Item
8.01. Other Events.
Unless this Current Report on Form 8-K
indicates otherwise or the context otherwise requires, references to “we,” “us,”
“our,” “Citizens & Northern Corporation,” “Citizens & Northern” or the
“Company” refer to Citizens & Northern
Corporation and its direct and indirect owned
subsidiaries.
Commencement
of Public Offering of Common Stock and Reduction in Dividend
On
November 12, 2009, Citizens & Northern Corporation announced the
commencement of an underwritten public offering of approximately $20 million of
its shares of common stock (the “Offering”). The Company intends to grant
underwriters a 30-day option to purchase up to an additional 15% of the shares
sold to cover over-allotments, if any. The Company issued a press
release announcing the Offering, a copy of which is attached hereto as Exhibit
99.1 and incorporated herein by reference. A copy of
the slide presentation to be used by the Company in connection with the Offering
is attached hereto as Exhibit 99.2 and incorporated herein by
reference.
Additionally,
after considering the Company’s recently announced results of operations and
capital needs, and in light of guidance issued by the Federal Reserve Board
concerning the payment of dividends, on November 10, 2009 the Company’s Board of
Directors approved a reduction in the Company’s quarterly dividend of at least
fifty percent (50%) (from $0.24 per share to no more than $0.12 per share)
commencing in the fourth quarter of 2009, subject to regulatory approval. No
determination has been made by our Board of Directors regarding whether or what
amount of dividends will be paid in future quarters. Additionally,
there can be no assurance that regulatory approval will be granted by the
Federal Reserve Board to pay the reduced dividend.
Risk
Factors
In the
preliminary prospectus supplement filed with the Commission on November 12, 2009
in connection with the Offering, the Corporation revised certain risk factors it
previously disclosed in its Form 10-K for the year ended December 31, 2009 and
its Form 10-Q for the quarter ended September 30, 2009, and added certain new
risk factors. The risk factors included in the preliminary prospectus
supplement are substantially as follows.
Risks
Related to Our Business and Industry
We
may be required to make further increases in our provisions for loan losses and
to charge off additional loans in the future, which could materially adversely
affect us.
There is
no precise method of predicting loan losses. We can give no assurance that our
allowance for loan losses is or will be sufficient to absorb actual loan losses.
We maintain an allowance for loan losses, which is a reserve established through
a provision for loan losses charged to expense, that represents management’s
best estimate of probable incurred losses within the existing portfolio of
loans. The level of the allowance reflects management’s evaluation of, among
other factors, the status of specific impaired loans, trends in historical loss
experience, delinquency trends, credit concentrations and economic conditions
within our market area. The determination of the appropriate level of the
allowance for loan losses inherently involves a high degree of subjectivity and
judgment and requires us to make significant estimates of current credit risks
and future trends, all of which may undergo material changes. Changes in
economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans and other factors, both within
and outside of our control, may require us to increase our allowance for loan
losses. Increases in nonperforming loans have a significant impact on our
allowance for loan losses. We believe that in 2008 and 2009, our market area has
not experienced as much deterioration in the real estate markets as has occurred
in much of the nation. However, if adverse trends in real estate markets spread
to our area on a larger scale, we would expect to experience increased
delinquencies and credit losses, particularly with respect to residential,
construction and commercial mortgage loans. Moreover, we expect that the current
recession may negatively impact economic conditions in our market areas and that
we could experience significantly higher delinquencies and credit
losses.
In
addition, bank regulatory agencies periodically review our allowance for loan
losses and may require us to increase the provision for loan losses or to
recognize further loan charge-offs, based on judgments that differ from those of
management. If loan charge-offs in future periods exceed our allowance for loan
losses, we will need to record additional provisions to increase our allowance
for loan losses. Furthermore, growth in our loan portfolio would generally lead
to an increase in the provision for loan losses. Generally, increases in our
allowance for loan losses will result in a decrease in net income and
stockholders’ equity, and may have a material adverse effect on our financial
condition, results of operations and cash flows.
Our
results of operations and financial condition may be materially and adversely
affected by other-than-temporary impairment charges relating to our investment
portfolio.
For the
nine months ended September 30, 2009, we recorded impairment charges totaling
approximately $84.4 million, including an other-than-temporary impairment charge
of approximately $81.6 million and the impact of changes in accounting
principles related to recognition of credit losses on debt securities totaling
approximately $2.8 million. Although we have written down a substantial portion
of the securities in our investment portfolio as of September 30, 2009, we may
be required to record future impairment charges on our investment securities if
they suffer declines in value that we determine are other-than-temporary.
Numerous factors, including the lack of liquidity for re-sales of certain
investment securities, the absence of reliable pricing information for
investment securities, adverse changes in the business climate, adverse
regulatory actions or unanticipated changes in the competitive environment,
could have a negative effect on our investment portfolio in future periods. If
an impairment charge is significant enough, it could affect the ability of
Citizens & Northern Bank (“C&N Bank”) or Citizens & Northern
Investment Corporation to pay dividends to us, which could materially adversely
affect us and our ability to pay dividends to shareholders. Significant
impairment charges could also negatively impact our regulatory capital ratios
and result in us not being classified as “well-capitalized” for regulatory
purposes.
Our
investment portfolio includes pooled trust-preferred securities and equity
securities of banks and bank holding companies. Our pooled trust-preferred
securities are composed of debt issued primarily by financial institutions, and
to a lesser extent insurance companies and real estate investment trusts. All of
our pooled trust-preferred securities were deemed investment grade by Moody’s
and/or Fitch when they were purchased; however, all of the rated securities have
since been downgraded by Moody’s and by Fitch. Trading volume in pooled
trust-preferred securities has been limited and consisted almost entirely of
sales by distressed sellers. As of September 30, 2009, our investment in a
senior tranche security has an investment grade rating; however, all the
mezzanine tranche securities have ratings several levels below investment grade
or are not rated. Our equity securities consist primarily of investments in
banks and bank holding companies. As of September 30, 2009, the fair values of
many of our equity securities were less than cost.
The $84.4
million of impairment charges we recorded in the nine months ended September 30,
2009, included approximately $72.8 million from pooled trust-preferred
securities, approximately $6.3 million from bank stocks, approximately $3.2
million from trust-preferred securities issued by individual financial
institutions and approximately $2.2 million from non-U.S. Government Agency
collateralized mortgage obligations. This contributed to our net loss available
to common shareholders of $45.0 million for the nine months ended September 30,
2009. Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
conditions warrant. We may be required to recognize additional
other-than-temporary impairment in the future. The risk of future
other-than-temporary impairment may be influenced by, among other things,
additional bank failures, prolonged recession in the U.S. economy, changes to
real estate values, interest deferrals and government assistance to financial
institutions. To the extent we continue to experience other-than-temporary
impairment charges, our results of operations and financial condition may be
negatively affected.
See
“ — Our investment portfolio is heavily invested in banks and holding
companies. Changes in the value or performance of these securities could
adversely impact our financial condition and results of operation” below for
discussion of our investment in banks and bank holding companies.
Our
investment portfolio is heavily invested in banks and bank holding companies.
Changes in the value or performance of these securities could adversely impact
our financial condition and results of operation.
Other
than government securities, our investment portfolio consists of investments in
banks and bank holding companies. Our bank-related investments include pooled
trust-preferred securities (which are long-term instruments, mainly issued by
banks, comprised of debt, typically with 30 or more companies included in each
pool), trust-preferred securities issued by individual financial institutions, a
corporate bond and equity securities of banks and bank holding companies. At
September 30, 2009, we had approximately $15.0 million of investments in banks
and bank holding companies. The value of these securities has been impacted by
the unfavorable economic conditions as well as a particular bank’s specific
circumstances.
Beginning
at the end of 2007, the banking industry generally was materially and adversely
affected by significant declines in the values of nearly all asset classes and
by a serious lack of liquidity. Market conditions have also led to the failure
or merger of a number of prominent financial institutions, declining asset
values, defaults on mortgages and consumer loans, and the lack of market and
investor confidence, including in financial institutions, as well as other
factors, have all combined to cause rating agencies to lower credit ratings, and
to otherwise increase the cost and decrease the availability of liquidity. Banks
have suffered significant losses and have become reluctant to lend, even on a
secured basis, due to the increased risk of default and the impact of declining
asset values on the value of collateral. As a result, the value of our
investments, both equity and pooled trust-preferred securities, has declined. We
recorded OTTI charges attributed to our investment in banks (exclusive of
collateralized mortgage obligations) of approximately $82.3 million for the nine
months ended September 30, 2009. If the value of the securities we hold
continues to decline, our results of operations and financial condition may be
negatively affected.
See “—
Our results of operations and financial condition may be materially and
adversely affected by other-than-temporary impairment charges relating to our
investment portfolio” above for an additional discussion of risks related to our
investment portfolio.
Our
assets as of September 30, 2009 include a deferred tax asset and we may not be
able to realize the full amount of such asset.
We
recognize deferred tax assets and liabilities based on differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities. At September 30, 2009, the net deferred tax asset was approximately
$31.1 million, up from a balance of approximately $16.4 million at December 31,
2008. The increase in net deferred tax asset resulted mainly from
other-than-temporary impairment losses on securities for financial reporting
purposes, which are not currently deductible for federal income tax reporting
purposes. The net deferred tax asset balance at September 30, 2009 attributable
to realized securities losses was $30.3 million, exclusive of a valuation
allowance of $886,000.
We
regularly review our deferred tax assets for recoverability based on history of
earnings, expectations for future earnings and expected timing of reversals of
temporary differences. Realization of deferred tax assets ultimately depends on
the existence of sufficient taxable income, including taxable income in prior
carryback years, as well as future taxable income. Of the total deferred tax
asset from realized losses on securities, a portion is from securities that, if
we were to sell them, would be classified as capital losses for income tax
reporting purposes. The valuation allowance at September 30, 2009 reflects the
excess of the tax benefit that would be generated from selling all of the
capital assets, over the amount that could be realized from the available
carryback and offset against capital gains generated from 2006 through 2008.
Realization of the remaining $886,000 of tax benefits associated with capital
assets is dependent upon realization of future capital gains. After adjustment
for the valuation allowance of capital assets, we believe the recorded net
deferred tax asset at September 30, 2009 is fully realizable; however, if we
determine that we will be unable to realize all or part of the net deferred tax
asset, we would adjust this deferred tax asset, which would negatively impact
our earnings or increase our net loss.
If
we need to, or are compelled to, raise additional capital in the future, that
capital may not be available when it is needed and on terms favorable to current
shareholders.
Federal
banking regulators require us and our banking subsidiaries to maintain adequate
levels of capital to support our operations. These capital levels are determined
and dictated by law, regulation and banking regulatory agencies. In addition,
capital levels are also determined by our management and board of directors
based on capital levels that they believe are necessary to support our business
operations. At September 30, 2009, all three capital ratios for us and each of
our banking subsidiaries were above “well capitalized” levels under current bank
regulatory guidelines. To be “well capitalized,” banking companies generally
must maintain a tier 1 leverage ratio of at least 5%, a Tier 1 risk-based
capital ratio of at least 6%, and a total risk-based capital ratio of at least
10%. However, our regulators may require us or our banking subsidiaries to
operate with higher capital levels. For example, regulators recently have
required some banks to attain a Tier 1 leverage ratio of at least 8%, a Tier 1
risk-based capital ratio of at least 10%, and a total risk-based capital ratio
of at least 12%.
Our
ability to raise additional capital will depend on conditions in the capital
markets at that time, which are outside of our control, and on our financial
performance. Accordingly, we cannot assure you of our ability to raise
additional capital on terms and time frames acceptable to us or to raise
additional capital at all. If we cannot raise additional capital in sufficient
amounts when needed, our ability to comply with regulatory capital requirements
could be materially impaired. Additionally, the inability to raise capital in
sufficient amounts may adversely affect our operations, financial condition and
results of operating. Our ability to borrow could also be impaired by factors
that are nonspecific to us, such as severe disruption of the financial markets
or negative news and expectations about the prospects for the financial services
industry as a whole as evidenced by recent turmoil in the domestic and worldwide
credit markets. If we raise capital through the issuance of additional shares of
our common stock or other securities, we would likely dilute the ownership
interests of current investors and could dilute the per share book value and
earnings per share of our common stock. Furthermore, a capital raise through
issuance of additional shares may have an adverse impact on our stock
price.
We
are a holding company dependent for liquidity on payments from our subsidiaries,
which are subject to restrictions.
We are a
holding company and depend on dividends, distributions and other payments from
our subsidiaries to fund dividend payments and to fund all payments on
obligations. Many of our subsidiaries are subject to laws that restrict dividend
payments or authorize regulatory bodies to block or reduce the flow of funds
from those subsidiaries to us. Restrictions or regulatory action of that kind
could impede access to funds that we need to make payments on our obligations or
dividend payments. In addition, our right to participate in a distribution of
assets upon a subsidiary’s liquidation or reorganization is subject to the prior
claims of the subsidiary’s creditors.
Unfavorable
economic and market conditions due to the current global financial crisis may
materially and adversely affect us.
Economic
and market conditions in the United States and around the world have
deteriorated significantly and may remain depressed for the foreseeable future.
Conditions such as slowing or negative growth and the sub-prime debt devaluation
crisis have resulted in a low level of liquidity in many financial markets and
extreme volatility in credit, equity and fixed income markets. These economic
developments could have various effects on us, including insolvency of major
customers and a negative impact on the investment income we are able to earn on
our investment portfolio.
Since
lending money is an essential part of our business, due to the current economic
conditions, customers may be unable or unwilling to borrow money or repay funds
already borrowed. The risk of non-payment is affected by credit risks of a
particular customer, changes in economic conditions, the duration of the loan
and, in the case of a collateralized loan, uncertainties as to the future value
of the collateral and other factors. The potential effects of the current global
financial crisis are difficult to forecast and mitigate. As a consequence, our
operating results for a particular period are difficult to predict. The impact
of this situation, together with concerns regarding the financial strength of
financial institutions, has led to distress in credit markets and liquidity
issues for financial institutions. Some financial institutions around the world
have failed; others have been forced to seek acquisition partners. The United
States and other governments have taken unprecedented steps to try to stabilize
the financial system, including investing in financial institutions. Our
business and our financial condition and results of operations could be
adversely affected by (1) continued or accelerated disruption and volatility in
financial markets, (2) continued capital and liquidity concerns regarding
financial institutions generally and our counterparties specifically, (3)
limitations resulting from further governmental action in an effort to stabilize
or provide additional regulation of the financial system, or (4) recessionary
conditions that are deeper or last longer than currently
anticipated.
Because
our business is concentrated in north central Pennsylvania and southern New
York, our financial performance could be materially adversely affected by
economic conditions and real estate values in these market areas.
Our
operations and the properties securing our loans are primarily in the
Pennsylvania Counties of Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron
and McKean, and in Steuben and Allegany Counties in New York State. Our
operating results depend largely on economic and real estate valuations in these
and surrounding areas. A deterioration in the economic conditions in these
market areas could materially adversely affect our operations and increase loan
delinquencies, increase problem assets and foreclosures, increase claims and
lawsuits, decrease the demand for our products and services and decrease the
value of collateral securing loans, especially real estate, in turn reducing
customers’ borrowing power, the value of assets associated with nonperforming
loans and collateral coverage.
Changes
in interest rates could adversely impact our financial condition and results of
operations.
Our
operating income, net income and liquidity depend to a great extent on our net
interest margin, i.e., the difference between the interest yields we receive on
loans, securities and other interest earning assets and the interest rates we
pay on interest-bearing deposits, borrowings and other liabilities. These rates
are highly sensitive to many factors beyond our control, including competition,
general economic conditions and monetary and fiscal policies of various
governmental and regulatory authorities, including the Board of
Governors
of the Federal Reserve System, or the Federal Reserve. If the rate of interest
we pay on our interest-bearing deposits, borrowings and other liabilities
increases more than the rate of interest we receive on loans, securities and
other interest earning assets, our net interest income, and therefore our
earnings, and liquidity could be materially adversely affected. Our earnings and
liquidity could also be materially adversely affected if the rates on our loans,
securities and other investments fall more quickly than those on our deposits,
borrowings and other liabilities. Our operations are subject to risks and
uncertainties surrounding our exposure to change in interest rate
environment.
Additionally,
based on our analysis of the interest rate sensitivity of our assets, an
increase in the general level of interest rates will negatively affect the
market value of our investment portfolio because of the relatively long duration
of the securities included in our investment portfolio.
We
are required to make a number of judgments in applying accounting policies and
different estimates and assumptions in the application of these policies could
result in a decrease in capital and/or other material changes to our reports of
financial condition and results of operations. Also, changes in accounting
standards can be difficult to predict and can materially impact how we record
and report our financial condition and results of operations.
Material
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses and reserve for unfunded lending
commitments and the fair value of certain financial instruments (securities,
derivatives, and privately held investments). While we have identified those
accounting policies that are considered critical and have procedures in place to
facilitate the associated judgments, different assumptions in the application of
these policies could result in a decrease to net income and, possibly, capital
and may have a material adverse effect on our financial condition and results of
operations.
Our
accounting policies and methods are fundamental to how we record and report our
financial condition and results of operations. From time to time, the Financial
Accounting Standards Board changes the financial accounting and reporting
standards that govern the preparation of our financial statements. These changes
can be hard to predict and can materially impact how we record and report our
financial condition and results of operations.
Competition
from other banks and financial institutions in originating loans, attracting
deposits and providing various financial services may adversely affect our
profitability and liquidity.
We have
substantial competition in originating loans, both commercial and consumer, in
our market area. This competition comes principally from other banks, savings
institutions, mortgage banking companies and other lenders. Some of our
competitors enjoy advantages, including greater financial resources and access
to capital, stronger regulatory ratios, and higher lending limits, a wider
geographic presence, more accessible branch office locations, the ability to
offer a wider array of services or more favorable pricing alternatives, as well
as lower origination and operating costs. This competition could reduce our net
income and liquidity by decreasing the number and size of loans that we
originate and the interest rates we may charge on these loans.
In
attracting business and consumer deposits, we face substantial competition from
other insured depository institutions such as banks, savings institutions and
credit unions, as well as institutions offering uninsured investment
alternatives, including money market funds. Some of our competitors enjoy
advantages, including greater financial resources and access to capital,
stronger regulatory ratios, stronger asset quality and performance, more
aggressive marketing campaigns, better brand recognition and more branch
locations. These competitors may offer higher interest rates than we do, which
could decrease the deposits that we attract or require us to increase our rates
to retain existing deposits or attract new deposits. Increased deposit
competition could materially adversely affect our ability to generate the funds
necessary for lending operations. As a result, we may need to seek other sources
of funds that may be more expensive to obtain and could increase our cost of
funds.
We
operate in a highly regulated environment and may be adversely affected by
changes in laws or regulations.
We are
subject to extensive regulation and supervision under federal and state laws and
regulations. The requirements and limitations imposed by such laws and
regulations limit the manner in which we conduct our business, undertake new
investments and activities and obtain financing. These regulations are designed
primarily for the protection of the deposit insurance funds and consumers and
not to benefit our shareholders. Financial institution regulation has been the
subject of significant legislation in recent years and may be the subject of
further significant legislation in the future, none of which is within our
control. There are currently several legislative proposals pending in Congress
and proposed rule makings by the federal banking regulators which, if adopted as
proposed, will impact the banking industry. On June 17, 2009, the U.S.
Department of the Treasury released a financial regulatory reform plan that
would, if enacted, represent the most sweeping reform of financial regulation
and financial services in decades. These programs and proposals subject us and
other financial institutions to additional restrictions, oversight and costs
that may have an adverse impact on our business, financial condition, results of
operations or the price of our common stock. If enacted, the Treasury
Department’s financial reform plan would substantially increase regulation of
the financial services industry and impose restrictions on the operations and
general ability of firms within the industry to conduct business consistent with
historical practices. Federal and state regulatory agencies also frequently
adopt changes to their regulations or change the manner in which existing
regulations are applied or enforced. We cannot predict the substance or impact
of pending or future legislation, regulation or the application thereof.
Compliance with such current and potential regulation and scrutiny may
significantly increase our costs, impede the efficiency of our internal business
processes, require us to increase our regulatory capital and limit our ability
to pursue business opportunities in an efficient manner.
Our
participation in TARP CPP subjects us to additional restrictions, oversight and
costs, and has other potential consequences, that could materially affect our
business, results of operations and prospects.
On
October 3, 2008, the Emergency Economic Stabilization Act of 2008, or the EESA,
was signed into law. Under EESA, the U.S. Department of Treasury, or the
Treasury, has the authority to, among other things, invest in financial
institutions for the purpose of stabilizing and providing liquidity to the U.S.
financial markets. Pursuant to this authority, the Treasury announced its
Troubled Asset Relief Program Capital Purchase Program, or TARP CPP, under which
it is purchasing preferred stock and warrants in eligible institutions,
including us, to increase the flow of credit to businesses and consumers and to
support the overall United States economy.
On
January 16, 2009, we issued 26,440 shares of Series A Preferred Stock and a
warrant to purchase 194,794 shares of common stock at an exercise price of
$20.36 per share to the Treasury for an aggregate price of approximately $26.44
million. As a result of our participation in the TARP CPP:
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We
are subject to restrictions, oversight and costs that may have an adverse
impact on our financial condition, results of operations and the price of
our common stock. For example, the American Recovery and Reinvestment Act
of 2009 enacted in February 2009 and subsequently adopted Interim Final
Regulations contain significant limitations on the amount and form of
bonus, retention and other incentive compensation that participants in the
TARP CPP may pay to executive officers and senior management. These
provisions may adversely affect our ability to attract and retain
executive officers and other key
personnel.
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TARP
CPP imposes restrictions on our ability to pay cash dividends on, and to
repurchase, our common stock.
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The
Treasury has the right to appoint two persons to our board of directors if
we miss dividend payments for six dividend periods, whether or not
consecutive, on the Series A Preferred
Stock.
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Future
federal statutes may adversely affect the terms of the TARP CPP that are
applicable to us and the Treasury may amend the terms of our agreement
with them unilaterally if required by future statutes, including in a
manner materially adverse to us.
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Compliance
with current and potential regulatory initiatives applicable to TARP CPP
participants as well as additional scrutiny from regulatory authorities
may significantly increase our costs, impede the efficiency of our
internal business processes, require us to increase our regulatory capital
and limit our ability to pursue business opportunities in an efficient
manner.
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Congress
has held hearings on the implementation of the TARP CPP and the use of funds and
may adopt further legislation impacting financial institutions that have
obtained funding under the TARP CPP requiring, among other things, changes in
lending and other practices that legislators believe led to the current economic
situation. Although it is unclear what, if any, additional legislation will be
enacted into law or rules will be issued, certain laws or rules may be enacted
or imposed administratively by the Treasury that could further restrict our
operations or increase governmental oversight of our businesses and our
corporate governance practices. The Special Inspector General for the Troubled
Asset Relief Program, or TARP, has requested information from CPP and other TARP
participants, including a description of past and anticipated uses of the TARP
funds and plans for addressing executive compensation requirements under the
TARP CPP. We and other TARP CPP participants are also required to submit monthly
reports about their lending and financial intermediation activities to the
Treasury. It is unclear at this point what the ramifications of such disclosure
are or may be in the future.
A
substantial decline in the value of our Federal Home Loan Bank of Pittsburgh
common stock may adversely affect our financial condition.
We own
common stock of the Federal Home Loan Bank of Pittsburgh, or the FHLB, in order
to qualify for membership in the Federal Home Loan Bank system, which enables us
to borrow funds under the Federal Home Loan Bank advance program. The carrying
value and fair market value of our FHLB common stock was $8.6 million as of
September 30, 2009.
Published
reports indicate that certain member banks of the Federal Home Loan Bank system
may be subject to asset quality risks that could result in materially lower
regulatory capital levels. In December 2008, the FHLB had notified its member
banks that it had suspended dividend payments and the repurchase of capital
stock until further notice is provided. In an extreme situation, it is possible
that the capitalization of a Federal Home Loan Bank, including the FHLB, could
be substantially diminished or reduced to zero. Consequently, given that there
is no market for our FHLB common stock, we believe that there is a risk that our
investment could be deemed other-than-temporarily impaired at some time in the
future. If this occurs, it may adversely affect our results of operations and
financial condition. If the FHLB were to cease operations, or if we were
required to write-off our investment in the FHLB, our business, financial
condition, liquidity, capital and results of operations may be materially
adversely affected.
Increases
in FDIC insurance premiums may have a material adverse effect on our results of
operations.
During
2008 and continuing in 2009, higher levels of bank failures have dramatically
increased resolution costs of the Federal Deposit Insurance Corporation, or the
FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the
U.S. Congress have taken action to increase federal deposit insurance coverage,
placing additional stress on the deposit insurance fund.
In order
to maintain a strong funding position and restore reserve ratios of the deposit
insurance fund, the FDIC increased assessment rates of insured institutions
uniformly by seven cents for every $100 of deposits beginning with the first
quarter of 2009, with additional changes beginning April 1, 2009, which require
riskier institutions to pay a larger share of premiums by factoring in rate
adjustments based on secured liabilities and unsecured debt levels.
To
further support the rebuilding of the deposit insurance fund, the FDIC imposed a
special assessment on each insured institution, equal to five basis points of
the institution’s total assets minus Tier 1 capital as of September 30, 2009.
For our banks, this represents an aggregate charge of approximately $589,000,
which was recorded as a pre-tax charge during the second quarter of 2009. The
FDIC has indicated that future special assessments are possible, although it has
not determined the magnitude or timing of any future assessments.
We are
generally unable to control the amount of premiums that we are required to pay
for FDIC insurance. If there are additional bank or financial institution
failures, we may be required to pay even higher FDIC premiums. Our expenses for
the nine months ended September 30, 2009 have been significantly and adversely
affected by these increased premiums and the special assessment. These increases
and assessment and any future increases in insurance premiums or additional
special assessments may materially adversely affect our results of
operations.
An
interruption or breach in security with respect to our information system, or
our outsourced service providers, could adversely impact our reputation and have
an adverse impact on our financial condition or results of
operations.
We rely
on software, communication, and information exchange on a variety of computing
platforms and networks and over the Internet. Despite numerous safeguards, we
cannot be certain that all of our systems are entirely free from vulnerability
to attack or other technological difficulties or failures. We rely on the
services of a variety of vendors to meet our data processing and communication
needs. If information security is breached or other technology difficulties or
failures occur, information may be lost or misappropriated, services and
operations may be interrupted and we could be exposed to claims from customers.
Any of these results could have a material adverse effect on our financial
condition, results of operations or liquidity.
Our
strategic plan involves growth and we may not be able to execute it
successfully.
In recent
years, our growth strategy has focused on increasing our presence in the
Lycoming County market and we have expanded our operations by acquisitions and
by building and opening new branches. Our future financial performance will
depend on our ability to take advantage of growth opportunities as they arise
and manage our future growth. Failure to execute our strategy could have a
material adverse effect on our financial condition, results of operations or
liquidity.
If
we fail to comply with insurance industry regulations, or if those regulations
become more burdensome, it could negatively impact our
profitability.
Through
Bucktail Life Insurance Company and C&N Financial Services Corporation, two
of our subsidiaries, we are engaged in insurance-related activities regulated by
the Arizona Department of Insurance and the Pennsylvania Department of
Insurance, as well as, to a more limited extent, the federal government and the
insurance departments of other states in which we do business. The cancellation
or suspension of our licenses or ability to operate in these states, as a result
of any failure to comply with the applicable insurance laws and regulations, may
negatively impact our operating results. Regulatory authorities have relatively
broad discretion to deny or revoke licenses for various reasons, including the
violation of regulations. Further, changes in the level of regulation of the
insurance industry or changes in laws or regulations themselves or
interpretations by regulatory authorities could adversely affect our ability to
operate our business.
If
we fail to maintain an effective system of internal control over financial
reporting and disclosure controls and procedures, we may be unable to accurately
report our financial results and comply with the reporting requirements under
the Securities Exchange Act of 1934. As a result, current and potential
shareholders may lose confidence in our financial reporting and disclosure
required under the Securities Exchange Act of 1934, which could adversely affect
our business and could subject us to regulatory scrutiny.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we
are required to include in our Annual Reports on Form 10-K, our management’s
report on internal control over financial reporting. While we have reported no
“significant deficiencies” or “material weaknesses” in the Form 10-K for the
fiscal year ended December 31, 2008, we cannot guarantee that we will not have
any “significant deficiencies” or “material weaknesses” reported by our
independent registered public accounting firm in the future. Compliance with the
requirements of Section 404 is expensive and time-consuming. If, in the future,
we fail to complete this evaluation in a timely manner, or if our independent
registered public accounting firm cannot timely attest to our evaluation, we
could be subject to regulatory scrutiny and a loss of public confidence in our
internal control over financial reporting. In addition, any failure to establish
an effective system of disclosure controls and procedures could cause our
current and potential shareholders and customers to lose confidence in our
financial reporting and disclosure required under the Securities Exchange Act of
1934, which could adversely affect our business.
Risks
Related to Our Common Stock
The
price of our common stock may fluctuate significantly, and this may make it
difficult for you to resell shares of common stock owned by you at times or at
prices you find attractive.
Stock
price volatility may make it difficult for you to resell your common stock when
you want and at prices you find attractive. Our stock price can fluctuate
significantly in response to a variety of factors including, among other
things:
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actual
or anticipated variations in quarterly results of
operations;
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recommendations
by securities analysts;
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operating
and stock price performance of other companies that investors deem
comparable to us;
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any
failure to pay dividends on our common stock or a reduction in
dividends;
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continued
levels of loan quality and volume
origination;
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the
adequacy of loan loss reserves;
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the
willingness of customers to substitute competitors’ products and services
for our products and services and vice versa, based on price, quality,
relationship or otherwise;
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interest
rate, market and monetary
fluctuations;
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the
timely development of competitive new products and services by us and the
acceptance of such products and services by
customers;
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changes
in consumer spending and saving habits relative to the financial services
we provide;
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relationships
with major customers;
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our
ability to continue to grow our business internally and through
acquisition and successful integration of new or acquired entities while
controlling costs;
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news
reports relating to trends, concerns and other issues in the financial
services industry, including the failures of other financial institutions
in the current economic downturn;
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perceptions
in the marketplace regarding us and/or our
competitors;
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new
technology used, or services offered, by
competitors;
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changes
in accounting principles, policies and
guidelines;
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rapidly
changing technology;
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significant
acquisitions or business combinations, strategic partnerships, joint
ventures or capital commitments by or involving us or our
competitors;
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failure
to integrate acquisitions or realize anticipated benefits from
acquisitions;
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changes
in and compliance with laws and government regulations of federal, state
and local agencies; and
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geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
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General
market fluctuations, industry factors and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes or credit loss trends, could also cause our stock price to decrease
regardless of operating results as evidenced by the current volatility and
disruption of capital and credit markets.
Our
common stock is not insured by any governmental entity, and, therefore, an
investment in our common stock involves risk.
Our
common stock is not a bank deposit and, therefore, is not insured against loss
by the Federal Deposit Insurance Corporation, any other deposit insurance fund
or by any other public or private entity. Investment in our common stock is
inherently risky for the reasons described in this “Risk Factors” section and
elsewhere in this Current Report on Form 8-K and other reports filed by the
Company under the Securities Exchange Act of 1934, and is subject to the same
market forces that affect the price of common stock in any company. As a result,
if you acquire our common stock, you may lose some or all of your
investment.
Our
common stock is equity and is subordinate to our existing and future
indebtedness and preferred stock and effectively subordinated to all the
indebtedness and other non-common equity claims against our
subsidiaries.
Shares of
our common stock are equity interests in us and do not constitute indebtedness.
As such, shares of our common stock rank junior to all of our indebtedness and
to other non-equity claims against us and our assets available to satisfy claims
against us, including in our liquidation. Additionally, holders of our common
stock are subject to the prior dividend and liquidation rights of the Series A
Preferred Stock that we issued to the Treasury in connection with our
participation in the TARP CPP. Furthermore, our right to participate in a
distribution of assets upon any of our subsidiaries’ liquidation or
reorganization is subject to the prior claims of that subsidiary’s creditors,
and to preference rights of the Series A Preferred Stock. As of September 30,
2009, the aggregate liquidation preference of our Series A Stock was $26.44
million.
There
are restrictions on our ability to pay cash dividends.
Although
we have historically paid cash dividends, there is no assurance that we will
continue to pay cash dividends. Based upon guidance issued by the Federal
Reserve Board concerning the payment of dividends discussed below, on November
10, 2009 our Board of Directors approved a reduction in our quarterly dividend
of at least fifty percent (50%) (from $0.24 per share to no more than $0.12 per
share) commencing in the fourth quarter of 2009, subject to regulatory approval.
No determination has been made by our Board of Directors regarding whether or
what amount of dividends will be paid in future quarters. Additionally, there
can be no assurance that regulatory approval will be granted by the Federal
Reserve Board to pay the reduced dividend. Future payment of cash dividends, if
any, will be at the discretion of our board of directors and will be dependent
upon our financial condition, results of operations, capital requirements and
such other factors as the board may deem relevant and will be subject to
applicable federal and state laws that impose restrictions on our and our
subsidiaries’ ability to pay dividends, as well as guidance issued from time to
time by regulatory authorities. Our ability to pay dividends depends primarily
on receipt of dividends from our direct and indirect subsidiaries.
Under
guidance issued by the Federal Reserve, as a bank holding company we are to
consult the Federal Reserve before declaring dividends and are to strongly
consider eliminating, deferring, or reducing dividends we pay to our
shareholders if (1) our net income available to shareholders for the past four
quarters, net of dividends previously paid during that period, is not sufficient
to fully fund the dividends, (2) our prospective rate of earnings retention is
not consistent with our capital needs and overall current and prospective
financial condition, or (3) we will not meet, or are in danger of not meeting,
our minimum regulatory capital adequacy ratios. Importantly, this Federal
Reserve guidance is relevant not only to dividends paid on our common stock, but
also to those payable in respect to our Series A Preferred Stock held by the
Treasury. Our failure to pay dividends on our Series A Preferred Stock or common
stock could have a material adverse effect on our business, operations,
financial condition, access to funding and the market price of our common
stock.
The
Letter Agreement and Securities Purchase Agreement — Standard Terms,
or collectively the “Purchase Agreement,” between us and the Treasury provides
that prior to the earlier of (i) January 16, 2012; and (ii) the date on which
all of the shares of the Series A Preferred Stock have been redeemed by us or
transferred by the Treasury to third parties, we may not, without the consent of
Treasury, (a) increase the cash dividend on our common stock above that last
declared prior to January 16, 2009 (i.e., $0.24 per share); or (b) subject to
limited exceptions, redeem, repurchase or otherwise acquire shares of our common
stock or preferred stock other than the Series A Preferred Stock. In addition,
we are unable to pay any dividends on our common stock unless we are current in
our dividend payments on the Series A Preferred Stock. These restrictions could
have a negative effect on the value of our common stock.
See “— We
are a holding company dependent for liquidity on payments from our subsidiaries,
which are subject to restrictions” above.
The
Series A Preferred Stock reduces the net income available to our common
shareholders and earnings per common share, and the Warrant we issued to
Treasury may be dilutive to holders of our common stock.
The
dividends declared and the accretion or discount on the Series A Preferred Stock
will reduce the net income available to common shareholders and our earnings per
common share. The Series A Preferred Stock will also receive preferential
treatment in the event of our liquidation, dissolution or winding up.
Additionally, the ownership interest of the existing holders of our common stock
will be diluted to the extent the Warrant we issued to Treasury in conjunction
with the sale to Treasury of the Series A Preferred Stock is exercised. If the
Warrant had been exercised on November 10, 2009, the shares of common stock
underlying the Warrant would have represented approximately 2.07% of the shares
of our common stock outstanding upon exercise (including the shares issued upon
exercise of the Warrant). Although Treasury has agreed not to vote any of the
shares of common stock it would receive upon exercise of the Warrant, a
transferee of any portion of the Warrant or of any shares of common stock
acquired upon exercise of the Warrant would not be bound by this
restriction.
There
can be no assurance that we will repurchase the Series A Preferred Stock and the
Warrant or that our regulators would approve such redemption and
repurchase.
We have
not determined if or when we will seek the approval of our regulators to
repurchase the Series A Preferred Stock and the Warrant. Such repurchases may be
made with the proceeds from this offering, as described in “Use of Proceeds,”
and are subject to regulatory approval. There can be no assurance when or if the
Series A Preferred Stock and with Warrant can be repurchased or what the
redemption price for the Warrant will be. Until such time as the Series A
Preferred Stock and the Warrant are repurchased, we will remain subject to the
terms and conditions set forth in the purchase agreement with the Treasury, the
Series A Preferred Stock and the Warrant. Further, we will remain subject to
increased regulatory and legislative oversight applicable to participants in the
TARP CPP for so long as the Series A Preferred Stock is
outstanding.
Offerings
of debt, which would be senior to our common stock upon liquidation, and/or
preferred equity securities which may be senior to our common stock for purposes
of dividend distributions or upon liquidation, may adversely affect the market
price of our common stock.
We may
attempt to increase our capital resources or, if our or any of our banks’
capital ratios fall below the required minimums, we could be forced to raise
additional capital by making additional offerings of debt or preferred equity
securities, including medium-term notes, trust-preferred securities, senior or
subordinated notes and preferred stock. Upon liquidation, holders of our debt
securities and shares of preferred stock and lenders with respect to other
borrowings are likely to receive distributions of our available assets prior to
the holders of our common stock. Additional equity offerings may dilute the
holdings of our existing shareholders or reduce the market price of our common
stock, or both. Holders of our common stock are not entitled to preemptive
rights or other protections against dilution.
We
may issue additional shares of common or preferred stock, which may dilute the
ownership and voting power of our shareholders and the book value of our common
stock.
We are
currently authorized to issue up to 20,000,000 shares of common stock of which
9,236,744 shares were outstanding as of November 10, 2009, and up to 30,000
shares of preferred stock of which 26,440 shares were outstanding as of November
10, 2009. Our board of directors has authority, without action or vote of the
shareholders of common stock, to issue all or part of the authorized but
unissued shares. However, additional shares of preferred stock could only be
issued as part of the TARP CPP and no such further issuances are anticipated.
Authorized but unissued shares of our common stock could be issued on terms or
in circumstances that could dilute the interests of other
shareholders.
There
may be future sales of our common stock, which may materially and adversely
affect the market price of our common stock.
We are
not restricted from issuing additional shares of our common stock, including
securities that are convertible into or exchangeable or exercisable for shares
of our common stock. As of November 10, 2009, there were 9,236,744 shares of our
common stock outstanding. Most of these shares are available for resale in the
public market without restriction, except for shares held by our affiliates.
Generally, our affiliates may sell their shares in compliance with the volume
limitations and other requirements imposed by Rule 144 under the Securities
Act.
As of
November 10, 2009, there were 516,602 shares of our common stock issuable upon
conversion, exchange or exercise in respect of outstanding securities, options
or warrants (including the Warrant), and we had the authority to issue up to
approximately 508,788 shares of our common stock under our Stock Incentive Plan
and Independent Directors Stock Incentive Plan (not including shares issuable
upon exercise of outstanding options) and 2,256,853 shares under our Dividend
Reinvestment and Stock Purchase Plan. A previously effective 5% discount on
shares of common stock purchased directly from us under our Dividend
Reinvestment and Stock Purchase and Sale Plan was suspended, effective at the
close of business on October 16, 2009 for purchases with optional cash payments,
and effective October 20, 2009 for purchases with reinvested dividends. The
suspension will remain in effect until further notice.
Additionally,
the sale of substantial amounts of our common stock or securities convertible
into or exchangeable or exercisable for our common stock, whether directly by us
in this offering or future offerings or by existing common shareholders in the
secondary market, the perception that such sales could occur or the availability
for future sale of shares of our common stock or securities convertible into or
exchangeable or exercisable for our common stock could, in turn, materially and
adversely affect the market price of our common stock and our ability to raise
capital through future offerings of equity or equity-related
securities.
The
trading volume in our common stock is less than that of other financial services
companies.
Our
common stock is listed on the NASDAQ Capital Market under the symbol “CZNC”. The
average daily trading volume for shares of our common stock is less than larger
financial institutions. During the twelve months ended October 31, 2009, the
average daily trading volume for our common stock was approximately 16,742
shares. As a result, sales of our common stock may place significant downward
pressure on the market price of our common stock. Furthermore, it may be
difficult for holders to resell their shares at prices they find attractive, or
at all.
Anti-takeover
provisions and restrictions on ownership could negatively impact our
shareholders.
Provisions
of Pennsylvania law and our amended and restated articles of incorporation and
by-laws could make it more difficult for a third party to acquire control of us
or have the effect of discouraging a third party from attempting to acquire
control of us. These provisions would make it more difficult for a third party
to acquire us even if an acquisition might be in the best interest of our
shareholders. In addition, the Bank Holding Company Act of 1956, as amended, or
the BHCA, requires any bank holding company to obtain the approval of the
Federal Reserve Board prior to acquiring more than 5% of our outstanding common
stock. Any person other than a bank holding company is required to obtain prior
approval of the Federal Reserve Board to acquire 10% or more of our outstanding
common stock under the Change in Bank Control Act. Any holder of 25% or more of
our outstanding common stock, other than an individual, is subject to regulation
as a bank holding company under the BHCA.
For
instance, our amended and restated articles of incorporation require the
affirmative vote of at least 75% of the votes that all shareholders are entitled
to cast to approve any of the following transactions:
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any
merger or consolidation of the Corporation with or into any other
corporation;
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any
share exchange in which a corporation, person, or entity acquires the
issued or outstanding shares of capital stock of the Corporation pursuant
to a vote of shareholders;
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any
sale, lease, exchange, or other transfer of all, or substantially all, of
the assets of the Corporation to any other corporation, person or entity;
or
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any
transaction similar to, or having similar effect as, any of the foregoing
transactions.
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In
addition, if, in any of the above cases, as of the record date for the
determination of shareholders entitled to notice of and to vote on any such
transaction, such other corporation, person, or entity is the beneficial owner,
directly or indirectly, of more than five percent (5%) of the shares of common
stock issued, outstanding, and entitled to vote as of such record date, referred
to as the “Acquiring Entity,” then the affirmative vote of 75% of the votes
entitled to cast thereon held by all of our shareholders other than the
Acquiring Entity (and any other shareholders “affiliated with” the Acquiring
Entity) is required to approve any such transaction.
The
foregoing supermajority voting requirements are inapplicable in the event that
the subject transaction is approved in advance by the affirmative vote of
66 – 2/3% of our Board of Directors. See the description of our common
stock set forth in our Current Report on Form 8-K filed September 25,
2009.
Cautionary
Statement Regarding Forward-Looking Statements
Certain
of the statements made in this Current Report on Form 8-K and other reports
filed by the Corporation under the Securities Exchange Act of 1934 or
registration statements under the Securities Act of 1933 are “forward-looking
statements” within the meaning and protections of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended.
Forward-looking
statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions, and
future performance, and involve known and unknown risks, uncertainties and other
factors, which may be beyond our control, and which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements.
All
statements other than statements of historical fact are statements that could be
forward-looking statements. You can identify these forward-looking
statements through our use of words such as “may”, “will”, “anticipate”,
“assume”, “should”, “indicate”, “would”, “believe”, “contemplate”, “expect”,
“estimate”, “continue”, “plan”, “point to”, “project”, “could”, “intend”,
“target”, and other similar words and expressions of the
future. These forward-looking statements may not be realized due to a
variety of factors, including, without limitation:
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the
effects of future economic, business and market conditions, domestic and
foreign, including seasonality;
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the
effects of, and changes in, governmental monetary and fiscal
policies;
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legislative
and regulatory changes, including changes in banking, insurance,
securities and tax laws and regulations and their application by our
regulators;
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changes
in accounting policies, rules and
practices;
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the
risk of changes in interest rates on the levels, composition and costs of
deposits, loan demand, and the values and liquidity of loan collateral,
securities, and interest sensitive assets and
liabilities;
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the
risk of decreases in the value of investment securities we
own;
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the
effects of other-than-temporary impairment charges relating to our
investment portfolio;
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failure
to realize deferred tax assets;
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credit
risks of borrowers;
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changes
in the availability and cost of credit and capital in the financial
markets;
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changes
in the prices, values and sales volumes of residential and commercial real
estate;
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the
effects of competition from a wide variety of local, regional, national
and other providers of financial, investment and insurance
services;
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the
failure of assumptions underlying the establishment of allowances or
reserves for possible loan losses and other
estimates;
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risks
related to our participation in the Troubled Asset Relief Program Capital
Purchase Program;
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possible
reductions in our quarterly dividends and regulatory restrictions on our
ability to pay dividends;
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potential
undiscovered weaknesses in our internal controls and disclosure
controls;
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a
potential decline in the value of our Federal Home Loan Bank of Pittsburgh
common stock;
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our
inability to realize growth opportunities or to manage our growth;
and
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other
factors and risks, including those detailed in this Current Report on Form
8-K and under “Risk Factors” in our other filings with the
SEC.
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Because
such forward–looking statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by such
statements. The foregoing list of important factors is not exclusive and
investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of the document in which they are
contained. We do not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on
behalf of us.
Item
9.01. Financial Statements and Exhibits.
(d) Exhibits
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Exhibit No.
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Description
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99.1
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Press
Release dated November 12, 2009
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99.2
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Slide
Presentation
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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.
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Citizens & Northern
Corporation |
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Date: November
12, 2009
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By:
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/s/ Craig
G. Litchfield |
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Craig
G. Litchfield, President & CEO |
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EXHIBIT
INDEX
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Exhibit Number
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Description
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99.1
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Press
Release dated November 12, 2009
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99.2
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Slide
Presentation
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