 63,592 34,315 34,532 22,111 20,964
Mortgage-backed securities 207,244 212,276 198,269 198,975 91,708 91,240
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 468,887 479,095 406,217 406,497 317,277 312,685
Marketable equity securities 24,886 33,080 19,745 27,472 22,098 26,814
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 493,773 $512,175 $ 425,962 $433,969 $ 339,375 $339,499
==================================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 321 $ 359 $ 726 $ 735 $ 707 $ 708
Obligations of other U.S. Government agencies 297 322 547 561 946 947
Mortgage-backed securities 89 93 175 181 258 259
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 707 $ 774 $ 1,448 $ 1,477 $ 1,911 $ 1,914
==================================================================================================================================
18
PROVISION AND ALLOWANCE FOR LOAN LOSSES
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. In evaluating collectibility, management
considers a number of factors, including the status of specific impaired loans,
trends in historical loss experience, delinquency trends, credit concentrations,
comparison of historical loan loss data to that of other financial institutions
and economic conditions within the Corporation's market area. Allowances for
impaired loans are 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.
Each quarter, management performs a detailed assessment of the allowance and the
provision for loan losses. The loan quality committee performs this assessment.
This committee includes the Bank's President, Chief Financial Officer, Executive
Vice Presidents in charge of loans and branch administration and additional
commercial lending staff. The committee reviews the identified risk elements in
the loan portfolio, including the "Watch List", past due reports and other
information. The "Watch List" is a collection of loans that have a history of
delinquency, collateral deficiency, cash flow problems, or other factors that
have come to management's attention to create the need for special monitoring.
The Bank also engages a consulting firm each year to perform an independent
credit review. Their review is performed annually on credit relationships of
$250,000 and higher as well as other selected credit relationships. 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 allowance for loan losses includes two components, allocated and
unallocated. The allocated component of the allowance for loan losses reflects
expected losses resulting from the analysis of individual loans and historical
loss experience, as modified for identified trends and concerns, for each loan
category. The historical loan loss experience element is determined based on the
ratio of net charge-offs to average loan balances over a five-year period, for
each significant type of loan, modified for risk adjustment factors identified
by management for each type of loan. The charge-off ratio, as modified, is then
applied to the current outstanding loan balance for each type of loan (net of
Watch List and other loans that are individually evaluated).
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the market area. This determination inherently involves a higher degree of
uncertainty and considers current risk factors that may not have yet manifested
themselves in the Bank's historical loss factors used to determine the allocated
component of the allowance, and it recognizes that management's knowledge of
specific losses within the portfolio may be incomplete.
Table IX reflects an allowance of $1,877,000 for losses related to impaired
loans as of December 31, 2002. This reflects management's evaluation of
impairment associated with several commercial loan relationships. Management
believes it has been conservative, but reasonable, in its commercial loan
impairment calculations. However, the actual losses realized from these
relationships could vary materially from the allowances calculated as of
December 31, 2002.
As you can see in Table IX, the allowance for loan losses related to impaired
loans was much higher at December 31, 2002 than as of the ends of each of the
previous 4 years. In years prior to 2002, amounts disclosed related to impaired
loans were limited to commercial loans that had been classified as nonaccrual.
Effective in the fourth quarter 2002, management changed its method of
identifying impaired loans to include all individual loans for which an
allowance was calculated. Management believes this method of determining
disclosure information is more consistent with the applicable requirements of
FASB Statements No. 114 and 118. This change affects disclosures related to
impaired loans, and the allocation of the allowance for loan losses as presented
in Table IX, but does not represent a change in management's method for
calculating the allowance for loan losses.
As noted in Table IX, the unallocated portion of the allowance for loan losses
was $1,759,000 at December 31, 2002 and $2,187,000 at December 31, 2001. The
unallocated balances ranged from $1,759,000 to $2,222,000 in 2002 and $1,983,000
to $2,364,000 during 2001. In evaluating the unallocated portion of the
allowance, management considers several trends, including comparisons of loan
loss data to other financial institutions and tracking of delinquency and
charge-off trends. Loan delinquency data has been fairly consistent over the
last 2 years. Total 90 day or more past due loans, plus nonaccrual loans,
amounted to $3,570,000 (0.79% of total loans) at December 31, 2002, and
$3,117,000 (0.82% of total loans) at December 31, 2001. Total 30-89 day past due
loans amounted to $8,853,000 (1.96% of total loans) at December 31, 2002, and
$7,066,000 (1.86% of total loans) at December 31, 2001. As reflected in Table
VIII, gross and net charge-offs were slightly lower in 2002 than in any of the
previous 4 years; however, in light of the increase in allowances on impaired
loans, this may not be a sustainable trend.
19
The provision for loan losses amounted to $940,000 in 2002, $600,000 in 2001 and
$676,000 in 2000. The higher provision in 2002 reflects increased estimates of
allowances on impaired or Watch List loans, as described above. The amount of
the provision in each year is determined based on the amount required to
maintain an appropriate allowance in light of the factors described above.
Tables VII, VIII, IX and X 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 VII - FIVE-YEAR HISTORY OF LOAN LOSSES (IN THOUSANDS)
2002 2001 2000 1999 1998 AVERAGE
Year-end gross loans, excluding
unearned discount $451,145 $379,228 $328,305 $310,892 $291,003 $352,115
Year-end allowance for loan
Losses 5,789 5,265 5,291 5,131 4,820 5,259
Year-end nonaccrual loans 1,252 1,050 1,608 1,956 1,135 1,400
Year-end loans 90 days or more
past due and still accruing 2,318 2,067 1,221 1,797 1,628 1,806
Net charge-offs 416 626 516 449 856 573
Provision for loan losses 940 600 676 760 763 748
Earnings coverage of charge-
Offs 36.0 19.3 16.4 25.6 12.9 20.3
Allowance coverage of charge-
Offs 13.9 8.4 10.3 11.4 5.6 9.2
Net charge-offs as a % of
provision for loan losses 44.3% 104.3% 76.3% 59.1% 112.2% 76.6%
TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS) YEARS ENDED DECEMBER 31,
2002 2001 2000 1999 1998
Balance, beginning of year $ 5,265 $ 5,291 $ 5,131 $ 4,820 $ 4,913
- ---------------------------------------------------------------------------------------------
Charge-offs:
Real estate loans 123 144 272 81 257
Installment loans 116 138 77 138 144
Credit cards and related plans 190 200 214 192 264
Commercial and other loans 123 231 53 219 301
- ---------------------------------------------------------------------------------------------
Total charge-offs 552 713 616 630 966
- ---------------------------------------------------------------------------------------------
Recoveries:
Real estate loans 30 6 26 81 12
Installment loans 30 27 23 60 43
Credit cards and related plans 18 20 28 30 40
Commercial and other loans 58 34 23 10 15
- ---------------------------------------------------------------------------------------------
Total recoveries 136 87 100 181 110
- ---------------------------------------------------------------------------------------------
Net charge-offs 416 626 516 449 856
Provision for loan losses 940 600 676 760 763
- ---------------------------------------------------------------------------------------------
Balance, end of year $ 5,789 $ 5,265 $ 5,291 $ 5,131 $ 4,820
=============================================================================================
20
TABLE IX - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
(IN THOUSANDS)
2002 2001 2000 1999 1998
Commercial $ 1,315 $ 1,837 $ 1,612 $ 2,081 $ 650
Consumer mortgage 460 674 952 834 97
Impaired loans 1,877 73 273 609 290
Consumer 378 494 471 437 702
All other commitments - - - 150 202
Unallocated 1,759 2,187 1,983 1,020 2,879
- -------------------------------------------------------------------------------------
Total Allowance $ 5,789 $ 5,265 $ 5,291 $ 5,131 $ 4,820
=====================================================================================
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 calculation for 1998 did not include specific amounts for
"Watch List" loans. These loans were included in the total population of loans
and historical loss ratios applied.
TABLE X - FIVE-YEAR SUMMARY OF LOANS BY TYPE
(IN THOUSANDS)
2002 % 2001 % 2000 % 1999 % 1998 %
Real estate - construction $ 103 0.02 $ 1,814 0.48 $ 452 0.14 $ 649 0.21 $ 1,004 0.34
Real estate - mortgage 370,453 82.12 306,264 80.76 263,325 80.21 247,604 79.64 230,815 79.31
Consumer 31,532 6.99 29,284 7.72 28,141 8.57 29,140 9.37 30,924 10.63
Agricultural 3,024 0.67 2,344 0.62 1,983 0.60 1,899 0.61 1,930 0.66
Commercial 30,874 6.84 24,696 6.51 20,776 6.33 18,050 5.81 17,630 6.06
Other 2,001 0.44 1,195 0.32 948 0.29 1,025 0.33 1,062 0.36
Political subdivisions 13,062 2.90 13,479 3.55 12,462 3.80 12,332 3.97 7,449 2.56
Lease receivables 96 0.02 152 0.04 218 0.07 222 0.07 218 0.07
- ---------------------------------------------------------------------------------------------------------------------------------
Total 451,145 100.00 379,228 100.00 328,305 100.00 310,921 100.00 291,032 100.00
Less: unearned discount - - - (29) (29)
- ---------------------------------------------------------------------------------------------------------------------------------
451,145 379,228 328,305 310,892 291,003
Less: allowance for loan losses (5,789) (5,265) (5,291) (5,131) (4,820)
- ---------------------------------------------------------------------------------------------------------------------------------
Loans, net $ 445,356 $ 373,963 $ 323,014 $ 305,761 $ 286,183
=================================================================================================================================
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate
liquidity position permits the Corporation to pay creditors, compensate for
unforeseen deposit fluctuations and fund unexpected loan demand. The Corporation
maintains overnight borrowing facilities with several correspondent banks that
provide a source of day-to-day liquidity. Also, the Corporation maintains
borrowing facilities with FHLB - Pittsburgh, secured by various securities and
mortgage loans. At December 31, 2002, the Corporation had unused borrowing
availability with correspondent banks and FHLB - Pittsburgh totaling
approximately $205,000,000. Additionally, the Corporation uses repurchase
agreements placed with brokers to borrow short-term funds secured by investment
assets, and uses "RepoSweep" arrangements to borrow funds from commercial
banking customers on an overnight basis.
On a longer-term basis, one of the tools used to measure liquidity is the loan
to deposit ratio. As of December 31, 2002, this ratio was 70%, which (by banking
industry standards) is a relatively low ratio (which indicates a relatively high
level of liquidity). This low loan to deposit ratio permits the Corporation to
utilize "excess" funds to purchase investment securities. If required to raise
cash in an emergency situation, the Corporation could sell non-pledged
investment securities to meet its obligations.
Management believes the combination of its strong capital position (discussed in
the next section), ample available borrowing facilities and low loan to deposit
ratio have placed the Corporation in a position of minimal short-term and
long-term liquidity risk.
21
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. For many years, the
Corporation and the Bank have maintained strong capital positions. Details
concerning the Corporation's and the Bank's regulatory capital amounts and
ratios are presented in Note 16 to the consolidated financial statements. As
reflected in Note 16, at December 31, 2002 and 2001, the ratios of total capital
to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1
capital to average total assets are well in excess of the amounts necessary to
be classified as "well-capitalized" by the banking agencies.
The Corporation's total stockholders' equity is affected by fluctuations in the
fair values of available-for-sale securities. The difference between amortized
cost and fair value of available-for-sale securities, net of deferred income
tax, is classified as "Accumulated Other Comprehensive Income" within
stockholders' equity. Changes in accumulated other comprehensive income are
excluded from earnings and directly increase or decrease stockholders' equity.
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 amount of
unrealized gains or losses reflected in comprehensive income may vary widely
from period-to-period, depending on the financial markets as a whole and how the
portfolio of available-for-sale securities is affected by interest rate
movements. Total comprehensive income (loss) was $21,821,000 in 2002,
$17,254,000 in 2001 and $17,442,000 in 2000. Other comprehensive income amounted
to $6,862,000 in 2002, $5,202,000 in 2001 and $8,966,000 in 2000.
INFLATION
Over the last several years, direct inflationary pressures on the Corporation's
payroll-related and other noninterest costs have been modest. In fact, some
economists have warned of the threat of deflationary pressures, similar to
recent experiences in Japan. The Corporation is significantly affected by the
Federal Reserve Board's efforts to control inflation through changes in interest
rates. Management monitors the impact of economic trends, including any
indicators of inflationary (or deflationary) pressure, in managing interest rate
and other financial risks.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, The Financial Accounting Standard Board ("FASB") issued Statement
No. 143, "Accounting for Asset Retirement Obligations." This statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. As used in this Statement, a legal obligation is an
obligation that a party is required to settle as a result of an existing or
enacted law, statute, ordinance or written or oral contract or by legal
construction of a contract under the doctrine of promissory estopple. This
Statement requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset. This
Statement amends FASB Statement No. 19 "Financial Accounting and Reporting by
Oil and Gas Producing Companies" and it applies to all entities. It is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
The adoption of this Statement on January 1, 2003 is not expected to have an
impact on the Corporation's earnings, financial condition or equity.
22
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets,
and supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." However, the
Statement retains the fundamental provisions of Statement No. 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and recording provisions of APB Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business.
However, this Statement retains the requirement of Opinion No. 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment or in the distribution to owners) or is classified as held for
sale. This Statement also amends ARB No. 51, "Consolidated Financial
Statements", to eliminate the exception to consolidation for a
temporarily-controlled subsidiary. The provisions of this Statement were
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Adoption of this Statement on January 1, 2002 did not
have an impact on the Corporation's earnings, financial condition or equity.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB Statements
No. 4, 44, and 64 Amendment of FASB Statement No. 13, and Technical
Corrections." "This Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt, " and an amendment of that Statement,
FASB Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements," along with rescinding FASB Statement No. 44, "Accounting for
Intangible Assets of Motor Carriers and amending FASB Statement No. 13,
Accounting for Leases." This Statement (1) eliminates an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions, (2) eliminates the extraordinary item
treatment of reporting gains and losses from extinguishments of debt, and (3)
makes certain other technical corrections. The provisions of this Statement
related to the rescission of Statement 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishments of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in Opinion 30 for classification as an extraordinary item
shall be reclassified. The provisions of this Statement related to Statement 13
shall be effective for transactions occurring after May 15, 2002. All other
provisions of this Statement shall be effective for financial statements issued
on or after May 15, 2002. The adoption of the effective portions of this
Statement did not have an impact on the Corporation's earnings, financial
condition or equity, except that (as described in Note 9 to the consolidated
financial statements) the Corporation incurred prepayment penalties from the
early retirement of debt of $101,000 in 2002, and included these costs in
interest expense (prior to this Statement, the prepayment penalties would have
been presented as extraordinary items in the income statement). The adoption of
the remaining portions of this Statement is not expected to have an impact on
the Corporation's earnings, financial condition or equity.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Corporation does not expect the adoption
of this Statement to have an impact on its earnings, financial condition or
equity.
On October 1, 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions," effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of Statement No 72, "Accounting for
Certain Acquisitions of Banking or Thrift Institutions," and FASB Interpretation
No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association
or a Similar Institution is Acquired in a Business Combination Accounted for by
the Purchase Method." The acquisition of all or part of a financial institution
that meets the definition of a business combination shall be accounted for by
the purchase method in accordance with Statement No. 141, "Business
Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets."
This Statement also provides guidance on the accounting for the impairment or
disposal of acquired long-term customer-relationship intangible assets (such as
depositor-and-borrower-relationship intangible assets and credit cardholder
intangible assets), including those acquired in transactions between two or more
mutual enterprises. The Adoption of this Statement has not had an impact on the
Corporation's earnings, financial condition or equity.
23
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirement for Guarantees, Including Indirect Guarantees of the
Indebtedness of Others." This Interpretation clarifies the requirements for a
guarantor's accounting for and disclosures of certain guarantees issued and
outstanding. The Interpretation requires a guarantor to recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
initial recognition and initial measurement provisions of the Interpretation are
applied on a prospective basis to guarantees issued or modified after December
31, 2002. The guarantor's accounting for guarantees issued prior to the date of
initial application should not be revised or restated to reflect the effect of
the recognition and measurement provisions of the Interpretation. The
Interpretation's disclosure requirements were implemented during the year ended
December 31, 2002 (see Note 15 to the consolidated financial statements for
expanded disclosures related to standby letters of credit). The adoption of the
recognition and measurement provisions of this statement are not expected to
have a significant impact on the Corporation's earnings, financial condition or
equity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerningMARKET RISK
The Corporation's two major categories of market risk, appears on pages 41 through 43interest rate and equity
securities risk, are discussed in the following sections.
INTEREST RATE RISK
Business risk arising from changes in interest rates is an inherent factor in
operating a bank. The Corporation's assets are predominantly long-term, fixed
rate loans and debt securities. Funding for these assets comes principally from
shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk
of lower future earnings or decline in fair value of the Annual ReportCorporation's financial
instruments when interest rates change.
The Bank uses a simulation model to calculate the potential effects of interest
rate fluctuations on net interest income and the market value of portfolio
equity. Only assets and liabilities of the Bank are included in management's
monthly simulation model calculations. Since the Bank makes up more than 90% of
the Corporation's total assets and liabilities, and because the Bank is herein incorporatedthe
source of the most volatile interest rate risk, management does not consider it
necessary to run the model for the remaining entities within the consolidated
group. For purposes of these calculations, the market value of portfolio equity
includes the fair values of financial instruments, such as securities, loans,
deposits and borrowed funds, and the book values of nonfinancial assets and
liabilities, such as premises and equipment and accrued interest. The model
measures and projects potential changes in net interest income, and calculates
the discounted present value of anticipated cash flows of financial instruments,
assuming an immediate increase or decrease in interest rates. Management
ordinarily runs a variety of scenarios within a range of plus or minus 50-300
basis points of current rates.
In the 3rd quarter 2002, the Bank changed to a different simulation (software)
model, and also changed some of the key methodologies and assumptions. The new
simulation model is run on an outsourcing basis, using data supplied by reference.the
Bank. These changes were made in an effort to improve the accuracy and relevance
of the Bank's interest rate risk measurements. The more significant changes are
as follows:
- The new model permits more precise measurements, in that the estimated
impact of interest rate changes is calculated for each individual
investment security and for each individual loan and deposit
instrument. In contrast, the old model required management to make
assumptions regarding contractual cash flows for fairly broad
categories of investment securities, loans and deposits.
- Using the new model, the average principal repayment term for callable
investment securities has been substantially lengthened. This change
has increased the calculated impact of interest rate changes on the
fair value of investment securities under each interest rate scenario.
- Prior to the model change, management assumed no difference between
book value and fair value of nonmaturity deposits and borrowings, such
as money market accounts, NOW accounts, savings, customer repurchase
agreements and checking accounts. Using the new model, management has
estimated the "run-off" of nonmaturity deposits and borrowings, and
has calculated the fair value of these liabilities using market
interest rates consistent with the estimated terms. The effect of this
change was to increase the market value of portfolio equity in all
interest rate scenarios.
24
- Also related to nonmaturity deposits and borrowings, management has
changed its assumptions regarding the impact of rate changes on
interest expense. In the past, management estimated the impact of a
rate change based on 100% of the "shock" amount - e.g., the rate paid
on savings accounts would be assumed to increase from 1% to 3% in a
"+200 basis point" calculation. Using the new model, management has
limited the estimated impact of rate changes on interest expense. For
example, in a +200 basis point calculation, the rate paid on savings
accounts would be assumed to increase 50% of 200 basis points, or 1%,
resulting in an increase in rate from 1% to 2%. The effect of this
change was to decrease the impact of rate changes on net interest
income in all interest rate scenarios.
- In the past, the Bank's interest rate shock calculations compared
"Base Most Likely" values to amounts calculated assuming an immediate
increase or decrease in rates. In developing the Base Most Likely
calculations, management made assumptions regarding growth in loans
and deposits, and other balance sheet changes. Also, management used
an interest rate forecast to estimate changes in interest rates on a
monthly basis throughout the period of net interest income
calculations. Using the new model, management's baseline calculation
assumes a "flat" balance sheet, and uses current interest rates with
no forecasted changes in rates. Management believes this change in
methodology provides a measurement of interest rate risk that is more
consistent with the majority of the financial institutions industry.
The Bank's Board of Directors has established policy guidelines for acceptable
levels of interest rate risk, based on an immediate increase or decrease in
interest rates of 200 basis points. The policy limit for fluctuation in net
interest income is minus 20% from the baseline one-year scenario. The policy
limit for market value variance is minus 30% from the baseline one-year
scenario. The most sensitive scenario presented in Table XII below is the "+200
basis points" scenario. As the table below shows, as of December 31, 2002, the
result of the Bank's net interest income calculation is well within the policy
threshold. However, if interest rates were to immediately increase 200 basis
points, the Bank's calculations based on the model show that the market value of
portfolio equity would decrease 34.2%, which exceeds the policy threshold. Over
the next several months, management will evaluate whether to make any changes to
asset or liability holdings in an effort to reduce exposure to decline in market
value in a rising interest rate environment. The table also shows that, if
interest rates were to immediately rise 200 basis points, net interest income
over the next 12 months would decline by 1.8%, which is well under the 20%
policy mark. This estimated exposure level is also significantly less than the
18.9% decline calculated as of December 31, 2001. Changes in the model,
particularly the assumptions referred to above concerning the impact of rate
changes on nonmaturity deposits and borrowings, had a substantial impact on
these revised results. Also, some of management's actions during 2002, including
an increased concentration of the investment securities portfolio in
mortgage-backed securities (as discussed in the "Net Interest Margin" section of
Management's Discussion and Analysis), have helped to reduce the exposure of net
interest income to rising rates in the near term.
The table that follows was prepared using the simulation models described above.
The models make estimates, at each level of interest rate change, regarding cash
flows from principal repayments on loans and mortgage-backed securities and call
activity on other investment securities. Actual results could vary significantly
from these estimates, which could result in significant differences in the
calculations of projected changes in net interest margin and market value of
portfolio equity. Also, the models do not make estimates related to changes in
the composition of the deposit portfolio that could occur due to rate
competition and the table does not necessarily reflect changes that management
would make to realign the portfolio as a result of changes in interest rates.
THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
PERIOD ENDING DECEMBER 31, 2003
(IN THOUSANDS)
DECEMBER 31, 2002 DATA
CURRENT PLUS 200 MINUS 200
INTEREST BASIS BASIS
RATES POINTS POINTS
SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 54,989 $ 59,608 $ 49,607
Interest expense 24,132 29,320 19,083
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 30,857 $ 30,288 -1.8% $ 30,524 -1.1%
===================================================================================================================
Market Value of Portfolio Equity at Dec. 31, 2002 $ 108,144 $ 71,117 -34.2% $ 130,764 20.9%
===================================================================================================================
25
PERIOD ENDING DECEMBER 31, 2002
(IN THOUSANDS)
DECEMBER 31, 2001 DATA
CURRENT PLUS 200 MINUS 200
INTEREST BASIS BASIS
RATES POINTS POINTS
SCENARIO AMOUNT % CHANGE AMOUNT % CHANGE
Interest income $ 56,943 $ 60,192 $ 52,767
Interest expense 26,652 35,633 17,827
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 30,291 $ 24,559 -18.9% $ 34,940 15.3%
===================================================================================================================
Market Value of Portfolio Equity at Dec. 31, 2001 $ 97,585 $ 69,980 -28.3% $ 118,667 21.6%
===================================================================================================================
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists primarily of investments
in stocks of banks and bank holding companies, mainly based in Pennsylvania. The
Corporation also owns some other stocks and mutual funds.
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, 2002 and 2001 are as follows:
(IN THOUSANDS) HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT DECEMBER 31, 2002 COST VALUE VALUE VALUE
Banks and bank holding companies $ 22,936 $ 31,508 $ (3,151) $ (6,302)
Other equity securities 1,950 1,572 (157) (314)
- -------------------------------------------------------------------------------------------------
Total $ 24,886 $ 33,080 $ (3,308) $ (6,616)
=================================================================================================
(IN THOUSANDS) HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT DECEMBER 31, 2001 COST VALUE VALUE VALUE
Banks and bank holding companies $ 18,922 $ 26,636 $ (2,664) $ (5,327)
Other equity securities 823 836 (84) (167)
- -------------------------------------------------------------------------------------------------
Total $ 19,745 $ 27,472 $ (2,748) $ (5,494)
=================================================================================================
26
ITEM 8. FINANCIAL STATEMENTS andAND 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 SheetCONSOLIDATED BALANCE SHEET
(In Thousands Except Per Share Data) December(IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, DecemberDECEMBER 31,
1999 1998
ASSETS
Cash & Due From Banks:2002 2001
Noninterest-Bearing $15,337 $15,428
Interest-Bearing 2,726 700
- - --------------------------------------------------------------------------------------------------------------------------------
TotalASSETS
Cash and Cash Equivalents 18,063 16,128
Available-for-Sale Securities 358,929 329,275
Held-to-Maturity Securities
(Estimated fair value of $1,830due from banks:
Noninterest-bearing $ 14,185 $ 14,055
Interest-bearing 715 1,981
- -----------------------------------------------------------------------------------------------------
Total cash and $1,931 in 1999cash equivalents 14,900 16,036
Available-for-sale securities 512,175 433,969
Held-to-maturity securities 707 1,448
Loans, net 445,356 373,963
Bank-owned life insurance 16,758 15,905
Accrued interest receivable 5,960 4,871
Bank premises and 1998, Respectively) 1,880 1,908
Loans, Net 305,761 286,183
Bank Premises and Equipment, Net 7,992 7,416equipment, net 10,333 9,967
Foreclosed Assets Heldassets held for Sale 310 652
Accrued Interest Receivable 5,066 4,109sale 56 179
Other Assets 7,897 627assets 12,523 10,661
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $705,898 $646,298
================================================================================================================================$ 1,018,768 $ 866,999
=====================================================================================================
LIABILITIES
Deposits:
Noninterest-Bearing $67,200 $57,871
Interest-Bearing 433,274 418,647Noninterest-bearing $ 70,824 $ 63,858
Interest-bearing 569,480 512,416
- -----------------------------------------------------------------------------------------------------
Total deposits 640,304 576,274
Dividends payable 1,586 1,466
Short-term borrowings 43,635 58,064
Long-term borrowings 208,214 125,584
Accrued interest and other liabilities 9,192 5,424
- --------------------------------------------------------------------------------------------------------------------------------
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 629,275 555,731902,931 766,812
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 10,000,000
shares; issued 5,431,021 in 2002 and 5,378,212 in 2001 5,431 5,378
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 15,468dividend distributable 1,639 1,369
Paid-in capital 21,153 19,758
Retained Earnings 62,886 57,477earnings 77,584 70,352
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total 86,950 80,096105,807 96,857
Accumulated Other Comprehensive Income (8,884) 11,922
Less:other comprehensive income 12,146 5,284
Unamortized stock compensation (49) (17)
Treasury Stockstock, at Cost
118,510cost:
145,415 shares at December 31, 1999 (1,443)
118,0102002 (2,067)
143,412 shares at December 31, 1998 (1,451)2001 (1,937)
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 76,623 90,567115,837 100,187
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $705,898 $646,298
================================================================================================================================$ 1,018,768 $ 866,999
=====================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
327
Consolidated Statement of Income
(In Thousands Except Per Share Data)CONSOLIDATED STATEMENT OF INCOME
Years Ended DecemberYEARS ENDED DECEMBER 31,
1999 1998 1997
INTEREST INCOME(IN THOUSANDS EXCEPT PER SHARE DATA) 2002 2001 2000
INTEREST INCOME
Interest and Feesfees on Loansloans $ 25,64230,641 $ 25,81928,592 $ 26,03327,082
Interest on Balancesbalances with Depository Institutions 30 37 54depository institutions 17 82 114
Interest on Loansloans to Political Subdivisions 541 380 391political subdivisions 587 719 644
Interest on Federal Funds Soldfederal funds sold 42 229 334184 64
Income from Available-for-Saleavailable-for-sale and Held-to-Maturity Securities:held-to-maturity securities:
Taxable 16,421 14,062 14,361
Tax Exempt 4,534 3,982 3,59519,051 19,752 18,296
Tax-exempt 5,799 4,242 4,483
Dividends 1,205 950 8741,148 1,090 960
- ---------------------------------------------------------------------------------------------------------------
Total interest and dividend income 57,285 54,661 51,643
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest and Dividend Income 48,415 45,459 45,642
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits 19,053 18,252 18,292deposits 17,215 20,417 23,108
Interest on Short-Term Borrowings 2,454 824 755short-term borrowings 916 3,944 6,102
Interest on Long-Term Borrowings 3,064 3,617 4,265long-term borrowings 8,184 3,995 935
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 26,315 28,356 30,145
- ----------------------------------------------------------------------------------------------------------------------------------
Total---------------------------------------------------------------------------------------------------------------
Interest Expense 24,571 22,693 23,312
- - ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin 23,844 22,766 22,330margin 30,970 26,305 21,498
Provision for Possible Loan Losses 760 763 797loan losses 940 600 676
- ---------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 30,030 25,705 20,822
- ----------------------------------------------------------------------------------------------------------------------------------
Interest Margin After Provision for Possible Loan Losses 23,084 22,003 21,533
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME
Service Chargescharges on Deposit Accounts 1,113 1,039 1,076deposit accounts 1,725 1,376 1,150
Service Chargescharges and fees 258 247 232
Trust and financial management revenue 1,755 1,576 1,613
Insurance commissions, fees and premiums 577 582 372
Increase in cash surrender value of life insurance 853 905 -
Fees 274 288 281
Trust Department Income 1,456 1,288 1,004
Insurance Commissions, Fees and Premiums 438 405 462
Fees Relatedrelated to Credit Card Operation 3,064 2,969 2,627credit card operation 631 550 897
Other Operating Income 99 94 384operating income 825 884 738
- ---------------------------------------------------------------------------------------------------------------
Total other income before realized gains on securities, net 6,624 6,120 5,002
Realized gains on securities, net 2,888 1,920 1,377
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total Other Income Before Realized Gains on Securities, Net 6,444 6,083 5,834
Realized Gains on Securities, Net 3,043 3,001 1,001other income 9,512 8,040 6,379
- - ----------------------------------------------------------------------------------------------------------------------------------
Total Other Income 9,487 9,084 6,835
- - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Salaries and Wages 6,926 6,621 5,975wages 9,418 8,493 7,597
Pensions and Other Employee Benefits 1,831 1,760 1,691other employee benefits 2,651 2,213 1,939
Occupancy Expense, Net 896 827 726expense, net 1,094 1,018 928
Furniture and Equipment Expense 1,078 792 723equipment expense 1,532 1,431 1,194
Expenses related to Credit Card Operation 2,597 2,732 2,395credit card operation 285 295 407
Pennsylvania Shares Tax 723 656 596shares tax 734 790 756
Other Operating Expense 3,681 3,095 2,989operating expense 5,135 4,431 4,085
- ---------------------------------------------------------------------------------------------------------------
Total other expenses 20,849 18,671 16,906
- ----------------------------------------------------------------------------------------------------------------------------------
Total Other Expenses 17,732 16,483 15,095---------------------------------------------------------------------------------------------------------------
Income before income tax provision 18,693 15,074 10,295
Income tax provision 3,734 3,022 1,819
- - ----------------------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================================$ 14,959 $ 12,052 $ 8,476
===============================================================================================================
NET INCOME PER SHARE - BASIC $ 2.212.80 $ 2.132.25 $ 1.94
==================================================================================================================================1.58
===============================================================================================================
NET INCOME PER SHARE - DILUTED 2.20 2.12 1.94
==================================================================================================================================$ 2.79 $ 2.25 $ 1.58
===============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
428
Consolidated Statement of Changes in Stockholders' Equity
(In Thousands Except Per Share Data)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
------ ------ ------------- ------- -------- ------ ----- -----STOCK
COMMON DIVIDEND PAID-IN RETAINED
STOCK DISTRIBUTABLE CAPITAL EARNINGS
- -------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 5,272 $ 1,437 $ 17,355 $ 62,886
Comprehensive income:
Net income 8,476
Unrealized gain on securities,
net of reclassification
adjustment and tax effects
- -------------------------------------------------------------------------------------
Total comprehensive income
- -------------------------------------------------------------------------------------
Cash dividends declared, $.94 per
share (5,102)
Shares issued from treasury related
to exercise of stock options 3
Stock dividend issued 53 (1,437) 1,384
Stock dividend declared, 1% 1,054 (1,054)
Restricted stock granted 14
- -------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000
5,325 1,054 18,756 65,206
Comprehensive income:
Net income 12,052
Unrealized gain on securities,
net of reclassification
adjustment and tax effects
- -------------------------------------------------------------------------------------
Total comprehensive income
- -------------------------------------------------------------------------------------
Cash dividends declared, $1.02 per
share (5,554)
Treasury stock purchased
Amortization of restricted stock
Tax benefit from employee benefit
plan 17
Stock dividend issued 53 (1,054) 1,001
Stock dividend declared, 1% 1,369 (1,369)
Restricted stock granted 1
- -------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 5,378 1,369 19,758 70,352
Comprehensive income:
Net income 14,959
Unrealized gain on securities,
net of reclassification
adjustment and tax effects
- -------------------------------------------------------------------------------------
Total comprehensive income
- -------------------------------------------------------------------------------------
Cash dividends declared, $1.16 per
share (6,158)
Treasury stock purchased
Amortization of restricted stock
Shares issued from treasury related
to exercise of stock options 26
Tax benefit from employee benefit
plan 70
Stock dividend issued 53 (1,369) 1,316
Stock dividend declared, 1% 1,639 (1,639)
Restricted stock granted 55
Forfeiture of restricted stock (2)
- -------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 5,431 $ 1,639 $ 21,153 $ 77,584
=====================================================================================
ACCUMULATED
OTHER UNAMORTIZED
COMPREHENSIVE STOCK TREASURY
INCOME COMPENSATION STOCK TOTAL
- -------------------------------------------------------------------------------------------
Balance DecemberBALANCE, DECEMBER 31, 1996 5,117 5,117 1,305 12,539 47,862 5,767 (997) 71,5931999 $ (8,884) $ - $ (1,443) $ 76,623
Comprehensive Income:income:
Net Income 10,107 10,107income 8,476
Unrealized Gaingain on Securities, Netsecurities,
net of Reclassification Adjustmentreclassification
adjustment and Tax 7,568 7,568
Effectstax effects 8,966 8,966
- -------------------------------------------------------------------------------------------
Total comprehensive income 17,442
- -------------------------------------------------------------------------------------------
Cash dividends declared, $.94 per
share (5,102)
Shares issued from treasury related
to exercise of stock options 3 6
Stock dividend issued -
Stock dividend declared, 1% -
Restricted stock granted (35) 21 -
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000
82 (35) (1,419) 88,969
Comprehensive income:
Net income 12,052
Unrealized gain on securities,
net of reclassification
adjustment and tax effects 5,202 5,202
- -------------------------------------------------------------------------------------------
Total Comprehensive Income 17,675comprehensive income 17,254
- -------------------------------------------------------------------------------------------
Cash dividends declared, $1.02 per
share (5,554)
Treasury stock purchased (521) (521)
Amortization of restricted stock 22 22
Tax benefit from employee benefit
plan 17
Stock dividend issued -
Stock dividend declared, 1% -
Restricted stock granted (4) 3 -
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 5,284 (17) (1,937) 100,187
Comprehensive income:
Net income 14,959
Unrealized gain on securities,
net of reclassification
adjustment and tax effects 6,862 6,862
- -------------------------------------------------------------------------------------------
Total comprehensive income 21,821
- -------------------------------------------------------------------------------------------
Cash dividends declared, $1.16 per
share (6,158)
Treasury stock purchased (239) (239)
Amortization of restricted stock 80 80
Shares issued from treasury related
to exercise of stock options 50 76
Tax benefit from employee benefit
plan 70
Stock Dividend Issued 51 51 (1,305) 1,254
Cash Dividends Declared $.72 Per Share (3,744) (3,744)dividend issued -
Stock Dividend Declared,dividend declared, 1% 1,706 (1,706)
Shares Issued from Treasury Related to
Exercise-
Restricted stock granted (116) 61 -
Forfeiture of Stock Options 6 5 11restricted stock 4 (2) -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December-------------------------------------------------------------------------------------------
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
====================================================================================================================================2002 $ 12,146 $ (49) $ (2,067) $ 115,837
===========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
529
Consolidated Statement of Cash Flows
(In Thousands)
Years Ended DecemberCONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) YEARS ENDED DECEMBER 31,
1999 1998 19972002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Incomeincome $ 11,48514,959 $ 11,07712,052 $ 10,1078,476
Adjustments to Reconcile Net Incomereconcile net income to Net Cash Providednet cash provided by
Operating Activities:operating activities:
Provision for Possible Loan Losses 760 763 797loan losses 940 600 676
Realized gains on securities, net (2,888) (1,920) (1,377)
Gain on Securities, Net (3,043) (3,001) (1,001)
(Gain) Loss on Salesale of Foreclosed Assets, Net 44 (26) 97
Provision forforeclosed assets, net (39) (88) (59)
Depreciation 971 806 723expense 1,346 1,300 1,086
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)amortization, net (376) (1,869) (2,491)
Increase in Accrued Interest Payablecash surrender value of life insurance (853) (905) -
Amortization of restricted stock 80 22 -
Deferred income taxes (284) (349) (63)
Increase in accrued interest receivable and Other Liabilities 2,003 653 (848)other assets (958) (126) (88)
Increase in accrued interest payable and other liabilities 669 579 1,247
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,524 10,597 10,82112,596 9,296 7,407
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the Maturitymaturity of Held-to-Maturity Securities 372 178 755held-to-maturity securities 731 1,083 156
Purchase of Held-to-Maturity Securities (354) (498) (781)held-to-maturity securities - (626) (196)
Proceeds from Salessales of Available-for-Sale Securities 30,027 83,888 134,157available-for-sale securities 29,345 25,788 32,173
Proceeds from Maturitiescalls and maturities of Available-for-Sale Securities 33,436 127,670 64,768available-for-sale
securities 155,811 152,568 15,337
Purchase of Available-for-Sale Securities (119,753) (232,922) (186,798)
Net Increase in Loans (20,503) (7,231) (7,652)available-for-sale securities (249,693) (261,148) (17,865)
Purchase of PremisesFederal Home Loan Bank of Pittsburgh stock (3,943) (1,750) -
Redemption of Federal Home Loan Bank of Pittsburgh stock 1,870 869 -
Net increase in loans (72,819) (51,984) (18,374)
Purchase of bank-owned life insurance - - (15,000)
Purchase of interest in low-income housing partnerships - (306) (697)
Purchase of premises and Equipment (1,547) (1,502) (834)equipment (1,712) (1,935) (2,426)
Proceeds from sale of foreclosed assets 648 660 498
- --------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (139,762) (136,781) (6,394)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 64,030 47,307 28,493
Net (decrease) increase in short-term borrowings (14,429) (36,627) 5,655
Proceeds from long-term borrowings 117,653 125,000 -
Repayments of long-term borrowings (35,023) (21) (34,420)
Purchase of treasury stock (239) (521) -
Sale of Foreclosed Assets 463 402 419treasury stock 76 - 6
Dividends paid (6,038) (5,441) (4,986)
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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)126,030 129,697 (5,252)
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1,935 1,875 (722)(1,136) 2,212 (4,239)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,128 14,253 14,97516,036 13,824 18,063
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $18,063 $16,128 $ 14,253
================================================================================================================================14,900 $ 16,036 $ 13,824
==========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONINFORMATION:
Assets acquired through foreclosure of real estate loans $ 486 $ 435 $ 445
Interest Paid $24,006 $22,615 $22,380
================================================================================================================================paid $ 26,424 $ 28,665 $ 29,446
Income Taxes Paid $2,973taxes paid $ 3,172 $3,512
================================================================================================================================4,509 $ 2,961 $ 1,801
The accompanying notes are an integral part of the consolidated financial
statements.
630
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. The consolidated financial
statements also include the accounts of the Bank's wholly-owned subsidiary, C&N
Financial Services Corporation, which began operations in 2000. 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 includesproducts include mortgage loans, commercial
loans, mortgageconsumer loans consumer installment loans,and credit cards, lease financing as well as specialized instruments such
as commercial letters-of-credit. Deposit services
providedproducts 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."Repo Sweep" accounts.
The Corporation provides Trust Departmentand Financial Management services, including the
administration of trusts and estates, retirement plans, and other employee
benefit plans.plans, and investment management services. In 2000, the Corporation
began offering a variety of personal and commercial insurance products through
C&N Financial Services Corporation. In 2001, C&N Financial Services Corporation
added a broker-dealer division, which offers mutual funds, annuities,
educational savings accounts and other investment products through registered
agents.
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.disclosures. Actual results
could differ from these estimates.
Material estimatesA material estimate that areis particularly susceptible to significant change relate tois
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.losses. Management believes that the
allowance for loan losses on loansis adequate and the valuation of
foreclosed assets held for sale are adequate.reasonable. 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.loan losses. Such agencies
may require the Corporation to recognize adjustments to allowancesthe allowance 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.method.
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 salesales of available-for-sale securities are computed
on the basis of specific identification of the adjusted cost of each security.
7
The fair valuesRESTRICTED EQUITY SECURITIES - Restricted equity securities consist primarily of
the majorityFederal Home Loan Bank of the Corporation's investmentsPittsburgh stock, and are estimated
based on bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain statecarried at cost 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, adjustedevaluated for differences between the quoted instruments and the
instruments being valued. The carrying valuesimpairment. Holdings of restricted equity securities approximate fair values.are included
in Other Assets in the Consolidated Balance Sheet, and dividends received on
restricted securities are included in Other Income in the Consolidated Statement
of Income.
31
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.fees.
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,based on factors such as 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 lifelives of an asset,assets are capitalized, and other repair and maintenance
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 ofestimated fair value,
minus estimated cost to sell orless selling 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, securities gains or losses,
depreciation, pension and other postretirement benefits and amortization of loan
origination fees and costs, pension expense, depreciationcosts.
STOCK COMPENSATION PLANS - As permitted by Accounting Principles Board Opinion
No. 25, the Corporation uses the intrinsic value method of bank premisesaccounting for stock
compensation plans. Utilizing the intrinsic value method, compensation cost is
measured by the excess of the quoted market price of the stock as of the grant
date (or other measurement date) over the amount an employee or director must
pay to acquire the stock. Stock options issued under the Corporation's stock
option plans have no intrinsic value, and equipment,accordingly, no compensation cost is
recorded for them.
The Corporation has also made awards of restricted stock. Compensation cost
related to restricted stock is recognized based on the market price of the stock
at the grant date over the vesting period.
32
The following table illustrates the effect on net income and postretirement benefits.earnings per share
if the Corporation had applied the fair value provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation," to stock options.
(NET INCOME IN THOUSANDS)
2002 2001 2000
Net income, as reported $ 14,959 $ 12,052 $ 8,476
Deduct: Total stock option compensation
expense determined under fair value
method for all awards, net of tax effects (191) (63) (77)
- ----------------------------------------------------------------------------------------
Pro forma net income $ 14,768 $ 11,989 $ 8,399
========================================================================================
Earnings per share-basic:
As reported $2.80 $2.25 $1.58
Pro forma $2.77 $2.24 $1.57
Earnings per share-diluted:
As reported $2.79 $2.25 $1.58
Pro forma $2.76 $2.24 $1.57
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.equivalents.
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 19982001 and 19972000 amounts have been reclassified to
conform to the 19992002 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 DecemberYEARS ENDED DECEMBER 31,
(In Thousands)
1999 1998 1997
Unrealized holding gains (losses) on(IN THOUSANDS) 2002 2001 2000
Unrealized holding gains on available-for-sale securities $ (28,481) $860 $12,46813,283 $ 9,802 $ 14,963
Less: Reclassification adjustment for gains realized in income (3,043) (3,001) (1,001)
-----------------------------------------------(2,888) (1,920) (1,377)
- -----------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (31,524) (2,141) 11,46710,395 7,882 13,586
Tax effect 10,718 728 (3,899)
-----------------------------------------------(3,533) (2,680) (4,620)
- -----------------------------------------------------------------------------------------------------------
Net-of-tax amount $(20,806) $ (1,413)6,862 $ 7,568
===============================================5,202 $ 8,966
===========================================================================================================
33
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 basic
and diluted net income per share and the weighted average number of shares of dilutive stock
options.share. 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
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
2002
Earnings per share - basic $ 14,959,000 5,339,449 $2.80
Dilutive effect of stock options 14,592
- ------------------------------------------------------------------------------
Earnings per share - diluted $ 14,959,000 5,354,041 $2.79
==============================================================================
2001
Earnings per share - basic $ 12,052,000 5,348,963 $2.25
Dilutive effect of stock options 1,489
- ------------------------------------------------------------------------------
Earnings per share - diluted $ 12,052,000 5,350,452 $2.25
==============================================================================
2000
Earnings per share - basic $ 8,476,000 5,363,232 $1.58
Dilutive effect of stock options 1,154
- ------------------------------------------------------------------------------
Earnings per share - diluted $ 8,476,000 5,364,386 $1.58
==============================================================================
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 19992002 ranged from $1,078,000$2,161,000 to $6,546,000.$6,458,000. For 1998,2001, these balances ranged
from $4,467,000$1,489,000 to $5,679,000.$5,923,000. Average daily cash balances with the Federal
Reserve Bank required to coverfor services provided to the Bank ranged from $25,000$1,500,000
to $425,000 during 1999$2,500,000 in 2002 and amounted to $425,000$1,500,000 throughout 1998.2001. Total balances
restricted amounted to $6,332,000 at December 31, 19992002 and $4,735,000 at
December 31, 1998 were $1,695,000 and
$5,744,000, respectively.2001.
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.
34
5. SECURITIES
Amortized cost and the fair value of securities at December 31, 1999, 19982002 and 19972001 are
summarized as follows:
DecemberDECEMBER 31, 1999
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value
AVAILABLE-FOR-SALE SECURITES:2002
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,514- $ - $ (16)- $ 2,498-
Obligations of Otherother U.S. Government Agencies 128,494 - (11,803) 116,691agencies 71,657 1,624 (933) 72,348
Obligations of Statesstates and Political 81,219 571 (5,042) 76,748
Subdivisionspolitical subdivisions 127,690 3,482 (293) 130,879
Other Securities 22,829 140 (1,262) 21,707securities 62,296 1,398 (102) 63,592
Mortgage-backed Securities 111,605 396 (4,185) 107,816securities 207,244 5,188 (156) 212,276
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 468,887 11,692 (1,484) 479,095
Marketable equity securities 24,886 8,959 (765) 33,080
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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) $358,929
===============================================================================================================$ 493,773 $ 20,651 $ (2,249) $ 512,175
========================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 617321 $ 38 $ - $ (8) $ 609359
Obligations of Otherother U.S. Government Agencies 949agencies 297 25 - (39) 910322
Mortgage-backed Securities 314securities 89 4 (7) 311
- 93
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,880707 $ 467 $ (54)- $ 1,830
===============================================================================================================774
========================================================================================================================
DecemberDECEMBER 31, 1998
(In Thousands) Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value2001
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 2,5122,503 $ 4454 $ - $ 2,5562,557
Obligations of Otherother U.S. Government Agencies 61,998 237 (394) 61,841agencies 75,295 698 (821) 75,172
Obligations of Statesstates and Political 78,434 3,167political subdivisions 95,835 1,422 (1,996) 95,261
Other securities 34,315 395 (178) 81,423
Subdivisions
Other Securities 16,713 92 (338) 16,46734,532
Mortgage-backed Securities 130,189 1,043 (186) 131,046securities 198,269 1,045 (339) 198,975
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 406,217 3,614 (3,334) 406,497
Marketable equity securities 19,745 7,993 (266) 27,472
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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
===============================================================================================================425,962 $ 11,607 $ (3,600) $ 433,969
========================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 630726 $ 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 $ 6329 $ - $ (2) $ 630735
Obligations of Otherother U.S. Government Agencies 350 8agencies 547 14 - 358561
Mortgage-backed Securities 615 28 (8) 635securities 175 6 - 181
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $1,597 $ 361,448 $ (10)29 $ 1,623
===============================================================================================================- $ 1,477
========================================================================================================================
The amortized cost and fair value of investment debt securities at December 31,
19992002 follow. Maturities of debt securities (including mortgage-backed
securities) are presented based on contractual maturities. Expected maturities will
differ from contractual maturities because monthly principal payments are
received from mortgage-backed securities, and 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.35
DecemberDECEMBER 31, 1999
(In Thousands) Amortized Fair
Cost Value
AVAILABLE-FOR-SALE SECURITIES:2002
AMORTIZED FAIR
(IN THOUSANDS) COST VALUE
AVAILABLE-FOR-SALE SECURITIES:
Due in one year or less $ 7505,008 $ 7575,012
Due after one year through five years 11,525 11,65329,314 30,626
Due after five years through ten years 20,892 20,62359,744 60,762
Due after ten years 313,494 292,427374,821 382,695
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $346,661 $325,460
=========================================================================================================$ 468,887 $ 479,095
==========================================================================================
HELD-TO-MATURITY SECURITIES:
Due in one year or less $ -321 $ -359
Due after one year through five years 1,023 1,006122 123
Due after five years through ten years 767 737234 261
Due after ten years 90 8730 31
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total $1,880 $1,830
=========================================================================================================$ 707 $ 774
==========================================================================================
The following table shows the amortized cost and maturity distribution of the
debt securities portfolio at December 31, 1999:2002:
Within One(IN THOUSANDS, EXCEPT FOR PERCENTAGES) WITHIN ONE - Five FiveFIVE FIVE - Ten After Ten
One Year Yield Years Yield Years Yield Years Yield Total Yield
AVAILABLE-FOR-SALE SECURITIES:TEN AFTER TEN
ONE YEAR YIELD YEARS YIELD YEARS YIELD YEARS YIELD TOTAL YIELD
AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government
agencies $ - - $ 26,104 5.05% $ 22,031 5.74% $ 23,522 5.66% $ 71,657 5.46%
Obligations of states and political
subdivisions - - 2,137 6.69% 4,154 5.81% 121,399 5.14% 127,690 5.19%
Other securities 5,008 4.39% 1,000 9.25% 11,000 5.74% 45,288 6.24% 62,296 6.05%
Mortgage-backed securities - - 73 7.92% 22,559 4.34% 184,612 5.11% 207,244 5.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 5,008 0.00% $ 29,314 5.32% $ 59,744 5.22% $ 374,821 5.29% $ 468,887 5.27%
===================================================================================================================================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 321 5.30% $ - - $ 2,514 5.760.00% $ - - $ - - $ 2,514 5.76321 5.30%
Obligations of Otherother U.S. Government
agencies - - 100 5.63% 197 6.76% - - 297 6.38%
Mortgage-backed securities - - - - - -
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
-22 8.22% 37 5.73% 30 3.48% 89 5.59%
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ - - $1,023 5.90321 5.30% $ 767 6.80122 6.10% $ 90 6.41 $1,880 6.29234 6.60% $ 30 3.48% $ 707 5.79%
===================================================================================================================================
Investment securities carried at approximately $50,755,000 and $57,424,000$90,655,000 at December 31, 19992002 and
1998, respectively,$69,962,000 at December 31, 2001, were pledged as collateral for public
deposits, trusts and certain other deposits as provided by law. In 1999, grossAlso, see Note 9
for information concerning securities pledged to secure borrowing arrangements.
Gross realized gains and losses from the salesales 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 applicablerelated to net realized gains, amounted to $1,035,000, $1,020,000for 2002, 2001 and
$340,000, for 1999, 1998
and 1997, respectively.
112000 were as follows:
(IN THOUSANDS)
2002 2001 2000
Gross realized gains $ 2,926 $ 2,408 $ 2,163
Gross realized losses (38) (488) (786)
- ------------------------------------------------------------------------------------------------------
Net realized gains $ 2,888 $ 1,920 $ 1,377
======================================================================================================
Income tax provision related to net realized gains $ 982 $ 653 $ 468
======================================================================================================
36
6. NET LOANS AND LEASE FINANCE RECEIVABLES
Major categories of loans and leases included in the loan portfolio are summarized as
follows:
At December(IN THOUSANDS) DECEMBER 31, (In Thousands) % ofOF DECEMBER 31, % of
1999 Total 1998 TotalOF
2002 TOTAL 2001 TOTAL
Real Estateestate - Constructionconstruction $ 649 0.21%103 0.02% $ 1,004 0.35%1,814 0.48%
Real Estateestate - Mortgage 247,604 79.64% 230,815 79.30%mortgage 370,453 82.12% 306,264 80.76%
Consumer 29,140 9.37% 30,924 10.63%
Agriculture 1,899 0.61% 1,930 0.66%31,532 6.99% 29,284 7.72%
Agricultural 3,024 0.67% 2,344 0.62%
Commercial 18,050 5.80% 17,630 6.06%30,874 6.84% 24,696 6.51%
Other 1,025 0.33% 1,062 0.37%2,001 0.44% 1,195 0.32%
Political Subdivisions 12,332 3.97% 7,449 2.56%subdivisions 13,062 2.90% 13,479 3.55%
Lease Receivables 222 0.07% 218 0.07%receivables 96 0.02% 152 0.04%
- -------------------------------------------------------------------------------------------------
Total 451,145 100.00% 379,228 100.00%
Less: allowance for loan losses (5,789) (5,265)
- -----------------------------------------------------------------------------------------------------------------------------
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)
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -----------------
Loans, net $ 445,356 $ 373,963
================================================ =================
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$1,564,000 at December 31, 2002 and
$1,875,000, respectively,$1,512,000 at December 31, 2001 have been offset against the carrying value of
loans.
There is no concentration of loans to borrowers engaged in similar businesses or
activities that exceedsexceed 10% of total loans at December 31, 1999.2002.
The Corporation grants commercial, residential and personal loans to customers
primarily in Tioga, Bradford, Sullivan and Lycoming counties.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 DistributionLOAN MATURITY DISTRIBUTION
December 31, 1999
Over One
Year but After
(In Thousands) One Year Less than Five
Or Less Five Years Years Total(IN THOUSANDS)
FIXED RATE LOANS: VARIABLE OR ADJUSTABLE
RATE LOANS:
GREATER THAN GREATER THAN
1 YEAR OR 1-5 YEARS 5 YEARS TOTAL 1 YEAR OR 1-5 YEARS 5 YEARS TOTAL
LESS LESS
Real Estateestate - Constructionconstruction $ 649103 $ - $ - $ 649103 $ - $ - $ - $ -
Real Estateestate - Mortgage 64,704 65,504 117,396 247,604mortgage 22,281 64,577 135,153 222,011 19,323 27,579 101,540 148,442
Consumer 10,731 13,244 5,165 29,140
Agriculture 724 1,069 106 1,8997,189 12,609 2,277 22,075 9,014 244 199 9,457
Agricultural 779 1,021 55 1,855 436 646 87 1,169
Commercial 9,241 6,101 2,708 18,0503,767 8,383 3,746 15,896 11,066 2,849 1,063 14,978
Other 243 283 499 1,025
Political Subdivisions 692 2,919 8,721 12,332
Lease Receivables 21 83 118 2221,066 375 362 1,803 198 - - ------------------------------------------------------------------------------------------------------------------------------198
Political subdivisions 798 3,253 9,010 13,061 - - 1 1
Lease receivables 31 65 - 96 - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total $87,005 $89,203 $134,713 $310,921
==============================================================================================================================$36,014 $90,283 $ 150,603 $ 276,900 $40,037 $31,318 $ 102,890 $ 174,245
==================================================================================================================================
Loans in the preceding table with maturities over one year but less than five
years and over five yearsthat 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$1,252,000 at December 31, 19992002 and $1,135,000$1,050,000 at December 31, 1998.2001. Interest
income on such loans is recorded only as received.
1237
Loans on which the original terms have been restructured totaled $143,000 and
$156,000$66,000 at
December 31, 19992002 and $75,000 at December 31, 1998, respectively.2001. None of the loans on which
the original terms were changed were past due at December 31, 19992002 and 2001.
Loans which were more than 90 days past due and still accruing interest totaled
$2,318,000 at December 31, 19992002 and $2,067,000 at December 31, 1998 totaled $1,797,000 and $1,628,000,
respectively.2001.
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
==============================================================================================================================
(IN THOUSANDS)
2002 2001 2000
Balance at beginning of year $ 5,265 $ 5,291 $ 5,131
Provision charged to operations 940 600 676
Loans charged off (552) (713) (616)
Recoveries 136 87 100
- -------------------------------------------------------------------------
Balance at end of year $ 5,789 $ 5,265 $ 5,291
=========================================================================
Information related to impaired loans as of December 31, 19992002 and 19982001 is as
follows:
(In Thousands) 1999 1998(IN THOUSANDS)
2002 2001
Balance of impaired loans $1,956 $1,135
===============================$ 3,714 $ 582
Specific allowance related to impaired $956 $290
Loansloans $ 1,877 $ 73
The average balance of impaired loans amounted to $1,582,000, $1,397,000$3,838,000 in 2002, $781,000
in 2001 and $1,208,000 for 1999, 1998 and 1997, respectively.$1,079,000 in 2000.
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
(IN THOUSANDS)
2002 2001 2000
Cash receipts applied to principal $ 497 $ 35 $ 503
Cash receipts recognized as interest income 247 14 87
- ----------------------------------------------------------------------------
Total cash receipts $ 744 $ 49 $ 590
============================================================================
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
===================================================================================================================
(IN THOUSANDS)
DECEMBER 31,
2002 2001
Land $ 1,275 $ 1,126
Buildings and improvements 12,295 11,313
Furniture and equipment 9,022 8,565
- ------------------------------------------------------------------------
Total 22,592 21,004
Less: accumulated depreciation (12,259) (11,037)
- ------------------------------------------------------------------------
Net $ 10,333 $ 9,967
========================================================================
38
Depreciation expense included in occupancy expense and furniture and equipment
expense was comprisedas follows:
(IN THOUSANDS)
2002 2001 2000
Occupancy expense $ 432 $ 401 $ 370
Furniture and equipment expense 914 899 716
- ----------------------------------------------------------------------------
Total $ 1,346 $ 1,300 $ 1,086
============================================================================
8. DEPOSITS
Balances and maturities of the following:time deposits are as follows:
Years Ended December(IN THOUSANDS)
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 Total2005 2006 2007 THEREAFTER TOTAL
Certificates of Deposit $127,796 $20,369 $14,648 $10,878 $19,743 $ 90,867 $33,564 $9,058 $6,815 $2,765251 $ 63 $143,132193,685
Yield 5.20% 5.54% 5.71% 5.53% 5.26% 5.60% 5.33%3.18% 3.75% 4.38% 4.84% 4.83% 4.47% 3.59%
Individual Retirement Accounts 47,218 30,41676,875 22,690 - - 169 - 99,734
Yield 5.00% 5.00% - - 77,6344.62% - 5.00%
- -------------------------------------------------------------------------------------------------------------------------------
Total Time Deposits $204,671 $43,059 $14,648 $10,878 $19,912 $ 251 $ 293,419
- -------------------------------------------------------------------------------------------------------------------------------
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%
===================================================================================================================================3.86% 4.41% 4.38% 4.84% 4.83% 4.47% 4.07%
===============================================================================================================================
DecemberDECEMBER 31, 1998
(In Thousands) 1999 2000 2001
2002 2003 Thereafter Total2004 2005 2006 THEREAFTER TOTAL
Certificates of Deposit $136,845 $25,406 $ 80,445 $33,422 $12,240 $6,369 $4,983 $16 $137,4757,004 $ 3,808 $ 6,289 $ 169 $ 179,521
Yield 5.17% 5.76% 5.82% 5.88% 5.67% 4.90% 5.42%4.59% 4.53% 4.99% 5.32% 5.01% 5.00% 4.63%
Individual Retirement Accounts 51,000 25,97754,607 29,533 - - - - 76,97784,140
Yield 5.00% 5.00% - - - - 5.00%
- -------------------------------------------------------------------------------------------------------------------------------
Total Time Deposits $191,452 $54,939 $ 7,004 $ 3,808 $ 6,289 $ 169 $ 263,661
- -----------------------------------------------------------------------------------------------------------------------------------
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%
===================================================================================================================================4.71% 4.78% 4.99% 5.32% 5.01% 5.00% 4.75%
===============================================================================================================================
Included in interest-bearing deposits are time deposits issued in the amount of
$100,000 or more. These certificates and theirAs of December 31, 2002, the remaining maturities or repricing
frequency of time deposits of $100,000 or more 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(IN THOUSANDS)
Three months or less $28,973
Over 3 months through 12 months 33,212
Over 1year through 3 years 4,919
Over 3 years 5,859
- ---------------------------------------------------
Total $72,963
===================================================
Interest expense from deposits of $100,000 or more amounted to $1,760,000,
$1,047,000$3,238,000 in
2002, $3,220,000 in 2001 and $898,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.$1,925,000 in 2000.
39
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
========================================================================================================
(IN THOUSANDS) AT DECEMBER 31,
2002 2001
Overnight borrowings (a) $ 14,350 $ 6,300
Federal Funds Purchased generally represent overnightHome Loan Bank of Pittsburgh borrowings (b) 2,500 22,000
Customer repurchase agreements (c) 20,218 19,764
Other repurchase agreements (d) 6,567 10,000
- --------------------------------------------------------------------------------
Total short-term borrowings $ 43,635 $ 58,064
================================================================================
The weighted average interest rate on total short-term borrowings outstanding
was 1.77% at December 31, 2002 and 3.44% at December 31, 2001. The maximum
amount of total short-term borrowings outstanding at any month-end was
$43,635,000 in 2002 and $96,167,000 in 2001.
(a) Overnight borrowings include federal funds purchased overnight from
correspondent banks and overnight borrowings from correspondent banks.the Federal Home Loan Bank of
Pittsburgh (FHLB-Pittsburgh) on the "Open Repo Plus" facility. The maximum
month-end amount of such borrowingborrowings was $14,350,000 in 1999, 19982002, $20,000,000 in 2001
and 1997 was $14,500,000, $2,000,000 and $10,000,000,
respectively.$16,500,000 in 2000. The average amount of such borrowings was $6,085,000, $2,801,000$2,347,000 in
2002, $4,012,000 in 2001 and $663,000$5,721,000 in 1999, 1998 and 1997, respectively, and the weighted2000. Weighted average interest rates
were 4.91%1.86% in 1999, 4.75%2002, 4.58% in 19982001 and 4.98%6.70% in 1997.2000.
(b) Flexline is a line of credit with the Federal Home Loan Bank ofShort-term FHLB - 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 DecemberAT DECEMBER 31,
(In Thousands) 1999 1998(IN THOUSANDS) 2002 2001
Fixed Rate 5.75%5.25% matured January 24, 2002 $ - $ 5,000
Fixed Rate 5.20% matured February 19, 2002 - 7,000
Fixed Rate 2.38% matured October 30, 2002 - 10,000
Fixed Rate 1.51% maturing February 14, 2000 $10,000 $19, 2003 1,000 -
Fixed Rate 5.72%1.68% 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 10,000November 19, 2003 1,500 -
- --------------------------------------------------------------------------------
Total Short-Term Federal Home Loan Bank Borrowings $58,000 $10,000short-term FHLB - Pittsburgh borrowings $ 2,500 $ 22,000
================================================================================
15
Collateral for Federal Home Loan BankFHLB - Pittsburgh loans is described below under long-term
borrowings.
d)the "Long-term
Borrowings" section of this note.
(c) 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$23,305,000 at December 31, 19992002 and
$2,080,000$32,431,000 at December 31, 1998.
(e) Repurchase Agreements2001.
(d) Other repurchase agreements included in Short-Termshort-term borrowings are as
follows:
At DecemberAT DECEMBER 31,
(In Thousands) 1999 1998(IN THOUSANDS) 2002 2001
Fixed Rate 5.18%5.72% matured January 3, 2002 $ - $ 10,000
Fixed Rate 2.91% maturing March 31, 2000 $16,881 $ -
Fixed Rate 5.50% maturing June 19, 2000 9,45025, 2003 6,567 -
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------
Total Repurchase Agreements $26,331short-term other repurchase agreements $ -
=========================================================================6,567 $ 10,000
================================================================================
The terms and collateral related to repurchase agreements are described under
the "Long-term Borrowings" section of this note.
40
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
(IN THOUSANDS) AT DECEMBER 31,
2002 2001
Federal Home Loan Bank of Pittsburgh borrowings (e) $ 170,061 $ 125,584
Repurchase agreements (f) 38,153 -
- -------------------------------------------------------------------------------------------
Total long-term borrowings $ 208,214 $ 125,584
===========================================================================================
(e) Long-term borrowings from FHLB - - -------------------------------------------------------------------------------
Total Long Term Borrowings $35,025 $60,044
===============================================================================
(f) Federal Home Loan Bank Loans included in Long-Term BorrowingsPittsburgh are as follows:
(In Thousands) At December(IN THOUSANDS) AT DECEMBER 31,
1999 19982002 2001
VariableFixed rate at 4.74%5.095%, matured May 1, 2002 $ - $ 15,000
Fixed rate at 5.38%, matured July 24, 2002 - 5,000
Fixed rate at 5.37%, maturing October 26, 2000 $ 5,000 $ 5,000
VariableJanuary 12, 2003 (*) - 10,000
Fixed rate at 5.60%5.48%, maturing January 24, 2003 (*) - 5,000
Fixed rate at 4.79%, maturing April 26, 2003 10,000 10,000
Fixed rate at 4.82%, maturing May 14, 2003 10,000 10,000
Fixed rate at 4.63%, maturing July 11, 20022003 10,000 10,000
VariableFixed rate at 5.19%4.65%, maturing July 22, 2003 -August 30, 2004 10,000 Variable10,000
Fixed rate at 4.32%3.84%, maturing October 20, 200322, 2004 10,000 10,000
Fixed rate at 2.34%, maturing November 19, 2004 3,000 -
Fixed rate at 2.16%, maturing December 20, 2004 5,000 -
Fixed rate at 4.19%, maturing January 24, 2005 5,000 -
Fixed rate at 4.04%, maturing February 22, 2005 7,000 -
Fixed rate at 5.05%, maturing August 29, 2005 5,000 5,000
Fixed rate at 4.145%, maturing October 31, 2005 5,000 5,000
Fixed rate at 2.84%, maturing November 21, 2005 2,500 -
Fixed rate at 2.68%, maturing December 20, 2005 5,000 -
Fixed rate at 4.83%, maturing February 21, 2006 20,000 20,000
Fixed rate at 4.455%, maturing October 30, 2006 5,000 5,000
Fixed rate at 3.28%, maturing November 20, 2006 2,000 -
Fixed rate at 3.09%, maturing December 20, 2006 5,000 -
Fixed rate at 4.58%, maturing May 1, 2007 15,000 -
Fixed rate at 3.66%, maturing October 15, 2007 10,000 -
Fixed rate at 3.45%, maturing December 24, 2007 10,000 -
Fixed rate at 4.98%, maturing March 23, 2011 5,000 5,000
Fixed rate at 4.54%, maturing January 4, 2012 10,000 -
Fixed rate at 6.86%, maturing December 30, 2016 555 571498 518
Fixed rate at 6.83%, maturing June 5, 2017 70 7363 66
- ------------------------------------------------------------------------------------------
Total long-term FHLB - -----------------------------------------------------------------------------------------------
Total Federal Home Loan Bank Borrowings $25,625 $35,644
===============================================================================================Pittsburgh borrowings $ 170,061 $ 125,584
==========================================================================================
All Federal Home Loan Bank(*) In November 2002, the Corporation paid off these loans, and incurred
prepayment penalties totaling $101,000. The prepayment penalties are included in
interest expense in the Consolidated Statement of Income.
The FHLB - Pittsburgh loan facilities are collateralized by Federal Home Loan Bank
Stock, mortgage-backedqualifying
securities and first mortgage loans with a book value totaling $292,759,000$387,091,000 at
December 31, 1999.
(g)2002. Also, the FHLB - Pittsburgh loan facilities require the
Corporation to invest in established amounts of FHLB - Pittsburgh stock. The
carrying values of the Corporation's holdings of FHLB - Pittsburgh stock were
$10,202,000 at December 31, 2002 and $8,129,000 at December 31, 2001.
41
(f) Repurchase Agreementsagreements included in Long-Term Borrowingslong-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
============================================================================================================
AT DECEMBER 31,
(IN THOUSANDS) 2002 2001
Fixed Rate 2.53% maturing February 25, 2003 $ 7,500 $ -
Fixed Rate 3.45% maturing February 25, 2004 7,500 -
Fixed Rate 3.96% maturing March 25, 2004 6,567 -
Fixed Rate 4.15% maturing February 25, 2005 5,000 -
Fixed Rate 4.63% maturing March 25, 2005 6,766 -
Fixed Rate 4.63% maturing February 25, 2006 4,820 -
- -----------------------------------------------------------------------------
Total long-term repurchase agreements $ 38,153 $ -
=============================================================================
Securities sold under repurchase agreements were delivered to the broker-dealers
who arrangearranged 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 was $54,763,000 at December 31, 19992002 and 1998 was
$32,512,000 and $25,967,000.$9,975,000 at
December 31, 2001. Average daily repurchase agreement borrowings for
the years ended December 31, 1999, 1998, and 1997 amounted to
$46,059,000,
$28,967,000$36,482,000 in 2002, $14,217,000 in 2001 and $37,481,000, respectively.$14,372,000 in 2000. During 2002,
2001 and 2000, the maximum amounts of outstanding borrowings under repurchase
agreements with broker-dealers were $44,720,000, $19,450,000 and $35,731,000.
The weighted average interest rate on repurchase agreements was 3.72%, 6.20% in
2001 and 5.68% in 2000.
10. DERIVATIVE FINANCIAL INSTRUMENTS
In June 2001, the Corporation began to utilize derivative financial instruments
related to a new certificate of deposit product called the "Index Powered
Certificate of Deposit" (IPCD). IPCDs have a term of 5 years, with interest paid
at maturity based on 90% of the appreciation (as defined) in the S&P 500 index.
There is no guaranteed interest payable to a depositor of an IPCD - however,
assuming an IPCD is held to maturity, a depositor is guaranteed the return of
his or her principal, at a minimum.
Statement of Financial Accounting Standards No. 133 requires the Corporation to
separate the amount received from each IPCD issued into 2 components: (1) an
embedded derivative, and (2) the principal amount of each deposit. Embedded
derivatives are derived from the Corporation's obligation to pay each IPCD
depositor a return based on appreciation in the S&P 500 index. Embedded
derivatives are carried at fair value, and are included in other liabilities in
the consolidated balance sheet. Changes in fair value of the embedded derivative
are included in other expense in the consolidated income statement. The
difference between the contractual amount of each IPCD issued, and the amount of
the embedded derivative, is recorded as the initial deposit (included in
interest-bearing deposits in the consolidated balance sheet). Interest expense
is added to principal ratably over the term of each IPCD at an effective
interest rate that will increase the principal balance to equal the contractual
IPCD amount at maturity.
In connection with IPCD transactions, the Corporation has entered into Equity
Indexed Call Option (Swap) contracts with FHLB-Pittsburgh. Under the terms of
the Swap contracts, the Corporation must pay FHLB-Pittsburgh quarterly amounts
calculated based on the contractual amount of IPCDs issued times a negotiated
rate. In return, FHLB-Pittsburgh is obligated to pay the Corporation, at the
time of maturity of the IPCDs, an amount equal to 90% of the appreciation (as
defined) in the S&P 500 index. If the S&P 500 index does not appreciate over the
term of the related IPCDs, the FHLB-Pittsburgh would make no payment to the
Corporation. The effect of the Swap contracts is to limit the Corporation's cost
of IPCD funds to the market rate of interest paid to FHLB-Pittsburgh. (In
addition, the Corporation pays a fee of 0.75% to a consulting firm at inception
of each deposit. This fee is amortized to interest expense over the term of the
IPCDs.) Swap liabilities are carried at fair value, and included in other
liabilities in the consolidated balance sheet. Changes in fair value of swap
liabilities are included in other expense in the consolidated income statement.
42
Amounts recorded as of and for 1999, 1998the years ended December 31, 2002 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. ESTIMATED2001
related to IPCDs are as follows (in thousands):
AT DECEMBER 31,
2002 2001
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $ 3,028 $ 1,410
Carrying value of IPCDs 2,572 1,154
Carrying value of embedded derivative liabilities 156 233
Carrying value of Swap contract liabilities 309 31
FOR THE YEARS ENDED
DECEMBER 31,
2002 2001
Interest expense 88 17
Other expense 8 7
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value estimatesis best determined based upon quoted market prices. However, in many
instances, there are made at a specific point in time, based on relevantno quoted market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offeringprices 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,instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value
estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristicsmay not be realized in an immediate settlement of variousthe instrument.
Statement of Financial Accounting Standards No. 107 excludes certain 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 affectall nonfinancial instruments from its disclosure requirements.
Therefore, the estimates. Estimatedaggregate fair values have been determined byvalue amounts presented may not represent the
Corporation using historical data, and an
estimation methodology suitable for each category of financial instruments. The
method for determining the estimatedunderlying fair value of the Corporation's investment
securities is described in Note 1.Corporation.
The Corporation's fair value estimates,Corporation used the following methods and assumptions are set forth belowin estimating fair
value disclosures for the Corporation's other
financial instruments.instruments:
CASH AND DUE FROM BANKSCASH EQUIVALENTS - The carrying amounts forof cash and due from banks
reported in the consolidated balance sheetshort-term
instruments approximate fair values.
SECURITIES - Fair values for securities, excluding restricted equity securities,
are based on quoted market prices. The carrying value of restricted equity
securities approximates these assets' fair values.value based on applicable redemption provisions.
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
1743
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 (by definition) equal to the amount payable on demand at December
31, 19992002 and 1998.2001. 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 aboveof deposits 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 - RatesThe fair value of borrowings is estimated using discounted cash
flow analyses based on rates currently available to the Corporation for borrowed funds
with similar
termstypes of borrowing arrangements.
ACCRUED INTEREST - The carrying amounts of accrued interest receivable and
remaining maturitiespayable approximate fair values.
EMBEDDED DERIVATIVE LIABILITIES - IPCDS - The fair values of embedded
derivatives are used to estimatecalculated by a third party. Factors that affect 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 CREDITembedded derivatives include term to maturity, market interest rates and
other market factors that affect the present value of the Corporation's
obligation to pay each IPCD depositor a return based on appreciation in the S&P
500 index.
EMBEDDED DERIVATIVE LIABILITIES - There is no
material difference between the notional amount andEQUITY OPTION SWAP CONTRACTS - The fair values
of equity option Swap contracts are calculated by a third party. Factors that
affect the fair value of off-balance sheet items which totaled $65,272,000 at Decemberequity option Swap contracts include: (1) the
negotiated rate associated with the Corporation's obligation to make quarterly
payments to the FHLB-Pittsburgh over the term of each IPCD; and (2) term to
maturity, market interest rates and other market factors that affect the present
value of the FHLB-Pittsburgh's obligation to pay the Corporation a return based
on appreciation in the S&P 500 index.
The estimated fair values, and related carrying amounts, of the Corporation's
financial instruments are as follows:
(IN THOUSANDS) AT DECEMBER 31,
2002 2001
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
Financial assets:
Cash and cash equivalents $ 14,900 $14,900 $ 16,036 $ 16,036
Available-for-sale securities 512,175 512,175 433,969 433,969
Held-to-maturity securities 707 774 1,448 1,477
Restricted equity securities 10,202 10,202 8,129 8,129
Loans, net 445,356 447,382 373,963 377,124
Accrued interest receivable 5,960 5,960 4,871 4,871
Financial liabilities:
Deposits 640,304 643,305 576,274 578,319
Short-term borrowings 43,635 43,662 58,064 58,148
Long-term borrowings 208,214 215,875 125,584 128,977
Accrued interest payable 1,307 1,307 1,420 1,420
Embedded derivative liabilities -
IPCDs 156 156 233 233
Equity option Swap contracts -
IPCDs 309 309 31 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.
44
12. 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,
19992002 and 2001, 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:(IN THOUSANDS)
PENSION POSTRETIREMENT
BENEFITS BENEFITS
2002 2001 2002 2001
CHANGE IN BENEFIT
OBLIGATION:
Benefit obligation at beginning of year $6,870 $6,059 $ 732 $7157,679 $ 7,646 $ 888 $ 790
Service cost 302 267 28 25349 271 24 19
Interest cost 460 424 50 42553 497 57 58
Plan participants' contributions 44 54- - 115 80
Actuarial loss (gain) loss (199) 384 15 -617 (338) (25) 79
Benefits paid (292) (264) (98) (104)(429) (397) (173) (138)
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $7,141 $6,870 $ 771 $732
=============================================================================================================================8,769 $ 7,679 $ 886 $ 888
==============================================================================================
Postretirement
(In Thousands) Pension Benefits Benefits
1999 1998 1999 19982002 2001 2002 2001
CHANGE IN PLAN ASSETS:
Fair value of plan assets at
Beginningbeginning of year $8,378 $7,628$ 8,423 $ 9,317 $ - $ -
Actual return on plan assets 1,151 1,014(326) (497) - -
Employer contribution 54 50- - 58 58
Plan participants' contributions 44 54- - 115 80
Benefits paid (292) (264) (98) (104)
-----------------------------------------------------------(429) (397) (173) (138)
- ----------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $9,237 $8,378 $ 7,668 $ 8,423 $ - $ -
=========================================================================================================================================================
Funded status $(1,101) $ 2,096 $1,508 $(771) $(732)744 $ (886) $ (888)
Unrecognized net actuarial loss (gain) loss (1,391) (790) (96) (111)1,726 90 (43) (17)
Unrecognized transition obligation (251) (274) 475 511(182) (205) 365 401
- ----------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 454443 $ 444 $(392) $(332)
============================================================629 $ (564) $ (504)
==============================================================================================
Pension Benefits Postretirement Benefits
1999 1998 1999 1998
WEIGHTED-AVERAGE
ASSUMPTIONS AS OF
DECEMBER 31:2002 2001 2002 2001
WEIGHTED-AVERAGE ASSUMPTIONS:
Discount rate 6.75% 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 4.75% 5.00% 5.00% N/A N/A N/A
45
Pension Benefits Postretirement Benefits
(In Thousands) 1999 1998 1997 1999 1998 1997PENSION BENEFITS POSTRETIREMENT BENEFITS
COMPONENTS OF NET
PERIODIC BENEFIT COST: 2002 2001 2000 2002 2001 2000
Service cost $302 $ 267349 $ 234271 $ 28308 $ 25 $1924 $ 19 $ 27
Interest cost 460 424 400 50 42 48553 497 491 57 58 52
Expected return on plan assets (749) (640) (550)(702) (787) (815) - - -
Amortization of transition obligation (23) (23) (23) 36 36 36
Amortization of prior service cost - - - - - -37 37
Recognized net actuarial loss (gain) loss8 (30) (64) 1 1 (2)
- - - - (2) (7)
- - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost (benefit) $(10) $ 28185 $ 61 $114 $101 $96
====================================================================================================================================(72) $ (103) $ 118 $ 115 $ 114
============================================================================================================
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 planPlan depend upon the tax deferred
contributions of employees. The Corporation's total basic and matching
contributions were $667,000 in 2002, $588,000 in 2001 and $511,000 in 2000.
Effective December 31, 2001, the Corporation amended the 401(k) Plan to convert
the "Basic Stock Fund" component of the Plan to an Employee Stock Ownership Plan
(ESOP). A portion of the Corporation's basic contributions to the Plan are made
to the ESOP, and the Plan uses these funds to purchase Corporation stock for 1999, 1998the
accounts of Plan participants. These purchases are made on the market (not
directly from the Corporation), and 1997employees are not permitted to purchase
Corporation stock under the Plan. The Plan includes a diversification feature
which permits Plan participants, upon reaching age 55 and 10 years of service
(as defined), to sell up to 50% of their Corporation shares back to the Plan
over a period of 6 years. This diversification feature will become effective in
2003, and accordingly, as of December 31, 2002, there were $513,000, $477,000no shares allocated
for repurchase by the Plan.
Dividends paid on shares held by the ESOP are charged to retained earnings. All
Corporation shares owned through the ESOP are included in the calculation of
weighted-average shares outstanding for purposes of calculating earnings per
share - basic and $436,000, respectively.diluted. As of December 31, 2002, the ESOP held 189,263 shares
of Corporation stock, all of which had been allocated to Plan participants. The
Corporation's contributions to the ESOP portion of the Plan for 2002 (included
in total contributions reported above) totaled $343,000.
The Corporation also has a nonqualified supplemental deferred compensation
arrangement with its key officers. Charges to expense for officers' supplemental
deferred compensation for 1999, 1998were $44,000 in 2002, $38,000 in 2001 and 1997 amounted to $54,000, $42,000 and
$35,000, respectively.
STOCK OPTION$70,000 in 2000.
STOCK-BASED COMPENSATION PLANS
The Corporation establishedhas a Stock Incentive Plan for a selected group of senior
officers. ApproximatelyA total of 180,000 shares of common stock may be issued under the
Stock Incentive Plan. The recipients'Awards may be made under the Stock Incentive Plan in the
form of qualified options ("Incentive Stock Options," as defined in the Internal
Revenue Code), nonqualified options, stock appreciation rights or restricted
stock. Through 1999, all awards under the Stock Incentive Plan were Incentive
Stock Options, with exercise prices equal to exercise these options
vest ratablythe market price of the stock at
the date of grant, ratable vesting over a 5-year period5 years and each option has a contractual expiration of
10 years. In 2000 and 2002, there were awards of Incentive Stock Options and
restricted stock. The Incentive Stock Options granted in 2000 and 2002 have an
exercise price equal to the market value of the stock at the date of grant, vest
after 6 months and expire after 10 years. The restricted stock awards vest
ratably over 3 years.
Also, the Corporation establishedhas an Independent Directors Stock Incentive Plan
(formerly called the Independent Directors Stock Option Plan which allows the issuancePlan). In 2001, this
plan was amended to permit awards of approximately 25,000nonqualified stock options and/or
restricted stock to non-employee directors. As amended, a total of 50,000 shares
of common stock to non-employee directors.may be issued under the Independent Directors Stock Incentive
Plan. The recipients' rights to exercise thesestock options under this plan expire 10
years from the date of grant. The exercise prices of all stock options awarded
under the plansIndependent Directors Stock Incentive Plan are equal to fair market value
as of the dates of grant. The restricted stock awards vest ratably over 3 years.
Effective January 2, 2003, the Corporation granted options to purchase a total
of 30,942 shares of common stock through the Stock Incentive and Independent
Directors Stock Incentive Plans. The exercise price for these options is $31.10
per share, which was the market price at the date of grant. Also, effective
January 2, 2003, the grant
20Corporation awarded a total of 3,444 shares of restricted
stock under the Stock Incentive and Independent Directors Stock Incentive Plans.
The stock options and restricted stock awards that were awarded in January 2003
are not included in the tables that follow.
46
TheAs described in Note 1, 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 1997the following table.
(NET INCOME IN THOUSANDS)
2002 2001 2000
Net income
As reported $11,485 $11,077 $10,107$14,959 $12,052 $8,476
Pro forma $11,428 $11,048 $10,096$14,768 $11,989 $8,399
Earnings per share-basic
As reported $2.21 $2.13 $1.94$2.80 $2.25 $1.58
Pro forma $2.20 $2.12 $1.94$2.77 $2.24 $1.57
Earnings per share-diluted
As reported $2.79 $2.25 $1.58
Pro forma $2.76 $2.24 $1.57
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 1997assumptions:
2002 2001 2000
Volatility 17% 17% 18% 18% 19%
Expected option lives 6 Years 6 Years 6 Years
Risk-free interest rate 6.46% 5.05% 5.78%5.00% 5.08% 5.00%
Dividend yield 3.76% 3.78% 4.05%4.16% 3.57% 3.96%
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 19972002 2001 2000
- - -----------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
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 $22.6583,236 $ 27.73 100,810 $ 28.04 82,420 $ 29.63
Granted 25,550 $27.67 20,500 $36.40 17,800 $32.2740,815 $ 25.50 1,976 $ 21.25 18,615 $ 20.91
Exercised (680) $24.06 (1,010) $24.03 (590) $20.00(3,562) $ 20.97 - $ - (225) $ 20.00
Forfeited (1,300) $27.89- $ - (19,550) $ 28.72 - -
(700) $20.00
- - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 82,420 $29.63 58,850 $30.38 39,360 $27.09
===================================================================================================================================120,489 $ 27.17 83,236 $ 27.73 100,810 $ 28.04
=============================================================================================================================
Options exercisable at year-end 30,700 $28.69 17,990 $26.99 8,720 $23.65110,549 $ 26.95 64,906 $ 26.94 48,215 $ 28.69
Fair value of options granted $ 5.273.67 $ 5.853.48 $ 5.883.14
2147
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
===================================================================================================================
12.2002:
OUTSTANDING EXERCISABLE
AT REMAINING AT
DECEMBER 31, CONTRACTUAL DECEMBER 31,
EXERCISE PRICES 2002 LIFE IN YEARS 2002
$20.00 2,995 3 2,995
$25.50 - $27.84 9,700 4 9,700
$33.25-$36.50 12,850 5 12,850
$33.13-$36.38 16,500 6 13,760
$25.00-$27.00 20,400 7 13,200
$20.25-$21.25 17,587 8 17,587
$25.50 40,457 9 40,457
- -------------------------------------------------------------------------------
120,489 110,549
===============================================================================
The following table summarizes restricted stock awards through December 31,
2002:
2002 2001 2000
Number of shares awarded 4,431 221 1,752
Market price of stock at date of grant $ 25.50 $ 21.25 $ 20.25
Compensation expense related to restricted stock was $80,000 in 2002 and $22,000
in 2001. There was no compensation expense related to restricted stock awards in
2000.
13. 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 19982002 and 2001:
(IN THOUSANDS)
2002 2001
Deferred tax liabilities:
Depreciation $ 275 $ 240
Prepaid pension 155 220
Accretion on securities 6 2
Investments in limited partnerships 21 24
Unrealized holding gains on securities 6,257 2,722
- ---------------------------------------------------------------------
Total 6,714 3,208
- ---------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses (2,026) (1,843)
Postretirement and sick benefits (216) (194)
Loan fees and costs (76) (60)
Supplemental executive retirement plan (175) (168)
Restricted stock compensation (27) -
- ---------------------------------------------------------------------
Total (2,520) (2,265)
- ---------------------------------------------------------------------
Deferred tax liability, net $ 4,194 $ 943
=====================================================================
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
==========================================================================================================
provision:
2002 2001 2000
Currently payable $ 4,018 $ 3,371 $ 1,882
Deferred (284) (349) (63)
- --------------------------------------------------------------------------------
Total provision $ 3,734 $ 3,022 $ 1,819
================================================================================
48
Reconciliation of tax provision:
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) Amount2002 2001 2000
AMOUNT % AmountAMOUNT % AmountAMOUNT %
Expected Provisionprovision $ 5,194 35.006,543 35.00% $ 5,111 35.005,276 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)3,603 35.00%
Tax-exempt interest income (2,223) (11.89) (1,730) (11.48) (1,738) (16.88)
Nondeductible Interest Expense 232 1.56 192 1.30 167 1.30interest expense 239 1.28 226 1.50 280 2.72
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 - 12received deduction (280) (1.50) (267) (1.77) (235) (2.28)
Increase in cash surrender value of
life insurance (299) (1.60) (317) (2.10) - -
Surtax exemption (176) (0.94) (151) (1.00) (103) (1.00)
Other, net (70) (0.37) (15) (0.10) 12 0.11
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Effective Income Tax and Rates $3,354 22.60 $3,527 24.20 $3,166 23.90
=============================================================================================================================income tax provision $ 3,734 19.98% $ 3,022 20.05% $ 1,819 17.67%
=====================================================================================================================
22
13.14. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiarysubsidiaries
and any associates of the foregoing persons are as follows:
(In Thousands)(IN THOUSANDS)
Beginning New Other Ending
Name of Borrower Balance Loans Repayments Changes Balance
BEGINNING NEW OTHER ENDING
BALANCE LOANS REPAYMENTS CHANGES BALANCE
15 Directors,
14 directors, 6 Executive Officers 1999 $4,709 $2,551executive officers 2002 $ (1,056)6,535 $ 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 5,5782,464 $ (2,722) $ 346 $ 6,623
14 directors, 6 executive officers 2001 5,730 658 (1,833) 1,980 6,535
14 directors, 6 executive officers 2000 6,640 724 (1,450) (184) 5,730
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 net
increases in existing lines of credit and transfers in and out of the related
party category.
14.15. 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 financial
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 financial
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, 19992002 and 19982001 are as follows:
(In Thousands) 1999 1998(IN THOUSANDS) 2002 2001
Commitments to extend credit $59,215 $48,610
Standby$ 103,138 $ 86,498
Financial standby letters of credit $ 6,057 $ 5,40010,753 5,508
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
49
collateral obtained, if deemed necessary by the Corporation, for extensions of
credit is based on management's credit assessment of the counterparty.
StandbyFinancial 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.Some of the financial standby letters of credit are collateralized by real
estate or other assets, while others are unsecured. The extent to which proceeds
from liquidation of collateral would be expected to cover the maximum potential
amount of future payments related to financial standby letters of credit is not
estimable. The Corporation has recorded no liability associated with financial
standby letters of credit as of December 31, 2002 and 2001.
Financial standby letters of credit as of December 31, 2002 expire as follows:
(IN THOUSANDS)
YEAR OF EXPIRATION AMOUNT
- ----------------------------------------
2003 $ 5,462
2004 2,605
2005 1,165
2006 593
2007 928
- ----------------------------------------
Total $ 10,753
========================================
16. CONTINGENCIES
In the normal course of business, the Corporation may be subject to pending and
threatened lawsuits in which claims for monetary damages could be asserted. In
management's opinion, the Corporation's financial position and results of
operations would not be materially affected by the outcome of such legal
proceedings.
17. 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'sCorporation's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank'stheir assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amountamounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and 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(as defined), and of Tier I capital (as
defined), to average assets (as defined). Management believes, as of December 31,
1999,2002 and 2001, that the Corporation and the Bank meetsmeet all capital adequacy
requirements to which it isthey are subject.
23
To be categorized as well capitalized, a bankan institution must maintain minimum
total risk based, Tier I risk based and Tier I leverage ratios as set forth in
the following table. The Corporation's and the Bank's actual capital amounts and
ratios are also 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
===========================================================================50
Minimum Well
Actual Requirements Capitalized
- - ---------------------------------------------------------------------------------------------------------------------
As of December 31, 1999(DOLLARS IN THOUSANDS) MINIMUM
TO BE WELL
MINIMUM CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENT ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------------------
DECEMBER 31, 2002:
Total Capitalcapital to Risk Weighted Assets 23.60% >=risk-
weighted assets:
Consolidated $113,168 20.09% $ 45,055 greater than $ 56,319 greater than
or equal to 8% >=or equal to 10%
Bank 94,044 17.17% 43,825 greater than 54,782 greater than
or equal to 8% or equal to 10%
Tier I Capital1 capital to Risk Weighted Assets 21.40% >=risk-
weighted assets:
Consolidated 103,691 18.41% 22,528 greater than 33,792 greater than
or equal to 4% >=or equal to 6%
Bank 86,140 15.72% 21,913 greater than 32,869 greater than
or equal to 4% or equal to 6%
Tier I1 capital to
Average Assets 14.54% >=average assets:
Consolidated 103,691 10.53% 39,372 greater than 49,215 greater than
or equal to 4% >=or equal to 5%
As of DecemberBank 86,140 8.94% 38,520 greater than 48,150 greater than
or equal to 4% or equal to 5%
DECEMBER 31, 19982001:
Total Capitalcapital to Risk Weighted Assets 24.73% >=risk-
weighted assets:
Consolidated $103,645 22.94% $ 36,144 greater than $ 45,180 greater than
or equal to 8% >=or equal to 10%
Bank 87,070 19.69% 35,372 greater than 44,215 greater than
or equal to 8% or equal to 10%
Tier I Capital1 capital to Risk Weighted Assets 21.68% >=risk-
weighted assets:
Consolidated 94,903 21.01% 18,072 greater than 27,108 greater than
or equal to 4% >=or equal to 6%
Bank 79,855 18.06% 17,686 greater than 26,529 greater than
or equal to 4% or equal to 6%
Tier I1 capital to
Average Assets 12.80% >=average assets:
Consolidated 94,903 11.18% 33,960 greater than 42,450 greater than
or equal to 4% >=or equal to 5%
Bank 79,855 9.63% 33,164 greater than 41,455 greater than
or equal to 4% or equal to 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, Companythe
Corporation's dividends in 20002003 may not exceed $13,735,000,$15,299,000, plus Companyconsolidated
net income for 1999.2003. 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$76,113,000 at December 31, 1999,2002, 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)accumulated other comprehensive income) or $7,202,000$8,614,000 at December 31,
1999.
242002.
51
16.18. 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
=======================================================================================================================
DECEMBER 31,
(IN THOUSANDS) 2002 2001
ASSETS
Cash $ 592 $ 333
Investment in subsidiaries:
Citizens & Northern Bank 95,879 82,914
Citizens & Northern Investment Corporation 18,929 16,383
Bucktail Life Insurance company 2,006 2,010
Other assets 45 13
- ---------------------------------------------------------------------------
TOTAL ASSETS $117,451 $101,653
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable $ 1,586 $ 1,466
Other liabilities 28 -
Stockholders' equity 115,837 100,187
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $117,451 $101,653
===========================================================================
CONDENSED INCOME STATEMENT
(In Thousands) Years Ended December
YEARS ENDED DECEMBER 31,
1999 1998 1997(IN THOUSANDS) 2002 2001 2000
DividendDividends from Subsidiary $7,000 $5,500 $3,980Citizens & Northern Bank $ 7,063 $ 6,286 $ 4,077
Other Dividend Income 224 218 186
Available-for-Saledividend income 174 250 -
Securities Gains 159 822 74
Expenses (184) (356) (77)gains - - ------------------------------------------------------------------------------------------------------------------------
Expenses (140) (74) (179)
- ------------------------------------------------------------------------------------
Income Beforebefore equity in undistributed income
of subsidiaries 7,097 6,462 3,898
Equity in Undistributed Earningsundistributed income of Subsidiaries 7,199 6,184 4,163
Equity in Undistributed Earnings of Subsidiaries 4,286 4,893 5,944subsidiaries 7,862 5,590 4,578
- - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $11,485 $11,077 $10,107
=======================================================================================================================
$14,959 $12,052 $ 8,476
====================================================================================
52
CONDENSED STATEMENT OF CASH FLOWS
Years Ended
December
YEARS ENDED DECEMBER 31,
(In Thousands) 1999 1998 1997(IN THOUSANDS) 2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES
ACTIVITIES:
Net Income $11,485 $11,077 $10,107income $ 14,959 $ 12,052 $ 8,476
Adjustments to Reconcile Net Incomereconcile net income to Net Cash
Providednet
cash provided by Operating Activities:
Equity Securities Gains (159) (822) (74)operating activities:
Equity in Undistributed Net Incomeundistributed net income of
Subsidiaries (4,285) (4,893) (5,944)subsidiaries (7,862) (5,590) (4,578)
Amortization of restricted stock 80 22 -
(Increase) Decreasedecrease in Other Assets 1,300 (200) (150)other assets (32) 14 (28)
Increase (Decrease) in Other Liabilities (145) 372 111other liabilities 98 - 17
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 8,196 5,534 4,0507,243 6,498 3,887
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES,
Cash Investment in (1,888) -- --
Subsidiarysubsidiary (783) (266) (225)
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of treasury stock 76 - 6
Purchase of Available-for-Sale Securities (753) (2,257) (602)
Proceeds from Sale of Available-for-Sale Securities 360 1,441 187treasury stock (239) (521) -
Dividends paid (6,038) (5,441) (4,986)
- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (2,281) (816) (415)(6,201) (5,962) (4,980)
- - ---------------------------------------------------------------------------------------------------------------------
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)259 270 (1,318)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 89 3 101333 63 1,381
- - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,381592 $ 89333 $ 3
=====================================================================================================================63
================================================================================================
2519. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 2002 and
2001:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 QUARTER ENDED
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest income $ 13,642 $ 14,523 $ 14,675 $ 14,445
Interest expense 6,316 6,745 6,675 6,579
- -----------------------------------------------------------------------------------------------------------------
Interest margin 7,326 7,778 8,000 7,866
Provision for loan losses 180 180 280 300
- -----------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 7,146 7,598 7,720 7,566
Other income 1,687 1,681 1,642 1,614
Securities gains 1,226 781 489 392
Other expenses 5,106 5,248 5,310 5,185
- -----------------------------------------------------------------------------------------------------------------
Income before income tax provision 4,953 4,812 4,541 4,387
Income tax provision 1,115 992 831 796
- -----------------------------------------------------------------------------------------------------------------
Net income $ 3,838 $ 3,820 $ 3,710 $ 3,591
=================================================================================================================
Net income per share - basic $ 0.72 $ 0.72 $ 0.70 $ 0.67
=================================================================================================================
Net income per share - diluted $ 0.72 $ 0.71 $ 0.69 $ 0.67
=================================================================================================================
53
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 QUARTER ENDED
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest income $ 13,093 $ 13,830 $ 13,962 $ 13,776
Interest expense 7,492 7,278 7,037 6,549
- ----------------------------------------------------------------------------------------------------------------
Interest margin 5,601 6,552 6,925 7,227
Provision for loan losses 150 150 150 150
- ----------------------------------------------------------------------------------------------------------------
Interest margin after provision for loan losses 5,451 6,402 6,775 7,077
Other income 1,434 1,516 1,600 1,570
Securities gains 455 742 520 203
Other expenses 4,598 4,580 4,575 4,918
- ----------------------------------------------------------------------------------------------------------------
Income before income tax provision 2,742 4,080 4,320 3,932
Income tax provision 477 891 914 740
- ----------------------------------------------------------------------------------------------------------------
Net income $ 2,265 $ 3,189 $ 3,406 $ 3,192
================================================================================================================
Net income per share - basic $ 0.42 $ 0.60 $ 0.64 $ 0.60
================================================================================================================
Net income per share - diluted $ 0.42 $ 0.60 $ 0.64 $ 0.60
================================================================================================================
54
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Citizens & Northern Corporation:
We have audited the accompanying consolidated balance sheetssheet of Citizens &
Northern Corporation and subsidiaries ("Corporation") as of December 31, 19992002 and 1998,2001, 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, 1999.2002.
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 auditing standards generally accepted
auditing
standards.in the United States of America. 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, 19992002 and 1998,2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999,2002, in conformity with accounting principles
generally accepted accounting
principles.in the United States of America.
Parente Randolph, PC /s/
Williamsport, Pennsylvania
February 10, 2000
26
MANAGEMENT'S RESPONSIBILITY FOR7, 2003
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL REPORTING
February 3, 2000
ToDISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers is incorporated herein
by reference to disclosure under the Stockholderscaptions "Proposal 1 - Election of
Directors," "Corporation's and BoardBank's Executive Officers," and "Section 16(a)
Beneficial Ownership Reporting Compliance" of the Corporation's proxy statement
dated March 18, 2003 for the annual meeting of stockholders to be held on April
15, 2003.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation information is incorporated herein
by reference to disclosure under the caption "Executive Compensation" of the
Corporation's proxy statement dated March 18, 2003 for the annual meeting of
stockholders to be held on April 15, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference to disclosure under the caption
"Security Ownership of Management" of the Corporation's proxy statement dated
March 18, 2003 for the annual meeting of stockholders to be held on April 15,
2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning loans to Directors and Executive Officers is provided in
Note 14 to the Consolidated Financial Statements, which is included in Part II,
Item 8 of this Annual Report on Form 10-K. Additional information is
incorporated herein by reference to disclosure appearing under the caption
"Certain Transactions" of the Corporation's proxy statement dated March 18, 2003
for the annual meeting of stockholders to be held on April 15, 2003.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the filing date of this report, the Corporation's Chief
Executive Officer and Chief Financial Officer carried out an evaluation of the
design and effectiveness of the Corporation's disclosure controls and procedures
pursuant to Rule 13a-14(c) and Rule 15d-14(c) of the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective to ensure that information required to be disclosed in
reports the Corporation files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Corporation's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the Chief Executive Officer's and Chief Financial Officer's most
recent evaluation. There were no significant deficiencies or material weaknesses
noted in the evaluation, and therefore there were no corrective actions taken.
56
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1). The following consolidated financial statements are set forth in Part
II, Item 8:
Page
----
Independent Auditors' Report 55
Financial Statements:
Consolidated Balance Sheet - December 31, 2002 and 2001 27
Consolidated Statement of Income - Years Ended
December 31, 2002, 2001 and 2000 28
Consolidated Statement of Changes in Stockholders' Equity -
Years Ended December 31, 2002, 2001 and 2000 29
Consolidated Statement of Cash Flows - Years Ended
December 31, 2002, 2001 and 2000 30
Notes to Consolidated Financial Statements 31- 54
(a)(2) Financial statement schedules are not applicable or included in the
financial statements or related notes.
(a)(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 Incorporated by reference to the exhibits
filed with the Corporation's registration
statement on Form S-4 on March 27, 1987.
3. (ii) By-laws Incorporated by reference to the exhibits
filed with the Corporation's registration
statement on Form S-4 on March 27, 1987.
4. Instruments defining the rights of security holders,
including indentures Not applicable
9. Voting trust agreement Not applicable
10. Material contracts:
Citizens & Northern Corporation Independent Directors Incorporated by reference to the exhibits
Stock Incentive Plan filed with the Corporation's proxy statement
dated March 19, 2001 for the annual
meeting of stockholders held on
April 17, 2001.
First Amendment to Citizens & Northern Corporation Incorporated by reference to the exhibits
Stock Incentive Plan filed with the Corporation's proxy statement
dated March 22, 1999 for the annual
meeting of stockholders held on
April 20, 1999.
57
Citizens & Northern Corporation Stock Incentive plan Incorporated by reference to the exhibits
filed with the Corporation's proxy statement
dated March 20, 1995 for the annual
meeting of stockholders held on
April 18, 1995.
11. Statement re: computation of per share earnings Information concerning the computation of
earnings per share is provided in Note 3
to the Consolidated Financial Statements,
which is included in Part II, Item 8 of
Form 10-K.
12. Statements re: computation of ratios Not applicable
13. Annual report to security holders, Form 10-Q or
quarterly report to security holders Not applicable
16. Letter re: change in certifying accountant Not applicable
18. Letter re: change in accounting principles Not applicable
21. Subsidiaries of the registrant Filed herewith
22. Published report regarding matters submitted to
vote of security holders Not applicable
23. Consents of experts and counsel Not applicable
24. Power of attorney Not applicable
99. Additional exhibits:
99.1 Certifications pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 Filed herewith
99.2 Additional information mailed to stockholders
with proxy statement and Form 10-K on March 19, 2002 Filed herewith
(b) On October 11, 2002, a Current Report on Form 8-K was filed to report the
Corporation's consolidated earnings results for the three-month and nine-month
periods ended September 30, 2002.
(c) Exhibits - The required exhibits are listed under Part IV, Item 14(a)(3) of
Form 10-K.
(d) Financial statement schedules are omitted because the required information
is not applicable or is included elsewhere in Form 10-K.
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Citizens & Northern Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized:
CITIZENS & NORTHERN CORPORATION
By: Craig G. Litchfield /s/
- ---------------------------
Craig G. Litchfield
Chairman, President and Chief Executive Officer
Date: March 18, 2003
By: Mark A. Hughes /s/
- ---------------------------
Treasurer and Principal Accounting Officer
Date: March 18, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
BOARD OF DIRECTORS
/s/ Dennis F. Beardslee /s/ Edward L. Learn
Dennis F. Beardslee Edward L. Learn
Date: March 18, 2003 Date: March 18, 2003
/s/ R. Robert DeCamp /s/ Craig G. Litchfield
R. Robert DeCamp Craig G. Litchfield
Date: March 18, 2003 Date: March 18, 2003
/s/ Jan E. Fisher /s/ Lawrence F. Mase
Jan E. Fisher Lawrence F. Mase
Date: March 18, 2003 Date: March 18, 2003
/s/ R. Bruce Haner /s/ Leonard Simpson
R. Bruce Haner Leonard Simpson
Date: March 18, 2003 Date: March 18, 2003
/s/ Susan E. Hartley /s/ James E. Towner
Susan E. Hartley James E. Towner
Date: March 18, 2003 Date: March 18, 2003
/s/ Karl W. Kroeck /s/ Ann M. Tyler
Karl W. Kroeck Ann M. Tyler
Date: March 18, 2003 Date: March 18, 2003
/s/ Leo F. Lambert
Leo F. Lambert
Date: March 18, 2003
59
CERTIFICATIONS
I, Craig G. Litchfield, Chairman, Chief Executive Officer and President of
Citizens & Northern Corporation, Managementcertify that:
1. I have reviewed this annual report on Form 10-K of Citizens & Northern
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
March 18, 2003 By: Craig G. Litchfield /s/
- -------------- -----------------------
Date Chairman, President and Chief Executive Officer
60
I, Mark A. Hughes, Treasurer and Chief Financial Officer of Citizens & Northern
Corporation, and its subsidiaries has preparedcertify that:
1. I have reviewed this annual report on Form 10-K of Citizens & Northern
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the consolidatedstatements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the "Annual
Reportfinancial condition, results of operations and
Form 10-K"cash flows of the registrant as of, and for, the periods presented in
accordance with generally accepted accounting
principlesthis annual report;
4. The registrant's other certifying officers and isI are responsible for
its contentestablishing 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
policiesmaintaining disclosure controls and procedures appropriate segregation of responsibilities(as
defined in Exchange Act Rules 13a-14 and programs of internal audit. These systems are15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to provide reasonable
assuranceensure 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 recognizesmaterial information relating to the registrant, including its
responsibilityconsolidated subsidiaries, is made known to foster a climateus by others within
those entities, particularly during the period in which Company affairs are conducted withthis
annual report is being prepared;
b) evaluated 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 Committeeeffectiveness of the Company's Board of Directors consists solely of
outside directors. The Audit Committee meets periodically with managementregistrant's disclosure
controls 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 portfolioprocedures as of a pointdate within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in time.
AMORTIZATION -this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The systematic chargeregistrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to earnings to reduce the premium paid for
an investment security.
CAPITAL RATIOSregistrant's auditors and COMPONENTS:
1. Capital Ratios
a. Leverage ratio - The ratiothe
audit committee of total equity to total liabilities.
b. Return on equity - Net income divided by equity.
c. Risk-based capital ratio - Ratioregistrant's board of equity to risk weighted
assets.
2. Components of Capital
a. Capital Stock - Investor ownership of common stockdirectors (or persons
performing the equivalent function):
a) all significant deficiencies in the Corporation stated as par value.
b. Paid-in-Capital - Valuedesign or operation 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 ratesinternal controls which could adversely affect the value ofregistrant's
ability to record, process, summarize and report financial data
and have identified for the Corporationregistrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether 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 liabilitiesmaterial, that are not financial instruments, such as
premises and equipment, accrued interest receivableinvolves management 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 throughother employees who have 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 loanssignificant role in the portfolio thatregistrant's
internal controls; and
6. The registrant's other certifying officers and I 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 gainindicated in
this annual report whether 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 1999there were significant 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. Alsointernal controls or 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 costsignificantly affect
internal controls subsequent to the Corporationdate of our most recent
evaluation, including any corrective actions with regard to
become Y2K compliant was approximately
$750,000. The costs were primarily hardwaresignificant deficiencies 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 633material weaknesses.
March 18, 2003 By: Mark A. Hughes /s/
- - -------------------------------------------------------------------------------
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-------------- -----------------------
Date 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 ExecutiveFinancial Officer
CITIZENS & CORPORATION
Athens/Dushore/East Smithfield/Elkland/Knoxville
Laporte/Liberty/Mansfield/Monroeton/Ralston/Sayre/Tioga
Towanda/Troy/Wellsboro/Wysox/Member FDIC
58
961