EXHIBIT 99.2
CITIZENS & NORTHERN CORPORATION
90-92 Main Street, P.O. Box 58
Wellsboro, PA 16901
Phone: (570) 724-3411 Fax: (570) 723-8097
E-Mail: cnemail@cnbankpa.com Web Page: http://www.cnbankpa.com
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Stock Symbol: CZNC.OB
Chartered 1864 FEDERAL DEPOSIT INSURANCE CORP
QUARTERLY REPORT
JUNE 30, 2004
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Dear Shareholder:
In many ways 2004 is a year of transition for your company. From a national
perspective, the much anticipated Federal Reserve rate increases appear to have
begun and the indications are that the increases will continue for some time.
The national economy has been growing at a historically rapid pace, which bodes
well for local employment and business activity. The rate increases will affect
future earnings to the extent that C&N's liabilities are more subject to current
repricing than its earning assets. However, we believe that we are positioned to
grow our earning assets, specifically loans, at a pace that will offset some if
not all of the rising rate environment effects.
For C&N, the major transitions include a move to a new core computer processing
system in the fourth quarter and the May opening of our eighteenth office on
Market Street in Williamsport, and soon our nineteenth office in South
Williamsport. Both of these transitions are proceeding smoothly with the
leadership of very competent and dedicated people. Both of these initiatives
coupled with the solid performance of our existing offices enhance future growth
and profit opportunities for your company.
The financial results for the first six months show some of the effects of these
transitions. Net Income, as compared with the same period of 2003, is down about
7.5%. While our Interest Margin increased by over $1.6 million, or about 10.4%,
Realized Gains on Securities decreased by $1.3 million. Much of our Realized
Gains over the years has been from our equity portfolio, which is composed
primarily of bank stocks. Last year, we believed that some of those equities
were "fully valued" and, accordingly, we sold them. This year with the looming
prospects of higher interest rates investors feel that bank stocks are less
attractive and thus the stock prices have dropped, which reduces the "fully
valued" stock opportunities. Additionally, expenses related to the core computer
system conversion and our Williamsport branching account for nearly $500
thousand of the increase in Other Expenses.
You will note that Non-performing Assets to Total Assets have increased
four-fold. During the second quarter, loans that we have been closely
monitoring, reached a point where we believed that, conservatively, we should
place them in Non-performing status.
Our talented Trust and Financial Management Group have successfully increased
Assets Under Management through both investment results and the addition of new
relationships to $359 million, or over 18%. The Group's prospects for continuing
profitable growth are very positive.
Thank you for your continued support.
Craig G. Litchfield
Chairman, President & CEO
CITIZENS & NORTHERN CORPORATION
BOARD OF DIRECTORS
Craig G. Litchfield Chairman of the Board
Dennis F. Beardslee Leo F. Lambert
R. Robert DeCamp Edward L. Learn
Jan E. Fisher Edward H. Owlett, III
R. Bruce Haner Leonard Simpson
Susan E. Hartley James E. Towner
Karl W. Kroeck Ann M. Tyler
DIRECTORS EMERITI
J. Robert Bower F. David Pennypacker
Lawrence F. Mase Donald E. Treat
OFFICERS
Craig G. Litchfield Chairman, President and
Chief Executive Officer
Mark A. Hughes Treasurer
Kathleen M. Osgood Corporate Secretary
CITIZENS & NORTHERN BANK
OFFICES
428 S. Main Street, ATHENS, PA 18810 570-888-2291
111 Main Street, DUSHORE, PA 18614 570-928-8124
Main Street, EAST SMITHFIELD, PA 18817 570-596-3131
104 Main Street, ELKLAND, PA 16920 814-258-5111
102 E. Main Street, KNOXVILLE, PA 16928 814-326-4151
Main Street, LAPORTE, PA 18626 570-946-4011
Main Street, LIBERTY, PA 16930 570-324-2331
1085 S. Main Street, MANSFIELD, PA 16933 570-662-1111
Route 220, MONROETON, PA 18832 570-265-2157
3461 Rte.405 Highway, MUNCY, PA 17756 570-546-6666
Thompson Street, RALSTON, PA 17763 570-995-5421
503 N. Elmira Street, SAYRE, PA 18840 570-888-2220
41 Main Street, TIOGA, PA 16946 570-835-5236
428 Main Street, TOWANDA, PA18848 570-265-6171
Court House Square, TROY, PA 16947 570-297-2159
90-92 Main Street, WELLSBORO, PA 16901 570-724-3411
130 Court Street, WILLIAMSPORT, PA 17701 570-320-0100
Route 6, WYSOX, PA 18854 570-265-9148
TRUST & FINANCIAL MANAGEMENT GROUP
90-92 Main Street, Wellsboro, PA 16901 800-487-8784
428 Main Street, Towanda, PA 18848 888-987-8784
503 N. Elmira Street, Sayre, PA 18840 888-760-8192
3461 Rte 405 Highway, Muncy, PA 17756 570-546-6666
130 Court Street, Williamsport, PA 17701 570-601-6000
ACCOUNT SERVICES - 90-92 Main St, Wellsboro, PA 16901 800-726-2265
BANKCARD SERVICES - 11822 Route 6, Wellsboro PA 16901 800-676-6639
FUNDS MANAGEMENT - 90-92 Main St., Wellsboro, PA 16901 800-577-9397
www.fmt@cnbankpa.com
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INTERNET BANKING - 90-92 Main St., Wellsboro, PA 16901 570-724-0266
www.cnbankpa.com
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C&N FINANCIAL SERVICES CORPORATION - 68 Main Street, Wellsboro, PA 866-ASK-CNFS
www.cnfinancialservices.com
CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)
3 MONTHS ENDED 6 MONTHS ENDED
JUNE JUNE
2004 2003 2004 2003
(CURRENT) (PRIOR YR) (CURRENT) (PRIOR YR)
Interest and Dividend Income $ 14,343 $ 13,943 $ 28,358 $ 27,873
Interest Expense 5,493 6,089 11,196 12,332
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Interest Margin 8,850 7,854 17,162 15,541
Provision for Loan Losses 350 250 700 600
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Interest Margin After Provision for Loan Losses 8,500 7,604 16,462 14,941
Other Income 1,855 1,628 3,480 3,168
Realized Gains on Securities, Net 321 908 1,285 2,629
Other Expenses 6,289 5,356 12,517 10,888
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income Before Income Tax Provision 4,387 4,784 8,710 9,850
Income Tax Provision 698 864 1,315 1,858
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NET INCOME $ 3,689 $ 3,920 $ 7,395 $ 7,992
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PER SHARE DATA (**):
Net Income - Basic $0.46 $0.48 $0.91 $0.99
Net Income - Diluted $0.45 $0.48 $0.91 $0.98
Dividend Per Share $0.22 $0.21 $0.44 $0.42
Number Shares Used in Computation - Basic 8,101,024 8,087,875 8,106,541 8,087,502
Number Shares Used in Computation - Diluted 8,148,139 8,137,454 8,158,157 8,127,510
CONSOLIDATED BALANCE SHEET
(In Thousands, Except Per Share Data) (Unaudited)
JUNE 30, JUNE 30,
2004 2003
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ASSETS
Cash & Due from Banks $ 15,334 $ 21,433
Available-for-Sale Securities 503,700 508,312
Loans, Net 545,360 476,640
Other Assets 54,745 52,950
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TOTAL ASSETS $1,119,139 $1,059,335
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LIABILITIES
Deposits $ 670,098 $ 657,076
Repo Sweep Accounts 17,753 16,307
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Total Deposits and Repo Sweeps 687,851 673,383
Borrowed Funds 302,353 239,652
Other Liabilities 7,778 23,313
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TOTAL LIABILITIES 997,982 936,348
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SHAREHOLDERS' EQUITY
Shareholders' Equity, Excluding Net Unrealized
Gains/Losses on Available-for sale Securities 117,060 108,292
Net Unrealized Gains/Losses on Available-
for-sale Securities (*) 4,097 14,695
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TOTAL SHAREHOLDERS' EQUITY 121,157 122,987
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,119,139 $1,059,335
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CONSOLIDATED FINANCIAL HIGHLIGHTS
(In Thousands, Except Per Share Data) (Unaudited)
6 MONTHS ENDED %
JUNE INCREASE
2004 2003 (DECREASE)
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EARNINGS PERFORMANCE
Net Income $ 7,395 $ 7,992 -7.47%
Return on Average Assets 1.35% 1.57% -14.01%
Return on Average Assets,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 1.37% 1.60% -14.38%
Return on Average Equity 11.52% 13.33% -13.58%
Return on Average Equity,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 12.74% 15.07% -15.46%
BALANCE SHEET HIGHLIGHTS
Total Assets $ 1,119,139 $ 1,059,335 5.65%
Available-for-Sale Securities 503,700 508,312 -0.91%
Loans (Net) 545,360 476,640 14.42%
Allowance for Loan Losses 6,609 5,860 12.78%
Deposits and Repo Sweep Accounts 687,851 673,383 2.15%
Trust Assets Under Management 359,230 304,223 18.08%
SHAREHOLDERS' VALUE (PER SHARE) (**)
Net Income - Basic $ 0.91 $ 0.99 -8.08%
Net Income - Diluted $ 0.91 $ 0.98 -7.14%
Dividends $ 0.44 $ 0.42 4.76%
Book Value $ 14.96 $ 15.20 -1.58%
Book Value, Excluding Unrealized
Gains/Losses on Available-for-
sale Securities (***) $ 14.45 $ 13.39 7.92%
Market Value (Last Trade) $ 25.20 $ 25.55 -1.37%
Market Value / Book Value 168.45% 168.09% 0.21%
Market Value / Book Value,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 174.39% 190.81% -8.61%
Price Earnings Multiple 13.85 12.90 7.36%
Dividend Yield 3.49% 3.29% 6.08%
SAFETY AND SOUNDNESS
Shareholders' Equity / Average Assets,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 10.76% 10.63% 1.22%
Nonperforming Assets / Total Assets 0.75% 0.15% 400.00%
Allowance for Loan Losses / Total Loans 1.20% 1.21% -0.83%
Risk Based Capital Ratio 19.40% 20.02% -3.10%
AVERAGE BALANCES
Average Assets $ 1,096,969 $ 1,022,525 7.28%
Average Assets, Excluding
Unrealized Gains/Losses on
Available-for-sale Securities 1,078,350 1,000,919 7.74%
Average Equity 128,340 120,641 6.38%
Average Equity, Excluding
Unrealized Gains/Losses on
Available-for-sale Securities 116,052 106,382 9.09%
(*) Net unrealized gains/losses on available-for-sale securities are presented
as "Accumulated Other Comprehensive Income" in the annual and quarterly
financial statements filed with the Securities and Exchange Commission.
(**) For purposes of per share calculations, the market value and number of
outstanding shares have been retroactively adjusted for the effects of the
3-for-2 stock split issued in April, 2003, and for 1% stock dividends
issued in January of each year presented.
(***) 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
shareholders' 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 the
calculation of earnings-based ratios. Further, the amount of unrealized
gains or 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" ratios because we believe they
provide meaningful information for evaluating the Corporation's financial
position and results of operations.