8-K/A - CZNC - Equibles

UNITED

STATES

SECURITIES

AND EXCHANGE COMMISSION

Washington,

D.C. 20549

FORM

8-K/A

(AmendmentNo. 1)

CURRENT

REPORT

Pursuant

to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): July 1, 2020

CITIZENS & NORTHERN CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania	0-16084	23-2451943
(State or other jurisdiction <br><br>of incorporation)	(Commission <br><br>File Number)	(I.R.S. Employer <br><br>Identification No.)
90-92 Main Street, Wellsboro, PA	16901
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(Address of Principal Executive Office)	(Zip Code)

Registrant’s telephone number, including area code

(570) 724-3411

Securities

registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common<br> Stock Par Value $1.00	CZNC	NASDAQ Capital Market

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨	Written<br>communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨	Soliciting<br>material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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¨	Pre-commencement<br>communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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¨	Pre-commencement<br>communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4 (c))
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Indicate by checkmark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR 230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR 240.12b-2)

Emerging growth company ¨

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨

Explanatory Note

On July 1, 2020, Citizens & Northern Corporation (C&N), along with Covenant Financial, Inc. (Covenant) announced the completion of the merger of Covenant with and into C&N. Covenant was the parent company of Covenant Bank, a commercial bank with headquarters in Bucks County, Pennsylvania. Concurrent with the merger of the parent companies, Covenant Bank merged into C&N’s wholly-owned subsidiary, Citizens & Northern Bank. This Form 8-K/A hereby amends the initial Report to file the unaudited historical financial statements of Covenant as of June 30, 2020 and December 31, 2019 and for the six-month periods ended June 30, 2020 and 2019 and pro forma financial information required by Item 9.01 of Form 8-K.

Item 9.01	Financial Statements and Exhibits.
(a)	Financial Statements of Businesses Acquired
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Covenant’s unaudited financial statements as of June 30, 2020 and December 31, 2019 and for the six-month periods ended June 30, 2020 and 2019 are incorporated by reference to Exhibit 99.1 of this Form 8-K/A.

(b)	Pro Forma Financial Information

The pro forma financial information required by this Item 9.01(b) is incorporated herein by reference to Exhibit 99.2 of this Form 8-K/A.

(c)	Shell company transactions.

Not applicable.

(d)	Exhibits

99.1 Covenant’s unaudited financial statements for the six-month periods ended June 30, 2020 and 2019

99.2 Pro forma financial information

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
Date: September 10, 2020	By:	/s/<br> Mark A. Hughes
	Mark A. Hughes, Treasurer

EXHIBIT 99.1

COVENANT FINANCIAL, INC.

DOYLESTOWN, PENNSYLVANIA

JUNE 30, 2020

COVENANT FINANCIAL, INC.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

JUNE 30, 2020

		Page<br><br> Number
Financial Statements
	Consolidated Balance Sheet - June 30, 2020 (unaudited)<br>and December 31, 2019)	3
	Consolidated Statement of Operations (unaudited)	4
	Consolidated Statement of Comprehensive Income (unaudited)	5
	Consolidated Statement of Changes in Stockholders’ Equity (unaudited)	6
	Consolidated Statement of Cash Flows (unaudited)	7
Notes to the Unaudited Consolidated Financial Statements		8–28

COVENANT FINANCIAL, INC.

CONSOLIDATED BALANCE SHEET (UNAUDITED)

		December 31,
		2019
ASSETS
Cash and due from banks	92,338,829	$	20,395,142
Interest-bearing deposit	745,152		16,315,833
Federal funds sold	2,463,000		2,271,000
Cash and cash equivalents	95,546,981		38,981,975
Interest-bearing time deposits	2,245,000		11,236,000
Securities available for sale	9,868,232		21,838,833
Securities held to maturity, fair value 2020 1,012,389; 2019 1,036,308	1,000,000		1,000,000
Loans, net of allowance for loan losses 2020 3,884,224; 2019 3,963,365	468,127,884		417,183,398
Restricted investment in bank stock	2,998,500		2,871,800
Premises and equipment, net	3,341,130		3,460,637
Accrued interest receivable	1,921,802		1,487,414
Bank-owned life insurance	11,170,387		11,043,908
Other real estate owned	950,000		1,322,780
Right-of-use asset	1,726,151		1,804,674
Other assets	9,246,525		3,736,182
TOTAL ASSETS	608,142,592	$	515,967,601
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	107,472,998	$	77,018,905
Interest-bearing demand	372,373,218		316,425,928
Total deposits	479,846,216		393,444,833
Other borrowed funds	-		3,000,000
Long-term debt, Federal Home Loan Bank	62,700,000		61,000,000
Long-term debt, subordinated	10,000,000		10,000,000
Accrued interest payable	512,629		550,771
Lease liability	1,731,663		1,808,506
Other liabilities	9,162,602		4,085,337
TOTAL LIABILITIES	563,953,110		473,889,447
STOCKHOLDERS' EQUITY
Common stock, par value 1; 5,000,000 shares<br> authorized; 4,400,434 shares issued and outstanding 2020; 4,400,434 shares issued and outstanding 2019	4,400,434		4,400,434
Surplus	31,243,687		31,141,011
Retained earnings	8,405,280		6,459,327
Accumulated other comprehensive income	140,081		77,382
TOTAL STOCKHOLDERS' EQUITY	44,189,482		42,078,154
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	608,142,592	$	515,967,601

All values are in US Dollars.

See accompanying notes to the unaudited consolidated financial statements.

COVENANT FINANCIAL, INC.

CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

	Six Months Ended
	June 30,
	2020		2019
INTEREST INCOME
Loans receivable, including fees	$	10,713,565	$	10,647,537
Securities		189,875		220,397
Other		297,242		618,652
Total interest and dividend income		11,200,682		11,486,586
INTEREST EXPENSE
Deposits		2,151,988		2,525,086
Borrowings		921,312		1,013,130
Total interest expense		3,073,300		3,538,215
NET INTEREST INCOME		8,127,382		7,948,370
Provision for loan losses		100,000		800,000
NET INTEREST INCOME AFTER<br> PROVISION FOR LOAN LOSSES		8,027,382		7,148,370
NONINTEREST INCOME
Service fees		149,734		229,270
Income on bank-owned life insurance		126,479		130,768
Other		37,200		19,200
Total noninterest income		313,413		379,238
NONINTEREST EXPENSE
Salaries and employee benefits		3,554,373		3,568,419
Occupancy and equipment		442,495		429,748
Professional fees		293,102		227,899
Advertising and promotion		52,205		79,682
Data processing		339,445		325,182
FDIC assessment		76,785		98,000
Other real estate owned		87,086		(6,669	)
Other		973,673		923,084
Total noninterest expense		5,819,164		5,645,345
Income before income tax expense		2,521,631		1,882,263
Income tax expense		575,678		384,895
NET INCOME	$	1,945,953	$	1,497,368
EARNINGS PER SHARE:
Basic	$	0.44	$	0.34
Diluted	$	0.42	$	0.34
WEIGHTED-AVERAGE SHARES OUTSTANDING:
Basic		4,400,434		4,400,267
Diluted		4,609,150		4,425,995

See accompanying notes to the unaudited consolidated financial statements.

COVENANT FINANCIAL, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

	Six Months Ended
	June 30,
	2020			2019
NET INCOME	$	1,945,953		$	1,497,368
Other comprehensive income:
Unrealized holding gains on securities available for sale		79,366			162,849
Income tax effect		(16,667	)		(34,198	)
Total other comprehensive income		62,699			128,651
Total comprehensive income	$	2,008,652		$	1,626,019

See accompanying notes to the unaudited consolidated financial statements.

COVENANT FINANCIAL, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

							Accumulated
							Other			Total
	Common				Retained		Comprehensive			Stockholders'
	Stock		Surplus		Earnings		Income			Equity
Balance, December 31, 2018	$	4,400,267	$	30,900,766	$	2,897,304	$	(75,359	)	$	38,122,978
Net income		-		-		1,497,368		-			1,497,368
Other comprehensive income		-		-		-		128,651			128,651
Compensation expense recognized<br> on stock options		-		121,275		-		-			121,275
Balance, June 30, 2019	$	4,400,267	$	31,022,041	$	4,394,672	$	53,292		$	39,870,272
Balance, December 31, 2019	$	4,400,434	$	31,141,011	$	6,459,327	$	77,382		$	42,078,154
Net income		-		-		1,945,953		-			1,945,953
Other comprehensive income		-		-		-		62,699			62,699
Compensation expense recognized<br> on stock options		-		102,676		-		-			102,676
Balance, June 30, 2020	$	4,400,434	$	31,243,687	$	8,405,280	$	140,081		$	44,189,482

See accompanying notes to the unaudited consolidated financial statements.

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COVENANT FINANCIAL, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

	Six Months Ended			Six Months Ended
	June 30,			June 30,
	2020			2019
OPERATING ACTIVITIES:
Net income	$	1,945,953		$	1,497,368
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		100,000			800,000
Accretion of loan origination fees, net		(388,976	)		(159,092	)
Depreciation of bank premises and equipment		144,597			144,857
Amortization of right of use asset		78,523			56,914
Net amortization of securities, premiums, and discounts		52,390			61,212
Compensation expense on stock options		102,676			121,275
Deferred income taxes		157,732			200,000
Net realized losses on sales of other real estate owned		4,711			0
Write down of other real estate owned		100,500			35,873
Income on cash surrender value of bank owned life insurance		(126,479	)		(130,768	)
Net decrease in servicing asset		24,472			14,825
Increase in accrued interest receivable		(434,388	)		(96,142	)
Decrease in accrued interest payable		(38,142	)		(15,033	)
Other, net		(708,792	)		(489,973	)
Net cash provided by operating activities		1,014,777			2,041,316
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Purchases		0			(2,115,000	)
Maturities, calls, and principal repayments		11,997,577			11,319,863
Net maturities of interest-bearing time deposits		8,991,000			5,981,000
Net increase in loans		(50,655,510	)		(14,863,010	)
(Purchases) redemptions of restricted bank stock, net		(126,700	)		2,000
Proceeds from sale of other real estate owned		267,569			64,593
Purchases of bank premises and equipment		(25,090	)		(172,814	)
Net cash (used in) provided by investing activities		(29,551,154	)		216,632
FINANCING ACTIVITIES
Net increase in deposits		86,401,383			22,212,371
Decrease in other borrowed funds		(3,000,000	)		(3,000,000	)
Proceeds from long-term debt, Federal Home Loan Bank		9,700,000			5,000,000
Payments from long-term debt, Federal Home Loan Bank		(8,000,000	)		(2,500,000	)
Net cash provided by financing activities		85,101,383			21,712,371
Increase in cash and cash equivalents		56,565,006			23,970,319
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		38,981,975			26,170,211
CASH AND CASH EQUIVALENTS AT JUNE 30	$	95,546,981		$	50,140,530
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest paid	$	3,111,442		$	3,553,248
Income taxes paid	$	0		$	396,500
SUPPLEMENTARY SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES
Other real estate owned acquired in settlement of loans	$	0		$	1,295,203
Lease adoption:
Right-of-use asset and lease liability	$	0		$	1,875,152

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

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COVENANT FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS

1.	BASIS OF PRESENTATION
	The consolidated financial statements include<br>the accounts of Covenant Financial, Inc., a bank holding company, and its subsidiary, Covenant Bank (collectively the “Company”).<br>All intercompany accounts and transactions have been eliminated in consolidation.
	The consolidated financial information<br>included herein, except the consolidated balance sheet dated December 31, 2019, is unaudited. Such information reflects all adjustments<br>(consisting solely of normal recurring adjustments) that are, in the opinion of Covenant’s management, necessary for a fair<br>presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’<br>equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally<br>accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements.
	The Company evaluates subsequent events<br>through the date of filing with the Securities and Exchange Commission.
2.	EARNINGS PER SHARE
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Basic earnings per share are computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share consider common stock equivalents (when dilutive) outstanding during the period such as options outstanding. Earnings per share have been computed based on the following for the six-month periods ended June 30, 2020 and June 30, 2019.

	Six Months Ended
	June 30,
	2020		2019
Net income attributable to shareholders	$	1,945,953	$	1,497,368
Weighted-average basic number of shares		4,400,434		4,400,267
Dilutive effect of options		208,716		25,728
Weighted-average diluted number of shares		4,609,150		4,425,995
Earnings per share:
Basic	$	0.44	$	0.34
Diluted		0.42		0.34
3.	BUSINESS COMBINATIONS
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Merger with Citizens & NorthernCorporation

On December 18, 2019, Citizens & Northern Corporation (C&N) and Covenant Financial, Inc. (Covenant) announced the signing of an Agreement and Plan of Merger. Effective July 1, 2020, the merger was completed. Under the terms of the Agreement and Plan of Merger, Covenant Financial, Inc. merged with and into C&N, with C&N remaining as the surviving entity and Covenant Bank merged with and into Citizens & Northern Bank (C&N’s wholly-owned banking subsidiary) with Citizens & Northern Bank remaining as the surviving entity.

At the effective time of the merger, Covenant shareholders elected to receive, for each share of Covenant common stock, subject to the election and adjustment procedures described in the joint proxy statement/prospectus, either 0.6212 share of C&N common stock or $16.50 in cash: provided, however, that 75 percent of the total number of outstanding shares of Covenant common stick were converted into C&N common stock, and the remaining outstanding shares of Covenant common stock were converted into cash.

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The amortized cost, gross unrealized gains and losses, and approximate fair value of securities available for sale are summarized as follows:

	June 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
AVAILABLE FOR SALE
U.S. treasury bills	$	0	$	0	$	0		$	0
Mortgage-backed securities - U.S.<br> government-sponsored enterprises GSEs, residential		3,215,350		35,753		(11,411	)		3,239,692
Corporate debt securities		2,000,000		27,809		0			2,027,809
State and municipal securities		2,982,176		54,384		0			3,036,560
SBA asset-backed securities		1,493,388		70,783		0			1,564,171
Total	$	9,690,914	$	188,729	$	(11,411	)	$	9,868,232
HELD TO MATURITY
Corporate debt securities	$	1,000,000	$	12,389	$	0		$	1,012,389
	December 31, 2019
---	---	---	---	---	---	---	---	---	---
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
AVAILABLE FOR SALE
U.S. treasury bills	$	9,999,611	$	389	$	0		$	10,000,000
Mortgage-backed securities - U.S. government-sponsored<br> enterprises GSEs, residential		3,883,202		5,203		(31,919	)		3,856,486
Corporate debt securities		2,000,000		39,968		0			2,039,968
State and municipal securities		3,094,240		67,829		(80	)		3,161,989
SBA asset-backed securities		2,763,828		16,853		(291	)		2,780,390
Total	$	21,740,881	$	130,242	$	(32,290	)	$	21,838,833
HELD TO MATURITY
Corporate debt securities	$	1,000,000	$	36,308	$	0		$	1,036,308

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The amortized cost and fair value of securities at June 30, 2020, by contractual maturity, are shown below. Actual maturities may differ from contract maturities as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Securities Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
Investment Securities	Cost		Value		Cost		Value
Due within one year	$	0	$	0	$	0	$	0
Due after one year through five years		0		0		0		0
Due after five years through ten years		2,406,551		2,438,601		1,000,000		1,012,389
Due after ten years		2,575,625		2,625,768		0		0
		4,982,176		5,064,369		1,000,000		1,012,389
Mortgage-backed securities, GSEs, residential		3,215,350		3,239,692		0		0
SBA asset-backed securities		1,493,388		1,564,171		0		0
Total	$	9,690,914	$	9,868,232	$	1,000,000	$	1,012,389

The following tables show the Company's investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

At June 30, 2020 and December 31, 2019, the Company had 8 and 17 securities in an unrealized loss position, respectively. The decline in fair value is due primarily to interest rate fluctuations and not credit losses. The Company did not intend to sell these securities prior to recovery, and it was more likely than not that the Company would not be required to sell these securities prior to recovery and, therefore, no securities were deemed to be other-than-temporarily impaired.

	June 30, 2020
	Less than Twelve Months					Twelve Months or Greater				Total
			Gross					Gross				Gross
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Losses			Value		Losses		Value		Losses
Mortgage-backed securities	$	782,982	$	(11,411	)	$	0	$	0	$	782,982	$	(11,411	)
Corporate debt securities		0		0			0		0		0		0
State and municipal securities		0		0			0		0		0		0
Asset-backed securities		0		0			0		0		0		0
Total	$	782,982	$	(11,411	)	$	0	$	0	$	782,982	$	(11,411	)

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| --- | | | December 31, 2019 | | | | | | | | | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | | | Less than Twelve Months | | | | | Twelve Months or Greater | | | | | Total | | | | | | | | | Gross | | | | | Gross | | | | | Gross | | | | | Fair | | Unrealized | | | Fair | | Unrealized | | | Fair | | Unrealized | | | | | Value | | Losses | | | Value | | Losses | | | Value | | Losses | | | | Mortgage-backed securities | $ | 218,431 | $ | (1,923 | ) | $ | 3,052,902 | $ | (29,996 | ) | $ | 3,271,333 | $ | (31,919 | ) | | Corporate debt securities | | 0 | | 0 | | | 0 | | 0 | | | 0 | | 0 | | | State and municipal securities | | 107,176 | | (80 | ) | | 0 | | 0 | | | 107,176 | | (80 | ) | | Asset-backed securities | | 315,416 | | (291 | ) | | 0 | | 0 | | | 315,416 | | (291 | ) | | Total | $ | 641,023 | $ | (2,294 | ) | $ | 3,052,902 | $ | (29,996 | ) | $ | 3,693,925 | $ | (32,290 | ) |

There were no sales of investment securities in the six-month periods ended June 30, 2020 and 2019.

At June 30, 2020 and December 31, 2019, the Company had pledged securities with a carrying value of approximately $7,695,000 and $9,363,000, respectively, for purposes such as securing public deposits and borrowings.

5.	LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The composition of loans receivable is as follows:

	June 30, 2020			December 31, 2019
Commercial and industrial;
Small Business Administration Paycheck Protection Program (PPP)	$	64,680,209		$	0
Other Commercial and industrial		41,161,670			53,098,390
Total Commercial and industrial		105,841,879			53,098,390
Commercial real estate		361,367,816			361,199,156
Residential real estate		7,354,914			7,402,234
Consumer, other		236,572			225,778
		474,801,181			421,925,558
Unearned net loan origination fees and costs
Small Business Administration Paycheck Protection Program (PPP)		(2,063,076	)		0
Other		(725,997	)		(778,795	)
Total unearned net loan origination fees and costs		(2,789,073	)		(778,795	)
Allowance for loan losses		(3,884,224	)		(3,963,365	)
Net loans	$	468,127,884		$	417,183,398

The Company originates and sells loans guaranteed by the Small Business Administration (SBA). The Company retains the unguaranteed portion of the loan and the servicing on the loans sold and receives a servicing fee based upon the principal balance outstanding. Loans serviced totaled $15,511,398 and $20,969,610 at June 30, 2020 and December 31, 2019, respectively.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the SBA and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

The maximum term of PPP loans is five years, though most of the Company’s PPP loans have two-year terms, and the Company will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Company has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs, will be recognized in interest income as a yield adjustment over the term of the loans.

The Company began accepting and processing applications for loans under the PPP in April 2020. As of June 30, 2020, the recorded investment in PPP loans was $62,617,133, including contractual principal balances of $64,680,209, reduced by net deferred origination fees of $2,063,076. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $241,972 from fees received on PPP loans was included in interest and fees on loans in the consolidated statements of income in the six-month period ended June 30, 2020. No provision or allowance for loan losses was recognized on PPP loans in 2020 because the SBA guarantees the loans, subject to compliance with program requirements.

Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Company may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

To work with clients impacted by COVID-19, the Company has offered short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Company mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES ACT and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2020. Most of the modifications under the program became effective in March or April 2020 and provided a deferral of interest or principal and interest for six months. At June 30, 2020, there were 152 loans with a recorded investment of approximately $82.5 million for which modifications were outstanding under the program. At July 31, 2020, there were 149 loans with a recorded investment of approximately $82.1 million for which modifications were outstanding under the program.

The following tables summarize the activity in the allowance for loan losses by loan class and the ending balance of the allowance for loan losses:

	Commercial and Industrial			Commercial Real Estate			Residential Real Estate			Consumer other			Unallocated			Total
Allowance for loan losses:
Balance, December 31, 2019	$	1,529,266		$	2,012,508		$	8,107		$	323		$	413,161		$	3,963,365
Charge-offs		(179,141	)		0			0			0			0			(179,141	)
Recoveries		0			0			0			0			0			0
Provision (credit)		(95,139	)		272,261			6,595			(50	)		(83,667	)		100,000
Balance, June 30, 2020	$	1,254,986		$	2,284,769		$	14,702		$	273		$	329,494		$	3,884,224
Allowance for loan losses:
Balance, December 31, 2018	$	1,715,497		$	2,261,919		$	14,325		$	5,277		$	586,667		$	4,583,685
Charge-offs		(1,000,000	)		0			0			0			0			(1,000,000	)
Recoveries		71,107			94,584			0			0			0			165,692
Provision (credit)		1,348,013			(113,477	)		(611	)		(5,157	)		(428,768	)		800,000
Balance, June 30, 2019	$	2,134,617		$	2,243,026		$	13,714		$	120		$	157,899		$	4,549,376

The following table presents, by portfolio segment, the allowance for loan losses as of June 30, 2020 and December 31, 2019:

	June 30, 2020
	Commercial and Industrial		Commercial Real Estate		Residential<br><br> Real <br><br>Estate		Consumer <br><br>Other		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	118,788	$	0	$	0	$	0	$	0	$	118,788
Ending balance: collectively evaluated for impairment		1,136,198		2,284,769		14,702		273		329,493		3,765,435
Total	$	1,254,986	$	2,284,769	$	14,702	$	273	$	329,493	$	3,884,223
Loans:
Ending balance: individually evaluated for impairment	$	1,288,904	$	1,656,269	$	0	$	0	$	0	$	2,945,173
Ending balance: collectively evaluated for impairment		104,552,975		359,711,547		7,354,914		236,572		0		471,856,008
Total	$	105,841,879	$	361,367,816	$	7,354,914	$	236,572	$	0	$	474,801,181
	December 31, 2019
---	---	---	---	---	---	---	---	---	---	---	---	---
	Commercial		Commercial		Residential		Consumer
	and Industrial		Real Estate		Real Estate		Other		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	125,674	$	0	$	0	$	0	$	0	$	125,674
Ending balance: collectively evaluated for impairment		1,403,592		2,012,508		8,107		323		413,161		3,837,691
Total	$	1,529,266	$	2,012,508	$	8,107	$	323	$	413,161	$	3,963,365
Loans:
Ending balance: individually evaluated for impairment	$	1,415,916	$	1,458,311	$	0	$	0	$	0	$	2,874,227
Ending balance: collectively evaluated for impairment		51,682,474		359,740,845		7,402,234		225,778		0		419,051,331
Total	$	53,098,390	$	361,199,156	$	7,402,234	$	225,778	$	0	$	421,925,558

The following tables summarize information in regard to impaired loans by loan portfolio class as of June 30, 22020 and December 31, 2019:

	June 30, 2020
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	1,088,115	$	4,100,985	$	0	$	1,271,552	$	4,161
Commercial real estate		1,656,269		2,680,240		0		2,177,752		68,757
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Subtotal		2,744,384		6,781,225		0		3,449,304		72,918
With an allowance recorded:
Commercial and industrial		200,788		200,788		118,788		204,033		2,013
Commercial real estate		0		0		0		0		0
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Subtotal		200,788		200,788		118,788		204,033		2,013
Total:
Commercial and industrial		1,288,903		4,301,773		118,788		1,475,585		6,174
Commercial real estate		1,656,269		2,680,240		0		2,177,752		68,757
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Total	$	2,945,172	$	6,982,013	$	118,788	$	3,653,337	$	74,931
	December 31, 2019
---	---	---	---	---	---	---	---	---	---	---
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	1,192,669	$	4,141,598	$	0	$	2,513,496	$	37,399
Commercial real estate		1,458,311		2,512,353		0		2,745,108		63,218
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Subtotal		2,650,980		6,653,951		0		5,258,604		100,617
With an allowance recorded:
Commercial and industrial		223,247		223,247		125,674		233,207		14,117
Commercial real estate		0		0		0		0		0
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Subtotal		223,247		223,247		125,674		233,207		14,117
Total:
Commercial and industrial		1,415,916		4,364,845		125,674		2,746,703		51,516
Commercial real estate		1,458,311		2,512,353		0		2,745,108		63,218
Residential real estate		0		0		0		0		0
Consumer, other		0		0		0		0		0
Total	$	2,874,227	$	6,877,198	$	125,674	$	5,491,811	$	114,734

The following table presents the classes of the commercial loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company's internal risk rating system as of June 30, 2020 and December 31, 2019:

	June 30, 2020						December 31, 2019
	Commercial		Commercial				Commercial		Commercial
	and Industrial		Real Estate		Total		and Industrial		Real Estate		Total
Pass	$	104,726,386	$	354,000,295	$	458,726,681	$	48,416,925	$	355,163,799	$	403,580,724
Special Mention		0		821,275		821,275		0		50,061		50,061
Substandard		222,078		6,483,746		6,705,824		3,694,448		5,922,796		9,617,244
Doubtful		893,415		62,500		955,915		987,017		62,500		1,049,517
	$	105,841,879	$	361,367,816	$	467,209,695	$	53,098,390	$	361,199,156	$	414,297,546

The following table presents the classes of the consumer portfolio summarized by performing and nonperforming as of June 30, 2020 and December 31, 2019:

	June 30, 2020						December 31, 2019
	Residential		Consumer,				Residential		Consumer,
	Real Estate		Other		Total		Real Estate		Other		Total
Performing	$	7,354,914	$	236,572	$	7,591,486	$	7,402,234	$	225,778	$	7,628,012
Nonperforming		0		0		0		0		0		0
	$	7,354,914	$	236,572	$	7,591,486	$	7,402,234	$	225,778	$	7,628,012

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2020 and December 31, 2019:

	June 30, 2020
	30-59<br><br> Days<br><br> Past <br><br>Due		60-89 <br><br>Days<br><br> Past <br><br>Due		90 Days<br><br> or <br><br>Greater<br><br> Past Due		Total <br><br> Past Due		Nonaccrual		Current		Total Loans<br><br> Receivable		90 Days or<br><br> Greater<br><br> Past Due<br><br> and Still<br><br> Accruing
Commercial and industrial	$	0	$	0	$	0	$	0	$	1,288,904	$	104,552,975	$	105,841,879	$	0
Commercial real estate		0		0		491,778		491,778		1,656,269		359,219,769		361,367,816		491,778
Residential real estate		0		0		0		0		0		7,354,914		7,354,914		0
Consumer, other		0		0		0		0		0		236,572		236,572		0
Total	$	0	$	0	$	491,778	$	491,778	$	2,945,173	$	471,364,230	$	474,801,181	$	491,778
	December 31, 2019
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	30-59 <br><br>Days <br><br>Past <br><br>Due		60-89 <br><br>Days <br><br>Past <br><br>Due		90 Days<br><br> or <br><br>Greater <br><br>Past Due		Total <br><br>Past Due		Nonaccrual		Current		Total Loans<br><br> Receivable		90 Days or Greater<br><br> Past Due<br><br> and Still<br><br> Accruing
Commercial and industrial	$	445,306	$	0	$	0	$	445,306	$	1,192,670	$	51,460,414	$	53,098,390	$	0
Commercial real estate		132,231		0		0		132,231		1,408,250		359,658,675		361,199,156		0
Residential real estate		0		0		0		0		0		7,402,234		7,402,234		0
Consumer, other		0		0		0		0		0		225,778		225,778		0
Total	$	577,537	$	0	$	0	$	577,537	$	2,600,920	$	418,747,101	$	421,925,558	$	0

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition that it would not otherwise consider resulting in a modified loan, which is then identified as a troubled debt restructuring (TDR). The Company may modify loans through rate reductions, extensions of maturity, interest-only payments, or payment modifications to better match the timing of cash flows due under the modified terms with the cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

The Company made one modification in the six months ended June 30, 2020, that is classified as a TDR. The principal balance of that loan at June 30, 2020, is $200,788. There was no reduction in principal in this loan from the modification, which involved a change in rates and terms. The Company recorded a specific allowance of $118,788 on this loan at June 30, 2020 and has committed to lend no additional amounts to this borrower. In the six months ended June 30, 2019, the Company made a modification to one loan with a principal balance of $52,500 that was classified as a TDR. No allowance has been recorded on this loan.

The following tables reflect information regarding the Company’s troubled debt restructurings as of June 30, 2020 and December 31, 2019.

	June 30, 2020
	Number <br><br>of Loans		Pre-<br><br>Modification<br><br> Outstanding<br><br> Recorded<br><br> Investment		Post-<br><br>Modification<br><br> Outstanding<br><br> Recorded<br><br> Investment
Commercial and industrial		5	$	532,188	$	532,188
Commercial real estate		0	$	0	$	0
	December 31, 2019
---	---	---	---	---	---	---
	Number <br><br>of Loans		Pre-<br><br>Modification<br><br> Outstanding<br><br> Recorded<br><br> Investment		Post-<br><br>Modification<br><br> Outstanding<br><br> Recorded<br><br> Investment
Commercial and industrial		5	$	469,718	$	469,718
Commercial real estate		1	$	52,000	$	52,000
6.	DEPOSITS
---	---

The components of deposits at June 30, 2020 and December 31, 2019, are as follows:

		December 31, 2019
Demand, noninterest-bearing	107,472,998	$	77,018,905
Demand, interest-bearing	88,640,973		56,404,178
Money market accounts	153,699,721		132,609,554
Savings	9,583,392		5,699,681
Time, 100,000 and over	88,537,401		90,300,925
Time, other	31,911,731		31,411,590
	479,846,216	$	393,444,833

All values are in US Dollars.

At June 30, 2020, the scheduled maturities of time deposits are as follows:

Year Ending	Amount
Within one year	$	87,468,851
Beyond one year but within two years		24,777,739
Beyond two years but within three years		7,876,273
Beyond three years but within four years		250,045
Beyond four years but within five years		76,224
	$	120,449,132

At June 30, 2020 and December 31, 2019, the total of individual time deposits with balances in excess of $250,000 (FDIC insurance limit) was approximately $53,780,000 and $49,890,000, respectively.

6.	OTHER BORROWED FUNDS AND LONG-TERM DEBT

The Company had a $3,000,000 line-of-credit with Atlantic Community Bankers Bank (ACBB). There was no outstanding balance on this line-of-credit at June 30, 2020. At December 31, 2019, other borrowed funds consisted of line-of-credit borrowings with ACBB in the amount of $3,000,000 (with an interest rate of 5.125 percent). The line-of-credit has been paid off and was secured by the common stock of the Bank.

Long-term debt at June 30, 2020 and December 31, 2019, consisted of a subordinated note payable with South State Corporation in the amount of $7,000,000 (with an interest rate of 6.25 percent, interest only until principal due date of June 2026, redeemable at par beginning in June 2021), a subordinated note payable with ESSA Bank & Trust in the amount of $1,000,000 (with an interest rate of 6.25 percent, interest only until principal due date of June 2026, redeemable at par beginning in June 2021), a subordinated note payable with FNCB Bank in the amount of $2,000,000 (with an interest rate of 6.50 percent, interest only until principal due date of July 2027, redeemable at par beginning in July 2022), and advances from the Federal Home Loan Bank of Pittsburgh (FHLB) under various notes totaling $62,700,000 and $61,000,000 with an average rate of 1.85 percent and 2.05 percent, respectively.

The Company has a maximum borrowing capacity with the FHLB of $238,904,700 of which advances of $62,700,000 and a letter-of-credit of $26,485,000 were outstanding at June 30, 2020. Advances from the FHLB are secured by qualifying assets of the Bank.

The following table sets forth information concerning FHLB advances:

				Weighted-			Stated Interest
	Maturity Range			Average			Rate Range
Description	From	To		Interest Rate			From			To			June 30, 2020		December 31, 2019
Fixed rate	12/14/20		08/29/24		2.11	%		1.51	%		2.72	%	$	40,000,000	$	45,000,000
Mid Term	10/09/20		06/21/21		1.39	%		0.36	%		2.48	%		22,700,000		16,000,000
Total													$	62,700,000	$	61,000,000

Maturities of borrowings at June 30, 2020, are summarized as follows:

			Amount
Due within one year	1.52	%	$	33,700,000
Due within two years	2.26	%		15,000,000
Due within three years	2.57	%		9,000,000
Due within four years	1.51	%		5,000,000
Total	1.85	%	$	62,700,000

8.	STOCK-BASED COMPENSATION

In 2017, the Company replaced its 2007 stock compensation plan and adopted the Covenant Financial, Inc. Equity Compensation Plan (2017 Plan). The Company recorded compensation expense of $102,676 and $121,275 in the six-month periods ended June 30, 2020 and 2019, respectively.

All options outstanding at June 30, 2020 were redeemed at $16.50 per share pursuant to merger with Citizens & Northern Corporation (C&N) on July 1, 2020.

A summary of activity related to the Company’s outstanding stock options for the six-month periods ended June 30, 2020 and 2019, is presented below:

	Number <br><br>of <br><br>Options		Weighted-Average<br><br> Exercise Price		Aggregate<br><br> Intrinsic Value
Outstanding, January 1, 2020		431,015	$	8.51
Granted		-		-
Exercised		-		-
Forfeited		-		-
Outstanding, June 30, 2020		431,015	$	8.51	$	3,443,810
Exercisable at June 30, 2020		431,015	$	8.51	$	3,443,810
	Number <br><br>of <br><br>Options			Weighted-Average<br><br> Exercise Price
---	---	---	---	---
Outstanding, January 1, 2019	346,034		$	8.40
Granted	92,648			8.94
Exercised	-			-
Forfeited	(7,500	)		-
Outstanding, June 30, 2019	431,182		$	8.51
Exercisable at June 30, 2019	272,783		$	8.44

9.	DERIVATIVE FINANCIAL INSTRUMENTS

The Company is a party to derivative financial instruments in the normal course of business to meet the needs of commercial banking customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, contain master netting and collateral provisions protecting the party at risk. The Company believes that the credit risk inherent in all of the derivative contracts is minimal based on the credit standards and the netting and collateral provisions of the interest rate swap agreements.

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously economically hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service the Company provides to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings. As of June 30, 2020, and December 31, 2019, the Company has 41 and 32 interest rate swaps with an aggregate notional amount of $137,176,000 and $117,048,000, respectively, related to this program. The Company recorded fee income of $260,000 and $353,000 and reduced interest income by $291,000 and $3,000 for the six-month periods ended June 30, 2020 and December 31, 2019, respectively.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Balance Sheet as of June 30, 2020 and December 31, 2019, respectively:

	June 30, 2020
		Asset Derivatives				Liability Derivatives
		Notional		Fair		Notional		Fair
		Amount		Value ^(1)^		Amount		Value ^(2)^
Interest rate
swap agreements	$	68,587,756	$	7,932,267	$	68,587,756	$	7,932,267
	$	68,587,756	$	7,932,267	$	68,587,756	$	7,932,267
		December 31, 2019
---	---	---	---	---	---	---	---	---
		Asset Derivatives				Liability Derivatives
		Notional		Fair		Notional		Fair
		Amount		Value ^(1)^		Amount		Value ^(2)^
Interest rate
swap agreements	$	58,524,041	$	2,315,380	$	58,524,041	$	2,315,380
	$	58,524,041	$	2,315,380	$	58,524,041	$	2,315,380
^(1)^	Included in other assets in the Consolidated Balance Sheet.
---	---
^(2)^	Included in other liabilities in the Consolidated Balance Sheet.
---	---

There are no gross amounts of interest rate swaps assets and liabilities not offset in the Consolidated Balance Sheet.

The Company has agreements with certain of its derivative counterparties that provide that if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain of its derivative counterparties that provide that if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations under the agreements. The Company maintains restricted cash collateral with a third-party trustee of $10,580,000 at June 30, 2020 and $5,490,000 at December 31, 2019, under the provisions of the agreement.

10.	REGULATORY MATTERS

The Company and its Bank subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. The final rules implementing BASEL Committee on Banking Supervisor’s Capital Guidance for U.S. banks (BASEL III rules) became effective for the Company on January 1, 2015, with full compliance with all of the requirements being phased in over a multi-year schedule and fully phased in by January 1, 2019. Under the BASEL III rules, the Company and Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available-for-sale securities is not included in computing regulatory capital. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its Bank subsidiary must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth on the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, Tier 1 capital to average assets, and common equity Tier 1 capital to risk-weighted assets. Management believes, as of June 30, 2020 and December 31, 2019, that the Company and its Bank subsidiary meet all capital adequacy requirements to which they are subject.

As of June 30, 2020, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, common equity risk based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since that notification that management believes have changed the Bank’s category. The Company’s ratios do not differ significantly from the Bank’s ratios presented below. The Bank’s actual capital amounts and ratios are as follows at June 30, 2020 and December 31, 2019:

	June 30, 2020					December 31, 2019
	Amount		Ratio			Amount		Ratio
Common equity Tier 1 capital
(to risk-weighted assets)
Actual	$	53,585,000		12.36	%	$	53,099,000		12.50	%
For capital adequacy purposes		19,510,000		4.50			19,122,000		4.50
To be well capitalized		28,200,000		6.50			27,620,000		6.50
Total capital
(to risk-weighted assets)
Actual	$	57,590,000		13.28	%	$	57,128,000		13.44	%
For capital adequacy purposes		34,685,000		8.00			33,994,000		8.00
To be well capitalized		43,400,000		10.00			42,493,000		10.00
Tier 1 capital
(to risk-weighted assets)
Actual	$	53,585,000		12.36	%	$	53,099,000		12.50	%
For capital adequacy purposes		26,014,000		6.00			25,496,000		6.00
To be well capitalized		34,700,000		8.00			33,994,000		8.00
Tier 1 capital
(to average assets)
Actual	$	53,585,000		9.26	%	$	53,099,000		10.33	%
For capital adequacy purposes		23,155,000		4.00			20,569,000		4.00
To be well capitalized		28,950,000		5.00			25,712,000		5.00
11.	FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS
---	---

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices in active markets. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instruments.

Fair value accounting guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level I –	Valuation is based on quoted prices in active markets for identical assets or<br> liabilities that the reporting entity has the ability to access at the measurement date. Level I assets and liabilities<br> generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from<br> readily available pricing sources for market transactions involving identical assets or liabilities.
Level II –	Valuation is based on inputs other than quoted prices included within Level I that are observable for the asset or liability,<br>either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities, quoted prices in<br>markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially<br>the full term of the asset or liability.
---	---
Level III –	Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair<br>value of the assets or liabilities. Level III assets and liabilities include financial instruments whose value is determined using<br>pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair<br>value requires significant management judgment or estimation.
---	---

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2020 and December 31, 2019, are as follows:

	June 30, 2020
	Level I		Level II		Level III		Total
Securities available for sale:
U.S. treasury bills	$	0	$	0	$	0	$	0
Mortgage-backed securities - residential		0		3,239,692		0		3,239,692
Corporate debt securities		0		2,027,809		0		2,027,809
State and municipal securities		0		3,036,560		0		3,036,560
Asset-backed securities - SBA		0		1,564,171		0		1,564,171
	$	0	$	9,868,232	$	0	$	9,868,232
Servicing asset	$	0	$	0	$	104,271	$	104,271
Interest rate swap agreements, assets	$	0	$	7,932,267	$	0	$	7,932,267
Interest rate swap agreements, liabilities	$	0	$	7,932,267	$	0	$	7,932,267
	December 31, 2019
---	---	---	---	---	---	---	---	---
	Level I		Level II		Level III		Total
Securities available for sale:
U.S. treasury bills	$	10,000,000	$	0	$	0	$	10,000,000
Mortgage-backed securities - residential		0		3,856,486		0		3,856,486
Corporate debt securities		0		2,039,968		0		2,039,968
State and municipal securities		0		3,161,989		0		3,161,989
Asset-backed securities - SBA		0		2,780,390		0		2,780,390
	$	10,000,000	$	11,838,833	$	0	$	21,838,833
Servicing asset	$	0	$	0	$	128,743	$	128,743
Interest rate swap agreements, assets	$	0	$	2,315,380	$	0	$	2,315,380
Interest rate swap agreements, liabilities	$	0	$	2,315,380	$	0	$	2,315,380

The following table presents a reconciliation of the servicing assets measured at fair value on a recurring basis using significant unobservable inputs (Level III) for the six-month periods ended June 30, 2020 and 2019:

	June 30, 2020			June 30, 2019
Beginning balance	$	128,743		$	161,423
Change in fair value		(24,472	)		(14,825	)
Ending balance	$	104,271		$	146,598

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2020 and December 31, 2019, are as follows:

	June 30, 2020
	Level I		Level II		Level III		Total
Impaired loans, net	$	-	$	-	$	82,000	$	82,000
Other real estate owned	$	-	$	-	$	950,000	$	950,000
	December 31, 2019
---	---	---	---	---	---	---	---	---
	Level I		Level II		Level III		Total
Impaired loans, net	$	-	$	-	$	97,573	$	97,573
Other real estate owned	$	-	$	-	$	1,322,780	$	1,322,780

Impaired loans are those in which the Company has measured impairment generally based on the fair value of the loan’s collateral less estimated cost of disposal. Fair value is generally determined based upon independent third-party appraisals of the properties or discounted cash flows based upon the expected proceeds. These assets are included as Level III fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value at June 30, 2020, consists of loan balances of $200,788 less a valuation allowance of $118,788. The fair value at December 31, 2019, consists of loan balances of $223,247 less a valuation allowance of $125,674.

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level III fair value based upon the lowest level of input that is significant to the fair value measurement.

Quantitative information about Level III fair value measurements at June 30, 2020 and December 31, 2019, is included in the table below:

	June 30, 2020
	Quantitative Information About Level III Fair Value Measurements
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
Servicing asset	$	104,271	Discounted cash	Discount rate	8.24% to 21.10%
			flow
				Prepayment rate	12.63% to 31.63%
				Life	0 to 5 years
Other real estate owned	$	950,000	Signed sales	Liquidation expenses	8.00%
			agreement or
			appraisal of
			collateral
	December 31, 2019
---	---	---	---	---	---
	Quantitative Information About Level III Fair Value Measurements
	Fair Value		Valuation	Unobservable	Range
	Estimate		Techniques	Input	(Weighted Average)
Servicing asset	$	128,743	Discounted cash	Discount rate	11.15% to 21.62%
			flow
				Prepayment rate	9.96% to 26.65%
				Life	0 to 5 years
Other real estate owned	$	1,322,780	Signed sales	Liquidation expenses	8.00%
			agreement or
			appraisal of
			collateral

The estimated fair values of the Company’s financial instruments at June 30, 2020 and December 31, 2019, were as follows.

	June 30, 2020
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
Financial assets:
Cash and cash equivalents	$	95,546,981	$	95,546,981	$	0	$	0	$	95,546,981
Interest-bearing time deposits		2,245,000		0		2,245,000		0		2,245,000
Securities available for sale		9,868,232		0		9,868,232		0		9,868,232
Securities held to maturity		1,000,000				1,012,389				1,012,389
Loans, net		468,127,884		0		0		467,000,000		467,000,000
Investment in restricted stock		2,998,500		0		2,998,500		0		2,998,500
Servicing asset		104,271		0		0		104,271		104,271
Interest rate swap agreements		7,932,267		0		7,932,267		0		7,932,267
Accrued interest receivable		1,921,802		0		1,921,802		0		1,921,802
Financial liabilities:
Deposits	$	479,846,216	$	359,397,083	$	122,399,000	$	0	$	481,796,083
Long-term debt		62,700,000		0		63,975,000		0		63,975,000
Interest rate swap agreements		7,932,267		0		7,932,267		0		7,932,267
Accrued interest payable		512,629		0		512,629		0		512,629
	December 31, 2019
---	---	---	---	---	---	---	---	---	---	---
	Carrying								Total
	Value		Level I		Level II		Level III		Fair Value
Financial assets:
Cash and cash equivalents	$	38,981,975	$	38,981,975	$	0	$	0	$	38,981,975
Interest-bearing time deposits		11,236,000		0		11,236,000		0		11,236,000
Securities available for sale		21,838,833		10,000,000		11,838,833		0		21,838,833
Securities held to maturity		1,000,000				1,036,308				1,036,308
Loans, net		417,183,398		0		0		412,269,000		412,269,000
Investment in restricted stock		2,871,800		0		2,871,800		0		2,871,800
Servicing asset		128,743		0		0		128,743		128,743
Interest rate swap agreements		2,315,380		0		2,315,380		0		2,315,380
Accrued interest receivable		1,487,414		0		1,487,414		0		1,487,414
Financial liabilities:
Deposits	$	393,444,833	$	271,732,318	$	122,248,000	$	0	$	393,980,318
Other borrowed funds		3,000,000		0		3,000,000		0		3,000,000
Long-term debt		61,000,000		0		61,698,000		0		61,698,000
Interest rate swap agreements		2,315,380		0		2,315,380		0		2,315,380
Accrued interest payable		550,771		0		550,771		0		550,771

EXHIBIT 99.2

UNAUDITED PRO FORMACOMBINED 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.

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.

Notes to Unaudited Pro FormaCondensed 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).

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.

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.

Notes to Unaudited Pro FormaCondensed 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<br>value adjustments including a market rate adjustment and a credit fair value adjustment on non-credit impaired loans. The market<br>rate adjustment represents the impact of movement in interest rates, irrespective of credit adjustments, compared to the contractual<br>rates of the acquired loans. The credit adjustment represents changes in credit quality of the underlying borrowers from loan inception<br>to the acquisition date. The market rate and credit adjustments are amortized into interest income over the estimated lives of<br>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<br>December 31, 2019, the pro forma impact of the market rate adjustment is a reduction in interest income of $2.7 million, while<br>the pro forma impact of the credit adjustment is an increase in interest income of $3.4 million. For the six months ended June<br>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<br>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<br>on Covenant’s time deposits to recent market rates for maturity dates corresponding to the maturity dates of Covenant’s<br>time deposits. This fair value adjustment is amortized into interest expense over the estimated remaining life of the applicable<br>time deposits, which have a weighted-average remaining life of slightly less than 1 year.
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(3)	The pro forma adjustment to interest expense on borrowed funds and subordinated debt includes differences attributable to interest<br>rates, based on comparison of rates on Covenant’s advances from the FHLB to current FHLB rates as of the merger date for<br>terms corresponding to the maturity dates of Covenant’s advances. This fair value adjustment is amortized into interest expense<br>over the remaining life of the applicable advances with a weighted-average remaining life of 1.4 years. This pro forma adjustment<br>also includes differences attributable to interest rates, based on comparison of rates on Covenant’s subordinated debt issuances<br>with the rates on recent issuances of subordinated debt of comparable size by other similar-sized banking companies, amortizable<br>over the remaining period until the call dates with a weighted-average period until callable of 1.2 years.
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(4)	The pro forma adjustment to noninterest expense reflects amortization of the core deposit intangible asset. Amortization of<br>the core deposit intangible asset is based on the estimated useful life of each applicable category of core deposit – checking,<br>savings and money market deposits – with amortization for each category based on accelerated methods consistent with account<br>run-off assumptions.
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(5)	The pro forma adjustments to the income<br>tax provision reflect an assumed tax rate of 21%.
(6)	Represents additional shares issued<br>by C&N, net of Covenant shares exchanged, in the merger.