SAFE & SOUND® STAR RATINGS™

Memorandum on findings

CITIZENS AND NORTHERN BANK

90-92 MAIN STREET
WELLSBORO, Pennsylvania 16901

STAR RATING: 4 starstarstarstar
Predictive Indicator neutral
As of June 30, 2014
Federal Reserve System Identifier 895710


HOLDING COMPANY INFORMATION

(Based on data from the previous quarter.)

Holding company data is in thousands and percent. Zero assets indicates that the data is not reported.

Holding company information

High Holder Ownership Assets Equity Equity to Assets Net Income
CITIZENS AND NORTHERN CORPORATIONwholly-owned1,235,139184,76214.954,288

Please click on the holding company link to check the ratings of any affiliated institutions whose conditions could impact the bank about which you have inquired.

INTRODUCTION

U.S. commercial banks are chartered under either federal or state jurisdiction for the purposes of accepting funds for deposit and extending loans to either individual or business borrowers. Banks are subject to credit, interest rate, and operational risk, and, because of both their public purpose and their importance to the nation’s economy, banks become the object of intense regulatory scrutiny.

U.S. thrift institutions are chartered under either federal or state jurisdiction for the primary purpose of utilizing deposited funds to issue loans secured by real estate. Currently, real estate-backed loans account for approximately 44% of total thrift industry assets, and one-to-four family residential mortgages comprise nearly 62% of the industry’s real estate loan portfolio. Thrift institutions are subject to credit, interest rate, and operational risk, and, during the last twenty years, thrifts have made great strides toward reducing historic mismatches between asset and liability maturities.

The Bankrate proprietary commercial bank rating model analyzes capitalization, asset quality, earnings, and liquidity and produces composite and component "Star" ratings that can be used as a measure of the rated entity's financial safety and soundness. Additionally, early warning components of the model highlight operating characteristics of immediate concern and recommended follow-up actions. "The analyses are not adjusted for TARP funding and those institutions receiving funds may receive ratings that would differ were the TARP funds adjusted out of the analyses. You can check whether or not this institution has received TARP funding and whether or not they have paid it back at http://projects.propublica.org/bailout/list/index."

INSTITUTIONAL HIGHLIGHTS
Institution Name CITIZENS AND NORTHERN BANK
Report Date June 30, 2014
Report Period 6 months
Star Composite Rating, Percentile Rank 4 /47.85
Predictive Indicator neutral
Earnings Rating, Percentile Rank 4 /65.53
Asset Quality Rating, Percentile Rank 4 /24.46
Capital Rating, Percentile Rank 5 /85.53
Liquidity Rating, Percentile Rank 3 /12.33
Institution Asset Size 1.2424 billion
Deposits 981.8390 million
Loans 614.3470 million
Equity 172.8590 million
Net Profit/Loss 8.3430 million

COMPONENT HIGHLIGHTS

Component star rating: 4 starstarstarstar
Earnings Highlights

Bank profitability is critical to building capital, establishing adequate loss reserves, and providing dividends to shareholders.

Key Earnings information and ratios:Ratio (%)Assessment
Return on Equity10.05Very Healthy
Net Interest Margin3.64Mid-Range
Level of Non-interest Income (1)1.32Below Normal
Overhead (1)2.71Well Below Standard
(1) = As a percentage of average assets
Note: All ratios are based on the latest four quarters of income and expense

Component star rating: 4 starstarstarstar
Asset quality highlights

Asset quality is a major determinant of the viability of any banking institution. Poor asset quality will have a very direct impact upon the other components and bank regulators invest substantial amounts of time and resources in gauging the quality of a bank's loans and investments.

Key Asset Quality information and ratios:Ratio (%)Assessment
Nonperforming Asset Ratio (2)9.66Relatively Low
Loss Reserve Coverage (3)45.47Substantially Below Normal
Loan Yield5.54Conservative
Asset Growth Rate2.21Normal
(2) = Nonperforming Assets/Equity plus Loss Reserves
(3) = Loan Loss Reserves/Nonperforming Loans

Component star rating: 5 starstarstarstarstar
Capital highlights

Bank capitalization stands as a protection against loss for bank customers, creditors, shareholders, and the Federal Deposit Insurance Corporation (FDIC). Regulators place a high degree of importance upon assessments of capitalization and assign regulatory benchmarks as determinants of capital adequacy.

Key measures of Capital Adequacy:Ratio (%)Assessment
Net Worth to Total Assets13.91Above Peer Norm
Regulatory Capital Ratio25.74Substantially Exceeded Requirement

Component star rating: 3 starstarstar
Liquidity highlights

Liquidity provides funding for normal bank operations and represents a reserve for unanticipated disintermediation. Liquidity can be both an asset and a liability concept.

Key measures of Liquidity:Ratio (%)Assessment
Balance Sheet Liquidity6.56Substantially Below Normal
Purchased Liabilities7.04No Greater Than Average Dependence

Early warning highlights

Early warning indicators identify areas of potential concern, which may lead to financial deterioration and thus, require inquiry or in-depth investigation. For this bank we have noted:

    Institution Commentary

    OVERVIEW of Institution
    Organized in 1876, CITIZENS AND NORTHERN BANK is a state chartered banking institution, which, as of June 30, 2014, reported $1.2424 billion in total assets. At that date, loans and deposits held by the bank amounted to $614.3470 million and $981.8390 million, respectively. The bank's June 30, 2014 equity base of $172.8590 million produced an Equity/Assets ratio of 13.91%, as of that date.

    COMPOSITE SUMMARY
    Bankrate believes that, as of June 30, 2014, this bank exhibited a sound condition, characterized by normal overall, sustainable profitability, good asset quality, very strong capitalization and near normal liquidity.

    EARNINGS ANALYSIS
    For the twelve months ended June 30, 2014, the bank recorded net income of $16.8640 million. The bank experienced a return on average assets (ROA) of 1.39% over the latest four quarters. Year earlier twelve month results amounted to a net income of $20.2310 million, or a 1.62% ROA over the most recent four quarters at that time. An ROA of at least 1.0% is deemed satisfactory in accordance with banking industry standards, and the industry's annualized ROA for the twelve months of 2014 was approximately 1.03% for commercial banks and 1.13% for thrift institutions.

    We have concluded that for the four quarters ending June 30, 2014, the bank achieved a very healthy return on equity. We deem net interest margin to have been mid-range. Noninterest income was below normal, and management should be questioned as to the outlook for this source of revenue. We also observed overhead ratios that were well below standard, a sign of strict expense control. Importantly, net interest margins, noninterest income components, and overhead expense levels represent operating factors that combine to impact overall operating results.

    ASSET QUALITY ANALYSIS
    The bank revealed, as previously stated, good asset quality. Our conclusion with respect to asset quality incorporates our analysis of data depicting regional economic conditions as well as our computations of a relatively low June 30, 2014 nonperforming asset ratio, substantially below normal reserve coverage for nonperforming loans; and apparently acceptable quality, or no greater than average, holdings of commercial real estate and construction loans, two categories that can intensify credit risk.

    Other asset categories, such as farm and consumer loans, which may carry more than usual default potential, should not have a substantial negative impact upon future results.

    Loan yield can measure financial reward versus credit risk. Excessive loan yield may be an indicator of existing or future problems. Our loan review indicates that the bank has assumed a seemingly prudent position between credit risk and financial reward.

    CAPITAL ANALYSIS
    For the one year period ended June 30, 2014, the bank reported an approximately normal rate of growth in equity capital. Balance sheet structural changes, through the one year period of time ended June 30, 2014, have improved the bank's capital position. Our analytical methodology does take into account the quantity, quality, and durability of net worth, and, as set forth above, we have determined, based upon our series of tests, that the bank demonstrates very strong capitalization. We have calculated the bank's June 30, 2014 Total Risk-Based Capital position, a computation used by industry regulators, and have concluded that this bank substantially exceeded the requirement, set by regulation, for this test.

    LIQUIDITY ANALYSIS
    As of June 30, 2014, the bank displayed Substantially Below Normal balance sheet liquidity and a No Greater Than Average Dependence upon wholesale, or non-core liabilities, which include all borrowings, such as Federal Home Loan Bank Advances, and CD's greater than $250,000.

    Accounting principles require some securities to be categorized as "Available-for-Sale." Changes in market value of these securities are reflected through the GAAP (Generally Accepted Accounting Principles) net worth of the institution. Based upon the bank's present balance sheet, changes in the value of the current level of securities reported as "Available-for-Sale" are very likely to have a substantial impact upon future net worth of the bank.

    INSTITUTION SUMMARY
    This bank has been rated sound.

    Positive factors that impacted that rating follow:

    • Capitalization

    As noted previously, early warning indicators, possibly requiring specific investigation include:

      PREDICTIVE INDICATOR
      As stated, we have determined a composite Star rating for this bank of 4 starstarstarstar , indicative of a sound financial condition. At times, financial conditions of banks change rapidly and significantly. Hence, our Safe & Sound Star ratings should not be deemed predictive of likely future ratings. However, in view of early warning indicators set forth within this report, in combination with the institution's financial data, we believe that the Star rating for this institution is unlikely to change within the ensuing twelve month period.

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