UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission file number: 000-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
PENNSYLVANIA 23-2451943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 MAIN STREET, WELLSBORO, PA 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK Par Value $1.00
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Common Stock ($1.00 par value) 8,277,769 Shares Outstanding on May 1, 2006
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Index
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet - March 31, 2006 and
December 31, 2005 Page 3
Consolidated Statement of Income - Three Months Ended
March 31, 2006 and 2005 Page 4
Consolidated Statement of Cash Flows - Three Months Ended
March 31, 2006 and 2005 Page 5
Notes to Consolidated Financial Statements Pages 6 through 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Pages 10 through 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK Pages 24 through 26
ITEM 4. CONTROLS AND PROCEDURES Page 26
PART II - OTHER INFORMATION Page 27 through 28
SIGNATURES Page 29
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification -
Chief Executive Officer Page 30
Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification -
Chief Financial Officer Page 31
Exhibit 32. Section 1350 Certifications Page 32
2
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
MARCH 31, DECEMBER 31,
2006 2005
(UNAUDITED) (NOTE)
----------- ------------
ASSETS
Cash and due from banks:
Non-interest-bearing $ 18,993 $ 20,922
Interest-bearing 2,469 5,524
---------- ----------
Total cash and cash equivalents 21,462 26,446
Available-for-sale securities 427,975 427,298
Held-to-maturity securities 420 422
Loans, net 644,071 644,938
Bank-owned life insurance 18,790 18,643
Accrued interest receivable 5,382 5,500
Bank premises and equipment, net 23,652 22,605
Foreclosed assets held for sale 317 194
Intangible Asset - Core Deposit Intangible 402 464
Intangible Asset - Goodwill 2,919 2,919
Other assets 15,254 13,525
---------- ----------
TOTAL ASSETS $1,160,644 $1,162,954
========== ==========
LIABILITIES
Deposits:
Non-interest-bearing $ 102,077 $ 96,644
Interest-bearing 650,637 660,421
---------- ----------
Total deposits 752,714 757,065
Dividends payable 1,989 1,973
Short-term borrowings 74,514 34,734
Long-term borrowings 195,089 232,205
Accrued interest and other liabilities 6,290 5,009
---------- ----------
TOTAL LIABILITIES 1,030,596 1,030,986
---------- ----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 20,000,000 shares,
issued 8,472,382 in 2006 and 8,389,418 in 2005 8,472 8,389
Stock dividend distributable -- 2,183
Paid-in capital 27,053 24,964
Retained earnings 94,562 93,728
---------- ----------
Total 130,087 129,264
Accumulated other comprehensive income 2,332 4,698
Unamortized stock compensation (40) (50)
Treasury stock, at cost:
184,613 shares at March 31, 2006 (2,331)
168,627 shares at December 31, 2005 (1,944)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 130,048 131,968
---------- ----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,160,644 $1,162,954
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 2005 has been derived from the audited
financial statements at that date but does not include all the information and
notes required by U.S. generally accepted accounting principles for complete
financial statements.
3
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
3 MONTHS ENDED
-----------------------
MARCH 31, MARCH 31,
2006 2005
---------- ----------
INTEREST INCOME
Interest and fees on loans $ 10,166 $ 9,006
Interest on balances with depository institutions 12 4
Interest on loans to political subdivisions 311 247
Interest on federal funds sold 43 8
Income from available-for-sale and
held-to-maturity securities:
Taxable 3,727 3,661
Tax-exempt 1,336 1,472
Dividends 268 295
---------- ----------
Total interest and dividend income 15,863 14,693
---------- ----------
INTEREST EXPENSE
Interest on deposits 5,009 3,426
Interest on short-term borrowings 426 225
Interest on long-term borrowings 1,843 2,306
---------- ----------
Total interest expense 7,278 5,957
---------- ----------
Interest margin 8,585 8,736
Provision for loan losses 600 375
---------- ----------
Interest margin after provision for loan losses 7,985 8,361
---------- ----------
OTHER INCOME
Service charges on deposit accounts 450 342
Service charges and fees 65 87
Trust and financial management revenue 511 479
Insurance commissions, fees and premiums 139 98
Increase in cash surrender value of life insurance 147 139
Fees related to credit card operation -- 187
Other operating income 477 371
---------- ----------
Total other income before realized gains on securities, net 1,789 1,703
Realized gains on securities, net 1,315 1,066
---------- ----------
Total other income 3,104 2,769
---------- ----------
OTHER EXPENSES
Salaries and wages 3,322 2,875
Pensions and other employee benefits 1,143 1,032
Occupancy expense, net 546 464
Furniture and equipment expense 650 648
Pennsylvania shares tax 244 215
Other operating expense 1,938 1,894
---------- ----------
Total other expenses 7,843 7,128
---------- ----------
Income before income tax provision 3,246 4,002
Income tax provision 426 707
---------- ----------
NET INCOME $ 2,820 $ 3,295
========== ==========
PER SHARE DATA:
Net income - basic $ 0.34 $ 0.40
Net income - diluted $ 0.34 $ 0.39
---------- ----------
Dividend per share $ 0.24 $ 0.23
---------- ----------
Number of shares used in computation - basic 8,296,922 8,275,172
Number of shares used in computation - diluted 8,335,009 8,346,220
The accompanying notes are an integral part of these consolidated financial
statements.
4
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
3 MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,820 $ 3,295
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 600 375
Realized gains on securities, net (1,315) (1,066)
Gain on sale of foreclosed assets, net (14) (50)
Depreciation expense 605 548
Accretion and amortization of securities, net 86 67
Increase in cash surrender value of life insurance (147) (139)
Amortization of restricted stock 10 21
Amortization of core deposit intangible 62 --
Increase in accrued interest receivable and other assets (2,472) (2,444)
Increase in accrued interest payable and other liabilities 2,529 1,151
-------- --------
Net Cash Provided by Operating Activities 2,764 1,758
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 2 3
Proceeds from sales of available-for-sale securities 10,566 31,488
Proceeds from calls and maturities of available-for-sale securities 8,291 18,204
Purchase of available-for-sale securities (21,893) (45,628)
Purchase of Federal Home Loan Bank of Pittsburgh stock (327) (1,832)
Redemption of Federal Home Loan Bank of Pittsburgh stock 1,162 1,902
Net decrease (increase) in loans 126 (19,832)
Purchase of premises and equipment (1,652) (953)
Proceeds from sale of foreclosed assets 32 59
-------- --------
Net Cash Used in Investing Activities (3,693) (16,589)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits (4,351) 8,074
Net increase in short-term borrowings 39,780 15,989
Proceeds from long-term borrowings -- 13,000
Repayments of long-term borrowings (37,116) (26,433)
Purchase of treasury stock (409) --
Sale of treasury stock 29 423
Tax benefit from compensation plans 7 --
Dividends paid (1,995) (1,890)
-------- --------
Net Cash (Used In) Provided by Financing Activities (4,055) 9,163
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (4,984) (5,668)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 26,446 18,953
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,462 $ 13,285
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans $ 141 $ 165
Interest paid $ 6,184 $ 5,421
Income taxes paid $ -- $ 420
The accompanying notes are an integral part of these consolidated financial
statements.
5
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF INTERIM PRESENTATION
The financial information included herein, with the exception of the
consolidated balance sheet dated December 31, 2005, is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods.
Results reported for the three months ended March 31, 2006 might not be
indicative of the results for the year ending December 31, 2006.
Certain merchant income previously included in fees related to credit card
operation has been reclassified to Other Operating Income. Merchant income was
$35,000 and $23,000 for the quarters ended March 31, 2006 and 2005,
respectively.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common
stock outstanding. The number of shares used in calculating net income and cash
dividends per share reflect the retroactive effect of stock dividends for all
periods presented. The following data show the amounts used in computing net
income per share and the weighted average number of shares of dilutive stock
options. As shown in the table that follows, diluted earnings per share is
computed using weighted average common shares outstanding, plus weighted-average
common shares available from the exercise of all dilutive stock options, less
the number of shares that could be repurchased with the proceeds of stock option
exercises based on the average share price of the Corporation's common stock
during the period.
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
---------- --------- --------
QUARTER ENDED MARCH 31, 2006
Earnings per share - basic $2,820,000 8,296,922 $0.34
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 141,849
Hypothetical share repurchase at $26.21 (103,762)
---------- --------- -----
Earnings per share - diluted $2,820,000 8,335,009 $0.34
========== ========= =====
QUARTER ENDED MARCH 31, 2005
Earnings per share - basic $3,295,000 8,275,172 $0.40
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 241,417
Hypothetical share repurchase at $29.99 (170,369)
---------- --------- -----
Earnings per share - diluted $3,295,000 8,346,220 $0.39
========== ========= =====
6
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
3. STOCK COMPENSATION PLANS
Effective in the first quarter of 2006, the Financial Accounting Standards Board
issued SFAS No. 123R, which replaces SFAS No. 123 and supersedes APB Opinion 25.
SFAS No. 123R requires the Corporation to record stock option expense based on
estimated fair value calculated using an option valuation model. The provisions
of SFAS 123R must be applied to any new awards granted, and to any modifications
of existing awards. Since the Corporation has neither modified, nor issued, any
new options in 2006, the provisions of SFAS No. 123R have no current reporting
implications.
In previous years, the Corporation used the intrinsic value method of accounting
for stock compensation plans, with compensation cost 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 had no
intrinsic value; therefore, no compensation cost was recorded for them.
The Corporation has also made prior awards of restricted stock. Compensation
cost related to restricted stock has been recognized based on the market price
of the stock at the grant date over the vesting period.
The following table illustrates the effect on net income and earnings per share
if the Corporation had applied the fair value provisions of SFAS No. 123 to
stock options.
3 MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2006 2005
--------- ---------
Net income, as reported $2,820 $3,295
Deduct: Total stock option compensation
expense determined under fair value
method for all awards, net of tax effects -- (35)
------ ------
Pro forma net income $2,820 $3,260
====== ======
Earnings per share-basic
As reported $ 0.34 $ 0.40
Pro forma $ 0.34 $ 0.39
Earnings per share-diluted
As reported $ 0.34 $ 0.39
Pro forma $ 0.34 $ 0.39
7
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
4. COMPREHENSIVE INCOME
U.S. generally accepted accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
unrealized gains and losses on available-for-sale securities are reported as a
separate component of the equity section of the balance sheet, changes in
unrealized gains and losses on available-for-sale securities, along with net
income, are components of comprehensive income.
The components of comprehensive income, and the related tax effects, are as
follows:
3 MONTHS ENDED
MARCH 31,
-----------------
(IN THOUSANDS) 2006 2005
------- -------
Net income $ 2,820 $ 3,295
Unrealized holding losses on available-for-sale securities (2,265) (5,881)
Less: Reclassification adjustment for gains realized in income (1,315) (1,066)
------- -------
Other comprehensive loss before income tax (3,580) (6,947)
Income tax related to other comprehensive loss 1,214 2,362
------- -------
Other comprehensive loss (2,366) (4,585)
------- -------
Comprehensive income (loss) $ 454 $(1,290)
======= =======
5. SECURITIES
Amortized cost and fair value of securities at March 31, 2006 are summarized as
follows:
MARCH 31, 2006
----------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 500 $ -- $ (1) $ 499
Obligations of other U.S. Government agencies 44,000 -- (1,161) 42,839
Obligations of states and political subdivisions 118,951 2,054 (1,624) 119,381
Other securities 108,519 1,046 (1,838) 107,727
Mortgage-backed securities 129,350 103 (4,039) 125,414
-------- ------- ------- --------
Total debt securities 401,320 3,203 (8,663) 395,860
Marketable equity securities 23,122 9,165 (172) 32,115
-------- ------- ------- --------
Total $424,442 $12,368 $(8,835) $427,975
======== ======= ======= ========
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 313 $ 13 $ -- $ 326
Obligations of other U.S. Government agencies 98 9 -- 107
Mortgage-backed securities 9 -- -- 9
-------- ------- ------- --------
Total $ 420 $ 22 $ -- $ 442
======== ======= ======= ========
8
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
The following table presents gross unrealized losses and fair value of
investments aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at March 31, 2006.
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
--------------------- --------------------- ---------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
-------- ---------- -------- ---------- -------- ----------
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ 500 $ (1) $ -- $ -- $ 500 $ (1)
Obligations of other U.S. Government agencies 33,207 (792) 9,632 (369) 42,839 (1,161)
Obligations of states and political subdivisions 53,595 (1,062) 7,991 (562) 61,586 (1,624)
Other securities 40,121 (518) 29,974 (1,320) 70,095 (1,838)
Mortgage-backed securities 31,912 (658) 87,774 (3,381) 119,686 (4,039)
-------- ------- -------- ------- -------- -------
Total debt securities 159,335 (3,031) 135,371 (5,632) 294,706 (8,663)
Marketable equity securities 1,264 (44) 1,213 (128) 2,477 (172)
-------- ------- -------- ------- -------- -------
Total temporarily impaired available-for-sale
securities $160,599 $(3,075) $136,584 $(5,760) $297,183 $(8,835)
======== ======= ======== ======= ======== =======
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
The unrealized losses on debt securities are primarily the result of volatility
in interest rates. Based on the credit worthiness of the issuers, which are
almost exclusively U.S. Government agencies or state and political subdivisions,
management believes the Corporation's debt securities at March 31, 2006 were not
other-than-temporarily impaired.
6. DEFINED BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan for all
employees meeting certain age and length of service requirements. Benefits are
based primarily on years of service and the average annual compensation during
the highest five consecutive years.
In addition, the Corporation sponsors a defined benefit health care plan that
provides postretirement medical benefits and life insurance to employees who
meet certain age and length of service requirements. This plan contains a
cost-sharing feature, which causes participants to pay for all future increases
in costs related to benefit coverage. Accordingly, actuarial assumptions related
to health care cost trend rates do not affect the liability balance at March 31,
2006 and December 31, 2005, and will not affect the Corporation's future
expenses.
The Corporation uses a December 31 measurement date for its plans.
The components of net periodic benefit costs from these defined benefit plans
are as follows:
PENSION POSTRETIREMENT
THREE MONTHS ENDED THREE MONTHS ENDED
(IN THOUSANDS) MARCH 31, MARCH 31,
------------------ ------------------
2006 2005 2006 2005
----- ----- ---- ----
Service cost $ 152 $ 119 $16 $12
Interest cost 157 155 15 17
Expected return on plan assets (208) (198) 0 0
Amortization of transition (asset) obligation (6) (6) 9 9
Recognized net actuarial loss (gain) 20 10 1 1
----- ----- --- ---
Net periodic benefit cost (benefit) $ 115 $ 80 $41 $39
===== ===== === ===
9
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
For 2006, the minimum funding requirement for the defined benefit pension plan
is $379,000; however, the Board of Directors authorized funding, in April 2006,
up to the maximum funding limit of $640,000. In the first quarter of 2006, the
Corporation funded postretirement contributions totaling $13,000, with estimated
annual postretirement contributions of $62,000 expected in 2006 for the full
year.
7. CONTINGENCIES
In the normal course of business, the Corporation may be subject to pending and
threatened lawsuits in which claims for monetary damages could be asserted. In
management's opinion, the Corporation's financial position and results of
operations would not be materially affected by the outcome of such pending legal
proceedings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in this section and elsewhere in this quarterly report on
Form 10-Q are forward-looking statements. Citizens & Northern Corporation and
its wholly-owned subsidiaries (collectively, the Corporation) intend such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995. Forward-looking statements, which are not historical facts, are based on
certain assumptions and describe future plans, business objectives and
expectations, and are generally identifiable by the use of words such as,
"should", "likely", "expect", "plan", "anticipate", "target", "forecast", and
"goal". These forward-looking statements are subject to risks and uncertainties
that are difficult to predict, may be beyond management's control and could
cause results to differ materially from those expressed or implied by such
forward-looking statements. Factors which could have a material, adverse impact
on the operations and future prospects of the Corporation include, but are not
limited to, the following:
- changes in monetary and fiscal policies of the Federal Reserve Board and
the U. S. Government, particularly related to changes in interest rates
- changes in general economic conditions
- legislative or regulatory changes
- downturn in demand for loan, deposit and other financial services in the
Corporation's market area
- increased competition from other banks and non-bank providers of financial
services
- technological changes and increased technology-related costs
- changes in accounting principles, or the application of generally accepted
accounting principles.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
REFERENCES TO 2006 AND 2005
Unless otherwise noted, all references to "2006" in the following discussion of
operating results are intended to mean the three months ended March 31, 2006,
and similarly, references to "2005" relate to the three months ended March 31,
2005.
10
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
EARNINGS OVERVIEW
Net income in 2006 was $2,820,000, or $.34 per share - basic and diluted, which
represents a decrease of 14.4% in net income compared to 2005. Return on average
assets was .97% in 2006, as compared to 1.17% in 2005. Return on average equity
was 8.51% for 2006, as compared to 9.87% in 2005.
The most significant income statement changes between 2006 and 2005 were as
follows:
- The net interest margin was $8,585,000 in 2006, a decrease of
$151,000, or 1.7%, from $8,736,000 in 2005. Despite growth in both
loans and deposits, the decrease in Net Interest Margin is attributed
primarily to increases in short-term interest rates, compared to
relatively flat long-term rates associated with the loan portfolio.
Changes in the net interest margin are discussed in more detail later
in Management's Discussion and Analysis.
- Other (non-interest) expenses increased $715,000, or 10.0%, in 2006
compared to 2005. For the first quarter of 2006, a major portion, or
$627,000, of the total increase related to operations and start-up
costs in new markets. New branch operations include First State Bank,
our Jersey Shore office (opened August 2005), as well as our Old
Lycoming Township branch and new Administrative office, both opened in
March 2006. Additional discussion of Other Expenses is described in
the "Non-interest Expense" section of Management's Discussion and
Analysis.
- The provision for loan losses was $600,000 in the first quarter of
2006, with an increase of $225,000 compared to the same period in
2005. The additional loan loss provision was primarily associated with
estimates of possible future charge-offs on certain large commercial
loans.
- Net realized gains on securities were $1,315,000 in the first quarter
of 2006, an increase of $249,000, compared to $1,066,000 in 2005.
Sales of bank stocks provided most of the gains realized in 2006.
- The income tax provision decreased to $426,000, or 13.1% of pre-tax
earnings, from $707,000, or 17.7% of pre-tax earnings in 2005. The
lower effective tax rate results from the higher ratio of tax-exempt
earnings based on the lower level of total pre-tax earnings.
TABLE I - QUARTERLY FINANCIAL DATA
MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
(IN THOUSANDS) 2006 2005 2005 2005 2005
-------- -------- --------- -------- --------
Interest income $15,863 $15,936 $15,571 $14,908 $ 14,693
Interest expense 7,278 7,149 6,426 6,155 5,957
------- ------- ------- ------- --------
Interest margin 8,585 8,787 9,145 8,753 8,736
Provision for loan losses 600 901 375 375 375
------- ------- ------- ------- --------
Interest margin after provision for loan losses 7,985 7,886 8,770 8,378 8,361
Other income 1,789 1,895 2,149 1,889 1,703
Securities gains (losses) 1,315 (586) 393 929 1,066
Gain from sale of credit card loans -- 1,906 -- -- --
Other expenses 7,843 7,358 7,303 7,173 7,128
------- ------- ------- ------- --------
Income before income tax provision 3,246 3,743 4,009 4,023 4,002
Income tax provision 426 639 722 725 707
------- ------- ------- ------- --------
Net income $ 2,820 $ 3,104 $ 3,287 $ 3,298 $ 3,295
======= ======= ======= ======= ========
Net income per share - basic $ 0.34 $ 0.37 $ 0.40 $ 0.40 $ 0.40
======= ======= ======= ======= ========
Net income per share - diluted $ 0.34 $ 0.37 $ 0.39 $ 0.39 $ 0.39
======= ======= ======= ======= ========
The number of shares used in calculating net income per share for each quarter
presented in Table I reflects the retroactive effect of stock dividends.
11
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
PROSPECTS FOR THE REMAINDER OF 2006
Management expects 2006 to be a year for building on the capital investments of
2005 by developing market presence in our new markets. The opening of 2 new
branches in Jersey Shore (Fall 2005) and Old Lycoming Township (March 2006)
provide growth opportunities in the Williamsport and surrounding Lycoming County
market, especially for expansion of commercial lending relationships. The August
2005 acquisition of Canisteo Valley Corporation, including the branches of First
State Bank, opens a variety of opportunities for growth and market development
along the northern border of our current market operations. Also, in late
February 2006, a new administrative facility opened, which provides ample space
for key operating support functions, and additional space needed for customer
contact personnel in our Wellsboro branch.
Currently, management expects the yield curve to continue to be nearly flat for
most of 2006. Based on current trends for both short-term and long-term
borrowing rates, management may compress the balance sheet by selling certain
available-for-sale debt securities to pay off borrowings as they mature in 2006.
Management hopes to use earnings from the expected growth in loans and deposits
to offset the anticipated reduction in net interest income associated with the
lack of opportunity for a positive spread between earnings on securities and the
interest costs on borrowings.
Another major variable that affects the Corporation's earnings is securities
gains and losses, particularly from bank stocks and other equity securities.
Management's decisions regarding sales of securities are based on a variety of
factors, with the overall goal of maximizing portfolio return over a long-term
horizon. It is difficult to predict, with much precision, the amount of net
securities gains and losses that will be realized throughout the remainder of
2006.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect many of the reported amounts and disclosures. Actual
results could differ from these estimates.
A material estimate that is particularly susceptible to significant change is
the determination of the allowance for loan losses. Management believes that the
allowance for loan losses is adequate and reasonable. The Corporation's
methodology for determining the allowance for loan losses is described in a
separate section later in Management's Discussion and Analysis. Given the very
subjective nature of identifying and valuing loan losses, it is likely that
well-informed individuals could make materially different assumptions, and
could, therefore, calculate a materially different allowance value. While
management uses available information to recognize losses on loans, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses. Such agencies
may require the Corporation to recognize adjustments to the allowance based on
their judgments of information available to them at the time of their
examination.
Another material estimate is the calculation of fair values of the Corporation's
debt securities. The Corporation receives estimated fair values of debt
securities from an independent valuation service, or from brokers. In developing
these fair values, the valuation service and the brokers use estimates of cash
flows, based on historical performance of similar instruments in similar
interest rate environments. Based on experience, management is aware that
estimated fair values of debt securities tend to vary among brokers and other
valuation services. Accordingly, when selling debt securities, management
typically obtains price quotes from more than one source. The large majority of
the Corporation's securities are classified as available-for-sale. Accordingly,
these securities are carried at fair value on the consolidated balance sheet,
with unrealized gains and losses excluded from earnings and reported separately
through accumulated other comprehensive income (included in stockholders'
equity).
12
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
NET INTEREST MARGIN
The Corporation's primary source of operating income is represented by the net
interest margin. The net interest margin is equal to the difference between the
amounts of interest income and interest expense. Tables II, III and IV include
information regarding the Corporation's net interest margin for 2006 and 2005.
In each of these tables, the amounts of interest income earned on tax-exempt
securities and loans have been adjusted to a fully taxable-equivalent basis.
Accordingly, the net interest margin amounts reflected in these tables exceed
the amounts presented in the consolidated financial statements. The discussion
that follows is based on amounts in the Tables.
The net interest margin, on a tax-equivalent basis, of $9,338,000 in 2006
decreased $208,000, or 2.2% from 2005. As reflected in Table IV, interest rate
changes had the most significant impact on net interest margin with reductions
of $774,000 in the net interest margin compared to 2005. The reduction in net
interest income from higher rates reflects the Corporation's "liability
sensitive" position, that is, deposits and borrowings reprice more quickly, on
average, than the earnings assets base of loans and available-for-sale
securities. Table IV also shows that volume increases had the effect of
increasing net interest income of $566,000 in 2006 compared to 2005, and was
primarily attributed to increased volume of loans. As presented in Table III,
the "Interest Rate Spread" (excess of average rate of return on interest-bearing
assets over average cost of funds on interest-bearing liabilities) tightened to
3.05% compared to 3.22% for the year ended December 31, 2005 and 3.32% for the
first quarter 2005.
INTEREST INCOME AND EARNING ASSETS
Interest income increased 7.2%, to $16,616,000 in 2006 from $15,503,000 in 2005.
Interest and fees from loans increased $1,250,000, or 13.3%, while income from
available-for-sale securities decreased $180,000, or 2.9%.
As indicated in Table III, average available-for-sale securities in the first
quarter 2006 amounted to $419,690,000, a decrease of 7.6% from the first quarter
2005. Proceeds from sales and maturities of securities have been used, in part,
to help fund the continued growth in loans. Also, since short-term interest
rates have been rising faster than long-term rates, there have been few
opportunities to purchase mortgage-backed securities or other bonds at spreads
sufficient to justify the applicable interest rate risk. The average rate of
return on available-for-sale securities of 5.74% for the first quarter 2006 was
higher than the 5.46% level in the first quarter 2005, and the 5.35% rate for
the year ended December 31, 2005. The higher average yield on available-for-sale
securities is attributed, in part, to the fourth quarter 2005 sale of certain
lower yielding securities acquired in 2003 and 2004, when market yields were
lower than current conditions. In addition, increased holdings of adjustable
rate trust preferred securities in 2005 and 2006 have contributed to the
increased yield since the yield on these securities generally rises consistent
with short-term rates.
The average balance of gross loans increased 8.8% to $648,872,000 for the first
quarter of 2006 from $596,513,000 in the first quarter 2005. The acquisition of
First State Bank in the third quarter of 2005 provided $21,903,000 of the growth
in average gross loans compared to the previous year. The most significant
growth was in commercial loans, due in part to the growth in staffing,
especially new personnel and relationships in Williamsport and throughout
Lycoming County, as well as an increased emphasis on commercial lending
throughout the Corporation's market area over the last few years. The average
rate of return on loans was 6.64% in the first quarter of 2006, as compared to
6.37% in first quarter of 2005, and 6.53% for the year 2005.
13
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense rose $1,321,000, or 22.2%, to $7,278,000 in 2006 from
$5,957,000 in 2005. Table III reflects the current trend in interest rates
incurred on liabilities, as the overall cost of funds on interest-bearing
liabilities rose to 3.22% for the first quarter of 2006, from 2.81% for the year
ended December 31, 2005, and 2.65% for the first quarter 2005. In addition,
Table III shows the impact of rising short-term interest rates, by category, on
the Corporation's primary sources of funds: (1) money market accounts, which
increased to an average rate of 3.08% in 2006 compared to 1.82% in 2005, (2)
interest checking accounts, which increased to an average rate of 2.53% from
..63%, (3) certificates of deposit, which increased to an average rate of 3.56%
from 3.07%, (4) short-term borrowings, which rose to an average rate of 3.57%
from 2.08%. The average rate incurred on long-term borrowings remained
substantially unchanged, and reflects the replacement of such borrowings with
either short-term instruments or repayment using the proceeds from the
available-for-sale securities portfolio.
From Table III, you can calculate that total average deposits (interest-bearing
and noninterest-bearing) increased to $749,104,000 in the first three months of
2006, or an 11.6% increase, from $671,165,000 in 2005. The increase in the
average deposit balances for the first quarter of each year has been
significantly impacted by fluctuations in deposits from municipal and non-profit
customers. In addition, the acquisition of First State Bank provided an increase
in average deposits of $26,453,000 in 2006 compared to 2005. The most
significant increases in average deposits by categories were $35,676,000 for
certificates of deposit (19.8%), $35,254,000 for interest checking accounts
(94.6%), $20,016,000 (26.3%) for demand deposit accounts. Most of the increase
in interest checking balances is attributable to one local governmental
customer, for which the Corporation became the primary depository institution in
September 2005.
The combined average total short-term and long-term borrowed funds decreased
$52,436,000 to $263,347,000 in the first quarter 2006 from $315,783,000 in the
first quarter 2005. Since the first quarter 2005, management's objective has
been to use proceeds from the securities portfolio to help fund loan growth, has
stabilized total borrowings to control the amount of growth in interest expense,
and has converted maturing long-term borrowings into overnight or short-term
borrowings. The growth of deposits, especially from new markets, has helped
management efforts to reduce the impact of interest rate fluctuations. The pace
of such changes or trends is reflected in the Corporation's consolidated balance
sheet, as total short-term borrowings increased to $74,514,000 at March 31, 2006
from $34,734,000 at December 31, 2005, while total long-term borrowings
decreased to $195,089,000 at March 31, 2006 from $232,205,000 at December 31,
2005.
14
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
THREE MONTHS ENDED
MARCH 31,
------------------ INCREASE/
(IN THOUSANDS) 2006 2005 (DECREASE)
------- -------- ----------
INTEREST INCOME
Available-for-sale securities:
Taxable 3,989 3,950 39
Tax-exempt 1,949 2,168 (219)
------- ------- ------
Total available-for-sale securities 5,938 6,118 (180)
------- ------- ------
Held-to-maturity securities,
Taxable 6 6 --
Interest-bearing due from banks 12 4 8
Federal funds sold 43 8 35
Loans:
Taxable 10,166 9,006 1,160
Tax-exempt 451 361 90
------- ------- ------
Total loans 10,617 9,367 1,250
------- ------- ------
Total Interest Income 16,616 15,503 1,113
------- ------- ------
INTEREST EXPENSE
Interest checking 452 58 394
Money market 1,362 887 475
Savings 87 70 17
Certificates of deposit 1,900 1,365 535
Individual Retirement Accounts 1,207 1,045 162
Other time deposits 1 1 --
Short-term borrowings 426 225 201
Long-term borrowings 1,843 2,306 (463)
------- ------- ------
Total Interest Expense 7,278 5,957 1,321
------- ------- ------
Net Interest Income $ 9,338 $ 9,546 $ (208)
======= ======= ======
Note: Interest income from tax-exempt securities and loans has been adjusted to
a fully tax-equivalent basis, using the Corporation's marginal federal income
tax rate of 34%.
15
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
3 MONTHS YEAR 3 MONTHS
ENDED RATE OF ENDED RATE OF ENDED RATE OF
3/31/2006 RETURN/ 12/31/2005 RETURN/ 3/31/2005 RETURN/
AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF
(DOLLARS IN THOUSANDS) BALANCE FUNDS % BALANCE FUNDS % BALANCE FUNDS %
---------- ------- ---------- ------- ---------- -------
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Taxable $ 302,330 5.35% $ 319,230 4.83% $ 331,981 4.83%
Tax-exempt 117,360 6.74% 123,295 6.72% 122,536 7.18%
---------- ---- ---------- ---- ---------- ----
Total available-for-sale securities 419,690 5.74% 442,525 5.35% 454,517 5.46%
---------- ---- ---------- ---- ---------- ----
Held-to-maturity securities,
Taxable 421 5.78% 427 5.85% 431 5.65%
Interest-bearing due from banks 1,430 3.40% 1,293 2.63% 856 1.90%
Federal funds sold 3,633 4.80% 2,600 3.73% 1,514 2.14%
Loans,
Taxable 618,331 6.67% 592,227 6.55% 573,140 6.37%
Tax-exempt 30,541 5.99% 26,117 6.25% 23,373 6.26%
---------- ---- ---------- ---- ---------- ----
Total loans 648,872 6.64% 618,344 6.53% 596,513 6.37%
---------- ---- ---------- ---- ---------- ----
Total Earning Assets 1,074,046 6.27% 1,065,189 6.03% 1,053,831 5.97%
Cash 10,311 9,014 9,011
Unrealized gain/loss on securities 7,368 11,197 15,627
Allowance for loan losses (8,540) (7,297) (6,909)
Bank premises and equipment 23,385 19,247 17,036
Intangible Asset - Core Deposit Intangible 433 169
Intangible Asset - Goodwill 2,919 983
Other assets 43,281 46,117 42,571
---------- ---------- ----------
Total Assets $1,153,203 $1,144,619 $1,131,167
========== ========== ==========
INTEREST-BEARING LIABILITIES
Interest checking $ 72,530 2.53% $ 46,408 1.15% $ 37,276 0.63%
Money market 179,348 3.08% 188,507 2.20% 197,858 1.82%
Savings 63,809 0.55% 60,203 0.50% 56,976 0.50%
Certificates of deposit 216,186 3.56% 197,165 3.26% 180,510 3.07%
Individual Retirement Accounts 120,174 4.07% 121,013 3.46% 121,462 3.49%
Other time deposits 908 0.45% 1,152 0.52% 950 0.43%
Short-term borrowing 48,384 3.57% 44,267 2.80% 43,774 2.08%
Long-term borrowing 214,963 3.48% 254,987 3.47% 272,009 3.44%
---------- ---- ---------- ---- ---------- ----
Total Interest-bearing Liabilities 916,302 3.22% 913,702 2.81% 910,815 2.65%
Demand deposits 96,149 87,956 76,133
Other liabilities 8,143 10,496 10,725
---------- ---------- ----------
Total Liabilities 1,020,594 1,012,154 997,673
---------- ---------- ----------
Stockholders' equity, excluding other comprehensive
income/loss 128,173 125,076 123,180
Other comprehensive income/loss 4,436 7,389 10,314
---------- ---------- ----------
Total Stockholders' Equity 132,609 132,465 133,494
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $1,153,203 $1,144,619 $1,131,167
========== ========== ==========
Interest Rate Spread 3.05% 3.22% 3.32%
Net Interest Income/Earning Assets 3.53% 3.62% 3.67%
(1) Rates of return on tax-exempt securities and loans are presented on a fully
taxable-equivalent basis.
(2) Non-accrual loans have been included with loans for the purpose of
analyzing net interest earnings.
16
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
YTD ENDED 3/31/06 VS. 3/31/05
------------------------------
CHANGE IN CHANGE IN TOTAL
(IN THOUSANDS) VOLUME RATE CHANGE
--------- --------- ------
EARNING ASSETS
Available-for-sale securities:
Taxable $(370) $ 409 $ 39
Tax-exempt (90) (129) (219)
----- ------ ------
Total available-for-sale securities (460) 280 (180)
----- ------ ------
Held-to-maturity securities,
Taxable -- -- --
Interest-bearing due from banks 4 4 8
Federal funds sold 18 17 35
Loans:
Taxable 731 429 1,160
Tax-exempt 107 (17) 90
----- ------ ------
Total loans 838 412 1,250
----- ------ ------
Total Interest Income 400 713 1,113
----- ------ ------
INTEREST-BEARING LIABILITIES
Interest checking 95 299 394
Money market (90) 565 475
Savings 9 8 17
Certificates of deposit 294 241 535
Individual Retirement Accounts (11) 173 162
Other time deposits -- -- --
Short-term borrowings 26 175 201
Long-term borrowings (489) 26 (463)
----- ------ ------
Total Interest Expense (166) 1,487 1,321
----- ------ ------
Net Interest Income $ 566 $ (774) $ (208)
===== ====== ======
(1) Changes in income on tax-exempt securities and loans are presented on a
fully taxable-equivalent basis, using the Corporation's marginal federal
income tax rate of 34%.
(2) The change in interest due to both volume and rates has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amount of the change in each.
17
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
TABLE V - COMPARISON OF NON-INTEREST INCOME
3 MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
(IN THOUSANDS) 2006 2005
--------- ---------
Service charges on deposit accounts $ 450 $ 342
Service charges and fees 65 87
Trust and financial management revenue 511 479
Insurance commissions, fees and premiums 139 98
Increase in cash surrender value of life insurance 147 139
Fees related to credit card operation -- 187
Other operating income 477 371
------- ------
Total other operating income, before realized
gains on securities, net 1,789 1,703
Realized gains on securities, net 1,315 1,066
------- ------
Total Other Income $3,104 $2,769
====== ======
Total non-interest income increased $335,000, or 12.1%, in 2006 compared to
2005, primarily related to an increase in net realized gains on securities of
$249,000. Securities gains are discussed in the Earnings Overview section of
Management's Discussion and Analysis. Other items of significance are as
follows:
- Service charges on deposit accounts increased $108,000, or 31.6%, in 2006
as compared to 2005. Overdraft charges represent the primary increase year
over year with $87,000, of which $17,000 represents overdraft charges to
customers of First State Bank. The aggregate increase includes
approximately $40,000 associated with a rate change initiated in August
2005.
- Fees related to credit card operation decreased $187,000 to due to the sale
of the Citizens & Northern Bank's credit card operations in December 2005.
- Other operating income increased $94,000, or 27.0%, in 2006 over 2005.
Included in this category were increases of $26,000 in ATM debit card fees,
and an increase of $82,000 in dividend income on Federal Home Loan Bank of
Pittsburgh stock due to a change in the record date for such distributions.
TABLE VI- COMPARISON OF NON-INTEREST EXPENSE
3 MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
(IN THOUSANDS) 2006 2005
--------- ---------
Salaries and wages $3,322 $2,875
Pensions and other employee benefits 1,143 1,032
Occupancy expense, net 546 464
Furniture and equipment expense 650 648
Pennsylvania shares tax 244 215
Other operating expense 1,938 1,894
------ ------
Total Other Expense $7,843 $7,128
====== ======
Salaries and wages increased $447,000, or 15.5%, for 2006 compared to 2005. The
increase in salaries expense relates primarily to the increase in the number of
full-time equivalent employees, which increased 14.0%, to 365 as of March 31,
2006 from 320 as of March 31, 2005. For 2006, new branch operations at Jersey
Shore, Old Lycoming Township and First State Bank added $232,000 to salaries
expense.
18
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
Pension and other employee benefits associated with the new branch operations
added $67,000 in 2006 to this category. Pension plan expense increased 37.3%, or
$31,000, in 2006 due to lower investment returns for 2005 than included in the
actuarial assumptions, as well as increases in the number of employees and
covered compensation, which include employees from First State Bank.
Occupancy Expense increased $82,000, or 17.7%, in 2006 compared to 2005. Total
occupancy costs in 2006 include $71,000, or 13.0% of 2006 occupancy costs, for
new locations, including First State Bank.
Other Operating Expense increased $44,000 or 2.3% in 2006 compared to 2005. The
increase in other expenses is primarily associated with such costs for First
State Bank in 2006, which amounted to $207,000, including $62,000 for the
amortization of core deposit intangibles. Other expenses include legal and
professional fees, as well as expenses associated with maintaining and preparing
other real estate (ORE) properties for sale. In 2006, attorney fees related to
collection activities on a large commercial credit decreased $66,000, and ORE
properties expenses decreased $43,000 in 2006 compared to 2005. In addition,
2005 costs associated with the 2005 NASDAQ Small Cap registration of $34,000 did
not recur in 2006; NASDAQ annual fees were at the same level in both years.
FINANCIAL CONDITION
Significant changes in the average balances of the Corporation's earning assets
and interest-bearing liabilities are described in the "Net Interest Margin"
section of Management's Discussion and Analysis. Also included in the Net
Interest Margin section is a discussion of a change in trend regarding
short-term and long-term borrowings. The allowance for loan losses and
stockholders' equity are discussed in separate sections of Management's
Discussion and Analysis.
As discussed in the "Prospects for the Remainder of 2006" section of
Management's Discussion and Analysis, the Corporation has completed several
planned building construction projects during the quarter which required
additional expenditures for completion costs, furnishings and related equipment
of approximately $1,600,000. Additional capital expenditures for the remainder
of 2006 are expected to be less than $3,000,000 and will relate to normal
equipment upgrades and replacements.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses reflects probable losses resulting from the
analysis of individual loans and historical loss experience, as modified for
identified trends and concerns, for each loan category. The historical loan loss
experience element is determined based on the ratio of net charge-offs to
average loan balances over a three-year period, for each significant type of
loan, modified for qualitative risk adjustment factors identified by management
for each type of loan. The charge-off ratio and qualitative factors are then
applied to the current outstanding loan balance for each type of loan (net of
other loans that are individually evaluated).
The allowance for loan losses was $8,915,000 at March 31, 2006, an increase of
$554,000 from the balance at December 31, 2005. Net charge-offs amounted to
$46,000 in the first three months of 2006, while the provision for loan losses
was $600,000. In the first three months of 2005, net charge-offs totaled
$237,000, and the provision was $375,000. The amount of the provision in each
period is determined based on the amount required to maintain an appropriate
allowance in light of the factors described above. As discussed in more detail
below, the higher provision for loan losses in the first quarter 2006 over the
same period of 2005 reflected an increase in the unallocated allowance as of
March 31, 2006 over December 31, 2005, as well as an increase in the allowance
for impaired loans.
In the second quarter 2005, management changed its process for determining and
disclosing the components of the allowance for loan losses. A management
committee evaluated several qualitative factors, including economic conditions,
lending policies, changes in the portfolio, risk profile of the portfolio,
competition and regulatory requirements, and other factors. This analysis was
performed separately for the following categories of lending activity:
commercial, mortgage, consumer and credit card. The management committee has met
again quarterly thereafter and updated its analysis (excluding credit card, for
which substantially all of the loans were sold in the fourth quarter 2005).
Based on the results of these evaluations, allocations were made to the
components of the allowance shown in Table VIII. For periods prior to 2005,
Table VIII includes the portion of the allowance determined by management's
subjective assessment of economic conditions and other factors in the
unallocated component of the allowance. Primarily as a result of this change in
process, Table VIII shows the amounts allocated to the allowance for commercial,
consumer mortgage and consumer
19
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
loans at March 31, 2006 and December 31, 2005 have increased in comparison to
the corresponding amounts at December 31, 2004 and previous years, while the
unallocated portion of the allowance was $382,000 at March 31, 2006 and $0 at
December 31, 2005, down from $2,578,000 at December 31, 2004.
As indicated in Table IX, total impaired loans amounted to $8,967,000 at March
31, 2006, as compared to $8,216,000 at December 31, 2005, $8,261,000 at December
31, 2004 and $4,621,000 at December 31, 2003. In total, the valuation allowance
related to impaired loans amounted to $2,603,000 at March 31, 2006, up from
$2,374,000 at December 31, 2005 and $1,378,000 at December 31, 2004. Table IX
also shows that the amount of loans classified as non-accrual amounted to
$9,176,000 at March 31, 2006, as compared to $6,365,000 at December 31, 2005,
$7,796,000 at December 31, 2004 and $1,145,000 at December 31, 2003. The net
growth in impaired and non-accrual loans that has occurred over the course of
2004, 2005 and the first quarter 2006 is mainly attributable to a few large
commercial relationships. In the first quarter 2006, a commercial loan with a
total balance of $2,025,000 was identified as impaired, and an estimated
valuation allowance of $500,000 was established. Also, there are two other large
commercial relationships that make up a significant portion of the impaired and
non-accrual totals as of March 31, 2006 and December 31, 2005. The total
outstanding loan balances from these two relationships was $4,172,000 as of
March 31, 2006 and December 31, 2005, and the related valuation allowance
totaled $1,124,000 at March 31, 2006 and $1,089,000 at December 31, 2005.
Management believes it has been conservative in its decisions concerning
identification of impaired loans, estimates of loss and non-accrual status.
However, the actual losses realized from these relationships could vary
materially from the allowances calculated as of March 31, 2006. Management
continues to closely monitor these commercial loan relationships, and will
adjust its estimates of loss and decisions concerning non-accrual status, if
appropriate.
Tables VII, VIII, IX and X present an analysis of the allowance for loan losses,
the allocation of the allowance, information concerning impaired and past due
loans and a five-year summary of loans by type.
TABLE VII- ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
QUARTER QUARTER
ENDED ENDED YEARS ENDED DECEMBER 31,
MARCH 31, MARCH 31, ------------------------------------------
(IN THOUSANDS) 2006 2005 2005 2004 2003 2002 2001
--------- --------- ------ ------ ------ ------ ------
Balance, beginning of year $8,361 $6,787 $6,787 $6,097 $5,789 $5,265 $5,291
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Real estate loans 9 100 264 375 168 123 144
Installment loans 73 56 224 217 326 116 138
Credit cards and related plans 9 65 198 178 171 190 200
Commercial and other loans 8 61 298 16 303 123 231
------ ------ ------ ------ ------ ------ ------
Total charge-offs 99 282 984 786 968 552 713
------ ------ ------ ------ ------ ------ ------
Recoveries:
Real estate loans -- 12 14 3 75 30 6
Installment loans 15 24 61 32 52 30 27
Credit cards and related plans 12 4 30 23 17 18 20
Commercial and other loans 26 5 50 18 32 58 34
------ ------ ------ ------ ------ ------ ------
Total recoveries 53 45 155 76 176 136 87
------ ------ ------ ------ ------ ------ ------
Net charge-offs 46 237 829 710 792 416 626
Allowance for loan losses
recorded in acquisition -- -- 377 -- -- -- --
Provision for loan losses 600 375 2,026 1,400 1,100 940 600
------ ------ ------ ------ ------ ------ ------
Balance, end of period $8,915 $6,925 $8,361 $6,787 $6,097 $5,789 $5,265
====== ====== ====== ====== ====== ====== ======
20
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
AS OF AS OF DECEMBER 31,
MARCH 31, ------------------------------------------
(IN THOUSANDS) 2006 2005 2004 2003 2002 2001
--------- ------ ------ ------ ------ ------
Commercial $2,357 $2,705 $1,909 $1,578 $1,315 $ 852
Consumer mortgage 2,969 2,806 513 456 460 188
Impaired loans 2,603 2,374 1,378 1,542 1,877 1,736
Consumer 604 476 409 404 378 302
Unallocated 382 -- 2,578 2,117 1,759 2,187
------ ------ ------ ------ ------ ------
Total Allowance $8,915 $8,361 $6,787 $6,097 $5,789 $5,265
====== ====== ====== ====== ====== ======
TABLE IX - PAST DUE AND IMPAIRED LOANS
MAR. 31, DEC. 31, DEC. 31, DEC. 31,
(IN THOUSANDS) 2006 2005 2004 2003
-------- -------- -------- --------
Impaired loans without a valuation allowance $ 819 $ 910 $3,552 $ 114
Impaired loans with a valuation allowance 8,148 7,306 4,709 4,507
------ ------ ------ ------
Total impaired loans $8,967 $8,216 $8,261 $4,621
====== ====== ====== ======
Valuation allowance related to impaired loans $2,603 $2,374 $1,378 $1,542
Total non-accrual loans $9,176 $6,365 $7,796 $1,145
Total loans past due 90 days or more and still accruing $1,139 $1,369 $1,307 $2,546
TABLE X - SUMMARY OF LOANS BY TYPE
AS OF DECEMBER 31,
MARCH 31, ----------------------------------------------------
(IN THOUSANDS) 2006 2005 2004 2003 2002 2001
--------- -------- -------- -------- -------- --------
Real estate - construction $ 8,545 $ 5,552 $ 4,178 $ 2,856 $ 103 $ 1,814
Real estate - residential mortgage 366,306 361,857 347,705 330,807 292,136 245,997
Real estate - commercial mortgage 175,907 153,661 128,073 100,240 78,317 60,267
Consumer 32,520 31,559 31,702 33,977 31,532 29,284
Agricultural 2,199 2,340 2,872 2,948 3,024 2,344
Commercial 38,089 69,396 43,566 34,967 30,874 24,696
Other 1,844 1,871 1,804 1,183 2,001 1,195
Political subdivisions 27,576 27,063 19,713 17,854 13,062 13,479
Lease receivables -- -- -- 65 96 152
-------- -------- -------- -------- -------- --------
Total 652,986 653,299 579,613 524,897 451,145 379,228
Less: allowance for loan losses (8,915) (8,361) (6,787) (6,097) (5,789) (5,265)
-------- -------- -------- -------- -------- --------
Loans, net $644,071 $644,938 $572,826 $518,800 $445,356 $373,963
======== ======== ======== ======== ======== ========
21
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation has utilized derivative financial instruments related to a
certificate of deposit product called the "Index Powered Certificate of Deposit"
(IPCD). IPCDs have a term of 5 years, with interest paid at maturity based on
90% of the appreciation (as defined) in the S&P 500 index. There is no
guaranteed interest payable to a depositor of an IPCD - however, assuming an
IPCD is held to maturity, a depositor is guaranteed the return of his or her
principal, at a minimum. In 2004, the Corporation stopped originating new IPCDs,
but continues to maintain and account for IPCDs and the related derivative
contracts entered into between 2001 and 2004.
Statement of Financial Accounting Standards No. 133 requires the Corporation to
separate the amount received from each IPCD issued into 2 components: (1) an
embedded derivative, and (2) the principal amount of each deposit. Embedded
derivatives are derived from the Corporation's obligation to pay each IPCD
depositor a return based on appreciation in the S&P 500 index. Embedded
derivatives are carried at fair value, and are included in other liabilities in
the consolidated balance sheet. Changes in fair value of the embedded derivative
are included in other expense in the consolidated income statement. The
difference between the contractual amount of each IPCD issued, and the amount of
the embedded derivative, is recorded as the initial deposit (included in
interest-bearing deposits in the consolidated balance sheet). Interest expense
is added to principal ratably over the term of each IPCD at an effective
interest rate that will increase the principal balance to equal the contractual
IPCD amount at maturity.
In connection with IPCD transactions, the Corporation has entered into Equity
Indexed Call Option (Swap) contracts with the Federal Home Loan Bank of
Pittsburgh (FHLB-Pittsburgh). Under the terms of the Swap contracts, the
Corporation must pay FHLB-Pittsburgh quarterly amounts calculated based on the
contractual amount of IPCDs issued times a negotiated rate. In return,
FHLB-Pittsburgh is obligated to pay the Corporation, at the time of maturity of
the IPCDs, an amount equal to 90% of the appreciation (as defined) in the S&P
500 index. If the S&P 500 index does not appreciate over the term of the related
IPCDs, the FHLB-Pittsburgh would make no payment to the Corporation. The effect
of the Swap contracts is to limit the Corporation's cost of IPCD funds to the
market rate of interest paid to FHLB-Pittsburgh. (In addition, the Corporation
paid a fee of 0.75% to a consulting firm at inception of each deposit. These
fees are being amortized to interest expense over the term of the IPCDs.) Swap
assets or liabilities are carried at fair value, and included in other assets or
other liabilities in the consolidated balance sheet. Changes in fair value of
swap liabilities are included in other expense in the consolidated income
statement.
Amounts recorded as of March 31, 2006 and December 31, 2005, and for the first
quarters of 2006 and 2005, related to IPCDs are as follows (in thousands):
MARCH 31, DEC. 31,
2006 2005
--------- --------
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $3,947 $3,952
Carrying value of IPCDs 3,765 3,733
Carrying value of embedded derivative liabilities 558 558
Carrying value of Swap contract (assets) liabilities (386) (346)
3 MONTHS ENDED 3 MONTHS ENDED
MARCH 31, MARCH 31,
2006 2005
-------------- --------------
Interest expense $39 $40
Other expense -- --
22
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate
liquidity position permits the Corporation to pay creditors, compensate for
unforeseen deposit fluctuations and fund unexpected loan demand. The Corporation
maintains overnight borrowing facilities with several correspondent banks that
provide a source of day-to-day liquidity. Also, the Corporation maintains
borrowing facilities with FHLB - Pittsburgh, secured by mortgage loans and
various investment securities. At March 31, 2006, the Corporation had unused
borrowing availability with correspondent banks and the Federal Home Loan Bank
of Pittsburgh totaling approximately $163,127,000. Additionally, the Corporation
uses repurchase agreements placed with brokers to borrow funds secured by
investment assets, and uses "RepoSweep" arrangements to borrow funds from
commercial banking customers on an overnight basis. Further, if required to
raise cash in an emergency situation, the Corporation could sell non-pledged
investment securities to meet its obligations. At March 31, 2006, the carrying
value of non-pledged securities was $182,223,000.
Management believes the combination of its strong capital position (discussed in
the next section), ample available borrowing facilities and substantial
non-pledged securities portfolio have placed the Corporation in a position of
minimal short-term and long-term liquidity risk.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the subsidiary banks (Citizens & Northern Bank and First
State Bank) are subject to various regulatory capital requirements administered
by the federal banking agencies. The Corporation's consolidated capital ratios
at March 31, 2006 are as follows:
Total capital to risk-weighted assets 17.83%
Tier 1 capital to risk-weighted assets 16.15%
Tier 1 capital to average total assets 10.79%
Management expects the Corporation and the subsidiary banks to maintain capital
levels that exceed the regulatory standards for well-capitalized institutions
for the next 12 months and for the foreseeable future. Planned capital
expenditures (discussed in the "Financial Position" section of Management's
Discussion and Analysis) during the next 12 months, though expected to be
substantial, are not expected to have a significantly detrimental effect on
capital ratios.
As shown in the consolidated balance sheet, Accumulated Other Comprehensive
Income fell to $2,332,000 at March 31, 2006 from $4,698,000 at December 31,
2005. The Accumulated Other Comprehensive Income balance represents unrealized
gains and losses on available-for-sale securities, net of deferred income tax.
Rising interest rates, which reduce the market prices of debt securities, were a
significant factor in the decline in Accumulated Other Comprehensive Income at
March 31, 2006 compared to December 31, 2005, as well as the effect of gains
realized from the sales of securities during the same period.
INFLATION
The Corporation is significantly affected by the Federal Reserve Board's efforts
to control inflation through changes in interest rates. Since mid-2004, the
Federal Reserve Board has increased the Fed funds target rate 15 times from 1%
to its current level of 4.75%. Further concerns about the possibility of
inflation could lead to further increases in the Fed funds target rate, which
management believes would be detrimental to the corporation's net interest
margin. Although management cannot predict future changes in the rate of
inflation, management monitors the impact of economic trends, including any
indicators of inflationary pressure, in managing interest rate and other
financial risks.
23
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Corporation's two major categories of market risk, interest rate risk and
equity securities risk, are discussed in the following sections.
INTEREST RATE RISK
Business risk arising from changes in interest rates is a significant factor in
operating a bank. The Corporation's assets are predominantly long-term, fixed
rate loans and debt securities. Funding for these assets comes principally from
short-term deposits and borrowed funds. Accordingly, there is an inherent risk
of lower future earnings or decline in fair value of the Corporation's financial
instruments when interest rates change.
Citizens & Northern 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 Citizens & Northern
Bank are included in management's monthly simulation model calculations. Since
Citizens & Northern Bank makes up more than 90% of the Corporation's total
assets and liabilities, and because Citizens & Northern Bank is the source of
the most volatile interest rate risk, management does not consider it necessary
to run the model for the remaining entities within the consolidated group. For
purposes of these calculations, the market value of portfolio equity includes
the fair values of financial instruments, such as securities, loans, deposits
and borrowed funds, and the book values of nonfinancial assets and liabilities,
such as premises and equipment and accrued expenses. The model measures and
projects potential changes in net interest income, and calculates the discounted
present value of anticipated cash flows of financial instruments, assuming an
immediate increase or decrease in interest rates. Management ordinarily runs a
variety of scenarios within a range of plus or minus 50-300 basis points of
current rates.
Citizens & Northern Bank's Board of Directors has established policy guidelines
for acceptable levels of interest rate risk, based on an immediate increase or
decrease in interest rates. The Bank's policy provides limits at +/- 100, 200
and 300 basis points from current rates for fluctuations in net interest income
from the baseline (flat rates) one-year scenario. The policy also limits
acceptable market value variances from the baseline values based on current
rates. As Table XI shows, as of March 31, 2006 and December 31, 2005, the
decline in net interest income and market value exceed the policy threshold
marks, if interest rates rise immediately by 200 or 300 basis points. The "out
of policy" positions are a reflection of the Corporation's liability sensitive
position (on average, deposits and borrowings reprice more quickly than loans
and debt securities). Management has reviewed these positions with the Board of
Directors monthly throughout 2005 and to date in 2006. In addition, management
will continue to evaluate whether to make any changes to asset or liability
holdings in an effort to reduce exposure to rising interest rates.
The table that follows was prepared using the simulation model described above.
The model makes estimates, at each level of interest rate change, regarding cash
flows from principal repayments on loans and mortgage-backed securities and call
activity on other investment securities. Actual results could vary significantly
from these estimates, which could result in significant differences in the
calculations of projected changes in net interest margin and market value of
portfolio equity. Also, the model does not make estimates related to changes in
the composition of the deposit portfolio that could occur due to rate
competition and the table does not necessarily reflect changes that management
would make to realign the portfolio as a result of changes in interest rates.
TABLE XI - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
MARCH 31, 2006 DATA
(IN THOUSANDS)
PERIOD ENDING MARCH 31, 2007
-----------------------------------------------------
NII
INTEREST INTEREST NET INTEREST NII RISK
BASIS POINT CHANGE IN RATES INCOME EXPENSE INCOME (NII) % CHANGE LIMIT
--------------------------- -------- -------- ------------ -------- -----
+300 $66,498 $45,678 $20,820 -28.3% 20.0%
+200 64,820 41,162 23,658 -18.6% 15.0%
+100 63,061 36,647 26,414 -9.1% 10.0%
0 61,181 32,131 29,050 0.0% 0.0%
-100 58,681 27,646 31,035 6.8% 10.0%
-200 55,715 23,608 32,107 10.5% 15.0%
-300 52,428 20,197 32,231 11.0% 20.0%
24
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
MARCH 31, 2006 DATA, CONTINUED
(IN THOUSANDS)
MARKET VALUE OF PORTFOLIO EQUITY
AT MARCH 31, 2006
--------------------------------
PRESENT PRESENT PRESENT
VALUE VALUE VALUE
BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT
--------------------------- -------- -------- ----------
+300 $ 49,920 -59.5% 45.0%
+200 73,963 -40.0% 35.0%
+100 98,947 -19.8% 25.0%
0 123,300 0.0% 0.0%
-100 140,755 14.2% 25.0%
-200 151,127 22.6% 35.0%
-300 159,675 29.5% 45.0%
DECEMBER 31, 2005 DATA
(IN THOUSANDS)
PERIOD ENDING DECEMBER 31, 2006
----------------------------------------------------------
INTEREST INTEREST NET INTEREST NII NII
BASIS POINT CHANGE IN RATES INCOME EXPENSE INCOME (NII) % CHANGE RISK LIMIT
--------------------------- -------- -------- ------------ -------- ----------
+300 $66,381 $43,764 $22,617 -24.8% 20.0%
+200 64,649 39,466 25,183 -16.3% 15.0%
+100 62,850 35,168 27,682 -7.9% 10.0%
0 60,942 30,871 30,071 0.0% 0.0%
-100 58,178 26,573 31,605 5.1% 10.0%
-200 55,000 23,098 31,902 6.1% 15.0%
-300 51,805 19,877 31,928 6.2% 20.0%
MARKET VALUE OF PORTFOLIO EQUITY
AT DECEMBER 31, 2005
--------------------------------
PRESENT PRESENT PRESENT
VALUE VALUE VALUE
BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT
--------------------------- -------- -------- ----------
+300 $ 54,493 -56.8% 45.0%
+200 77,762 -38.3% 35.0%
+100 102,136 -19.0% 25.0%
0 126,029 0.0% 0.0%
-100 142,377 13.0% 25.0%
-200 151,148 19.9% 35.0%
-300 160,867 27.6% 45.0%
25
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists primarily of investments
in stock of banks and bank holding companies located mainly in Pennsylvania. The
Corporation also owns some other stocks and mutual funds. Included in "Other
Equity Securities" in the table that follows are preferred stocks issued by U.S.
Government agencies with a fair value of $2,000,000 at March 31, 2006 and
$1,997,000 at December 31, 2005.
Investments in bank stocks are subject to the risk factors that affect the
banking industry in general, including competition from non-bank entities,
credit risk, interest rate risk and other factors, which could result in a
decline in market prices. Also, losses could occur in individual stocks held by
the Corporation because of specific circumstances related to each bank. Further,
because of the concentration of bank and bank holding companies located in
Pennsylvania, these investments could decline in market value if there is a
downturn in the state's economy.
Equity securities held as of March 31, 2006 and December 31, 2005 are presented
in Table XII.
TABLE XII - EQUITY SECURITIES
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
(IN THOUSANDS) COST VALUE VALUE VALUE
------- ------- ------------ ------------
AT MARCH 31, 2006
Banks and bank holding companies $19,080 $27,564 $(2,756) $(5,513)
Other equity securities 4,045 4,551 (455) (910)
------- ------- ------- -------
Total $23,125 $32,115 $(3,211) $(6,423)
======= ======= ======= =======
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
COST VALUE VALUE VALUE
------- ------- ------------ ------------
AT DECEMBER 31, 2005
Banks and bank holding companies $20,010 $28,879 $(2,888) $(5,776)
Other equity securities 4,023 4,387 (439) (877)
------- ------- ------- -------
Total $24,033 $33,266 $(3,327) $(6,653)
======= ======= ======= =======
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's management, under the supervision of and with the
participation of the Corporation's Chief Executive Officer and Chief Financial
Officer, has carried out an evaluation of the design and effectiveness of the
Corporation's disclosure controls and procedures as defined in Rule 13a-15(e)
and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of
period covered by this report. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Corporation's disclosure controls and procedures are effective to
ensure that all material information required to be disclosed in reports the
Corporation files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There were no significant changes in the Corporation's internal control over
financial reporting that occurred during the period covered by this report that
has materially affected, or that is reasonably likely to affect, our internal
control over financial reporting.
26
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and the subsidiary banks 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 1A. RISK FACTORS
There have been no material changes from the risk factors previously
disclosed in Item 1A of the Corporation's Form 10-K filed March 3, 2006
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
a. Issuer Sales of Equity Securities
During the quarter ended March 31, 2006, the Corporation issued 1,700
shares of common stock held in treasury upon the exercise of stock
options by employees under the Corporation's equity compensation
plans. Exercise price for the stock options was $17.00 per share and
resulted in aggregate cash proceeds to the Corporation of $28,900.
Treasury shares were issued upon exercise of these options by a small
number of employees in reliance upon the private placement exemption
from registration under Section 4(2) of the Securities Act of 1933.
c. Issuer Purchases of Equity Securities
On August 19, 2005, the Corporation announced a plan to repurchase
shares of its outstanding common stock up to a total of $3 million
over the period ending August 31, 2006.The Board of Directors
authorized repurchase from time to time at prevailing market prices in
open market or in privately negotiated transactions as, in
management's sole opinion, market conditions warrant and based on
stock availability, price and the Company's financial performance. The
Corporation announced that it is anticipated such purchases will be
made during the remaining period, although no assurance may be given
when such purchases will be made or the aggregate number of shares
that will be purchased. As of March 31, 2006, the maximum additional
value available for purchases under this program is $2,532,000.
The following table sets forth a summary of the purchases by the
Corporation, on the open market, of its equity securities for the
first quarter of 2006:
TOTAL DOLLAR VALUE
TOTAL NUMBER OF SHARES
OF SHARES AVERAGE PRICE PURCHASED UNDER
PERIOD PURCHASED PAID PER SHARE PROGRAM
------ ------------ -------------- ------------------
January 1-31, 2006 --
February 1-28, 2006 6,500 $25.75 $167,375
March 1-31, 2006 9,500 25.40 241,300
------ ------ --------
Quarterly Totals 16,000 $25.54 $408,675
====== ====== ========
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
27
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
ITEM 6. EXHIBITS
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 Exhibit 3.1
of the Corporation's Form 8-K
filed August 25, 2004
11. Statement re: computation of per share earnings Information concerning the computation of
earnings per share is provided in Note 2
to the Consolidated Financial Statements,
which is included in Part I, Item 1 of Form 10-Q
31. Rule 13a-14(a)/15d-14(a) certifications:
31.1 Certification of Chief Executive Officer Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith
32. Section 1350 certifications Filed herewith
28
CITIZENS & NORTHERN CORPORATION - FORM 10-Q
SIGNATURE PAGE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
May 5, 2006 By: Craig G. Litchfield /s/
Date ------------------------------------
Chairman, President and Chief
Executive Officer
May 5, 2006 By: Mark A. Hughes /s/
Date ------------------------------------
Treasurer and Chief Financial
Officer
29