SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-16084
CITIZENS & NORTHERN CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-2451943
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90-92 Main Street
Wellsboro, Pa. 16901
(Address of principal executive offices) (Zip code)
570-724-3411
(Registrant's telephone number including area code)
Not applicable
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]X No
[ ]--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X]X No
[ ]--- ---
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Title Outstanding
- ----- -----------
Common Stock ($1.00 par value) 8,101,5078,102,757 Shares Outstanding AugustNovember 3, 2004
1
CITIZENS & NORTHERN CORPORATION
Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - June 30, 2004 and December 31, 2003 Page 3
Consolidated Statement of Income - Three Months and Six Months Ended June 30, 2004 and 2003 Page 4
Consolidated Statement of Cash Flows - Six Months Ended June 30, 2004 and 2003 Page 5
Notes to Consolidated Financial Statements Pages 6 through 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 11 through 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk Pages 25 through 27
Item 4. Controls and Procedures Page 27
Part II. Other Information Pages 27Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet - September 30, 2004 and
December 31, 2003 Page 3
Consolidated Statement of Income - Three Months and
Nine Months Ended September 30, 2004 and 2003 Page 4
Consolidated Statement of Cash Flows - Nine Months
Ended September 30, 2004 and 2003 Page 5
Notes to Consolidated Financial Statements Pages 6 through 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations Pages 11 through 25
Item 3. Quantitative and Qualitative Disclosures About
Market Risk Pages 25 through 28
Item 4. Controls and Procedures Page 28
Part II. Other Information Pages 28 through 29
Signatures Page 30
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification -
Chief Executive Officer Page 31
Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification -
Chief Financial Officer Page 32
Exhibit 32. Section 1350 Certifications Page 33
2
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Data)
JUNESEPTEMBER 30, DECEMBER 31,
2004 2003
(UNAUDITED) (NOTE)
------------- ------------
ASSETS
Cash and due from banks:
Noninterest-bearing $ 14,56913,200 $ 13,938
Interest-bearing 7651,082 1,233
----------- -----------
Total cash and cash equivalents 15,33414,282 15,171
Available-for-sale securities 503,700499,572 483,032
Held-to-maturity securities 445437 560
Loans, net 545,360564,867 518,800
Bank-owned life insurance 17,78517,936 17,473
Accrued interest receivable 6,0355,817 5,632
Bank premises and equipment, net 14,90915,985 12,482
Foreclosed assets held for sale 53552 101
Other assets 15,51815,985 13,650
----------- -----------
TOTAL ASSETS $ 1,119,1391,135,433 $ 1,066,901
=========== ===========
LIABILITIES
Deposits:
Noninterest-bearing $ 79,86079,348 $ 75,616
Interest-bearing 590,238593,527 582,449
----------- -----------
Total deposits 670,098672,875 658,065
Dividends payable 1,7821,783 1,763
Short-term borrowings 40,75342,061 37,763
Long-term borrowings 279,353279,091 235,190
Accrued interest and other liabilities 5,99610,619 8,777
----------- -----------
TOTAL LIABILITIES 997,9821,006,429 941,558
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2004
and 10,000,000 shares in 2003; issued 8,307,305 in 2004 and 8,226,033 in 2003 8,307 8,226
Stock dividend distributable --- 2,164
Paid-in capital 22,43122,457 20,104
Retained earnings 88,78990,411 84,940
----------- -----------
Total 119,527121,175 115,434
Accumulated other comprehensive income 4,09710,235 12,037
Unamortized stock compensation (90)(68) (54)
Treasury stock, at cost:
207,965204,548 shares at JuneSeptember 30, 2004 (2,377)(2,338)
211,408 shares at December 31, 2003 (2,074)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 121,157129,004 125,343
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,119,1391,135,433 $ 1,066,901
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date but does not include all the information and
notes required by U.S. generally accepted accounting principles for complete
financial statements.
3
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
3 MONTHS ENDED FISCAL YEAR TO DATE
JUNE-------------------------- --------------------------
SEPT. 30, JUNESEPT. 30, 69 MONTHS ENDED JUNESEPT. 30,
2004 2003 2004 2003
(CURRENT) (PRIOR YEAR) (CURRENT) (PRIOR YEAR)
---------- ------------ ---------- ------------
INTEREST INCOME
Interest and fees on loans $ 8,3268,620 $ 8,0238,164 $ 16,56125,181 $ 15,88524,049
Interest on balances with depository institutions 3 1 5 4 7 8
Interest on loans to political subdivisions 239 199 453 366260 206 713 572
Interest on federal funds sold 3 5 4 -- 8 8
Income from available-for-sale and
held-to-maturity securities:
Taxable 3,493 3,598 6,757 7,5443,499 3,027 10,256 10,571
Tax-exempt 1,938 1,820 3,873 3,5621,844 1,859 5,717 5,421
Dividends 343 293 706 501296 1,049 797
---------- ---------- ---------- ----------
Total interest and dividend income 14,343 13,943 28,358 27,87314,573 13,553 42,931 41,426
---------- ---------- ---------- ----------
INTEREST EXPENSE
Interest on deposits 2,965 3,815 6,308 7,7313,086 3,470 9,394 11,201
Interest on short-term borrowings 126 99 249 241122 121 371 362
Interest on long-term borrowings 2,402 2,175 4,639 4,3602,457 2,064 7,096 6,424
---------- ---------- ---------- ----------
Total interest expense 5,493 6,089 11,196 12,3325,665 5,655 16,861 17,987
---------- ---------- ---------- ----------
Interest margin 8,850 7,854 17,162 15,5418,908 7,898 26,070 23,439
Provision for loan losses 350 250 700 6001,050 850
---------- ---------- ---------- ----------
Interest margin after provision for loan losses 8,500 7,604 16,462 14,9418,558 7,648 25,020 22,589
---------- ---------- ---------- ----------
OTHER INCOME
Service charges on deposit accounts 453 446 874 855463 452 1,337 1,307
Service charges and fees 55 50 131 11978 91 209 210
Trust and financial management income 573 467 1,030 845453 413 1,483 1,258
Insurance commissions, fees and premiums 110 77 219 157108 63 327 220
Increase in cash surrender value of life insurance 153 183 312 377151 175 463 552
Fees related to credit card operation 225 195 409 357159 207 568 564
Other operating income 286 210 505 458215 304 720 762
---------- ---------- ---------- ----------
Total other income before realized gains on securities, net 1,855 1,628 3,480 3,1681,627 1,705 5,107 4,873
Realized gains on securities, net 321 908 1,285 2,629459 660 1,744 3,289
---------- ---------- ---------- ----------
Total other income 2,176 2,536 4,765 5,7972,086 2,365 6,851 8,162
---------- ---------- ---------- ----------
OTHER EXPENSES
Salaries and wages 2,729 2,325 5,400 4,7732,906 2,356 8,306 7,129
Pensions and other employee benefits 828 796 1,812 1,660866 777 2,678 2,437
Occupancy expense, net 360 317 737 657450 310 1,187 967
Furniture and equipment expense 388 352 724 684437 345 1,161 1,029
Pennsylvania shares tax 211212 196 423 392635 588
Other operating expense 1,773 1,370 3,421 2,7221,867 1,352 5,288 4,074
---------- ---------- ---------- ----------
Total other expenses 6,289 5,356 12,517 10,8886,738 5,336 19,255 16,224
---------- ---------- ---------- ----------
Income before income tax provision 4,387 4,784 8,710 9,8503,906 4,677 12,616 14,527
Income tax provision 698 864 1,315 1,858501 759 1,816 2,617
---------- ---------- ---------- ----------
NET INCOME $ 3,6893,405 $ 3,9203,918 $ 7,39510,800 $ 7,99211,910
========== ========== ========== ==========
PER SHARE DATA:
Net income - basic $ 0.460.42 $ 0.48 $ 0.911.33 $ 0.991.47
Net income - diluted $ 0.450.42 $ 0.48 $ 0.911.32 $ 0.981.46
---------- ---------- ---------- ----------
Dividend per share $ 0.22 $ 0.21 $ 0.440.66 $ 0.420.63
---------- ---------- ---------- ----------
Number of shares used in computation - basic 8,101,024 8,087,875 8,106,541 8,087,5028,101,833 8,090,861 8,104,964 8,088,632
Number of shares used in computation - diluted 8,148,139 8,137,454 8,158,157 8,127,5108,145,950 8,151,281 8,154,129 8,135,712
The accompanying notes are an integral part of these consolidated financial
statements.
4
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS) (UNAUDITED)
69 MONTHS ENDED
JUNE-------------------------
SEPT. 30, SEPT. 30,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,39510,800 $ 7,99211,910
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 700 6001,050 850
Realized gains on securities, net (1,285) (2,629)(1,744) (3,289)
Gain on sale of foreclosed assets, net (36) (45)(34) (83)
Depreciation expense 669 5901,077 815
Accretion and amortization, net 383 643575 1,124
Increase in cash surrender value of life insurance (312) (377)(463) (552)
Amortization of restricted stock 44 5166 77
Increase in accrued interest receivable and other assets (1,283) (5,172)(1,535) (79)
Increase in accrued interest payable and other liabilities 1,378 1,1862,841 2,903
--------- ---------
Net Cash Provided by Operating Activities 7,653 2,83912,633 13,676
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities 113 120 140
Proceeds from sales of available-for-sale securities 27,902 38,88167,809 46,876
Proceeds from calls and maturities of available-for-sale securities 54,967 101,62472,022 153,160
Purchase of available-for-sale securities (114,664) (120,791)(157,929) (168,755)
Purchase of Federal Home Loan Bank of Pittsburgh stock (2,813) (1,176)(1,178)
Redemption of Federal Home Loan Bank of Pittsburgh stock 1,779 168
Net increase in loans (27,260) (32,005)(47,627) (55,671)
Purchase of premises and equipment (3,096) (789)(4,580) (2,505)
Proceeds from sale of foreclosed assets 84 14393 233
--------- ---------
Net Cash Used in Investing Activities (62,988) (13,825)(71,126) (27,532)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 12,033 16,77214,810 12,424
Net increase (decrease) in short-term borrowings 2,990 (2,878)4,298 1,532
Proceeds from long-term borrowings 63,943 34,50073,943 46,000
Repayments of long-term borrowings (19,780) (27,512)(30,042) (37,518)
Purchase of treasury stock (575) (174)
Sale of treasury stock 462 119527 141
Dividends paid (3,575) (3,308)(5,357) (4,991)
--------- ---------
Net Cash Provided by Financing Activities 55,498 17,51957,604 17,414
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 163 6,533(889) 3,558
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 15,171 14,900
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,33414,282 $ 21,43318,458
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of available-for-sale securities $ - $ 10,000
Assets acquired through foreclosure of real estate loans $ -510 $ 121172
Interest paid $ 8,64313,300 $ 9,89514,352
Income taxes paid $ 1,7732,438 $ 1,9202,570
The accompanying notes are an integral part of these consolidated financial
statements.statements
5
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF INTERIM PRESENTATION
The financial information included herein, with the exception of the
consolidated balance sheet dated December 31, 2003, is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods.
Results reported for the three-month and six-monthnine-month periods ended JuneSeptember 30,
2004 might not be indicative of the results for the year ending December 31,
2004.
This document has not been reviewed or confirmed for accuracy or relevance by
the Federal Deposit Insurance Corporation or any other regulatory agency.
2. PER SHARE DATA
Net income per share is based on the weighted-average number of shares of common
stock outstanding. The number of shares used in calculating net income and cash
dividends per share reflect the retroactive effect of stock splits and dividends
for all periods presented. The following data show the amounts used in computing
net income per share and the weighted average number of shares of dilutive stock
options. As shown in the table that follows, diluted earnings per share is
computed using weighted average common shares outstanding, plus weighted-average
common shares available from the exercise of all dilutive stock options, less
the number of shares that could be repurchased with the proceeds of stock option
exercises based on the average share price of the Corporation's common stock
during the period.
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
------------- ----------- --------
SIXNINE MONTHS ENDED JUNESEPT. 30, 2004
Earnings per share - basic $ 7,395,000 8,106,541 $0.9110,800,000 8,104,964 $1.33
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 227,141190,915
Hypothetical share repurchase at $25.65 (175,525)
------------$25.38 (141,750)
------------- --------- -----
Earnings per share - diluted $ 7,395,000 8,158,157 $0.91
============10,800,000 8,154,129 $1.32
============= ========= =====
SIXNINE MONTHS ENDED JUNESEPT. 30, 2003
Earnings per share - basic $ 7,992,000 8,087,502 $0.9911,910,000 8,088,632 $1.47
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 199,628197,322
Hypothetical share repurchase at $22.52 (159,620)
------------$23.68 (150,242)
------------- --------- -----
Earnings per share - diluted $ 7,992,000 8,127,510 $0.98
============11,910,000 8,135,712 $1.46
============= ========= =====
6
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
WEIGHTED-
AVERAGE EARNINGS
NET COMMON PER
INCOME SHARES SHARE
------------- ---------- --------
QUARTER ENDED JUNESEPT. 30, 2004
Earnings per share - basic $ 3,689,000 8,101,024 $0.463,405,000 8,101,833 $0.42
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 223,023184,187
Hypothetical share repurchase at $25.06 (175,908)$24.83 (140,070)
------------ --------- -----
Earnings per share - diluted $ 3,689,000 8,148,139 $0.453,405,000 8,145,950 $0.42
============ ========= =====
QUARTER ENDED JUNESEPT. 30, 2003
Earnings per share - basic $ 3,920,000 8,087,8753,918,000 8,090,861 $0.48
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 197,145216,930
Hypothetical share repurchase at $24.09 (147,566)$26.01 (156,510)
------------ --------- -----
Earnings per share - diluted $ 3,920,000 8,137,4543,918,000 8,151,281 $0.48
============ ========= =====
3. STOCK COMPENSATION PLANS
As permitted by Accounting Principles Board Opinion No. 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 No. 123, "Accounting for Stock-based
Compensation," to stock options.
7
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
(NET INCOME IN THOUSANDS)
FISCAL YEAR-TO-DATE
3 MONTHS ENDED FISCAL YEAR-TO-DATE
JUNE 30, 69 MONTHS ENDED
JUNESEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
------ ------ ------- ------
Net income, as reported $ 3,689 $ 3,920 $ 7,395 $ 7,992$3,405 $3,918 $10,800 $11,910
Deduct: Total stock option compensation
expense determined under fair value
method for all awards, net of tax effects (42) (47) (91) (106)
--------- --------- --------- ---------(5) (9) (96) (115)
------ ------ ------- -------
Pro forma net income $ 3,647 $ 3,873 $ 7,304 $ 7,886
========= ========= ========= =========$3,400 $3,909 $10,704 $11,795
====== ====== ======= =======
Earnings per share-basic:share-basic
As reported $ 0.460.42 $ 0.48 $ 0.911.33 $ 0.991.47
Pro forma $ 0.450.42 $ 0.48 $ 0.901.32 $ 0.981.46
Earnings per share-diluted:share-diluted
As reported $ 0.450.42 $ 0.48 $ 0.911.32 $ 0.981.46
Pro forma $ 0.450.42 $ 0.48 $ 0.901.31 $ 0.971.45
4. COMPREHENSIVE INCOME
Accounting principles generally accepted in the United States of America 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 (loss).
Comprehensive income (loss) is calculated as follows:
(IN THOUSANDS)
3 MONTHS ENDED 69 MONTHS ENDED
JUNE------------------------------- --------------------------------
SEPTEMBER 30, JUNESEPTEMBER 30, JUNESEPTEMBER 30, JUNESEPTEMBER 30,
(IN THOUSANDS)
2004 2003 2004 2003
------------ ------------- ------------- ------------
Net income $ 3,6893,405 $ 3,9203,918 $ 7,39510,800 $ 7,99211,910
Other comprehensive income:income (loss):
Unrealized holding gains (losses) gains on available-for-sale
securities:
(Losses) gainsGains (losses) arising during the period (15,613) 3,322 (10,748) 6,4919,760 (4,199) (988) 2,291
Reclassification adjustment for realized gains (321) (908) (1,285) (2,629)
-------- -------- -------- --------(459) (660) (1,744) (3,289)
---------- ---------- ---------- ----------
Other comprehensive income (loss) income before income tax
(15,934) 2,414 (12,033) 3,8629,301 (4,859) (2,732) (998)
Income tax related to other comprehensive income 5,419 (822) 4,093 (1,313)
-------- -------- -------- --------(loss) (3,163) 1,651 929 339
---------- ---------- ---------- ----------
Other comprehensive income (loss) income (10,515) 1,592 (7,940) 2,549
-------- -------- -------- --------6,138 (3,208) (1,802) (659)
---------- ---------- ---------- ----------
Comprehensive (loss) income $ (6,826)9,543 $ 5,512710 $ (545)8,998 $ 10,541
======== ======== ======== ========11,251
========== ========== ========== ==========
8
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
5. SECURITIES
Amortized cost and fair value of securities at JuneSeptember 30, 2004 are summarized
as follows:
(IN THOUSANDS)
JUNESEPTEMBER 30, 2004
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
(IN THOUSANDS) COST GAINS LOSSES VALUE
----------- ------------ ------------ -------
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ - $ -
Obligations of other U.S. Government agencies 62,258 140 (1,372) 61,02650,337 268 (499) 50,106
Obligations of states and political subdivisions 157,500 1,828 (3,558) 155,770134,792 4,597 (678) 138,711
Other securities 63,444 1,779 (703) 64,52076,890 2,793 (805) 78,878
Mortgage-backed securities 183,992 1,311 (3,580) 181,723191,246 1,488 (2,060) 190,674
--------- --------- -------- -------- -------- -----------------
Total debt securities 467,194 5,058 (9,213) 463,039453,265 9,146 (4,042) 458,369
Marketable equity securities 30,300 11,498 (1,137) 40,66130,800 11,589 (1,186) 41,203
--------- --------- -------- -------- -------- -----------------
Total $497,494 $ 16,556 $(10,350) $503,700484,065 $ 20,735 $ (5,228) $ 499,572
========= ========= ======== ======== ======== =================
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ 318317 $ 20 $ - $ 338337
Obligations of other U.S. Government agencies 98 13 - 111
Mortgage-backed securities 2922 1 - 3023
--------- --------- -------- -------- -------- -----------------
Total $ 445437 $ 34 $ - $ 479471
========= ========= ======== ======== ======== =================
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 JuneSeptember 30,
2004.
(IN THOUSANDS)
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
----------------------- ---------------------- ----------------------
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(IN THOUSANDS) VALUE LOSSES VALUE LOSSES VALUE LOSSES
------- ---------- ------ ---------- ------- ----------
AVAILABLE-FOR-SALE SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ - $ - $ - $ -
Obligations of other U.S. Government agencies 37,082 (511) 9,128 (861) 46,210 (1,372)5,020 (26) 9,516 (473) 14,536 (499)
Obligations of states and political subdivisions 70,497 (2,866) 8,928 (692) 79,425 (3,558)16,248 (405) 9,799 (273) 26,047 (678)
Other securities 16,525 (641) 5,045 (62) 21,570 (703)13,558 (556) 4,850 (249) 18,408 (805)
Mortgage-backed securities 134,835 (3,580) - - 134,835 (3,580)
--------- --------- --------- --------- --------- ---------112,934 (1,698) 16,355 (362) 129,289 (2,060)
-------- ------- -------- ------- -------- -------
Total debt securities 258,939 (7,598) 23,101 (1,615) 282,040 (9,213)147,760 (2,685) 40,520 (1,357) 188,280 (4,042)
Marketable equity securities 740 (64) 4,937 (1,073) 5,677 (1,137)
--------- --------- --------- --------- --------- ---------3,616 (111) 5,032 (1,075) 8,648 (1,186)
-------- ------- -------- ------- -------- -------
Total temporarily impaired available-for-sale
securities $151,376 $(2,796) $ 259,679 $ (7,662) $ 28,038 $ (2,688) $ 287,717 $ (10,350)
========= ========= ========= ========= ========= =========45,552 $(2,432) $196,928 $(5,228)
======== ======= ======== ======= ======== =======
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury $ - $ - $ - $ - $ - $ -
Obligations of other U.S. Government agencies - - - - - -
Mortgage-backed securities - - - - - -
--------- --------- --------- --------- --------- ----------------- ------- -------- ------- -------- -------
Total temporarily impaired held-to-maturity
securities $ - $ - $ - $ - $ - $ -
========= ========= ========= ========= ========= ================= ======= ======== ======= ======== =======
9
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
The unrealized losses on debt securities are primarily the result of volatility
in interest rates. Based on the credit worthiness of the issuers, which are
almost exclusively U.S. Government agencies or state and political subdivisions,
management believes the Corporation's debt securities with unrealized losses at
JuneSeptember 30, 2004 were not other-than-temporarily impaired.
Of the total $1,137,000$1,186,000 unrealized losses on equity securities at JuneSeptember 30,
2004, $949,000$885,000 was from a preferred stock issued by an U.S. Government agency.
Management believes this security's fair value is affected primarily by
volatility in interest rates, and that there is very little credit risk
associated with this security. ForAccordingly, management believes this preferred
stock was not other-than-temporarily impaired at September 30, 2004. Also, for
the remaining equity securities for which fair value was less than cost at
JuneSeptember 30, 2004, management believes the financial condition and near-term
prospects of those issuers indicate those securities were not
other-than-temporarily impaired.
6. DEFINED BENEFIT PLANS
The Corporation has a noncontributory defined benefit pension plan for all
employees meeting certain age and length of service requirements. Benefits are
based primarily on years of service and the average annual compensation during
the highest five consecutive years 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 and will not
affect the Corporation's future expenses.
The Corporation uses a December 31 measurement date for its plans.
The components of net periodic benefit costs from these defined benefit plans
are as follows:
(IN THOUSANDS)
PENSION POSTRETIREMENT
69 MONTHS ENDED 69 MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
(IN THOUSANDS)------------------- -------------------
2004 2003 2004 2003
Service cost $ 238357 $ 198297 $ 2233 $ 1624
Interest cost 310 296 32 30465 444 48 45
Expected return on plan assets (374) (308)(561) (462) - -
Amortization of transition (asset) obligation (12) (12) 18 18(18) (18) 27 27
Recognized net actuarial loss 32 44 248 66 3 -
----- ----------- ------ ----- -----
Net periodic benefit cost $ 194291 $ 218327 $ 74111 $ 64
===== =====96
====== ====== ===== =====
(IN THOUSANDS)
PENSION POSTRETIREMENT
3 MONTHS ENDED 3 MONTHS ENDED
JUNESEPTEMBER 30, JUNESEPTEMBER 30,
(IN THOUSANDS)------------------- -------------------
2004 2003 2004 2003
Service cost $ 119 $ 99 $ 11 $ 8
Interest cost 155 148 16 15
Expected return on plan assets (187) (154) - -
Amortization of transition (asset) obligation (6) (6) 9 9
Recognized net actuarial loss 16 22 1 -
----- ----- ----- -----
Net periodic benefit cost $ 97 $ 109 $ 37 $ 32
===== ===== ===== =====
The Corporation funded its total defined benefit pension contribution for 2004
of $328,000 in April 2004. In the first sixnine months of 2004, the Corporation
funded postretirement contributions totaling $26,000.$36,000. The estimated total
(annual) amount of 2004 postretirement contributions is $60,000.
10
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
7. CONTINGENCIES
In the normal course of business, the Corporation may be subject to pending and
threatened lawsuits in which claims for monetary damages could be asserted. In
management's opinion, the Corporation's financial position and results of
operations would not be materially affected by the outcome of such pending legal
proceedings.
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this section and elsewhere in the Form 10-Q are
forward-looking statements. Citizens & Northern Corporation and its wholly-owned
subsidiaries (collectively, the Corporation) intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe
future plans, business objectives and expectations, and are generally not
historical facts, are identifiable by the use of words such as, "believe",
"expect", "intend", "anticipate", "estimate", "project", and similar
expressions. 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 currently anticipated.
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:
- -o changes in monetary and fiscal policies of the Federal Reserve Board and
the U. S. Government, particularly related to changes in interest rates
- -o changes in general economic conditions
- -o legislative or regulatory changes
- -o downturn in demand for loan, deposit and other financial services in the
Corporation's market area
- -o increased competition from other banks and non-bank providers of financial
services
- -o technological changes and increased technology-related costs
- -o changes in accounting principles, or the application of generally accepted
accounting principles.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
REFERENCES TO 2004 AND 2003
Unless otherwise noted, all references to "2004" in the following discussion of
operating results are intended to mean the sixnine months ended JuneSeptember 30, 2004,
and similarly, references to "2003" are intended to mean the sixnine months ended
JuneSeptember 30, 2003.
EARNINGS OVERVIEW
Net income for 2004 was $7,395,000,$10,800,000, or $.91$1.33 per share - basic and $1.32 per
share diluted. This represents a decrease of 8.1% in net income per share - basic and 7.1% in net
income per share - diluted as compared toof 9.3% from 2003.
Return on average assets was 1.35%1.30% in 2004, down from 1.57%1.54% in 2003. Return on
average equity decreased to 11.52%11.28% in 2004 from 13.33%13.10% in 2003.
The most significant income statement changes between 2004 and 2003 were as
follows:
o In 2004, two significant initiatives affected profitability: (1)
pre-tax losses of $539,000 from start-up expenses and operations of
two new branches - the Williamsport branch, which opened June 4, and
the South Williamsport branch, which opened in September, and (2)
non-payroll expenses of $512,000 related to conversion to new core
banking software (implemented in October 2004).
11
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
o Other (noninterest) expenses increased $3,031,000, or 18.7%, in 2004
compared to 2003. In addition to the effects of the new branches and
computer system, payroll costs increased substantially, primarily from
the addition of several new employees for Lending, Trust and Financial
Management, Employee Training and other duties. Also, building-related
expenses and other computer-related expenses were up in the first nine
months of 2004 compared to the same period in 2003. Increases in other
expenses are described in the "Noninterest Expense" section of
Management's Discussion and Analysis.
o Net realized gains on securities were $1,285,000$1,744,000 in 2004, compared to
$2,629,000$3,289,000 in 2003. In both years, the gains were mainly from sales of
bank stocks. These sales resulted from circumstances specific to each
underlying company, and the proceeds have been reinvested in other
bank stocks. Total gains from sales of bank stocks amounted to
$1,086,000$1,259,000 in 2004 and $1,572,000$1,972,000 in 2003. OtherNet security gains from
debt securities amounted to $199,000$485,000 in 2004 and $1,057,000$1,317,000 in 2003,
and consisted mainly of sales and calls of Municipal and U.S. Agency
bonds.
11
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
- Other (noninterest) expenses increased $1,629,000, or 15.0%, in 2004
compared to 2003. The increase reflects increases in payroll costs,
employee benefits and other expenses. In addition to increases in
expenses related to additional employees and other items, the
Corporation incurred noninterest expenses totaling approximately
$500,000 related to two significant initiatives in the first six
months of 2004: (1) start-up expenses associated with the
Williamsport branch, which opened in May, and (2) non-payroll
expenses related to conversion to new core computer software
(expected to be completed in the 4th quarter 2004). Increases in
other expenses are described in the "Noninterest Expense" section of
Management's Discussion and Analysis.
-o The interest margin increased $1,621,000,$2,631,000, or 10.4%11.2%, to $17,162,000$26,070,000 in
2004 from $15,541,000$23,439,000 in 2003. The Corporation has experienced
significant growth in loans, which has more than offset the effects of
lower yields in 2004. Also, average interest rates on deposits and
borrowed funds have been substantially lower in 2004 than in 2003.
Changes in the net interest margin are discussed in more detail later
in Management's Discussion and Analysis.
-o The income tax provision decreased to $1,315,000$1,816,000 in 2004 from
$1,858,000$2,617,000 in 2003. While pre-tax income has decreased, the
Corporation's effective tax rate has also fallen to 15.1%14.4% in 2004 from
18.9%18.0% in 2003. This lower effective tax rate resulted mainlywas affected by higher
tax-exempt interest from management's decision to increase the weighting of tax-exempt obligations of states and political
subdivisions, as a percentage of total assets.
SECONDrevenue.
THIRD QUARTER 2004
Net income for the secondthird quarter 2004 was $3,689,000,$3,405,000, a decrease of $231,000
(5.9%$513,000
(13.1%) from the secondthird quarter 2003. Net income per share was $0.46 - Basic$0.42 (Basic and
$0.45 - DilutedDiluted) for the secondthird quarter 2004, as compared to $0.48 (Basic and Diluted)
for the secondthird quarter 2003.
Net Income for the secondthird quarter 2004 was down $17,000 (0.5%$284,000 (7.7%) from the firstsecond
quarter 2004. As shown in Table I, net realized security gains amounted to
$321,000other expenses increased $449,000 in the
second quarter 2004, down from $964,000 in the first quarter
2004. The interest margin increased $538,000 in the secondthird quarter 2004, as compared to the firstsecond quarter. Non-payroll related core
banking system expenses amounted to $329,000 in the third quarter 2004. Also,
other income fell $228,000 in the third quarter from the previous quarter. Trust
and Financial Management revenue was $120,000 lower in the third quarter than in
the second quarter, primarily because of timing issues (June 30 and December 31
are the most common billing dates for Trust services). Credit card fees and
other operating income were also lower in the third quarter 2004 primarily due to higher average balances of
loans and available-for-sale securities.than in the
previous quarter.
12
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE I - QUARTERLY FINANCIAL DATA
(IN THOUSANDS)
SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2004 2004 2004 2003 2003 2003 2003
--------- -------- -------- -------- --------- -------- --------
Interest income $14,573 $14,343 $14,015 $13,797 $13,553 $13,943 $13,930
Interest expense 5,665 5,493 5,703 5,550 5,655 6,089 6,243
------- ------- ------- ------- ------- ------- -------
Interest margin 8,908 8,850 8,312 8,247 7,898 7,854 7,687
Provision for loan losses 350 350 350 250 250 250 350
------- ------- ------- ------- ------- ------- -------
Interest margin after provision for loan losses 8,558 8,500 7,962 7,997 7,648 7,604 7,337
Other income 1,627 1,855 1,625 1,722 1,705 1,628 1,540
Securities gains 459 321 964 1,510 660 908 1,721
Other expenses 6,738 6,289 6,228 5,890 5,336 5,356 5,532
------- ------- ------- ------- ------- ------- -------
Income before income tax provision 3,906 4,387 4,323 5,339 4,677 4,784 5,066
Income tax provision 501 698 617 992 759 864 994
------- ------- ------- ------- ------- ------- -------
Net income $ 3,405 $ 3,689 $ 3,706 $ 4,347 $ 3,918 $ 3,920 $ 4,072
======= ======= ======= ======= ======= ======= =======
Net income per share - basic $ 0.42 $ 0.46 $ 0.46 $ 0.54 $ 0.48 $ 0.48 $ 0.50
======= ======= ======= ======= ======= ======= =======
Net income per share - diluted $ 0.42 $ 0.45 $ 0.45 $ 0.53 $ 0.48 $ 0.48 $ 0.50
======= ======= ======= ======= ======= ======= =======
The number of shares used in calculating net income per share for each quarter
presented in Table I reflects the retroactive effect of stock splits and
dividends.
12
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
PROSPECTS FOR THE REMAINDER OF 2004
Overall, managementManagement believes earnings prospects for the remainder of 2004 to be
relatively comparable to results for the first halfthree quarters of the year. Loan
growth is expected to continue, with a great deal of commercial loan origination
activity currently ongoing. Net loans are up 14.4%13.0% as of JuneSeptember 30, 2004
compared to JuneSeptember 30, 2003. As you can see in Table I, the interest margin
has grown slightly in each of the last 56 quarters, to $8,850,000$8,908,000 in the 2nd3rd
quarter 2004 from $7,687,000 in the 1st quarter of 2003. Interest rates have
been rising recently and management anticipates continued rising rates over the
remainder of 2004, including increases in short-term rates. The Federal Reserve
raised the Federal Funds target rate, a key economic indicator,Target Rate by .25% in June, August and September, to
1.25% on June 29, 2004.its current level of 1.75%. The impact of rising rates would likely be a slight "squeeze" on the net interest
margin, ascause (on
average) deposits and borrowings would be expected to reprice faster than loans and debt
securities. The Corporation's interest rate risk is discussed in more detail in
Item 3 of Form 10-Q.
Another major variable that could affect 2004 earnings is securities gains and
losses. The Corporation's management makes decisions regarding sales of
securities based on a variety of factors, with an overall goal of maximizing
portfolio return over a long-term horizon. Therefore, it is difficult to
predict, with much precision, the amounts of securities gains and losses that
may be realized over the remainder of 2004.
Total capital purchases for 2004 are estimated to range fromexceed $5 million to $7
million, depending on the timing of possible building projects and equipment
purchases.million. As
indicated in the consolidated statement of cash flows, total purchases of
premises and equipment for the first 69 months of 2004 amounted to more than $3$4.5
million. In 2004, the Corporation paid more than $1 million for equipment and to
complete the renovation of the facility on Market Street in Williamsport, and
also paid more than $1approximately $2 million for software licenses and equipment related to the
new core computer software. Trust and Financial Management, Commercial Lending
and a few other personnel moved into the Williamsport facility in February 2004,
and the branch operations opened June 4, 2004. Total capitalized costs incurred
in 2003 and 2004 to purchase, renovate and equip the start-up of operations in
Williamsport amounted to $2,972,000. In
March 2004, management selected aapproximately $3 million. The new core processingcomputer system,
from Open
Solutions, Inc. Management expects the core system implementationwhich was implemented in mid-October 2004, is expected to be
completed by year-end 2004 atresult in a total
capitalized cost of approximately $2.5 million. In the fourth quarter 2004,
depreciation expense will increase by approximately $100,000 as a result of the
new computer system.
In June 2004, the Corporation entered into a 5-year lease agreement, with
opportunities to renew, to add an additional branch office located in South
Williamsport. Rent expense for the first year of the lease will amount to
$18,000, and renovation costs arethrough September 30, 2004 amounted to
approximately $92,000. This office opened for business late in the third
quarter.
13
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
In October 2004, the Corporation acquired real estate in Wellsboro for the
purpose of building an administrative facility. The purchase price included the
exchange of a building (that had been used by the Facilities Management staff)
with a book value of $105,000 at September 30, 2004 and cash of approximately
$284,000. The total project cost, including acquisition of the real estate and
the construction of the building, is estimated at approximately $140,000.
Management expects this officebetween $1.3 to open for business later this year.
Although the$2 million and
expected to be completed in 2005.
The amount of capitalized spending expected for 2004 is high by the Corporation's normal
historic standards, ithistorical standards. For example, average annual capital purchases from
2001-2003 amounted to $2,335,000. Management believes the expansion in Lycoming
County (Williamsport and South Williamsport) will result in future opportunities
for growth and positive contributions to net income. Further, management
believes the investments in the new computer system, and in the new
administrative facility in Wellsboro, are necessary for support of an overall
growth strategy. On a net basis, these investments may reduce earnings in 2005;
however, the effect on earnings is not expected to have a material,
adverse impact on the Corporation's financial position or results of operations
in 2004.be material.
CRITICAL ACCOUNTING POLICIES
The presentation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect many of the reported amounts and disclosures. Actual
results could differ from these estimates.
A material estimate that is particularly susceptible to significant change is
the determination of the allowance for loan losses. Management believes that the
allowance for loan losses is adequate and reasonable. The Corporation's
methodology for determining the allowance for loan losses is described in a
separate section later in Management's Discussion and Analysis. Given the very
subjective nature of identifying and valuing loan losses, it is likely that
well-informed individuals could make materially different assumptions, and
could, therefore, calculate a materially different allowance value. While
management uses available information to recognize losses on loans, changes in
economic conditions may necessitate revisions in future years. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses. Such agencies
may require the Corporation to recognize adjustments to the allowance based on
their judgments of information available to them at the time of their
examination.
Another material estimate is the calculation of fair values of the Corporation's
debt securities. The Corporation receives estimated fair values of debt
securities from an independent valuation service, or from brokers. In developing
these fair values, the valuation service and the brokers use estimates of cash
flows, based on historical performance of similar instruments in similar
interest rate environments. Based on experience, management is aware that
estimated fair values of debt securities tend to vary among brokers and other
valuation services. Accordingly, when selling debt securities, management
typically obtains price quotes from more than one source. The large majority of
the Corporation's securities are classified as available-for-sale. Accordingly,
these securities are carried at fair value on the consolidated balance 13
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
sheet,
with unrealized gains and losses excluded from earnings and reported separately
through accumulated other comprehensive income (included in stockholders'
equity).
NET INTEREST MARGIN
The Corporation's primary source of operating income is represented by the net
interest margin. The net interest margin is equal to the difference between the
amounts of interest income and interest expense. Tables II, III and IV include
information regarding the Corporation's net interest margin for 2004 and 2003.
In each of these tables, the amounts of interest income earned on tax-exempt
securities and loans have been adjusted to a fully taxable-equivalent basis.
Accordingly, the net interest margin amounts reflected in these tables exceed
the amounts presented in the consolidated financial statements. The discussion
that follows is based on amounts in the Tables.
The net interest margin, on a tax-equivalent basis, was $19,222,000$29,131,000 in 2004, an
increase of $1,855,000,$2,893,000, or 10.7%11.0%, over 2003. As reflected in Table IV, the
increase in net interest margin was caused primarily by the growth in volume.
Increased interest income from higher volumes of earning assets exceeded
increases in interest expense attributable to higher volumes of interest-bearing
liabilities by $1,597,000$2,287,000 in 2004 compared to 2003. Table IV also shows that
interest rate changes had the effect of increasing net interest income $258,000$606,000
in 2004 compared to 2003. As presented in Table III, the "Interest Rate Spread"
(excess of average rate of return on interest-bearing assets over average cost
of funds on interest-bearing liabilities) was 3.45%3.44% for the 1st sixnine months of
2004, compared to 3.31% for the year ended December 31, 2003 and 3.30%3.29% for the
1st sixnine months of 2003.
14
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
INTEREST INCOME AND EARNING ASSETS
Interest income increased slightly to $30,418,000$45,992,000 in 2004 from $29,699,000$44,225,000 in
2003. Income from available-for-sale securities decreased $75,000,increased $434,000, or 0.6%2.2%, whileand
interest from loans increased $807,000$1,341,000 or 4.9%5.4%. Overall, the majority of the
increase in interest income resulted from higher volumes of loans, which more
than offset the effect of lower interest rates.
As indicated in Table III, average available-for-sale securities in 2004
amounted to $481,226,000,$484,300,000, an increase of 0.7%1.7% over 2003. The average rate of
return on available-for-sale securities was 5.50%5.44% for the 1st sixnine months of
2004, just slightly lowerhigher than the 5.59%5.42% level in the 1st sixnine months of 2003,
but
higher thanand the rate of return for the year ended December 31, 2003 of 5.43%.
Table III also shows changes in the composition of the available-for-sale
securities portfolio. Municipal bonds were a larger portion of the portfolio in
the 1st sixnine months of 2004 than in the 1st sixnine months of 2003. The average
balance of municipal bonds grew to $161,064,000$158,842,000 or 33.5%32.8% of the portfolio, in
the 1st sixnine months of 2004 from $138,811,000,$142,813,000, or 29.1%30.0% of the portfolio, in the
1st sixnine months of 2003. 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 average balance of gross loans increased 14.7%14.3% in 2004 over the 1st sixnine
months of 2003, to $535,160,000$543,700,000 from $466,686,000.$475,830,000. The largest area of growth
was real estate secured loans, with substantial increases in both residential
and commercial mortgages. The average rate of return on loans fell to 6.47%6.44% in
2004 from 7.10%6.99% in the 1st sixnine months of 2003, due to lower market rates.
INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES
Interest expense fell $1,136,000,$1,126,000, or 9.2%6.3%, to $11,196,000$16,861,000 in 2004 from
$12,332,000$17,987,000 in 2003. Overall, the impact of lower interest rates was
moresignificantly larger than
twice the impact of higher volumes of interest-bearing
liabilities in 2004 compared to 2003. In Table IV, you can see the impact of
lower interest rates on the Corporation's major categories of interest-bearing
deposits - principally, CDs, money market accounts and IRA's.
At the beginning of the second quarter of
2004, the Corporation lowered the interest rate on most of the 18-month IRAs
from 5% to 3.5%, reducing interest expense approximately $388,000 for the
quarter ended June 30, 2004.
14
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
As you can calculate from Table III, totalTotal average deposits (interest-bearing and noninterest-bearing) increased to
$660,129,000$665,713,000 in the 1st sixnine months of 2004 from $647,580,000$650,396,000 in the 1st sixnine
months of 2003. This represents an increase of 1.9%2.4%. The largest growth
categories were demand deposits, which increased $10,249,000,$9,249,000, or 15.3%13.4%, and IRAs,
which increased $11,908,000,$11,117,000, or 11.5%10.6%. Average Certificates of Deposit fell 5.7%5.3%
to $184,181,000$182,151,000 in the 1st sixnine months of 2004 from $195,256,000$192,405,000 in the 1st sixnine
months of 2003. Overall, average deposit growth
has been slow in recent months. Management believes the return to positive U.S.
stock market performance has motivated some customers to move funds out of the
Bank to mutual funds and other equity securities. Also,2003, as deposits from a few of the Corporation's Municipal and
not-for-profit customers have fallen over the last several months due to the
customers' use of the funds for building projects and other purposes. Table III
reflects the downward trend in interest rates incurred on liabilities, as the
overall cost of funds on interest-bearing liabilities fell to 2.55%2.52% for the 1st
sixnine months of 2004, from 2.84% for the year ended December 31, 2003 and 3.02%2.90%
for the 1st sixnine months of 2003.
Average total short-term and long-term borrowed funds increased $55,633,000$58,025,000 to
$298,644,000$304,561,000 in the 1st sixnine months of 2004 from $243,011,000$246,536,000 in the 1st sixnine
months of 2003. The Corporation has utilized borrowings to fund security
purchases and to help fund loan growth during these periodsthis period of relatively low
deposit growth.
15
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE
(IN THOUSANDS)
SIXNINE MONTHS ENDED
JUNESEPTEMBER 30,
------------------- INCREASE/
(IN THOUSANDS)
2004 2003 (DECREASE)
------- ------- ----------
INTEREST INCOME
Available-for-sale securities:
U.S. Treasury securities $ --- $ --- $ ---
Securities of other U.S. Government agencies
and corporations 1,335 1,651 (316)1,977 2,461 (484)
Mortgage-backed securities 3,804 4,194 (390)5,676 5,717 (41)
Obligations of states and political subdivisions 5,720 5,219 5018,441 7,952 489
Equity securities 706 501 2051,049 797 252
Other securities 1,605 1,680 (75)2,584 2,366 218
------- ------- -------
Total available-for-sale securities 13,170 13,245 (75)19,727 19,293 434
------- ------- -------
Held-to-maturity securities:
U.S. Treasury securities 8 9 (1)13 13 --
Securities of other U.S. Government agencies
and corporations 4 8 (4)6 11 (5)
Mortgage-backed securities 1 2 (1)3 (2)
------- ------- -------
Total held-to-maturity securities 13 19 (6)20 27 (7)
------- ------- -------
Interest-bearing due from banks 4 7 (3)8 (1)
Federal funds sold 4 8 (4)8 --
Loans:
Real estate loans 14,123 13,278 84521,502 20,212 1,290
Consumer 1,314 1,445 (131)1,943 2,177 (234)
Agricultural 92 98 (6)138 148 (10)
Commercial/industrial 1,012 1,028 (16)1,566 1,463 103
Other 18 33 (15)28 45 (17)
Political subdivisions 666 535 1311,050 839 211
Leases 2 3 (1)5 (2)
------- ------- -------
Total loans 17,227 16,420 80726,230 24,889 1,341
------- ------- -------
Total Interest Income 30,418 29,699 71945,992 44,225 1,767
------- ------- -------
INTEREST EXPENSE
Interest checking 114 146 (32)173 207 (34)
Money market 1,110 1,527 (417)1,748 2,113 (365)
Savings 139 264 (125)211 355 (144)
Certificates of deposit 2,558 3,244 (686)3,839 4,653 (814)
Individual Retirement Accounts 2,384 2,543 (159)3,418 3,858 (440)
Other time deposits 3 7 (4)5 15 (10)
Federal funds purchased 50 31 1970 67 3
Other borrowed funds 4,838 4,570 2687,397 6,719 678
------- ------- -------
Total Interest Expense 11,196 12,332 (1,136)16,861 17,987 (1,126)
------- ------- -------
Net Interest Income $19,222 $17,367$29,131 $26,238 $ 1,8552,893
======= ======= =======
Note: Interest income from tax-exempt securities and loans has been adjusted to
a fully tax-equivalent basis, using the Corporation's marginal federal income
tax rate of 34%.
16
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE IILIII - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(DOLLARS IN THOUSANDS)
69 MONTHS YEAR 69 MONTHS
ENDED RATE OF ENDED RATE OF ENDED RATE OF
6/9/30/2004 RETURN/ 12/31/2003 RETURN/ 6/9/30/2003 RETURN/
AVERAGE COST OF AVERAGE COST OF AVERAGE COST OF
BALANCE FUNDS % BALANCE FUNDS % BALANCE FUNDS %
---------- ------- ---------- ------- ---------- -------
EARNING ASSETS
Available-for-sale securities, at amortized cost:
U.S. Treasury securities $ --- 0.00% $ --- 0.00% $ --- 0.00%
Securities of other U.S. Government agencies
and corporations 58,370 4.60%58,022 4.55% 67,218 4.72% 67,609 4.92%68,743 4.79%
Mortgage-backed securities 179,091 4.27%179,015 4.24% 176,800 4.20% 187,774 4.50%181,935 4.20%
Obligations of states and political subdivisions 161,064 7.14%158,842 7.10% 146,371 7.36% 138,811 7.58%142,813 7.44%
Equity securities 29,998 4.73%30,200 4.64% 28,084 4.16% 25,490 3.96%27,321 3.90%
Other securities 52,703 6.12%58,221 5.93% 52,980 5.76% 58,022 5.84%
----------- ----55,284 5.72%
---------- --------- ---------- --------- ---------- -----
Total available-for-sale securities 481,226 5.50%484,300 5.44% 471,453 5.43% 477,706 5.59%
----------- ----476,096 5.42%
---------- --------- ---------- --------- ---------- -----
Held-to-maturity securities:
U.S. Treasury securities 318 5.06%317 5.48% 320 5.31% 321 5.65%320 5.43%
Securities of other U.S. Government agencies
and corporations 126 6.38%117 6.85% 220 5.00% 240 6.72%226 6.51%
Mortgage-backed securities 35 5.75%32 4.17% 64 4.69% 77 5.24%
----------- ----71 5.65%
---------- --------- ---------- --------- ---------- -----
Total held-to-maturity securities 479 5.46%466 5.73% 604 5.13% 638 6.01%
----------- ----617 5.85%
---------- --------- ---------- --------- ---------- -----
Interest-bearing due from banks 1,147 0.70%1,249 0.75% 1,669 0.60% 1,626 0.87%1,463 0.73%
Federal funds sold 798 1.01%894 1.20% 680 1.18% 1,296 1.24%890 1.20%
Loans:
Real estate loans 443,325 6.41%450,870 6.37% 399,353 6.79% 383,049 6.99%390,911 6.91%
Consumer 33,029 8.00%32,835 7.90% 32,386 8.75% 32,166 9.06%32,090 9.07%
Agricultural 2,859 6.47%2,838 6.50% 2,924 6.81% 2,796 7.07%2,859 6.92%
Commercial/industrial 35,176 5.79%35,267 5.93% 32,909 6.15% 31,994 6.48%32,720 5.98%
Other 594 6.09%608 6.15% 851 6.58% 990 6.72%904 6.66%
Political subdivisions 20,113 6.66%21,221 6.61% 16,649 6.87% 15,605 6.91%16,265 6.90%
Leases 64 6.28%61 6.57% 78 6.41% 86 7.03%
----------- ----81 8.25%
---------- --------- ---------- --------- ---------- -----
Total loans 535,160 6.47%543,700 6.44% 485,150 6.88% 466,686 7.10%
----------- ----475,830 6.99%
---------- --------- ---------- --------- ---------- -----
Total Earning Assets 1,018,810 6.00%1,030,609 5.96% 959,556 6.15% 947,952 6.32%954,896 6.19%
Cash 14,32514,722 13,583 12,88613,345
Unrealized gain/loss on securities 18,61916,454 20,296 21,60620,666
Allowance for loan losses (6,336)(6,466) (5,908) (5,839)(5,877)
Bank premises and equipment 13,74114,428 11,090 10,47110,696
Other assets 37,81038,006 36,103 35,449
-----------35,912
---------- ---------- ----------
Total Assets $ 1,096,969$1,107,753 $1,034,720 $1,022,525
===========$1,029,638
========== ========== ==========
INTEREST-BEARING LIABILITIES
Interest checking $ 39,50039,594 0.58% $ 37,647 0.71% $ 36,814 0.80%37,675 0.73%
Money market 186,101 1.20%191,363 1.22% 190,161 1.43% 189,570 1.62%189,751 1.49%
Savings 56,11856,685 0.50% 54,789 0.78% 53,439 1.00%54,523 0.87%
Certificates of deposit 184,181 2.79%182,151 2.82% 190,019 3.14% 195,256 3.35%192,405 3.23%
Individual Retirement Accounts 115,706 4.14%116,315 3.93% 106,216 4.88% 103,798 4.94%105,198 4.90%
Other time deposits 1,232 0.49%1,453 0.46% 1,666 1.02% 1,661 0.85%1,941 1.03%
Federal funds purchased 8,298 1.21%6,978 1.34% 7,033 1.29% 4,212 1.48%6,778 1.32%
Other borrowed funds 290,346 3.35%297,583 3.32% 242,358 3.67% 238,799 3.86%
----------- ----239,758 3.75%
---------- --------- ---------- --------- ---------- -----
Total Interest-bearing Liabilities 881,482 2.55%892,122 2.52% 829,889 2.84% 823,549 3.02%828,029 2.90%
Demand deposits 77,29178,152 70,528 67,04268,903
Other liabilities 9,8569,792 12,032 11,293
-----------11,506
---------- ---------- ----------
Total Liabilities 968,629980,066 912,449 901,884
-----------908,438
---------- ---------- ----------
Stockholders' equity, excluding other comprehensive
income/loss 116,052116,828 108,876 106,382107,561
Other comprehensive income/loss 12,28810,859 13,395 14,259
-----------13,639
---------- ---------- ----------
Total Stockholders' Equity 128,340127,687 122,271 120,641
-----------121,200
---------- ---------- ----------
Total Liabilities and Stockholders' Equity $ 1,096,969$1,107,753 $1,034,720 $1,022,525
===========$1,029,638
========== ========== ==========
Interest Rate Spread 3.45%3.44% 3.31% 3.30%3.29%
Net Interest Income/Earning Assets 3.79%3.78% 3.70% 3.69%3.67%
(1) Rates of return on tax-exempt securities and loans are presented on a fully
taxable-equivalent basis.
(2) Nonaccrual loans have been included with loans for the purpose of analyzing
net interest earnings.
17
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES
(IN THOUSANDS)
YTD ENDED 6/9/30/04 VS. 6/9/30/03
------------------------------------
CHANGE IN CHANGE IN TOTAL
VOLUME RATE CHANGE
--------- --------- -------
EARNING ASSETS
Available-for-sale securities:
U.S. Treasury securities $ --- $ --- $ ---
Securities of other U.S. Government agencies
and corporations (213) (103) (316)(368) (116) (484)
Mortgage-backed securities (184) (206) (390)(89) 48 (41)
Obligations of states and political subdivisions 814 (313) 501869 (380) 489
Equity securities 98 107 20590 162 252
Other securities (156) 81 (75)130 88 218
------- ------- -------
Total available-for-sale securities 359 (434) (75)632 (198) 434
------- ------- -------
Held-to-maturity securities:
U.S. Treasury securities - (1) (1)-- -- --
Securities of other U.S. Government agencies
and corporations (4) - (4)(6) 1 (5)
Mortgage-backed securities (1) - (1) (2)
------- ------- -------
Total held-to-maturity securities (5) (1) (6)(7) -- (7)
------- ------- -------
Interest-bearing due from banks (2) (1) (3)-- (1)
Federal funds sold (2) (2) (4)-- -- --
Loans:
Real estate loans 2,005 (1,160) 8452,954 (1,664) 1,290
Consumer 39 (170) (131)50 (284) (234)
Agricultural 2 (8) (6)(1) (9) (10)
Commercial/industrial 99 (115) (16)114 (11) 103
Other (12)(14) (3) (15)(17)
Political subdivisions 151 (20) 131247 (36) 211
Leases (1) - (1) (2)
------- ------- -------
Total loans 2,283 (1,476) 8073,349 (2,008) 1,341
------- ------- -------
Total Interest Income 2,633 (1,914) 7193,973 (2,206) 1,767
------- ------- -------
INTEREST-BEARING LIABILITIES
Interest checking 10 (42) (32)11 (45) (34)
Money market (27) (390) (417)18 (383) (365)
Savings 12 (137) (125)13 (157) (144)
Certificates of deposit (175) (511) (686)(237) (577) (814)
Individual Retirement Accounts 276 (435) (159)381 (821) (440)
Other time deposits (2) (2) (4)(3) (7) (10)
Federal funds purchased 26 (7) 192 1 3
Other borrowed funds 916 (648) 2681,501 (823) 678
------- ------- -------
Total Interest Expense 1,036 (2,172) (1,136)1,686 (2,812) (1,126)
------- ------- -------
Net Interest Income $ 1,5972,287 $ 258606 $ 1,8552,893
======= ======= =======
(1) Changes in income on tax-exempt securities and loans is presented on a fully
taxable-equivalent basis, using the Corporation's marginal federal income tax
rate of 34%.
(2) The change in interest due to both volume and rates has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amount of the change in each.
18
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE V - COMPARISON OF NONINTEREST INCOME
(IN THOUSANDS)
69 MONTHS ENDED
JUNE----------------------------
SEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003
------------ -------------
Service charges on deposit accounts $ 874 $ 855$1,337 $1,307
Service charges and fees 131 119209 210
Trust and financial management revenue 1,030 8451,483 1,258
Insurance commissions, fees and premiums 219 157327 220
Increase in cash surrender value of life insurance 312 377463 552
Fees related to credit card operation 409 357568 564
Other operating income 505 458720 762
------ ------
Total other operating income, before realized
gains on securities, net 3,480 3,1685,107 4,873
Realized gains on securities, net 1,285 2,6291,744 3,289
------ ------
Total Other Income $4,765 $5,797$6,851 $8,162
====== ======
Total noninterest income decreased $1,032,000,$1,311,000, or 17.8%16.1%, in 2004 compared to
2003. The most significant change - the decrease in net realized security gains
- - is discussed in the "Earnings Overview" section of Management's Discussion and
Analysis. Other items of significance are as follows:
- -o Trust and financial management revenue increased $185,000,$225,000, or 21.9%17.9%, for
2004 versus 2003. Trust and financial management revenue is affected
significantly by the market value of assets under management. As of
JuneSeptember 30, 2004, the value of trust assets under management amounted to
$359,230,000,$358,349,000, an increase of $55,007,000$50,726,000 or 18.1%16.5% from $304,223,000,$307,623,000, as of
JuneSeptember 30, 2003.
- -o Insurance commissions and fees rose $62,000,$107,000, or 39.5%48.6%, for 2004 compared
to 2003. The increase in insurance-related revenues had 2 components: (1)
an increase in revenues of $45,000$79,000 from Bucktail Life Insurance Company
("Bucktail"), a subsidiary of the Corporation that reinsures credit and
mortgage life and accident and health insurance, and (2) an increase in
revenues of $17,000$28,000 from the insurance division of C & N Financial Services
Corporation ("C&NFSC"). C&NFSC insurance revenues amounted to $75,000$113,000 in
2004 and $58,000$85,000 in 2003.
- - Credit card fee income has increased mainly due to the formation of a
"Reward Card Program" which pays users a rebate for using their credit
card. This program was started in April 2003 and has had the desired
effect of raising card usage. This, along with an increased rate on
interchange fees, has raised overall credit card fees $52,000 or 14.6% to
$409,000 in 2004 compared to $357,000 in 2003.
- - Other operating income rose $47,000 or 10.3% in 2004 compared to 2003. The
largest contributors to this increase were an increase in revenues from
C&NFSC's brokerage services to $109,000 in 2004, an increase of $64,000
over 2003.
- -o The increase in cash surrender value of life insurance fell $65,000,$89,000, or
17.2%16.1%, to $312,000$463,000 in 2004 from $377,000$552,000 in 2003. The Corporation's policy
return is determined, in part, by the earnings generated from a pooled
separate investment trust held by the life insurance company. In 2004, the
earnings on that pooled separate trust fund have been lower than in 2003,
which is reflective ofreflects lower market yields on debt securities.
19
CITIZENS & NORTHERN CORPORATION - FORM 10 - Qsecurities held in that trust
fund.
TABLE VI- COMPARISON OF NONINTEREST EXPENSE
(IN THOUSANDS)
69 MONTHS ENDED
JUNE-----------------------------
SEPTEMBER 30, JUNESEPTEMBER 30,
2004 2003
------------ -------------
Salaries and wages $ 5,4008,306 $ 4,7737,129
Pensions and other employee benefits 1,812 1,6602,678 2,437
Occupancy expense, net 737 6571,187 967
Furniture and equipment expense 724 6841,161 1,029
Pennsylvania shares tax 423 392635 588
Other operating expense 3,421 2,7225,288 4,074
------- -------
Total Other Expense $12,517 $10,888$19,255 $16,224
======= =======
Salaries and wages increased $627,000,$1,177,000, or 13.1%16.5%, for 2004 compared to 2003.
The increase is mainly the result of annual merit raises, generally ranging from
2%-5%, and an increase in number of employees. The number of full-time
equivalent employees increased 10.8%12.5% to 298316 as of JuneSeptember 30, 2004 from 269281 as
of JuneSeptember 30, 2003.
19
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Pensions and other employee benefits increased $152,000$241,000 or 9.2%9.9% in 2004 over
2003. The largest expense increases within this category were increases of
$62,000 in health insurance expense, $32,000 in payroll taxes, $28,000$96,000 in Savings & Retirement (401(k)) expense, $89,000 in health insurance
expense, $67,000 in payroll taxes, and $22,000$26,000 in unemployment compensation
expense. In addition to the impact of more employees and a higher salary base,
health care and unemployment rates were higher in 2004 than in 2003.
Occupancy Expense rose $80,000,$220,000, or 12.2%22.8% in 2004 compared to 2003. The majority
of this increase is directly related to the general overall increase in utility
rates, coupled with the addition of the Williamsport facility.and South Williamsport
facilities. Building maintenance and repairs increased $75,000, or 45%, in 2004
over 2003. Light, fuel and water expense rose $47,000,$63,000, or 38.6%37.8%, in 2004 over
2003. Depreciation expense rose $30,000,$59,000, or 12.8%16.5%, due to higher depreciation
from branch remodeling projects that were completed in 2003.
Other Operating Expense increased $699,000$1,214,000 or 25.7%29.8% in 2004 compared to 2003.
Overall, the increase in Other Operating Expense resulted from higher volumes of
loans and other transactions, start-up of the Williamsport facility,and South
Williamsport facilities, the implementation of the core computer system
conversion and other activities that have resulted in more expenses incidental
to personnel and technology. The largest increases in expenses within this
category were as follows:
-o Professional fees, $153,000, $114,000$331,000, $289,000 of which is directly related to
the core computer system conversion.
-o Employee tuition and education, $169,000
o Office supplies, $163,000
o Expenses related to Bucktail Life Insurance Company, $88,000
- Employee tuition and education, $86,000
- Office supplies, $73,000$148,000
FINANCIAL CONDITION
Significant changes in the average balances of the Corporation's earning assets
and interest-bearing liabilities are described in the "Net Interest Margin"
section of Management's Discussion and Analysis. The allowance for loan losses
and stockholders' equity are discussed in separate sections of Management's
Discussion and Analysis. The following areonly significant changeschange in the Corporation's
consolidated balance sheet as of JuneSeptember 30, 2004 compared to December 31,
2003, other than the items addressed in those discussions:
- - As reflected in the consolidated balance sheet, the carrying value ofdiscussions, relates to
available-for-sale securities which rose to $503,700,000$499,572,000 at JuneSeptember 30, 2004
from $483,032,000 at December 31, 2003. The largest increase in
available-for-sale securities has been in Other Securities, which increased to a
carrying value of $64,520,000$78,878,000 at JuneSeptember 30, 2004 from $47,648,000 at December
31, 2003. The Corporation purchased approximately $21,000,000$34,000,000 of Trust Preferred
and CMO securities in 2004. Also mortgage-backed securities increased to
$181,723,000$190,674,000 at JuneSeptember 30, 2004 from $169,208,000 at December 31, 2003.
Management identified opportunities to purchase
mortgage-backed securities in 2004Obligations of state and entered into long-term repurchase
agreements to fund them.
20
- - Accumulated other comprehensive incomepolitical subdivisions (municipal bonds) fell to
$4,097,000$138,711,000 at JuneSeptember 30, 2004 from $12,037,000$162,418,000 at December 31, 2003.
The balance in accumulated other
comprehensive income is equal to the amount of unrealized gains or losses
on available-for-sale securities, net of deferred income tax. Higher
interest rates caused the fairManagement sold Municipal Bonds with a carrying value of approximately
$20,000,000 in September 2004, and reinvested the Corporation's debt securities
(within the available-for-sale securities portfolio) to declineproceeds in the 2nd
quarter of 2004.mortgage-backed
securities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses includes two components, allocated and
unallocated. The allocated component of the allowance for loan losses reflects
probable losses resulting from the analysis of individual loans and historical
loss experience, as modified for identified trends and concerns, for each loan
category. The historical loan loss experience element is determined based on the
ratio of net charge-offs to average loan balances over a five-year period, for
each significant type of loan, modified for risk adjustment factors identified
by management for each type of loan. The charge-off ratio is then applied to the
current outstanding loan balance for each type of loan (net of other loans that
are individually evaluated).
The unallocated portion of the allowance is determined based on management's
assessment of general economic conditions as well as specific economic factors
in the market area. This determination inherently involves a higher degree of
uncertainty and considers current risk factors that may not have yet manifested
themselves in the Bank's historical loss factors used to determine the allocated
component of the allowance, and it recognizes that management's knowledge of
specific losses within the portfolio may be incomplete.
20
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
As indicated in Table IX, total impaired loans increased substantially in the
first quarteramounted to $7,560,000 at
September 30, 2004. This amount of impaired loans is down from $8,322,000 at
June 30, 2004 toand $8,722,000 at March 31, 2004, from $4,621,000 atbut still much higher than the
December 31, 2003. Total2003 amount of $4,621,000. The decrease in impaired loans decreased slightlyin the
third quarter 2004 resulted mainly from acquisition of real estate related to a
commercial loan, with a charge-off of $153,000 and transfer to foreclosed assets
of the estimated net realizable value of the real estate of $400,000, and from
principal payments totaling $514,000 from the March 31, 2004
amount, to $8,322,000 at June 30, 2004.work-out of another commercial
loan. Table IX also shows that total loans past due more than 90 days and still
accruing interest increaseddecreased to $1,589,000 at September 30, 2004, from $2,135,000
at June 30, 2004 and $5,591,000 at March 31, 2004 from $2,546,000 at December 31, 2003, then decreased to
$2,135,000 at June 30, 2004. These fluctuations resulted
mainly from management's
analysis of certain large commercial loan relationships, including one
commercial loan relationship with total outstanding loan balances of
approximately $3.7 million as of JuneSeptember 30, 2004. In the first quarter 2004,
loans to this commercial customer hit the 90-day past due category, contributing
significantly to the increase in total loans past due 90 days or more reflected
in Table IX. During the second quarter 2004, management moved the loans
outstanding related to this large relationship, as well as certain other
commercial loans, into nonaccrual status. Currently, management estimates that
payment of virtually all outstanding principal on this large relationship will
be received. Accordingly, the Corporation's allowance calculations reflect no
estimated loss as of JuneSeptember 30, 2004. During the second quarter 2004,
management moved the loans outstanding related to this large relationship, as
well as certain other commercial loans, into nonaccrual status. Management believes it has been
conservative in its decisions concerning identification of impaired loans,
estimates of loss and nonaccrual status. Management continues to closely monitor
these commercial loan relationships, and will adjust its estimates of loss and
decisions concerning nonaccrual status, if appropriate.
The allowance for loan losses was $6,609,000$6,570,000 at JuneSeptember 30, 2004, an increase
of $512,000$473,000 from the balance at December 31, 2003. As reflected in Table VIII,
the increase in the allowance resulted mainly from an increase in the
unallocated portion to $2,701,000$2,653,000 at JuneSeptember 30, 2004 from $2,117,000 at
December 31, 2003. The September 30, 2004 unallocated allowance was very
consistent with the June 30, 2004 unallocated balance of $2,701,000.
Management's decision to increase the unallocated allowance in 2004 resulted
primarily from the increase in impaired loans earlier in 2004, as discussed
above.
The provision for loan losses increased to $700,000$1,050,000 in 2004 from $600,000$850,000 in
2003. The amount of the provision in each period is determined based on the
amount required to maintain an appropriate allowance in light of the factors
described above. In 2004, the higher provision for loan losses resulted mainly
from the increase in the unallocated portion of the allowance.
As you can see in Table VII, net charge-offs totaled $188,000$577,000 in the first sixnine
months of 2004, which is relatively low bycomparable to the Corporation's recent
historical standards.
Tables VII, VIII, IX and X present an analysis of the allowance for loan losses,
the allocation of the allowance, information concerning impaired and past due
loans and a five-year summary of loans by type.
21
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE VII-VII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
SIX9 MONTHS SIX9 MONTHS
ENDED ENDED YEARS ENDED DECEMBER 31,
ENDED ENDED
JUNESEPT. 30, JUNESEPT. 30, ------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
-------- -------- ------ ------ ------ ------ ------
Balance, beginning of year $6,097 $5,789 $5,789 $5,265 $5,291 $5,131 $4,820
------ ------ ------ ------ ------ ------ ------
Charge-offs:
Real estate loans 51 61337 162 168 123 144 272 81
Installment loans 90 211156 299 326 116 138 77 138
Credit cards and related plans 91 100132 137 171 190 200 214 192
Commercial and other loans - 25411 303 303 123 231 53 219
------ ------ ------ ------ ------ ------ ------
Total charge-offs 232 626636 901 968 552 713 616 630
------ ------ ------ ------ ------ ------ ------
Recoveries:
Real estate loans 3 3869 75 30 6 26 81
Installment loans 18 3323 46 52 30 27 23 60
Credit cards and related plans 18 14 9 17 18 20 28 30
Commercial and other loans 9 1715 31 32 58 34 23 10
------ ------ ------ ------ ------ ------ ------
Total recoveries 44 9759 160 176 136 87 100 181
------ ------ ------ ------ ------ ------ ------
Net charge-offs 188 529577 741 792 416 626 516 449
Provision for loan losses 700 6001,050 850 1,100 940 600 676 760
------ ------ ------ ------ ------ ------ ------
Balance, end of year $6,609 $5,860period $6,570 $5,898 $6,097 $5,789 $5,265 $5,291 $5,131
====== ====== ====== ====== ====== ====== ======
TABLE VIII - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE
(IN THOUSANDS)
AS OF AS OF AS OF DECEMBER 31,
SEPT. 30, JUNE 30, MARCH 31,------------------------------------------------------
2004 2004 2003 2002 2001 2000 1999
--------- ------- ------ ------ ------ ------ ------
Commercial $1,838 $1,700 $1,606 $1,578 $1,315 $1,837 $1,612 $2,081
Consumer mortgage 481 472 460 456 460 674 952 834
Impaired loans 1,198 1,340 1,667 1,542 1,877 73 273 609
Consumer 400 396 399 404 378 494 471 437
All other commitments - - - - - --- -- -- -- -- -- 150
Unallocated 2,653 2,701 2,238 2,117 1,759 2,187 1,983 1,020
------ ------ ------ ------ ------ ------ ------
Total Allowance $6,570 $6,609 $6,370 $6,097 $5,789 $5,265 $5,291 $5,131
====== ====== ====== ====== ====== ====== ======
TABLE IX - PAST DUE AND IMPAIRED LOANS
(IN THOUSANDS)
SEPT. 30, JUNE 30, MARCH 31, DECEMBERDEC. 31,
2004 2004 2004 2003
-------- -------- --------- --------
Impaired loans without a valuation allowance $3,685 $4,056 $3,861 $ 114
Impaired loans with a valuation allowance 3,875 4,266 4,861 4,507
------ ------ ------ ------
Total impaired loans $7,560 $8,322 $8,722 $4,621
====== ====== ====== ======
Valuation allowance related to impaired loans $1,198 $1,340 $1,667 $1,542
Total nonaccrual loans $7,655 $8,365 $1,359 $1,145
Total loans past due 90 days or more and
still accruing $1,589 $2,135 $5,591 $2,546
22
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE X - SUMMARY OF LOANS BY TYPE
(IN THOUSANDS)
AS OF JUNE 30, AS OF DECEMBER 31,
SEPT. 30, -------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
--------- ---------- --------- ----------- --------- ---------
Real estate - construction $ 4,0954,085 $ 2,856 $ 103 $ 1,814 $ 452 $ 649
Real estate - mortgage 453,540470,578 431,047 370,453 306,264 263,325 247,604
Consumer 32,21232,884 33,977 31,532 29,284 28,141 29,140
Agricultural 2,8032,886 2,948 3,024 2,344 1,983 1,899
Commercial 34,71736,654 34,967 30,874 24,696 20,776 18,050
Other 1,9811,893 1,183 2,001 1,195 948 1,025
Political subdivisions 22,56222,407 17,854 13,062 13,479 12,462 12,332
Lease receivables 5950 65 96 152 218 222
--------- --------- --------- --------- --------- ----------------- -------- -------- -------- -------- --------
Total 551,969571,437 524,897 451,145 379,228 328,305 310,921
Less: unearned discount - - - - - (29)
--------- --------- --------- --------- --------- ---------
551,969-------- -------- -------- -------- -------- --------
571,437 524,897 451,145 379,228 328,305 310,892
Less: allowance for loan
losses (6,609)(6,570) (6,097) (5,789) (5,265) (5,291) (5,131)
--------- --------- --------- --------- --------- ----------------- -------- -------- -------- -------- --------
Loans, net $ 545,360 $ 518,800 $ 445,356 $ 373,963 $ 323,014 $ 305,761
========= ========= ========= ========= ========= =========$564,867 $518,800 $445,356 $373,963 $323,014 $305,761
======== ======== ======== ======== ======== ========
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 the Federal Home Loan Bank of
Pittsburgh (FHLB-Pittsburgh). Under the terms of the Swap contracts, the
Corporation must pay FHLB-Pittsburgh quarterly amounts calculated based on the
contractual amount of IPCDs issued times a negotiated rate. In return,
FHLB-Pittsburgh is obligated to pay the Corporation, at the time of maturity of
the IPCDs, an amount equal to 90% of the appreciation (as defined) in the S&P
500 index. If the S&P 500 index does not appreciate over the term of the related
IPCDs, the FHLB-Pittsburgh would make no payment to the Corporation. The effect
of the Swap contracts is to limit the Corporation's cost of IPCD funds to the
market rate of interest paid to FHLB-Pittsburgh. (In addition, the Corporation
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.
23
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Amounts recorded for IPCDs are as follows (in thousands):
JUNESEPT. 30, DEC. 31,
2004 2003
--------- ---------
Contractual amount of IPCDs (equal
to notional amount of Swap contracts) $4,035 $3,593$ 4,035 $ 3,593
Carrying value of IPCDs 3,6213,657 3,160
Carrying value of embedded derivative liabilities 379305 298
Carrying value of Swap contract liabilities 2362 130
69 MONTHS 69 MONTHS
ENDED ENDED
JUNESEPT. 30, JUNESEPT. 30,
2004 2003
--------- ---------
Interest expense $ 69105 $ 5889
Other expense 1 -5 8
LIQUIDITY
Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate
liquidity position permits the Corporation to pay creditors, compensate for
unforeseen deposit fluctuations and fund unexpected loan demand. The Corporation
maintains overnight borrowing facilities with several correspondent banks that
provide a source of day-to-day liquidity. Also, the Corporation maintains
borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by
mortgage loans and various investment securities. At JuneSeptember 30, 2004, the
Corporation had unused borrowing availability with correspondent banks and the
Federal Home Loan Bank of Pittsburgh totaling approximately $142,116,000.$136,887,000.
Additionally, the Corporation uses repurchase agreements placed with brokers to
borrow funds secured by investment assets, and uses "RepoSweep" arrangements to
borrow funds from commercial banking customers on an overnight basis.
Historically, one of the tools used to monitor a bank's longer-term liquidity
situation has been the loan-to-deposit ratio. As of JuneSeptember 30, 2004, this
ratio was 81%84%, which is a moderate-to-low ratiomoderate level by banking industry standards, but
higher than the Corporation's historical position in recent decades. The higher
than historical level of loans-to-deposits reflects the Corporation's very
strong loan growth over the past few years. The loan-to-deposit ratio was 79% at
December 31, 2003, 70% at December 31, 2002 and 65% at December 31, 2001.
Management believes the current, higher loan-to-deposit ratio is an indicator
that some of the Corporation's historical liquidity "cushion" has been reduced;
however, the current position continues to provide sufficient funds for
maintenance of a substantial investment securities portfolio. If required to
raise cash in an emergency situation, the Corporation could sell non-pledged
investment securities to meet its obligations. At JuneSeptember 30, 2004, the
carrying value of non-pledged securities was $331,491,000.$308,481,000.
Management believes the combination of its strong capital position (discussed in
the next section), ample available borrowing facilities and moderate loan to
deposit ratio have placed the Corporation in a position of minimal short-term
and long-term liquidity risk.
STOCKHOLDERS' EQUITY AND CAPITAL ADEQUACY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. For many years, the
Corporation and the Bank have maintained strong capital positions. The following
table presents consolidated capital ratios at JuneSeptember 30, 2004:
24
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
Total capital to risk-weighted assets 19.40%
Tier 1 capital to risk-weighted assets 17.69%
Tier 1 capital to average total assets 10.67%
Total capital to risk-weighted assets 18.92%
Tier 1 capital to risk-weighted assets 17.28%
Tier 1 capital to average total assets 10.72%
Management expects the Corporation and the Bank to maintain capital levels that
exceed the regulatory standards for well-capitalized institutions for the next
12 months and for the foreseeable future. Planned capital expenditures (as
discussed in the "Earnings Overview" section of Management's Discussion and
Analysis) during the next 12 months are not expected to have a significantly
detrimental effect on capital ratios or results of operations.
INFLATION
Over the last several years, direct inflationary pressures on the Corporation's
payroll-related and other noninterest costs have been modest. The Corporation is
significantly affected by the Federal Reserve Board's efforts to control
inflation through changes in interest rates. Management monitors the impact of
economic trends, including indicators of inflationary pressure, in managing
interest rate and other financial risks.
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 3. INTEREST RATE RISK AND MARKET RISK
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Corporation's two major categories of market risk, interest rate and equity
securities risk, are discussed in the following sections.
INTEREST RATE RISK
Business risk arising from changes in interest rates is a significant factor in
operating a bank. The Corporation's assets are predominantly long-term, fixed
rate loans and debt securities. Funding for these assets comes principally from
short-term deposits and borrowed funds. Accordingly, there is an inherent risk
of lower future earnings or decline in fair value of the Corporation's financial
instruments when interest rates change.
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 nonfinancial assets and
liabilities, such as premises and equipment and accrued expenses. The model
measures and projects potential changes in net interest income, and calculates
the discounted present value of anticipated cash flows of financial instruments,
assuming an immediate increase or decrease in interest rates. Management
ordinarily runs a variety of scenarios within a range of plus or minus 50-300
basis points of current rates.
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 of(the prior
policy included limits based on +/- 200 basis points.points change from current rates).
The new policy limitlimits for fluctuationfluctuations in net interest income is minus 20%are tiered from
the baseline one-year scenario. The new policy limitlimits for market value variance is minus 30%variances
are also tiered from the baseline one-year
scenario.values based on current rates. The most
sensitive scenario presented in Table XI below is the "+200300 basis points"
scenario. As Table XI shows, as of JuneSeptember 30, 2004, the Bank's net interest
income calculation iscalculations are well within the policy threshold. However, if interest
rates were to immediately increase 200300 basis points, the Bank's calculations
based on the model show that the market value of portfolio equity would decrease
37.7%47.3%, which slightly exceeds the policy threshold. Management continually
evaluates whether to make any changes to asset or liability holdings in an
effort to reduce exposure to decline in market value in a rising interest rate
environment.
25
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
The December 31, 2003 data included in Table XI has been presented in comparison
to the new risk limits.
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
25
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q and call
activity on other investment securities. Actual results could vary significantly
from these estimates, which could result in significant differences in the
calculations of projected changes in net interest margin and market value of
portfolio equity. Also, the model does not make estimates related to changes in
the composition of the deposit portfolio that could occur due to rate
competition and the table does not necessarily reflect changes that management
would make to realign the portfolio as a result of changes in interest rates.
TABLE XI - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
PERIOD ENDING JUNE 30, 2005
(IN THOUSANDS)
JUNESEPTEMBER 30, 2004 DATA
(IN THOUSANDS)
CURRENT PLUS 200 MINUS 200PERIOD ENDING SEPTEMBER 30, 2005
-----------------------------------------------------------------------------
INTEREST INTEREST NET INTEREST NII NII
BASIS BASISPOINT CHANGE IN RATES POINTS POINTS
SCENARIO AMOUNTINCOME EXPENSE INCOME (NII) % CHANGE AMOUNT % CHANGERISK LIMIT
- --------------------------- ---------- ---------- -------------- ---------- ------------
Interest income $ 56,563 $ 59,912 $ 51,543
Interest expense 22,237 27,964 17,690
--------- --------- ---------
Net Interest Income $ 34,326 $ 31,948 -6.9% $ 33,853 -1.4%
========= ========= ==== ========= ====
Market Value of Portfolio Equity at June+300 62,954 33,489 29,465 -15.7% 20.0%
+200 61,210 29,659 31,551 -9.7% 15.0%
+100 59,416 25,830 33,586 -3.9% 10.0%
0 57,477 22,544 34,933 0.0% 0.0%
-100 54,580 19,592 34,988 0.2% 10.0%
-200 51,973 17,230 34,743 -0.5% 15.0%
-300 49,505 16,499 33,006 -5.5% 20.0%
MARKET VALUE OF PORTFOLIO EQUITY
AT SEPTEMBER 30, 2004
$ 124,604 $ 77,670 -37.7% $ 154,390 23.9%
========= ========= ==== ========= ====---------------------------------------------
PRESENT PRESENT PRESENT
VALUE VALUE VALUE
BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT
- --------------------------- -------- ---------- ------------
+300 74,160 -47.3% 45.0%
+200 96,252 -31.5% 35.0%
+100 119,233 -15.2% 25.0%
0 140,609 0.0% 0.0%
-100 151,990 8.1% 25.0%
-200 160,305 14.0% 35.0%
-300 171,393 21.9% 45.0%
PERIOD ENDING DECEMBER 31, 2004
(IN THOUSANDS)26
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
DECEMBER 31, 2003 DATA
(IN THOUSANDS)
CURRENT PLUS 200 MINUS 200PERIOD ENDING DECEMBER 31, 2004
-----------------------------------------------------------------------------
INTEREST INTEREST NET INTEREST NII NII
BASIS BASISPOINT CHANGE IN RATES POINTS POINTS
SCENARIO AMOUNTINCOME EXPENSE INCOME (NII) % CHANGE AMOUNT % CHANGERISK LIMIT
- --------------------------- ---------- ---------- -------------- ---------- ------------
Interest income $ 54,126 $+300 60,287 29,227 31,060 -7.1% 20.0%
+200 58,319 $ 48,386
Interest expense 20,676 26,047 16,343
--------- --------- ---------
Net Interest Income $ 33,450 $ 32,272 -3.5% $15.0%
+100 56,293 23,003 33,290 -0.5% 10.0%
0 54,126 20,676 33,450 0.0% 0.0%
-100 50,844 18,349 32,495 -2.9% 10.0%
-200 48,386 16,343 32,043 -4.2% ========= ========= ===== ========= ====
Market Value of Portfolio Equity at Dec.15.0%
-300 46,232 15,645 30,587 -8.6% 20.0%
MARKET VALUE OF PORTFOLIO EQUITY
AT DECEMBER 31, 2003
$ 123,499 $---------------------------------------------
PRESENT PRESENT PRESENT
VALUE VALUE VALUE
BASIS POINT CHANGE IN RATES EQUITY % CHANGE RISK LIMIT
- --------------------------- -------- ---------- ------------
+300 59,637 -51.7% 45.0%
+200 79,649 -35.5% $35.0%
+100 101,318 -18.0% 25.0%
0 123,499 0.0% 0.0%
-100 138,591 12.2% 25.0%
-200 152,462 23.5% ========= ========= ===== ========= ====35.0%
-300 171,534 38.9% 45.0%
EQUITY SECURITIES RISK
The Corporation's equity securities portfolio consists primarily of investments
in stock of banks and bank holding companies located mainly in Pennsylvania. The
Corporation also owns some other stocks and mutual funds. Included in "Other
Equity Securities" in the table that follows are preferred stocks issued by U.S.
Government agencies with a fair value of $11,026,000$10,805,000 at JuneSeptember 30, 2004 and
$11,347,000 at December 31, 2003.
Investments in bank stocks are subject to the risk factors that affect the
banking industry in general, including competition from nonbank entities, credit
risk, interest rate risk and other factors, which could result in a decline in
market prices. Also, losses could occur in individual stocks held by the
Corporation because of specific circumstances related to each bank. Further,
because of the concentration of bank and bank holding companies located in
Pennsylvania, these investments could decline in market value if there is a
downturn in the state's economy.
Equity securities held as of JuneSeptember 30, 2004 and December 31, 2003 are
presented in Table XII.
2627
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
TABLE XII - EQUITY SECURITIES
(IN THOUSANDS)
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT JUNESEPTEMBER 30, 2004 COST VALUE VALUE VALUE
- --------------------- -------- -------- ------------ ------------
Banks and bank holding companies $ 16,74117,229 $ 27,48228,294 $ (2,748)(2,829) $ (5,496)(5,659)
Other equity securities 13,559 13,179 (1,318) (2,636)13,571 12,909 (1,291) (2,582)
-------- -------- --------- ----------
Total $ 30,30030,800 $ 40,66141,203 $ (4,066)(4,120) $ (8,132)(8,241)
======== ======== ========= ==========
HYPOTHETICAL HYPOTHETICAL
10% 20%
DECLINE IN DECLINE IN
FAIR MARKET MARKET
AT DECEMBER 31, 2003 COST VALUE VALUE VALUE
- --------------------- -------- -------- ------------ ------------
Banks and bank holding companies $ 16,375 $ 29,288 $ (2,929) $ (5,858)
Other equity securities 13,576 13,400 (1,340) (2,680)
-------- -------- --------- ----------
Total $ 29,951 $ 42,688 $ (4,269) $ (8,538)
======== ======== ========= ==========
PART I - FINANCIAL INFORMATION (CONTINUED)
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer carried
out an evaluation of the design and effectiveness of the Corporation's
disclosure controls and procedures pursuant to Rule 13a-15(e) and Rule 15d-15(e)
of the Securities Exchange Act of 1934 as of the end of the period covered by
this report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures are effective to ensure that 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 materially affect, our
internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. 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 2. Changes inUnregistered Sales of Equity Securities and Use of Proceeds
and Issuer Purchases of Equity
Securities
e. Issuer Purchases of Equity Securities
27None
28
CITIZENS & NORTHERN CORPORATION - FORM 10 - Q
The following table sets forth purchases by the Corporation (on the open
market) of its equity securities during the first 6 months of 2004.
TOTAL
NUMBER OF MAXIMUM
SHARES NUMBER OF
PURCHASED SHARES
AS PART OF THAT MAY YET
TOTAL AVERAGE PUBLICLY BE PURCHASED
NUMBER OF PRICE ANNOUNCED UNDER THE
SHARES PAID PER PLANS OR PLANS OR
PERIOD PURCHASED SHARE PROGRAMS PROGRAMS
- ------------------- --------- -------------- -------------- --------------
January 1-31, 2004 - Not applicable Not applicable Not applicable
February 1-29, 2004 - Not applicable Not applicable Not applicable
March 1-31, 2004 - Not applicable Not applicable Not applicable
April 1-30, 2004 18,900 $25.12 - Not applicable
May 1-31, 2004 - Not applicable Not applicable Not applicable
June 1-30, 2004 4,000 $25.06 - Not applicable
-------- -------------- -------------- --------------
Total 22,900 $25.11 - Not applicable
======== ============== ============== ==============
There have been no publicly announced plans or programs for repurchase of
the Corporation's stock.
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of Citizens & Northern Corporation was held
on Tuesday, April 20, 2004. The Board of Directors fixed the close of business
on March 8, 2004 as the record date for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting and at any adjournment
thereof. On this record date, there were outstanding and entitled to vote
8,118,529 shares of Common Stock.
The total number of votes cast was 6,089,869. 436,979 were voted in person by
owners or representatives and 5,652,890 were voted by proxy for the following
purposes and with the following results.
1. The election of the following as Class II Directors to serve for a term
of three years:
R. Bruce Haner
Total Votes in Favor 6,050,382
Total Votes Against 39,487
Susan E. Hartley
Total Votes in Favor 5,922,881
Total Votes Against 166,988
Leo F. Lambert
Total Votes in Favor 5,990,757
Total Votes Against 99,112
Edward L. Learn
Total Votes in Favor 6,061,965
Total Votes Against 27,904
28
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Leonard Simpson
Total Votes in Favor 6,008,388
Total Votes Against 81,481
2. The ratification and approval of the Director and Executive Officer
Indemnification Program:
Total Votes in Favor 5,572,155
Total Votes Against 365,569
Total Votes Abstained 152,145
3. The approval of the increase in the aggregate number of authorized
shares of the Corporation's common stock from 10,000,000 to
20,000,000:
Total Votes in Favor 5,803,301
Total Votes Against 168,969
Total Votes Abstained 117,599
4. The ratification of the action of the Board of Directors in the
appointment of the firm of Parente Randolph, PC as independent
auditors of the Corporation:
Total Votes in Favor 6,011,429
Total Votes Against 46,825
Total Votes Abstained 31,615
Not Applicable
Item 5. Not Applicable
Item 6. Exhibits
and Reports on Form 8 - K
a. Exhibits:
Page
----
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer 31
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer 32
Exhibit 32 Section 1350 Certifications 33
b. A Current Report on Form 8-K under Items 7 and 12, dated April 9, 2004,
was furnished to report the Corporation's consolidated earnings results
for the quarterly period ended March 31, 2004.
29
CITIZENS AND NORTHERN CORPORATION - FORM 10 - Q
Signature Page
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CITIZENS & NORTHERN CORPORATION
August 5,November 4, 2004 By: /s/ Craig G. Litchfield
/s/- ---------------- -----------------------
Date ----------------------- Chairman, President and Chief Executive Officer
August 5,November 4, 2004 By: /s/ Mark A. Hughes
/s/- ---------------- -----------------------
Date ------------------ Treasurer and Chief Financial Officer
30