Citizens & Northern (CZNC) 8-K/A Financial Statements and Exhibits

EXHIBIT 99.2

UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL DATA

(In thousands of dollars, except per share data)

In December 2019, Citizens & Northern Corporation (C&N), along with Covenant Financial, Inc. (Covenant) announced the signing of an Agreement and Plan of Merger. In July 2020, the Corporation and Covenant announced the completion of the merger as of July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank with offices in Bucks County, Pennsylvania, and Chester County, Pennsylvania. Under the terms of the Agreement and Plan of Merger, Covenant merged into C&N, and Covenant Bank merged into C&N’s wholly-owned subsidiary, Citizens & Northern Bank.

The unaudited pro forma combined condensed consolidated financial information has been prepared using the acquisition method of accounting, giving effect to the merger. The unaudited pro forma combined condensed consolidated balance sheet combines the historical information of C&N and Covenant as of June 30, 2020 and assumes the merger was completed on that date. The unaudited pro forma combined condensed consolidated income statement combines the historical financial information of C&N and Covenant and gives effect to the merger as if it had been completed as of January 1, 2019 and carried forward through the interim period presented. The unaudited pro forma combined condensed consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations or financial condition had the merger been completed on the date described above, nor is it necessarily indicative of the results of operations in future periods or the future financial condition and results of operations of the combined entities. The financial information should be read in conjunction with the accompanying notes to the unaudited pro forma combined condensed consolidated financial information. Certain reclassifications have been made to Covenant historical financial information to conform to C&N’s presentation of financial information.

The actual value of C&N’s common stock recorded as consideration in the merger is based on the average of the high and low trading price of C&N’s common stock on July 1, 2020, which is the merger completion date. For purposes of the pro forma financial information, the fair value of C&N’s common stock issued in connection with the merger was $20.32 per share.

The pro forma financial information includes estimated adjustments, including adjustments to record Covenant’s assets and liabilities at their respective fair values, and represents C&N’s pro forma estimates based on available fair value information as of the date of the merger agreement.

The pro forma adjustments are subject to change as additional information becomes available. The final allocation of the purchase price will be determined after a more thorough analysis has been completed to determine the fair value of Covenant’s assets and liabilities. Changes in the estimated fair values of the net assets as compared with the information presented in the unaudited pro forma combined condensed consolidated financial information may change the amount of the purchase price allocated to goodwill and other assets and liabilities and may impact C&N’s statements of income due to adjustments in amortization of the adjusted assets and liabilities. Also, any adjustments to Covenant’s stockholders’ equity will change the purchase price allocation, which may result in an adjustment to the amount of goodwill recorded. The final adjustments may vary materially from the adjustments reflected in the unaudited pro forma financial information herein.

C&N’s management estimates $8.0 million of pre-tax merger-related expenses will be incurred, including $287,000 in 2019, $1.1 million in the first six months of 2020 and the rest over the final two quarters of 2020. Estimated and historical merger-related expenses include severance and employee retention expenses, system conversion costs, professional fees and other expenses. Estimated merger-related expenses are excluded from the unaudited pro forma combined condensed consolidated statements of income presented herein except for historical expenses incurred in 2019 and the six-month period ended June 30, 2020. C&N’s management expects the merger will provide the combined company with financial benefits that include reduced operating expenses. The unaudited pro forma combined condensed consolidated financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the benefits of expected cost savings or opportunities to earn additional revenue, and accordingly does not attempt to predict or suggest future results. Also, the unaudited pro forma combined condensed consolidated statements of income presented herein do not necessarily reflect what the historical results of the combined company would have been had the companies been combined during these periods.

The unaudited pro forma combined condensed consolidated financial information has been derived from and should be read in conjunction with C&N’s historical consolidated financial information and related notes, which are contained in C&N’s 10-Q for the three-month and six-month periods ended June 30, 2020, Covenant’s audited financial statements for the year ended December 31, 2019 which were included in C&N’s Form S-4 filed on April 7, 2020, and Covenant’s unaudited financial statements for the six-month period ended June 30, 2020 which appear elsewhere in this document.

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Unaudited Pro Forma Condensed Consolidated Balance Sheets

As of June 30, 2020  

	C&N			Covenant			Pro Forma			Pro Forma			Note
(In Thousands)	Historical			Historical			Adjustments			Combined			Reference
ASSETS
Cash and due from banks:
Noninterest-bearing	$	24,075		$	81,412		$	(22,357	)	$	83,130			(1)
Interest-bearing and federal funds sold		53,567			16,380						69,947
Total cash and due from banks		77,642			97,792			(22,357	)		153,077
Held-to-maturity securities		0			1,000						1,000
Available-for-sale debt securities, at fair value		332,188			9,868						342,056
Marketable equity security		1,003			0						1,003
Loans held for sale		1,258			0						1,258
Loans receivable		1,241,413			472,012			(5,012	)		1,708,413
Allowance for loan losses		(11,026	)		(3,884	)		3,884			(11,026	)
Loans, net		1,230,387			468,128			(1,128	)		1,697,387			(2)
Bank-owned life insurance		18,843			11,170						30,013
Accrued interest receivable		6,326			1,922						8,248
Bank premises and equipment, net		18,332			3,341						21,673
Foreclosed assets held for sale		1,593			950						2,543
Core deposit intangibles, net		1,123			0			4,800			5,923			(3)
Goodwill		28,388			0			19,320			47,708			(4)
Other assets		28,383			13,972			(75	)		42,280			(5)
TOTAL ASSETS	$	1,745,466		$	608,143		$	560		$	2,354,169
LIABILITIES
Deposits:
Noninterest-bearing	$	353,707		$	107,473					$	461,180
Interest-bearing		1,027,471			372,373			1,950			1,401,794			(6)
Total deposits		1,381,178			479,846			1,950			1,862,974
Borrowed funds		87,308			62,700			1,275			151,283			(7)
Subordinated debt		6,500			10,000			91			16,591			(8)
Other liabilities		14,689			11,408						26,097
TOTAL LIABILITIES		1,489,675			563,954			3,316			2,056,945
TOTAL STOCKHOLDERS' EQUITY		255,791			44,189			(2,756	)		297,224			(9)
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,745,466		$	608,143		$	560		$	2,354,169

The accompanying notes are an integral part of these unaudited financial statements.

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Notes to Unaudited Pro Forma Condensed Consolidated Balance Sheets

(1) The pro forma reduction in noninterest-bearing cash and due from banks includes funds required for the cash portion of the merger consideration ($21.9 million) and estimated net additional Covenant expenses of $0.5 million including severance and similar expenses, costs associated with technology integration, professional fees based on successful completion of the merger and income tax benefits associated with stock options triggered by the merger.

(2) The pro forma estimate of the fair value of Covenant’s loans is based on a preliminary analysis by C&N’s management including a market rate adjustment, a credit fair value adjustment on loans not identified as specifically impaired and an adjustment on loans purchased with identified credit impairment (purchased credit impaired, or PCI). The market rate adjustment represents the impact of movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment on non-impaired loans represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit adjustment on PCI loans is non-accretable and represents the portion of the loan balances that have been identified as uncollectible for each loan. The following table presents the preliminary fair value adjustment to the amortized cost of loans acquired at July 1, 2020:

(In Thousands)
Gross amortized cost at acquisition	$	472,012
Market rate adjustment		6,688
Credit fair value adjustment on non-credit impaired loans (accretable)		(10,000	)
Credit fair value adjustment on PCI loans (non-accretable)		(1,700	)
Estimated fair value of acquired loans	$	467,000

C&N is in the process of updating this analysis of the fair value of loans as of the merger completion date, including updated assessments of credit quality and the impact of changes in interest rates.

(3) C&N’s estimate of the fair value of the core deposit intangible was determined based on financial, economic, market and other conditions as of the merger date.

(4) The pro forma amount of goodwill recorded from the merger is calculated as the fair value of consideration paid by C&N, less amounts allocated to fair value of assets acquired and liabilities assumed, summarized as follows (in thousands):

Estimated transaction value			$	63,287
Covenant's stockholders' equity at June 30, 2020	44,189
Purchase accounting adjustments:
Loans	(1,128	)
Core deposit intangibles	4,800
Deposits	(1,950	)
Borrowed funds	(1,275	)
Subordinated debt	(91	)
	356
Adjustment to net deferred tax asset	(75	)
	281
Covenant's estimated merger-related expenses, net	(503	)
Covenant's stockholders' equity, as adjusted				43,967
Estimated allocation to goodwill			$	19.320

(5) The pro forma adjustment to other assets represents an adjustment to the carrying value of the net deferred tax asset resulting from the fair value adjustments to the carrying values of loans, core deposit intangible assets, deposits, borrowed funds and subordinated debt, as described herein, assuming a tax rate of 21%.

(6) The pro forma adjustment to deposits reflects differences in interest rates, based on comparison of rates on Covenant’s time deposits to recent market rates as of the merger date for terms corresponding with the maturity dates of Covenant’s time deposits.

(7) The pro forma adjustment to borrowed funds reflects differences in interest rates, based on comparison of rates on Covenant’s advances from the Federal Home Loan Bank of Pittsburgh (FHLB) to current FHLB rates as of the merger date for terms corresponding with the maturity dates of Covenant’s advances.

(8) The pro forma adjustment to subordinated debt reflects differences in interest rates, based on comparison of rates on Covenant’s subordinated debt issuances with the rates on recent issuances of subordinated debt of comparable size by other similar-sized banking companies.

(9) The pro forma adjustment to stockholders’ equity includes the estimated value of equity-based merger consideration issued by C&N ($41.4 million), reduced by the elimination of Covenant’s stockholders’ equity ($44.2 million).

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Unaudited Pro Forma Condensed Consolidated Statements of Income

For the Year Ended December 31, 2019  

	C&N		Covenant		Pro Forma			Pro Forma		Note
(Dollars In Thousands, Except Per Share Data)	Historical		Historical		Adjustments			Combined		Reference
INTEREST INCOME
Interest and fees on loans	$	55,212	$	22,051		697		$	77,960		(1)
Interest and dividend income on securities		9,045		434					9,479
Other interest income		514		1,246					1,760
Total interest and dividend income		64,771		23,731		697			89,199
INTEREST EXPENSE
Interest on deposits		8,190		5,131		(1,801	)		11,520		(2)
Interest on borrowed funds and subordinated debt		2,093		2,095		(801	)		3,387		(3)
Total interest expense		10,283		7,226		(2,602	)		14,907
Net interest income		54,488		16,505		3,299			74,292
Provision for loan losses		849		460					1,309
Net interest income after provision for loan losses		53,639		16,045		3,299			72,983
NONINTEREST INCOME
Trust and financial management revenue		6,106		0					6,106
Brokerage revenue		1,266		0					1,266
Service charges on deposit accounts		5,358		344					5,702
Interchange revenue from debit card transactions		2,754		0					2,754
Net gains from sale of loans		924		0					924
Increase in cash surrender value of life insurance		402		262					664
Other noninterest income		2,474		43					2,517
Sub-total		19,284		649		0			19,933
Realized gains on available-for-sale debt securities, net		23		0					23
Total noninterest income		19,307		649		0			19,956
NONINTEREST EXPENSE
Compensation and employee benefits		26,481		7,761					34,242
Occupancy and equipment expense		3,918		909					4,827
Data processing expenses		3,403		653					4,056
Pennsylvania shares tax		1,380		397					1,777
Professional fees		1,069		437					1,506
Merger-related expenses:
Monument Bancorp, Inc. transaction		3,812							3,812
Covenant transaction		287		380					667
Other noninterest expense		9,187		1,734		960			11,881		(4)
Total noninterest expense		49,537		12,271		960			62,768
Income before income tax provision		23,409		4,423		2,339			30,171
Income tax provision		3,905		861		491			5,257		(5)
NET INCOME	$	19,504	$	3,562	$	1,848		$	24,914
EARNINGS PER COMMON SHARE - BASIC	$	1.46	$	0.81				$	1.62
EARNINGS PER COMMON SHARE - DILUTED	$	1.46	$	0.79				$	1.61
Weighted-average Shares Outstanding:
Basic		13,298,736		4,400,342		(2,352,523	)		15,346,555		(6)
Diluted		13,321,559		4,527,193		(2,479,374	)		15,369,378		(6)
Net Income Attributable to Common Shares	$	19,404	$	3,562	$	1,848		$	24,814

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Unaudited Pro Forma Condensed Consolidated Statements of Income

For the Six Months Ended June 30, 2020  

	C&N		Covenant		Pro Forma			Pro Forma		Note
(Dollars In Thousands, Except Per Share Data)	Historical		Historical		Adjustments			Combined		Reference
INTEREST INCOME
Interest and fees on loans	$	29,506	$	10,714		198		$	40,418		(1)
Interest and dividend income on securities		3,922		190					4,112
Other interest income		122		297					419
Total interest and dividend income		33,550		11,201		198			44,949
INTEREST EXPENSE
Interest on deposits		3,939		2,152		(102	)		5,989		(2)
Interest on borrowed funds and subordinated debt		1,083		921		(251	)		1,753		(3)
Total interest expense		5,022		3,073		(353	)		7,742
Net interest income		28,528		8,128		551			37,207
Provision for loan losses		1,352		100					1,452
Net interest income after provision for loan losses		27,176		8,028		551			35,755
NONINTEREST INCOME
Trust and financial management revenue		3,044		0					3,044
Brokerage revenue		676		0					676
Service charges on deposit accounts		2,081		150					2,231
Interchange revenue from debit card transactions		1,449		0					1,449
Net gains from sale of loans		1,879		0					1,879
Increase in cash surrender value of life insurance		202		126					328
Other noninterest income		1,478		37					1,515
Total noninterest income		10,809		313		0			11,122
NONINTEREST EXPENSE
Compensation and employee benefits		14,361		3,554					17,915
Occupancy and equipment expense		2,078		442					2,520
Data processing expenses		2,058		339					2,397
Pennsylvania shares tax		845		224					1,069
Professional fees		843		152					995
Merger-related expenses - Covenant transaction		1,124		141					1,265
Other noninterest expense		5,001		967		384			6,352		(4)
Total noninterest expense		26,310		5,819		384			32,513
Income before income tax provision		11,675		2,522		167			14,364
Income tax provision		2,071		576		35			2,682		(5)
NET INCOME	$	9,604	$	1,946	$	132		$	11,682
EARNINGS PER COMMON SHARE - BASIC	$	0.70	$	0.44				$	0.74
EARNINGS PER COMMON SHARE - DILUTED	$	0.70	$	0.42				$	0.74
Weighted-average Shares Outstanding:
Basic		13,697,617		4,400,434		(2,352,615	)		15,745,436		(6)
Diluted		13,705,733		4,609,150		(2,561,331	)		15,753,552		(6)
Net Income Attributable to Common Shares	$	9,550	$	1,946	$	132		$	11,628

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Notes to Unaudited Pro Forma Condensed Consolidated Statements of Income

(1) The pro forma adjustment to income on loans reflects C&N management’s preliminary estimate of the effect of fair value adjustments including a market rate adjustment and a credit fair value adjustment on non-credit impaired loans. The market rate adjustment represents the impact of movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The market rate and credit adjustments are amortized into interest income over the estimated lives of the loans. At July 1, 2020, C&N management estimated the average life of the acquired loans to be 2.5 years. For the year ended December 31, 2019, the pro forma impact of the market rate adjustment is a reduction in interest income of $2.7 million, while the pro forma impact of the credit adjustment is an increase in interest income of $3.4 million. For the six months ended June 30, 2020, the pro forma impact of the market rate adjustment is a reduction in interest income of $1.0 million, while the pro forma impact of the credit adjustment is an increase in interest income of $1.2 million.

(2) The pro forma adjustment to interest expense on deposits reflects differences in interest rates, based on comparison of rates on Covenant’s time deposits to recent market rates for maturity dates corresponding to the maturity dates of Covenant’s time deposits. This fair value adjustment is amortized into interest expense over the estimated remaining life of the applicable time deposits, which have a weighted-average remaining life of slightly less than 1 year.

(3) The pro forma adjustment to interest expense on borrowed funds and subordinated debt includes differences attributable to interest rates, based on comparison of rates on Covenant’s advances from the FHLB to current FHLB rates as of the merger date for terms corresponding to the maturity dates of Covenant’s advances. This fair value adjustment is amortized into interest expense over the remaining life of the applicable advances with a weighted-average remaining life of 1.4 years. This pro forma adjustment also includes differences attributable to interest rates, based on comparison of rates on Covenant’s subordinated debt issuances with the rates on recent issuances of subordinated debt of comparable size by other similar-sized banking companies, amortizable over the remaining period until the call dates with a weighted-average period until callable of 1.2 years.

(4)	The pro forma adjustment to noninterest expense reflects amortization of the core deposit intangible asset. Amortization of the core deposit intangible asset is based on the estimated useful life of each applicable category of core deposit – checking, savings and money market deposits – with amortization for each category based on accelerated methods consistent with account run-off assumptions.
(5)	The pro forma adjustments to the income tax provision reflect an assumed tax rate of 21%.
(6)	Represents additional shares issued by C&N, net of Covenant shares exchanged, in the merger.

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