ITEM 1. BUSINESS
Citizens & Northern Corporation ("Corporation") is a one-bank holding company whose principal subsidiary is Citizens & Northern Bank ("Bank"). The Corporation'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 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, Sullivan and Lycoming counties. 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 Bank's market area are larger in overall size than the Bank. 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 customers or on any individual industry.
Although there have been no completed 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;
- - constructed and opened a branch in Muncy, PA in 2000;
- - purchased and remodeled a former bank operations center in Williamsport, PA, and began offering trust and financial management, commercial lending, branch banking and other services, in 2004;
- - opened a branch office at a leased facility in South Williamsport, PA in 2004; and
- - replaced the core banking computer system in 2004.
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In November 2004, the Corporation, along with Canisteo Valley Corporation ("Canisteo"), announced the signing of a definitive agreement and plan of merger. Canisteo is the parent company of First State Bank; a New York State chartered commercial bank with two offices in Steuben County, NY, and assets of $42.5 million as of September 30, 2004.
Under the agreement, the Corporation will acquire Canisteo in an all-cash merger transaction. The transaction, which has been approved by the Boards of Directors of both companies, is expected to be completed during the third quarter 2005, pending Canisteo stockholder approval, regulatory approval, and other customary conditions of closing.
At December 31, 2004, the Bank had total assets of $1,093,273,000, total deposits of $677,537,000 and net loans outstanding of $572,826,000. At December 31, 2004, the Bank had a total of 324 full-time equivalent employees.
Most of the activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:
- - 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 and must comply with the reporting requirements of the Federal Bank Holding Company Act.
- - The Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking.
- - C&NFSC is a Pennsylvania corporation. The Pennsylvania Department of Insurance regulates C&NFSC's insurance activities. Brokerage products are offered through a third party networking agreement between the Bank and UVEST Financial Services, Inc.
- - Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance.
A copy of the Corporation's annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation's Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible, after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation's web site at www.cnbankpa.com.
ITEM 2.
ITEM 2. PROPERTIES
The Bank owns each of its properties, except for the facilities located at 68 Main Street, Wellsboro, and 2 East Mountain Avenue, South Williamsport, which are leased. All of the properties are in good condition. None of the owned 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 1085 S. Main Street 428 Main Street Athens, PA 18810 Mansfield, PA 16933 Towanda, PA 18848
111 Main Street Route 220 Courthouse Square Dushore, PA 18614 Monroeton, PA 18832 Troy, PA 16947
Main Street 3461 Route 405 Highway 90-92 Main Street East Smithfield, PA 18817 Muncy, PA 17756 Wellsboro, PA 16901
104 Main Street Thompson Street 130 Court Street Elkland, PA 16920 Ralston, PA 17763 Williamsport, PA 17701
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102 E. Main Street 503 N. Elmira Street Route 6 Knoxville, PA 16928 Sayre, PA 18840 Wysox, PA 18854
Main Street 2 East Mountain Avenue Laporte, PA 18626 South Williamsport, PA 17702
Main Street 41 Main Street Liberty, PA 16930 Tioga, PA 16946
Other offices:
Bankcard Services C&N Financial Services Corp. Internal Audit RR 7 Box 503 68 Main Street Water Street Wellsboro, PA 16901 Wellsboro, PA 16901 Wellsboro, PA 16901
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation's financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2004, no matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
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. Effective January 13, 2005, the Corporation's stock began to be listed on the NASDAQ SmallCap Market with the trading symbol CZNC. Previously, the Corporation's stock was available through the Over-The-Counter Bulletin Board. As of March 1, 2005, there were 2,444 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 2004 and 2003.
While the Corporation expects to continue its policy of regular quarterly dividend payments, future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and the Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.
Known "market makers" who handle Citizens & Northern Corporation stock transactions are:
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EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation's shareholders. The figures shown in the table below are as of December 31, 2004.
Effective January 3, 2005, the Corporation granted options to purchase a total of 37,176 shares of common stock through the Stock Incentive and Independent Directors Stock Incentive Plans. The exercise price for these options is $27.00 per share, which was the market price at the date of grant. Also, effective January 3, 2005, the Corporation awarded a total of 4,128 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 2005 are not included in the tables above. More details related to the Corporation's equity compensation plans are provided in Notes 1 and 12 to the consolidated financial statements.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
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(1) Includes available-for-sale and held-to-maturity securities, and interest-bearing cash and due from banks.
(2) For purposes of this computation, the number of outstanding shares has been increased for the effects of a 3-for-2 stock split issued in April 2003 and for 1% stock dividends issued in January following each year-end.
(3) Ratios calculated using average balance sheet data.
(4) Generally accepted accounting principles ("GAAP") require that available-for-sale securities be reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through stockholders' equity, net of tax. Management believes there is an inherent mismatch between the income statement and balance sheet related to unrealized gains/losses that may create a material inconsistency in earnings-based ratios. Further, the amount of unrealized gains/losses may vary widely from period-to-period, depending on the financial markets as a whole and interest rate movements. Therefore, management has provided these "non-GAAP" amounts and ratios because we believe they provide meaningful information for evaluating the Corporation's financial position and results of operations.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain 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 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.
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EARNINGS OVERVIEW
Net income in 2004 was $14,863,000, or $1.82 per share - - basic and $1.81 per share - - diluted. Net income for 2004 was $1,394,000, or 8.6%, lower than the $16,257,000 ($1.99 per share - - basic and $1.98 per share - - diluted) recorded in 2003. In comparing earnings for 2004 with 2003's results, it is important to note the lower level of realized securities gains generated in 2004, as described below. Assuming an income tax rate of 34%, the lower securities gains in 2004 reduced net income for 2004 by $1,269,000 from 2003. Excluding the effects of lower securities gains, net income for 2004 was approximately 1% lower than the amount recorded in 2003. In 2002, net income totaled $14,959,000 ($1.83 per share - basic and diluted).
The most significant income statement changes are as follows:
2004 VS. 2003
- The interest margin increased $3,630,000, or 11.5% in 2004 from $31,686,000 in 2003. Higher interest income, primarily from growth in loans, combined with lower interest expense, combined to drive the increase in the interest margin. The "Net Interest Margin" section of Management's Discussion and Analysis provides a more detailed discussion of factors that affected interest income and interest expense.
- Realized securities gains, net of realized losses, decreased $1,922,000 to $2,877,000 in 2004 from $4,799,000 in 2003. In both 2004 and 2003. the Corporation sold selected bank stocks that management believed to be fully valued, generating substantial realized gains. Net gains from sales of equity securities, which consisted primarily of bank stocks, amounted to $2,011,000 in 2004 and $3,384,000 in 2003. Net gains from sales and calls of debt securities amounted to $866,000 in 2004, and $1,415,000 in 2003.
- Other (noninterest) operating expenses increased $1,363,000, or 25.9%, in 2004 over 2003. Overall, this increase is the result of higher volumes of loans and other transactions, start-up of the Williamsport and South Williamsport facilities, the implementation of the core computer system conversion and other activities have resulted in more expense incidental to additional personnel and technology. A further explanation of these costs is provided in the "Noninterest Expense" section of Management's Discussion and Analysis.
- Pre-tax income was lower in 2004 than in 2003 and the income tax provision decreased to $2,851,000 in 2004 from $3,609,000 in 2003. The income tax provision, as a percentage of pre-tax income, was 16.09% in 2004, down from 18.17% in 2003. Note 13 to the Consolidated Financial Statements presents more detail concerning the Corporation's accounting for income taxes.
2003 VS. 2002
- The interest margin increased $716,000, or 2.3%, to $31,686,000 in 2003 from $30,970,000 in 2002. In 2003, interest rates were at very low levels by historical standards. In that rate environment, on average, interest earning assets repriced faster than interest-bearing liabilities, which had the effect of driving down the Corporation's net interest margin. However, substantial growth in loans generated higher interest income, which more than offset the effects of lower rates on the net interest margin.
- Realized securities gains, net of realized losses, increased $1,911,000, to $4,799,000 in 2003 from $2,888,000 in 2002. In both 2003 and 2002, the Corporation sold selected bank stocks that management believed to be fully valued, generating substantial realized gains.
- Other (noninterest) operating expenses increased $1,265,000, or 6.1%, in 2003 over 2002. This increase includes higher employee benefits and payroll costs. As described in more detail in the "Noninterest Expense" section of Management's Discussion and Analysis, these cost increases reflect a higher number of employees, as well as increases in expense related to the defined benefit pension and employee health insurance plans.
- Although pre-tax income was higher in 2003 than in 2002, the income tax provision decreased to $3,609,000 in 2003 from $3,734,000 in 2002. The income tax provision, as a percentage of pre-tax income, was 18.17% in 2003, down from 19.98% in 2002. This lower effective tax rate reflects management's decision to increase the weighting of tax-exempt investment securities as a percentage of total assets. Note 13 to the Consolidated Financial Statements presents more detail concerning the Corporation's accounting for income taxes.
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OUTLOOK FOR 2005
The Corporation is in a growth mode. In addition to the pending acquisition of Canisteo Valley Corporation (see Note 21 to the consolidated financial statements), management has several projects planned for 2005. The growth in administrative, trust and commercial lending staff has resulted in the need for more room. In order to meet that need, a new administrative building will be erected within 2 blocks of the Wellsboro main office. The facility will provide about 17,000 square feet of room. In Lycoming County, the Corporation has signed agreements for the acquisition of 2 sites for future full-service offices. Management hopes to begin construction in Jersey Shore by the second quarter 2005. Construction of the second building will most likely begin by the end of 2005. Total capital purchases for 2005 are estimated to range from $6 million to $8.5 million.
Management expects the expansion and investments in new markets to provide future, continuing opportunities for earnings growth. It may be difficult in 2005, however, to achieve a level of earnings comparable to 2004's results. Management expects the Lycoming County expansion to help achieve significant loan growth in 2005, which would provide a boost to earnings. Over the last 6 months of 2004 and first 2 months of 2005, however, the Federal Reserve has raised the Fed Funds Target rate 6 times, from 1% to its current level of 2.5%. Further increases are expected, as various economic pundits speculate the Fed's "equilibrium" rate to range anywhere from 3% to 5%. Meanwhile, long-term rates have not changed much over the last year, and many economists believe they will not move much during 2005. Rising short-term rates, combined with flat long-term rates, would be expected to have a negative effect on the Corporation's net interest margin in 2005. Further, noninterest expense in 2005 will include payroll and other start-up costs related to the new branches, as well as costs from the planned administrative facility and a full year of depreciation and maintenance from the core computer system that was placed in service in October 2004.
Another major variable that affects the Corporation's earnings is securities gains and losses. 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 in 2005.
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. As described in Note 1 to 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 accumulated other comprehensive income (included in stockholders' equity).
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NET INTEREST MARGIN 2004/2003/2002
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 I, II and III include information regarding the Corporation's net interest margin in 2004, 2003 and 2002. 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. The discussion that follows is based on amounts in the Tables.
The net interest margin, on a taxable-equivalent basis, was $39,218,000 in 2004, an increase of $3,736,000 or 10.5%, over 2003. As reflected in Table III, increased interest income from higher volumes of earning assets exceeded increases in interest expense attributable to higher volumes of interest-bearing liabilities by $2,830,000 in 2004 compared to 2003. Table III also shows that interest rate changes had the effect of increasing net interest income $906,000 in 2004 compared to 2003. As shown in Table II, the Interest Rate Spread was 3.43% in 2004, up from 3.31% in 2003.
In 2003, the net interest margin of $35,482,000 was $1,519,000, or 4.5%, higher than the net interest margin in 2002. In 2003, the increase in net interest margin resulted mainly from increases in volume of earning assets, and from declining interest rates on the Corporation's deposits and borrowed funds. Table III shows that changes in volume of earning assets and interest-bearing liabilities resulted in an increase in net interest income of $4,129,000 in 2003, while changes in rates reduced net interest income $2,610,000.
INTEREST INCOME AND EARNING ASSETS
The Corporation's major categories of earning assets are loans and available-for-sale investment securities. As shown in Table I, total interest income increased to $61,824,000 in 2004 from $59,019,000 in 2003, an increase of 4.8%. Interest and fees on loans increased $2,274,000, or 6.8%. Interest and dividends from available-for-sale securities rose $532,000, or 2.1%. In 2004, the positive effect on earnings of higher average balances of loans and available-for-sale securities outstanding more than offset the dampening effect of lower average rates of return.
Total interest income decreased $1,259,000, or 2.1%, in 2003 as compared to 2002. Interest and fees on loans increased $1,880,000, or 6.0% while interest and dividends from available-for-sale securities decreased $3,073,000, or 10.7%. In 2003, interest rates continued a fall to 40-year low levels. In 2003, the Corporation's lending growth produced an increase in interest income, despite significantly declining rates. Over the course of 2003, as falling rates caused principal repayments on mortgage-backed securities and calls of U.S. Government agency securities to accelerate, the Corporation was forced to reinvest at lower yields on available-for-sale securities or use the proceeds to help fund loan growth.
Table II shows the composition of the available-for-sale securities portfolio, based on average balances. In 2004, the average balance of municipal bonds was $151,049,000, or 31% of the total portfolio. Municipals bonds were also 31% of the total portfolio in 2003 and 24% in 2002. 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.
The Corporation's other major categories of available-for-sale securities are mortgage-backed securities, U.S. Government agency bonds, equity securities and other securities. Most of the Corporation's mortgage-backed securities are "Hybrid ARMs," issued by U.S. Government agencies. Hybrid ARMs have a fixed rate for some period of time (fixed rates on the Corporation's holdings range from 3-10 years), then reprice once a year thereafter, based on changes in a market rate (index), subject to annual and lifetime caps. Looking ahead to the possibility of a rising long-term interest rate environment, Hybrid ARMs would typically provide a shorter average life, and faster principal repayments, than longer-term, fixed rate mortgage-backed securities. Equity securities consist mainly of bank stocks, and are discussed in more detail in the "Equity Securities" section of Item 7A.
ITEM 7A. 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 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 Corporation's financial instruments when interest rates change.
The Bank uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. Only assets and liabilities of the Bank are included in management's monthly simulation model calculations. Since the Bank makes up more than 90% of the Corporation's total assets and liabilities, and because the Bank is the source of the most volatile interest rate risk, management does not consider it necessary to run the model for the remaining entities within the consolidated group. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of other assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 50-300 basis points of current rates.
The Bank's Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. In September 2004, the Bank's policy was expanded to provide policy limits at +/- 100, 200 and 300 basis points from current rates (the prior policy included limits based on +/- 200 basis points change from current rates). The new policy limits for fluctuations in net interest income are tiered from the baseline one-year scenario. The new policy limits for market value variances are also tiered from the baseline values based on current rates. The most sensitive scenario presented in Table XIV presented below is the "+300 basis points" scenario. As the table shows, as of December 31, 2004, if interest rates were to immediately rise 300 basis points, the Bank's calculations based on the model show that although the change in net interest income is within the policy threshold, the market value of portfolio equity would decrease 49.2%, which exceeds the policy limit of 45%. Management will continue to evaluate whether to make any changes to asset or liability holdings in an effort to reduce exposure to decline in market value or net interest income in a rising interest rate environment.
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.
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TABLE XIV - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
DECEMBER 31, 2004 DATA (IN THOUSANDS)
MARKET VALUE OF PORTFOLIO EQUITY AT DECEMBER 31, 2004
PERIOD ENDING DECEMBER 31, 2004
DECEMBER 31, 2003 DATA (IN THOUSANDS)
MARKET VALUE OF PORTFOLIO EQUITY AT DECEMBER 31,2003
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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. Included in "Other equity securities" in the table that follows are preferred stocks issued by U.S. Government agencies with a fair value of $6,130,000 at December 31, 2004 and $11,347,000 at December 31, 2003.
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, 2004 and 2003 are as follows:
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ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENT OF INCOME (IN THOUSANDS EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
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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 & 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. 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 products include mortgage loans, commercial loans, consumer loans and credit cards, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, individual retirement accounts and certificates of deposit. The Corporation also offers non-insured "Repo Sweep" accounts.
The Corporation provides Trust and Financial Management services, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through C&N Financial Services Corporation. C&N Financial Services Corporation also has 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 accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect 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. 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.
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 the level-yield method.
AVAILABLE-FOR-SALE SECURITIES - includes debt securities not classified as held-to-maturity and unrestricted equity securities. Such 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. 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 sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security.
RESTRICTED EQUITY SECURITIES - Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities 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.
LOANS - Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan 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.
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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 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, based on factors such as credit concentrations, past due or delinquency status, trends in historical loss experience, specific impaired loans, and economic conditions. Past due or delinquency status of loans is computed based on the contractual terms of the loans. 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. Loan balances are charged off when it becomes evident that such balances are not fully collectible.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation expense is computed using the straight-line method.
INTEREST COSTS - The Corporation capitalizes interest as a component of the cost of premises and equipment constructed or acquired for its own use. In 2004, total interest incurred was $22,649,000, of which $22,606,000 was charged to expense and $43,000 was capitalized. Total interest incurred amounted to $23,537,000 in 2003 and $26,315,000 in 2002, all of which was charged to expense.
FORECLOSED ASSETS HELD FOR SALE - Foreclosed assets held for sale consist of real estate acquired by foreclosure and are carried at estimated fair value, less selling cost.
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 loan losses, securities gains or losses, depreciation, pension and other postretirement benefits, alternate minimum tax, investments in limited partnerships and amortization of loan origination fees and costs.
STOCK COMPENSATION PLANS - As permitted by Accounting Principles Board (APB) Opinion 25, the Corporation uses the intrinsic value method of accounting for stock compensation plans. Utilizing the intrinsic value method, compensation cost is measured by the excess of the quoted market price of the stock as of the grant date (or other measurement date) over the amount an employee or director must pay to acquire the stock. Stock options issued under the Corporation's stock option plans have no intrinsic value, and accordingly, no compensation cost is recorded for them.
The Corporation has also made awards of restricted stock. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period.
The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value provisions of Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-based Compensation," to stock options.
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In December 2004, the Financial Accounting Standards Board issued SFAS 123R, which replaces SFAS 123 and supersedes APB Opinion 25. SFAS 123R will require the Corporation to record stock option expense based on estimated fair value determined using an option valuation model. SFAS 123R applies to new awards granted, and to modifications of existing awards, on or after July 1, 2005.
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.
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.
2. 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 components of other comprehensive income and the related tax effects are as follows:
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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 a 3-for-2 stock split issued in April 2003, as well as 1% 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. 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.
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 2004 ranged from $2,984,000 to $4,541,000. For 2003, theses balances ranged from $2,402,000 to $4,434,000. Average daily cash balances with the Federal Reserve Bank required for services provided to the Bank were $2,500,000 in 2004 and 2003. Total balances restricted amounted to $6,248,000 at December 31, 2004 and $6,324,000 at December 31, 2003.
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Deposits with one financial institution are insured up to $100,000. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the insured amount.
5. SECURITIES
Amortized cost and fair value of securities at December 31, 2004 and 2003 are summarized as follows:
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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 December 31, 2004:
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-sponsored agencies or state and political subdivisions, management believes the Corporation's debt securities at December 31, 2004 were not other-than-temporarily impaired.
Of the total $999,000 unrealized losses on equity securities at December 31, 2004, $870,000 was from a preferred stock issued by an U.S. Government-sponsored agency. Management believes this security's fair value is affected primarily by volatility in interest rates, and although not guaranteed by the U.S. Government, that there is very little credit risk associated with this security. For the remaining equity securities for which fair value was less than cost at December 31, 2004, management believes the financial condition and near-term prospects of those issuers indicate those securities were not other-than-temporarily impaired.
The amortized cost and fair value of investment debt securities at December 31, 2004 follow. Maturities of debt securities (including mortgage-backed securities) are presented based on contractual maturities. Expected maturities differ from contractual maturities because monthly principal payments are received from mortgage-backed securities, and because borrowers may have the right to prepay obligations with or without prepayment penalties.
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(IN THOUSANDS)
The following table shows the amortized cost and maturity distribution of the debt securities portfolio at December 31, 2004:
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
Investment securities carried at $89,158,000 at December 31, 2004 and $80,308,000 at December 31, 2003, were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. Also, see Note 9 for information concerning securities pledged to secure borrowing arrangements.
Gross realized gains and losses from the sales of available-for-sale securities, and the income tax provision related to net realized gains, for 2004, 2003 and 2002 were as follows:
(IN THOUSANDS)
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6. LOANS
Major categories of loans and leases included in the loan portfolio are as follows:
Net unamortized loan fees and costs of $1,704,000 at December 31, 2004 and $1,629,000 at December 31, 2003 have been offset against the carrying value of loans.
There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at December 31, 2004.
The Corporation grants commercial, residential and personal loans to customers primarily in Tioga, Bradford, Sullivan and Lycoming Counties. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors' ability to honor their contracts is dependent on the local economic conditions within the region.
Transactions in the allowance for loan losses were as follows:
Information related to impaired and nonaccrual loans, and loans past due 90 days or more, as of December 31, 2004 and 2003 is as follows:
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The following is a summary of information related to impaired loans for 2004, 2003 and 2002:
No additional funds are committed to be advanced in connection with impaired loans.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
Depreciation expense included in occupancy expense and furniture and equipment expense was as follows:
8. DEPOSITS
At December 31, 2004, the scheduled maturities of time deposits are as follows:
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Included in interest-bearing deposits are time deposits in the amount of $100,000 or more. As of December 31, 2004, the remaining maturities or repricing frequency of time deposits of $100,000 or more are as follows:
Interest expense from deposits of $100,000 or more amounted to $2,214,000 in 2004, $2,693,000 in 2003 and $3,238,000 in 2002.
9. BORROWED FUNDS
SHORT-TERM BORROWINGS
Short-term borrowings include the following:
The weighted average interest rate on total short-term borrowings outstanding was 1.72% at December 31, 2004 and 1.21% at December 31, 2003. The maximum amount of total short-term borrowings outstanding at any month-end was $55,278,000 in 2004 and $45,166,000 in 2003.
(a) Overnight borrowings include federal funds purchased overnight from correspondent banks and overnight borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh) on the "Open Repo Plus" facility. The maximum month-end amount of such borrowings was $17,100,000 in 2004, $16,950,000 in 2003 and $14,350,000 in 2002. The average amount of such borrowings was $6,258,000 in 2004, $6,044,000 in 2003 and $2,347,000 in 2002. Weighted average interest rates were 1.59% in 2004, 1.50% in 2003 and 1.86% in 2002.
(b) Short-term FHLB - Pittsburgh loans are as follows:
Collateral for FHLB - Pittsburgh loans is described under the "Long-term Borrowings" section of this note.
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(c) Customer repurchase agreements mature overnight, and are collateralized by securities with a carrying value of $26,336,000 at December 31, 2004 and $35,680,000 at December 31, 2003.
(d) Other repurchase agreements included in short-term borrowings are as follows:
The terms and collateral related to repurchase agreements are described under the "Long-term Borrowings" section of this note.
LONG-TERM BORROWINGS
Long-term borrowings are as follows:
(e) Long-term borrowings from FHLB - Pittsburgh are as follows:
The FHLB - Pittsburgh loan facilities are collateralized by qualifying securities and mortgage loans with a book value totaling $350,935,000 at December 31, 2004. 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 $12,360,000 at December 31, 2004 and $11,575,000 at December 31, 2003.
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(f) Repurchase agreements included in long-term borrowings are as follows:
Securities sold under repurchase agreements were delivered to the broker-dealers who arranged 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 carrying value of the underlying securities was $70,528,000 at December 31, 2004 and $58,086,000 at December 31, 2003. Average daily repurchase agreement borrowings amounted to $58,663,000 in 2004, $40,333,000 in 2003 and $36,482,000 in 2002. During 2004, 2003 and 2002, the maximum amounts of outstanding borrowings under repurchase agreements with broker-dealers were $67,386,000, $50,153,000 and $44,720,000. The weighted average interest rate on repurchase agreements was 3.20% in 2004, 3.68% in 2003 and 3.72% in 2002.
10. DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation utilizes derivative financial instruments related to a certificate of deposit product called the "Index Powered Certificate of Deposit" (IPCD). IPCDs have a term of 5 years, with interest paid at maturity based on 90% of the appreciation (as defined) in the S&P 500 index. There is no guaranteed interest payable to a depositor of an IPCD - however, assuming an IPCD is held to maturity, a depositor is guaranteed the return of his or her principal, at a minimum.
Statement of Financial Accounting Standards No. 133 requires the Corporation to separate the amount received from each IPCD issued into 2 components: (1) an embedded derivative, and (2) the principal amount of each deposit. Embedded derivatives are derived from the Corporation's obligation to pay each IPCD depositor a return based on appreciation in the S&P 500 index. Embedded derivatives are carried at fair value, and are included in other liabilities in the consolidated balance sheet. Changes in fair value of the embedded derivative are included in other expense in the consolidated income statement. The difference between the contractual amount of each IPCD issued, and the amount of the embedded derivative, is recorded as the initial deposit (included in interest-bearing deposits in the consolidated balance sheet). Interest expense is added to principal ratably over the term of each IPCD at an effective interest rate that will increase the principal balance to equal the contractual IPCD amount at maturity.
In connection with IPCD transactions, the Corporation has entered into Equity Indexed Call Option (Swap) contracts with 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.
Amounts recorded related to IPCDs are as follows (in thousands):
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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 is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation's financial 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 may not be realized in an immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.
The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:
CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-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 fair 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.
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, 2004 and 2003. 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. The fair value estimates of 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.
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BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.
ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values.
EMBEDDED DERIVATIVE LIABILITIES - IPCDs - The fair values of embedded derivatives are calculated by a third party. Factors that affect the fair value of embedded 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 - EQUITY OPTION SWAP CONTRACTS - The fair values of equity option Swap contracts are calculated by a third party. Factors that affect the fair value of equity 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)
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, 2004 and 2003, and will not affect the Corporation's future expenses.
The Corporation uses a December 31 measurement date for its plans.
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The following tables show the funded status and amounts recognized in the consolidated balance sheet from these defined benefit plans:
(IN THOUSANDS)
The accumulated benefit obligation for the defined benefit pension plan was $8,380,000 at December 31, 2004 and $7,595,000 at December 31, 2003.
The components of net periodic benefit costs from these defined benefit plans are as follows:
(IN THOUSANDS)
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The weighted-average assumptions used to determine benefit obligations as of December 31, 2004 and 2003 are as follows:
The expected return on pension plan assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The selected rate considers the historical and expected future investment trends of the present and expected future assets in the plan. Management believes the assumed 8.50% return on plan assets, which was used for net periodic benefit cost calculations in 2002, 2003 and 2004, is reasonable. Management has calculated the average annual return on pension plan assets over the period 1991-2004 to be 9.45%, with annual returns ranging from a low of - -7.23% to a high of +19.87% over that period.
The Corporation's pension plan weighted-average asset allocations at December 31, 2004 and 2003 are as follows:
The Bank's Trust and Financial Management Department manages the investment of pension plan assets. The targeted asset allocation for the pension plan is 60% equity securities, 35% debt securities and 5% cash. This targeted asset allocation reflects a balanced approach, considering the need for growth of plan assets to meet future demand, as well as the need for ongoing liquidity to fund benefit payments. Specifically, the Trust Department attempts to match the maturities of zero-coupon bonds with the estimated amounts of benefit payments over the ensuing 10-year period. Within the equity portion of pension plan investments, the Trust Department employs a strategy of diversification. Holdings include large capitalization stocks from many different industries, as well as mid-cap and foreign mutual funds. The pension plan's assets do not include any shares of the Corporation's common stock.
The Corporation expects to contribute $365,000 to the defined benefit pension plan, and $61,000 to the postretirement benefit plan, in 2005.
Estimated future benefit payments (including, for the postretirement plan, only the estimated employer contributions), which reflect expected future service, are as follows:
(IN THOUSANDS)
In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the "Act") was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least "actuarially equivalent" to Medicare Part D.
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The Corporation has not yet determined whether benefits provided under the postretirement plan are actuarially equivalent to benefits that will be available under Medicare Part D. Accordingly, the financial statement amounts and disclosures related to the postretirement benefits plan do not reflect the effects of the Act.
PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation's matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation's total basic and matching contributions were $727,000 in 2004, $728,000 in 2003 and $667,000 in 2002.
The profit sharing/401(k) Plan includes 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 the accounts of Plan participants. These purchases are made on the market (not directly from the Corporation), and employees 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. As of December 31, 2004, there were no 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 diluted. As of December 31, 2004, the ESOP held 292,614 shares of Corporation stock, all of which had been allocated to Plan participants. The Corporation's contributions to the ESOP portion of the Plan (included in total contributions reported above) totaled $385,000 in 2004, $377,000 in 2003 and $343,000 in 2002.
The Corporation also has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to expense for officers' supplemental deferred compensation were $4,000 in 2004, $45,000 in 2003 and $44,000 in 2002.
STOCK-BASED COMPENSATION PLANS
The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 400,000 shares of common stock may be issued under the Stock Incentive Plan. 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 the market price of the stock at the date of grant, ratable vesting over 5 years and a contractual expiration of 10 years. In 2000, 2002, 2003 and 2004, there were awards of Incentive Stock Options and restricted stock. The Incentive Stock Options granted in 2000, 2002, 2003 and 2004 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 has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of 75,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients' rights to exercise stock options under this plan expire 10 years from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. The restricted stock awards vest ratably over 3 years.
Effective January 3, 2005, the Corporation granted options to purchase a total of 37,176 shares of common stock through the Stock Incentive and Independent Directors Stock Incentive Plans. The exercise price for these options is $27.00 per share, which was the market price at the date of grant. Also, effective January 3, 2005, the Corporation awarded a total of 4,128 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 2005 are not included in the tables that follow.
As 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 would have been adjusted to the pro forma amounts indicated in the following table.
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(NET INCOME IN THOUSANDS)
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:
A summary of the status of the Corporation's stock option plans is presented below:
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The following table summarizes information about stock options outstanding as of December 31, 2004:
The following table summarizes restricted stock awards in 2004, 2003 and 2002:
Compensation expense related to restricted stock was $85,000 in 2004, $102,000 in 2003 and $80,000 in 2002.
13. INCOME TAXES
The following temporary differences gave rise to the net deferred tax liability at December 31, 2004 and 2003:
(IN THOUSANDS)
Tax provision:
Reconciliation of tax provision:
14. RELATED PARTY TRANSACTIONS
Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:
(IN THOUSAND
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.
Deposits from related parties held by the Corporation amounted to $1,887,000 at December 31, 2004 and $3,078,000 at December 31, 2003.
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, 2004 and 2003 are as follows:
Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management's credit assessment of the counterparty.
Financial 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. 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, 2004 and 2003.
Financial standby letters of credit as of December 31, 2004 expire as follows:
(IN THOUSANDS)
16. OPERATING LEASES AND OTHER PURCHASE COMMITMENTS
The Corporation leases facilities and office equipment under operating leases expiring through 2009. Rental expense under these operating leases totaled approximately $89,000 in 2004. Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of 1 year as of December 31, 2004 are as follows:
(IN THOUSANDS)
The facility leases contain renewal options for an additional 5-15 years at rental amounts established in the leases.
In 2004, the Corporation purchased the license to utilize banking software, and entered into contractual commitments to pay annual maintenance fees associated with the software. Maintenance expense amounted to $60,000 in 2004, and maintenance fees payable will be approximately $360,000 per year through 2008 and $300,000 in 2009. Through October 2009, the Corporation would also be required to pay additional software license fees, based on the Bank's asset size, determined based on the following schedule (additional licensing fees in thousands):
Effective in October 2007, the Corporation has the right to terminate its contractual commitment to the software vendor, subject to payment of 25% of any remaining annual maintenance fees.
The agreement between the software vendor and the Corporation contains options for an unlimited number of additional 5-year renewals. The agreement includes formulas to determine the amounts of maintenance fees and additional licensing fees, if the Corporation exercises the renewal options.
17. CONTINGENCIES
In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management's opinion, the Corporation's financial position and results of operations would not be materially affected by the outcome of these legal proceedings.
18. 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 Corporation'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 their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts 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 following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2004 and 2003, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
To be categorized as well capitalized, an 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.
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, the Corporation's dividends in 2005 may not exceed $17,085,000, plus consolidated net income for 2005. 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 $88,610,000 at December 31, 2004, 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 accumulated other comprehensive income) or $9,864,000 at December 31, 2004.
19. PARENT COMPANY ONLY
The following is condensed financial information for Citizens & Northern Corporation.
CONDENSED BALANCE SHEET
CONDENSED INCOME STATEMENT
CONDENSED STATEMENT OF CASH FLOWS
20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (UNAUDITED)
The following table presents summarized quarterly financial data for 2003 and 2002:
21. PENDING MERGER
In November 2004, the Corporation, along with Canisteo Valley Corporation ("Canisteo"), announced the signing of a definitive agreement and plan of merger. Canisteo is the parent company of First State Bank; a New York State chartered commercial bank with two offices in Steuben County, NY, and assets of $42.5 million as of September 30, 2004.
Under the agreement, the Corporation will acquire Canisteo in an all-cash merger transaction. The transaction, which has been approved by the Boards of Directors of both companies, is expected to be completed during the third quarter 2005, pending Canisteo stockholder approval, regulatory approval, and other customary conditions of closing.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Citizens & Northern Corporation:
We have audited the accompanying consolidated balance sheet of Citizens & Northern Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.
Parente Randolph, LLC /s/
Williamsport, Pennsylvania February 24, 2005
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE 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.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Corporation's management is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of the Corporation's management, including the principal executive officer and principal financial officer, the Corporation is in the process of conducting an evaluation of its internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
The Corporation's evaluation of its internal control over financial reporting has not yet been completed. Accordingly, as permitted by Securities and Exchange Act of 1934 Release No. 50754, management's annual report on internal control over financial reporting and the related attestation report of the registered public accounting firm are not included in this Form 10-K.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 2004 that was not disclosed.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions "Proposal 1 - Election of Directors," "Corporation's and Bank's Executive Officers," "Section 16(a) Beneficial Ownership Reporting Compliance," "Board of Director Committees, Attendance at Meetings and Compensation of Directors" and "Stockholder Proposals" of the Corporation's proxy statement dated March 22, 2005 for the annual meeting of stockholders to be held on April 19, 2005.
The Corporation's Board of Directors has adopted a Code of Ethics, available on the Corporation's web site at www.cnbankpa.com for the Corporation's employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation's employee handbook.)
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to disclosure under the captions "Executive Compensation," "Stock Incentive plan," "Option Grants," "Aggregated Stock Options Exercised During 2004 and Year-end Option Values," "Pension Plan," "Savings Plan," "Incentive Award Plan" and "Change in Control Agreements" of the Corporation's proxy statement dated March 22, 2005 for the annual meeting of stockholders to be held on April 19, 2005.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MATTERS
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 22, 2005 for the annual meeting of stockholders to be held on April 19, 2005.
"Equity Compensation Plan Information" as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant's Common Equity and Related Stockholder Matters) of this Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning loans and deposits with 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 22, 2005 for the annual meeting of stockholders to be held on April 19, 2005.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning services provided by the Corporation's independent auditors, Parente Randolph, LLC, the audit committee's pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption "Audit Committee" of the Corporation's proxy statement dated March 22, 2005 for the annual meeting of stockholders to be held on April 19, 2005.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1). The following consolidated financial statements are set forth in Part II, Item 8:
(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 Exhibit 3.1 of the Corporation's Form 8-K filed August 25, 2004
4. Instruments defining the rights of security holders, including indentures Not applicable
9. Voting trust agreement Not applicable
10.Material contracts:
10.1 Form of Indemnification Agreements dated May 2004 between the Corporation and the Directors and certain officers Filed herewith
10.2 Change in Control Agreement dated December 31, 2003 between the Corporation and Thomas L. Rudy, Jr. Filed herewith
Change in Control Agreement dated Incorporated by reference to the December 31, 2003 between the exhibits filed with the Corporation's Corporation and Craig G. Form 10-K on March 10, 2004 Litchfield
Change in Control Agreement dated Incorporated by reference to the December 31, 2003 between the exhibits filed with the Corporation's Corporation and Mark A. Hughes Form 10-K on March 10, 2004
Change in Control Agreement dated Incorporated by reference to the December 31, 2003 between the exhibits filed with the Corporation's Corporation and Matthew P. Prosseda Form 10-K on March 10, 2004
Change in Control Agreement dated Incorporated by reference to the December 31, 2003 between the exhibits filed with the Corporation's Corporation and Deborah E. Scott Form 10-K on March 10, 2004
Second Amendment to Citizens & Incorporated by reference to the Northern Corporation Stock exhibits filed with the Corporation's Incentive Plan Form 10-K on March 10, 2004
First Amendment to Citizens & Incorporated by reference to the Northern Corporation Stock exhibits filed with the Corporation's Incentive Plan Form 10-K on March 10, 2004
Citizens & Northern Corporation Incorporated by reference to the Stock Incentive Plan exhibits filed with the Corporation's Form 10-K on March 10, 2004
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Citizens & Northern Corporation Incorporated by reference to the Independent Directors Incentive exhibits Stock filed with the Plan Corporation's proxy statement dated March 19, 2001 for the annual meeting of stockholders held on April 17, 2001.
11. Statement re: computation of per Information concerning the computation share earnings 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
14. Code of ethics The Code of Ethics is available through the Corporation's website at www.cnbankpa.com. To access the Code of Ethics, click on "Shareholder News & Info.," followed by "Corporate Governance" and "Code of Ethics."
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
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
99. Additional exhibits:
99.1 Additional information mailed to stockholders with proxy statement and Form 10-K on March 22, 2005 Filed herewith
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(b) Exhibits - The required exhibits are listed under Part IV, Item 15(a)(3) of Form 10-K.
(c) Financial statement schedules are omitted because the required information is not applicable or is included elsewhere in Form 10-K.
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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:
By: Craig G. Litchfield /s/ - --------------------------- Craig G. Litchfield Chairman, President and Chief Executive Officer
Date: March 11, 2005
By: Mark A. Hughes /s/ - ---------------------- Treasurer and Principal Accounting Officer
Date: March 11, 2005
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 11, 2005 Date: March 11, 2005
/s/ R. Robert DeCamp /s/ Craig G. Litchfield R. Robert DeCamp Craig G. Litchfield Date: March 11, 2005 Date: March 11, 2005
/s/ Jan E. Fisher /s/ Edward H. Owlett, III Jan E. Fisher Edward H. Owlett, III Date: March 11, 2005 Date: March 11, 2005
/s/ R. Bruce Haner /s/ Leonard Simpson R. Bruce Haner Leonard Simpson Date: March 11, 2005 Date: March 11, 2005
/s/ Susan E. Hartley /s/ James E. Towner Susan E. Hartley James E. Towner Date: March 11, 2005 Date: March 11, 2005
/s/ Karl W. Kroeck /s/ Ann M. Tyler Karl W. Kroeck Ann M. Tyler Date: March 11, 2005 Date: March 11, 2005
/s/ Leo F. Lambert Leo F. Lambert Date: March 11, 2005
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