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
Member FEDERAL DEPOSIT INSURANCE CORP
QUARTERLY REPORT
SEPTEMBER 30, 2004
Dear Shareholder:
During 2004, there have been many projects and challenges that have occupied our
attention and focus. Chief among them are the computer core system conversion,
the expansion of our presence in Lycoming County and the forecast of higher
interest rates. The conversion to the new computer system is scheduled for the
weekend of October 16th and 17th. Our people, under the very capable leadership
of Jim Shelmire and Scott Keck, have worked very hard in preparing for this
significant event. The costs have been high in both time and money, but we
believe the outcome will position us well for future growth in assets and
income.
On September 7th, we opened our 19th branch office in South Williamsport in our
pursuit of establishing a meaningful market presence in Lycoming County. We are
moving forward on plans for other full service locations in that market.
As the Federal Reserve pursues a strategy of increasing the short-term Federal
Funds rate over the next year, our interest spread and margin will be challenged
as the costs of funds may increase more rapidly than the return we will realize
from our earning assets, most of which are fixed rate. We expect continued
growth in the loan portfolio to help reduce some of the impact to earnings of
the interest rate squeeze.
As we have grown, so has our need for office space. Thus we have plans for a new
administrative building in Wellsboro only two blocks from our branch location.
The land was purchased the first of October. We hope to break ground before
winter sets in.
The financial results for the nine months ending September 30th reveal strong
growth in the interest margin, up 11.2%, due primarily to a nearly 13% growth in
net loans. Net income at $10.8 million was down from last year by 9.3%. The
lower net income is due in large part to two factors: $1.051 million in
additional expenses incurred thus far for the core banking software conversion
and the start-up expenses and operations for the two new Williamsport offices;
and $1.545 million less in net realized security gains. Total assets increased
8.14% to $1.135 billion. Deposits and repo sweeps increased to over $695
million. Trust assets under management increased by nearly 16.5% to $358
million.
Our nonperforming loans increased substantially, on a historical basis, during
the second quarter of this year. We continue to monitor the credit quality and
we are maintaining an adequate allowance relative to total loans. Our equity
position remains strong at 10.71% average equity to average assets.
The third quarter dividend of 22 cents per share brings the total dividends paid
for 2004 to 66 cents for the three quarters, up 4.8% over the first three
quarters of 2003.
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
2 E. Mountain Ave., SO. WILLIAMSPORT, PA 17702 570-601-3016
41 Main Street, TIOGA, PA 16946 570-835-5236
428 Main Street, TOWANDA, PA 18848 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 9 MONTHS ENDED
SEPTEMBER SEPTEMBER
2004 2003 2004 2003
(CURRENT) (PRIOR YR) (CURRENT) (PRIOR YR)
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Interest and Dividend Income $ 14,573 $ 13,553 $ 42,931 $ 41,426
Interest Expense 5,665 5,655 16,861 17,987
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Interest Margin 8,908 7,898 26,070 23,439
Provision for Loan Losses 350 250 1,050 850
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Interest Margin After Provision for Loan Losses 8,558 7,648 25,020 22,589
Other Income 1,627 1,705 5,107 4,873
Realized Gains on Securities, Net 459 660 1,744 3,289
Other Expenses 6,738 5,336 19,255 16,224
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Income Before Income Tax Provision 3,906 4,677 12,616 14,527
Income Tax Provision 501 759 1,816 2,617
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NET INCOME $ 3,405 $ 3,918 $ 10,800 $ 11,910
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PER SHARE DATA (**):
Net Income - Basic $0.42 $0.48 $1.33 $1.47
Net Income - Diluted $0.42 $0.48 $1.32 $1.46
Dividend Per Share $0.22 $0.21 $0.66 $0.63
Number of Shares Used in Computation - Basic 8,101,833 8,090,861 8,104,964 8,088,632
Number of Shares Used in Computation - Diluted 8,145,950 8,151,281 8,154,129 8,135,712
CONSOLIDATED BALANCE SHEET
(In Thousands) (Unaudited)
SEPT. 30, SEPT. 30,
2004 2003
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ASSETS
Cash & Due from Banks $ 14,282 $ 18,458
Available-for-Sale Securities 499,572 482,064
Loans, Net 564,867 500,005
Other Assets 56,712 49,483
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TOTAL ASSETS $1,135,433 $1,050,010
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LIABILITIES
Deposits $ 672,875 $ 652,728
Repo Sweep Accounts 22,961 22,866
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Total Deposits and Repo Sweeps 695,836 675,594
Borrowed Funds 298,191 238,997
Other Liabilities 12,402 13,313
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TOTAL LIABILITIES 1,006,429 927,904
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SHAREHOLDERS' EQUITY
Shareholders' Equity, Excluding Net Unrealized
Gains/Losses on Available-for-sale Securities 118,769 110,619
Net Unrealized Gains/Losses on Available-
for-sale Securities (*) 10,235 11,487
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TOTAL SHAREHOLDERS' EQUITY 129,004 122,106
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $1,135,433 $1,050,010
=======================================================================================================
CONSOLIDATED FINANCIAL HIGHLIGHTS
(In Thousands, Except Per Share Data) (Unaudited)
9 MONTHS ENDED %
SEPTEMBER INCREASE
2004 2003 (DECREASE)
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EARNINGS PERFORMANCE
Net Income $ 10,800 $ 11,910 -9.32%
Return on Average Assets 1.30% 1.54% -15.58%
Return on Average Assets,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 1.32% 1.57% -15.92%
Return on Average Equity 11.28% 13.10% -13.89%
Return on Average Equity,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 12.33% 14.76% -16.46%
BALANCE SHEET HIGHLIGHTS
Total Assets $1,135,433 $1,050,010 8.14%
Available-for-Sale Securities 499,572 482,064 3.63%
Loans (Net) 564,867 500,005 12.97%
Allowance for Loan Losses 6,570 5,898 11.39%
Deposits and Repo Sweep Accounts 695,836 675,594 3.00%
Trust Assets Under Management 358,349 307,623 16.49%
SHAREHOLDERS' VALUE (PER SHARE) (**)
Net Income - Basic $ 1.33 $ 1.47 -9.52%
Net Income - Diluted $ 1.32 $ 1.46 -9.59%
Dividends $ 0.66 $ 0.63 4.76%
Book Value $ 15.92 $ 15.09 5.50%
Book Value, Excluding Unrealized
Gains/Losses on Available-for-
sale Securities (***) $ 14.66 $ 13.67 7.24%
Market Value (Last Trade) $ 25.00 $ 26.24 -4.73%
Market Value / Book Value 157.04% 173.89% -9.69%
Market Value / Book Value,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 170.53% 191.95% -11.16%
Price Earnings Multiple 14.10 13.39 5.30%
Dividend Yield 3.52% 3.20% 10.00%
SAFETY AND SOUNDNESS
Shareholders' Equity / Average Assets,
Excluding Unrealized Gains/Losses
on Available-for-Sale Securities (***) 10.71% 10.66% 0.47%
Nonperforming Assets / Total Assets 0.67% 0.13% 415.38%
Allowance for Loan Losses / Total Loans 1.15% 1.17% -1.71%
Risk Based Capital Ratio 18.92% 20.55% -7.93%
AVERAGE BALANCES
Average Assets $1,107,753 $1,029,638 7.59%
Average Assets, Excluding
Unrealized Gains/Losses on
Available-for-sale Securities 1,091,299 1,008,972 8.16%
Average Equity 127,687 121,200 5.35%
Average Equity, Excluding
Unrealized Gains/Losses on
Available-for-sale Securities 116,828 107,561 8.62%
(*) 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.