0000810958srt:WeightedAverageMembercznc:ImpairedLoansMemberus-gaap:FairValueMeasurementsNonrecurringMemberus-gaap:CommercialPortfolioSegmentMemberus-gaap:RealEstateLoanMemberus-gaap:MarketApproachValuationTechniqueMember2021-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023

◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)


PENNSYLVANIA		23-2451943
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant’s telephone number including area code)

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


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ◻

If an emerging growth company, indicate by check mark 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. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ⌧

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.


Common Stock ($1.00 par value)	~~15,605,135~~15,361,113 Shares Outstanding on May ~~4, 2022~~3, 2023

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index


Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – March 31, ~~2022~~2023 and December 31, ~~2021~~2022			Page 3

Consolidated Statements of Income (Unaudited) – Three-month Periods Ended March 31, ~~2022~~2023 and ~~2021~~2022			Page 4

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ (Unaudited) – Three-month Periods Ended March 31, ~~2022~~2023 and ~~2021~~2022			Page 5

Consolidated Statements of Cash Flows (Unaudited) – Three-month Periods Ended March 31, ~~2022~~2023 and ~~2021~~2022			Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month Periods Ended March 31, ~~2022~~2023 and ~~202~~20221			Page 7

Notes to Unaudited Consolidated Financial Statements			Pages 8 – 3337

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 3438 – 5556

Item 3. Quantitative and Qualitative Disclosures About Market Risk			Pages 5556 – 5758

Item 4. Controls and Procedures			Page 5758

Part II. Other Information			Pages 5758 – 5961

Signatures			Page 6062

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data) (Unaudited)


	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
ASSETS
Cash and due from banks:
Noninterest-bearing	$	19,471	$	16,729	$	23,283	$	25,811
Interest-bearing		94,875		88,219		28,929		29,237
Total cash and due from banks		114,346		104,948		52,212		55,048
Available-for-sale debt securities, at fair value		532,913		517,679		472,814		498,033

Loans receivable		1,538,190		1,564,849		1,745,139		1,740,040
Allowance for loan losses		(14,271)		(13,537)
Allowance for credit losses on loans						(18,346)		(16,615)
Loans, net		1,523,919		1,551,312		1,726,793		1,723,425

Bank-owned life insurance		30,804		30,669		31,352		31,214
Accrued interest receivable		7,507		7,235		8,805		8,653
Bank premises and equipment, net		21,169		20,683		21,277		21,574
Foreclosed assets held for sale		531		684		459		275
Deferred tax asset, net		11,818		5,887		18,914		20,884
Goodwill		52,505		52,505		52,505		52,505
Core deposit intangibles, net		3,206		3,316		2,775		2,877
Other assets		31,653		32,730		41,966		39,819
TOTAL ASSETS	$	2,330,371	$	2,327,648	$	2,429,872	$	2,454,307

LIABILITIES
Deposits:
Noninterest-bearing	$	552,255	$	521,206	$	544,556	$	563,843
Interest-bearing		1,408,697		1,403,854		1,371,484		1,433,750
Total deposits		1,960,952		1,925,060		1,916,040		1,997,593
Short-term borrowings		2,357		1,803		93,396		80,062
Long-term borrowings - FHLB advances		20,581		28,042		98,701		62,347
Senior notes, net		14,717		14,701		14,781		14,765
Subordinated debt, net		33,031		33,009		24,634		24,607
Accrued interest and other liabilities		22,525		23,628		26,752		25,608
TOTAL LIABILITIES		2,054,163		2,026,243		2,174,304		2,204,982

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; 0 shares issued		0		0
Common stock, par value $1.00 per share; authorized 20,000,000 shares;
issued 16,030,172 and outstanding 15,718,723 at March 31, 2022;
issued 16,030,172 and outstanding 15,759,090 at December 31, 2021		16,030		16,030
preference per share; no shares issued						0		0
Common stock, par value $1.00 per share; authorized 30,000,000 shares;
issued 16,030,172 and outstanding 15,485,035 at March 31, 2023;
issued 16,030,172 and outstanding 15,518,819 at December 31, 2022						16,030		16,030
Paid-in capital		142,991		144,453		143,395		143,950
Retained earnings		145,073		142,612		151,990		151,743
Treasury stock, at cost; 311,449 shares at March 31, 2022 and 271,082
shares at December 31, 2021		(7,708)		(6,716)
Accumulated other comprehensive (loss) income		(20,178)		5,026
Treasury stock, at cost; 545,137 shares at March 31, 2023 and 511,353
shares at December 31, 2022						(13,050)		(12,520)
Accumulated other comprehensive loss						(42,797)		(49,878)
TOTAL STOCKHOLDERS' EQUITY		276,208		301,405		255,568		249,325
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	2,330,371	$	2,327,648	$	2,429,872	$	2,454,307

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)


	Three Months Ended				Three Months Ended
	March 31,		March 31,		March 31,		March 31,
	2022		2021		2023		2022
INTEREST INCOME
Interest and fees on loans:
Taxable	$	18,549	$	19,491	$	22,431	$	18,549
Tax-exempt		454		439		571		454
Income from available-for-sale debt securities:
Taxable		1,969		1,113		2,211		1,969
Tax-exempt		722		642		640		722
Other interest and dividend income		79		69		286		79
Total interest and dividend income		21,773		21,754		26,139		21,773
INTEREST EXPENSE
Interest on deposits		910		1,278		3,230		910
Interest on short-term borrowings		1		15		1,097		1
Interest on long-term borrowings - FHLB advances		49		134		681		49
Interest on senior notes, net		118		0		120		118
Interest on subordinated debt, net		363		244		230		363
Total interest expense		1,441		1,671		5,358		1,441
Net interest income		20,332		20,083		20,781		20,332
Provision for loan losses		891		259
Net interest income after provision for loan losses		19,441		19,824
(Credit) provision for credit losses						(352)		891
Net interest income after (credit) provision for credit losses						21,133		19,441
NONINTEREST INCOME
Trust revenue		1,786		1,626		1,777		1,786
Brokerage and insurance revenue		522		326		430		522
Service charges on deposit accounts		1,235		1,015		1,290		1,235
Interchange revenue from debit card transactions		963		881		1,007		963
Net gains from sale of loans		382		1,064		74		382
Loan servicing fees, net		210		248		122		210
Increase in cash surrender value of life insurance		135		150		138		135
Other noninterest income		588		1,472		771		588
Realized gains on available-for-sale debt securities, net		2		0		7		2
Total noninterest income		5,823		6,782		5,616		5,823
NONINTEREST EXPENSE
Salaries and employee benefits		10,607		8,895		11,427		10,607
Net occupancy and equipment expense		1,411		1,304		1,402		1,411
Data processing and telecommunications expense		1,623		1,380		1,936		1,623
Automated teller machine and interchange expense		384		337		475		384
Pennsylvania shares tax		488		491		403		488
Professional fees		489		547		937		489
Other noninterest expense		1,884		2,755		2,507		1,884
Total noninterest expense		16,886		15,709		19,087		16,886
Income before income tax provision		8,378		10,897		7,662		8,378
Income tax provision		1,483		2,110		1,409		1,483
NET INCOME	$	6,895	$	8,787	$	6,253	$	6,895
EARNINGS PER COMMON SHARE - BASIC	$	0.44	$	0.55	$	0.40	$	0.44
EARNINGS PER COMMON SHARE - DILUTED	$	0.44	$	0.55	$	0.40	$	0.44

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~

(In Thousands) (Unaudited)


	Three Months Ended				Three Months Ended
	March 31,		March 31,		March 31,		March 31,
	2022		2021		2023		2022
Net income	$	6,895	$	8,787	$	6,253	$	6,895

Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities		(32,025)		(6,114)
Reclassification adjustment for (gains) realized in income		(2)		0
Other comprehensive loss on available-for-sale debt securities		(32,027)		(6,114)
Unrealized holding gains (losses) on available-for-sale debt securities						8,993		(32,025)
Reclassification adjustment for gains realized in income						(7)		(2)
Other comprehensive income (loss) on available-for-sale debt securities						8,986		(32,027)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		133		(5)		(8)		133
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(11)		(4)		(14)		(11)
Other comprehensive income (loss) on pension and postretirement obligations		122		(9)
Other comprehensive (loss) income on pension and postretirement obligations						(22)		122

Other comprehensive loss before income tax		(31,905)		(6,123)
Income tax related to other comprehensive loss		6,701		1,287
Other comprehensive income (loss) before income tax						8,964		(31,905)
Income tax related to other comprehensive (income) loss						(1,883)		6,701

Net other comprehensive loss		(25,204)		(4,836)
Net other comprehensive income (loss)						7,081		(25,204)

Comprehensive (loss) income	$	(18,309)	$	3,951
Comprehensive income (loss)					$	13,334	$	(18,309)

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)


	Three Months Ended				Three Months Ended
	March 31,		March 31,		March 31,		March 31,
	2022		2021		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	6,895	$	8,787	$	6,253	$	6,895
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		891		259
(Credit) provision for credit losses						(352)		891
Realized gains on available-for-sale debt securities, net		(2)		0		(7)		(2)
Net amortization of securities		714		488		530		714
Increase in cash surrender value of life insurance		(135)		(150)		(138)		(135)
Depreciation and amortization of bank premises and equipment		507		553		570		507
Net accretion of purchase accounting adjustments		(340)		(818)		(84)		(340)
Stock-based compensation		368		341		377		368
Deferred income taxes		770		462		526		770
Increase in fair value of servicing rights		(2)		(75)
Decrease (increase) in fair value of servicing rights						83		(2)
Gains on sales of loans, net		(382)		(1,064)		(74)		(382)
Origination of loans held for sale		(14,752)		(32,478)		(2,493)		(14,752)
Proceeds from sales of loans held for sale		13,661		30,727		2,265		13,661
Increase in accrued interest receivable and other assets		(963)		(2,190)		(851)		(963)
(Decrease) increase in accrued interest payable and other liabilities		(1,663)		891
Increase (decrease) in accrued interest payable and other liabilities						2,982		(1,663)
Other		81		(20)		(38)		81
Net Cash Provided by Operating Activities		5,648		5,713		9,549		5,648
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit		0		(1,250)
Proceeds from maturities of certificates of deposit						1,250		0
Proceeds from sales of available-for-sale debt securities						16,658		0
Proceeds from calls and maturities of available-for-sale debt securities		18,746		17,093		17,024		18,746
Purchase of available-for-sale debt securities		(62,949)		(34,494)		(2,000)		(62,949)
Redemption of Federal Home Loan Bank of Pittsburgh stock		337		584		3,634		337
Purchase of Federal Home Loan Bank of Pittsburgh stock		(282)		(473)		(5,462)		(282)
Net decrease in loans		26,807		29,936
Proceeds from bank owned life insurance		0		287
Proceeds from sales of premises and equipment		0		495
Net (increase) decrease in loans						(4,392)		26,807
Purchase of premises and equipment		(993)		(239)		(276)		(993)
Proceeds from sale of foreclosed assets		139		0		0		139
Other		75		70		70		75
Net Cash (Used in) Provided by Investing Activities		(18,120)		12,009
Net Cash Provided by (Used in) Investing Activities						26,506		(18,120)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		35,952		103,793
Net increase (decrease) in short-term borrowings		554		(10,211)
Net (decrease) increase in deposits						(81,536)		35,952
Net increase in short-term borrowings						13,334		554
Proceeds from long-term borrowings - FHLB advances						43,403		0
Repayments of long-term borrowings - FHLB advances		(7,380)		(4,024)		(7,026)		(7,380)
Sale of treasury stock		141		77		0		141
Purchases of treasury stock		(3,380)		(157)		(1,865)		(3,380)
Common dividends paid		(4,017)		(3,912)		(3,951)		(4,017)
Net Cash Provided by Financing Activities		21,870		85,566
INCREASE IN CASH AND CASH EQUIVALENTS		9,398		103,288
Net Cash (Used in) Provided by Financing Activities						(37,641)		21,870
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(1,586)		9,398
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		95,848		96,017		47,698		95,848
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	105,246	$	199,305	$	46,112	$	105,246
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of certificates of deposit	$	0	$	750
Increase in accrued purchase of available-for-sale debt securities	$	3,770	$	6,245
(Decrease) increase in accrued purchase of available-for-sale debt securities					$	(2,000)	$	3,770
Assets acquired through foreclosure of real estate loans	$	0	$	134	$	184	$	0
Interest paid	$	1,116	$	2,193	$	4,836	$	1,116
Income taxes paid	$	46	$	47	$	64	$	46

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands Except Share and Per Share Data) (Unaudited)

Accumulated

Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Three Months Ended March 31, 2022

Shares

Shares

Stock

Capital

Earnings

Income (Loss)

Stock

Total
Balance, December 31, 2021

16,030,172

271,082

$
16,030

$
144,453

$
142,612

$
5,026

$
(6,716)

$
301,405
Net income

6,895

6,895
Other comprehensive loss, net

(25,204)

(25,204)
Cash dividends declared on common stock, $.28 per share

(4,434)

(4,434)
Shares issued for dividend reinvestment plan

(16,134)

12

405

417
Shares issued from treasury and redeemed related to exercise of stock options

(7,024)

(34)

175

141
Restricted stock granted

(78,243)

(1,932)

1,932

0
Forfeiture of restricted stock

6,072

124

(124)

0
Stock-based compensation expense

368

368
Purchase of restricted stock for tax withholding

6,054

(153)

(153)
Treasury stock purchases

129,642

(3,227)

(3,227)
Balance, March 31, 2022

16,030,172

311,449

$
16,030

$
142,991

$
145,073

$
(20,178)

$
(7,708)

$
276,208

Three Months Ended March 31, 2021
















Balance, December 31, 2020

15,982,815

70,831

$
15,983

$
143,644

$
129,703

$
11,795

$
(1,369)

$
299,756
Net income

8,787

8,787
Other comprehensive loss, net

(4,836)

(4,836)
Cash dividends declared on common stock, $.27 per share

(4,314)

(4,314)
Shares issued for dividend reinvestment plan

19,475

19

383

402
Shares issued from treasury and redeemed related to exercise of stock options

(5,414)

(28)

105

77
Restricted stock granted

10,989

(63,402)

11

(1,240)

1,229

0
Forfeiture of restricted stock

3,791

73

(73)

0
Stock-based compensation expense

341

341
Purchase of restricted stock for tax withholding

7,659

(157)

(157)
Balance, March 31, 2021

16,013,279

13,465

$
16,013

$
143,173

$
134,176

$
6,959

$
(265)

$
300,056


									Accumulated
									Other
	Common	Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
Three Months Ended March 31, 2023	Shares	Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, December 31, 2022	16,030,172	511,353	$	16,030	$	143,950	$	151,743	$	(49,878)	$	(12,520)	$	249,325
Adoption of ASU 2016-13 (CECL)								(1,652)						(1,652)
Net income								6,253						6,253
Other comprehensive income, net										7,081				7,081
Cash dividends declared on common stock, $.28 per share								(4,354)						(4,354)
Shares issued for dividend reinvestment plan		(17,695)				(29)						432		403
Restricted stock granted		(53,788)				(1,314)						1,314		0
Forfeiture of restricted stock		19,222				411						(411)		0
Stock-based compensation expense						377								377
Purchase of restricted stock for tax withholding		8,615										(203)		(203)
Treasury stock purchases		77,430										(1,662)		(1,662)
Balance, March 31, 2023	16,030,172	545,137	$	16,030	$	143,395	$	151,990	$	(42,797)	$	(13,050)	$	255,568

Three Months Ended March 31, 2022
Balance, December 31, 2021	16,030,172	271,082	$	16,030	$	144,453	$	142,612	$	5,026	$	(6,716)	$	301,405
Net income								6,895						6,895
Other comprehensive loss, net										(25,204)				(25,204)
Cash dividends declared on common stock, $.28 per share								(4,434)						(4,434)
Shares issued for dividend reinvestment plan		(16,134)				12						405		417
Shares issued from treasury related to exercise of stock options		(7,024)				(34)						175		141
Restricted stock granted		(78,243)				(1,932)						1,932		0
Forfeiture of restricted stock		6,072				124						(124)		0
Stock-based compensation expense						368								368
Purchase of restricted stock for tax withholding		6,054										(153)		(153)
Treasury stock purchases		129,642										(3,227)		(3,227)
Balance, March 31, 2022	16,030,172	311,449	$	16,030	$	142,991	$	145,073	$	(20,178)	$	(7,708)	$	276,208

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”). The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services, LLC and Northern Tier Holding LLC. C&N Bank is the sole member of C&N Financial Services, LLC and Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, ~~2021,~~2022, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2022 information has been reclassified for consistency with the 2023 presentation.

Operating results reported for the three-month period ended March 31, ~~2022~~2023 might not be indicative of the results for the year ending December 31, ~~2022.~~2023. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on the consolidated financial statements issued in the near future.

~~Recently Issued But Not Yet Effective~~Recent Accounting Pronouncements - Adopted

On January 1, 2023, the Corporation adopted ASU 2016-13 Financial ~~Instruments-Credit~~Instruments – Credit Losses (Topic 326)~~, as modified by subsequent ASUs, changes accounting for credit losses~~: Measurement of Credit Losses on ~~loans receivable and debt securities from an~~Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to anas the current expected credit loss (“CECL”) methodology. ~~Among other things, ASU 2016-13~~CECL requires ~~the measurement~~an estimate of ~~all expected~~ credit losses for the remaining estimated life of the financial ~~assets held at the reporting date based on~~asset using historical experience, current conditions, and reasonable and supportable ~~forecasts. Accordingly, ASU 2016-13 requires~~forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the ~~use of forward-looking information~~net amount expected to ~~form~~be collected by using an allowance for credit ~~loss estimates. Many~~losses. Purchased credit deteriorated (“PCD”) loans will receive an initial allowance at the acquisition date that represents an adjustment to the amortized cost basis of the ~~loss estimation techniques applied today will still be permitted, though the inputs~~loan, with no impact to ~~those techniques will change to reflect the full amount of expected credit losses.~~ earnings.

In addition, ~~ASU 2016-13 amends~~CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available for sale debt securities if management does not intend to sell and does not believe that it is more likely than not, they will be required to sell. The Corporation adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to January 1, 2023. As of December 31, 2022, the Company did not have any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the Company determined that an allowance for credit losses on available for sale debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies and the Corporation’s data and system needs to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.was not necessary.

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

●

~~Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.~~

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). The following table illustrates the impact on the allowance for credit losses from the adoption of ASC 326:


	As Reported
	Under		Pre-ASC 326		Impact of
	ASC 326		Adoption		ASC 326
(In Thousands)	January 1, 2023		December 31, 2022		Adoption
Loans receivable	$	1,740,846	$	1,740,040	$	806
Allowance for credit losses on loans		18,719		16,615		2,104
Allowance for credit losses on off-balance sheet exposures (included in accrued interest and other liabilities)		1,218		425		793
Deferred tax asset, net		21,323		20,884		439
Retained earnings		150,091		151,743		(1,652)

The Corporation adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of PCD assets was adjusted to establish the allowance for credit losses. Essentially all of the PCD loans were reported as nonaccrual loans at January 1, 2023 and March 31, 2023.

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for Troubled Debt Restructurings (“TDRs”) by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation adopted ASU 2022-02 on January 1, 2023. Changes in disclosure requirements in accordance with ASU 2022-02 are reflected in Note 6. The adoption of ASU 2022-02 did not have a material impact on the consolidated financial statements.

Accounting Policies

The Corporation’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited consolidated financial statements and notes for the year ended December 31, 2022 and are contained in the Corporation’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Allowance for Credit Losses – Available-for-Sale Debt Securities

For available-for-sale debt securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Corporation has the intent to sell the security or it is more likely than not that the Corporation will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Corporation evaluates whether the decline in fair value is the result of credit losses or other factors. The Corporation has elected the practical expedient of zero credit loss estimates for securities issued or guaranteed by U.S. Government entities or agencies. In making the credit loss assessment of securities not issued or guaranteed by U.S. Government entities or agencies, the Corporation may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income.

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Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes an available-for-sale debt security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At March 31, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.

Accrued interest receivable on available-for-sale debt securities totaled $2,659,000 at March 31, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses on Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Accrued interest receivable on loans totaled $6,109,000 at March 31, 2023 and was excluded from the estimate of credit losses.

The allowance for credit losses (“ACL”) includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis).

Evaluation of Expected Losses on Individual Loans

Loans evaluated on an individual basis are identified based on a detailed assessment of certain larger loan relationships, and their related credit risk ratings, by a management committee referred to as the Watch List Committee. The allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Corporation will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

The scope of loans reviewed individually for credit loss each quarter includes all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Additionally, all PCD loans are evaluated individually for credit loss.

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Collective Evaluation of Expected Losses – Pool Basis

The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Corporation has identified the following portfolio segments and calculates the allowance for credit losses for each using the weighted-average remaining maturity (“WARM”) method:

Commercial real estate - nonowner occupied, further broken down into the following classes:

Nonowner occupied

Multi-family (5 or more) residential

1-4 Family - commercial purpose

Commercial real estate - owner occupied

All other commercial loans, further broken down into the following classes:

Commercial and industrial

Commercial lines of credit

Political subdivisions

Commercial construction and land

Other commercial loans

Residential mortgage loans, further broken down into the following classes:

1-4 Family – residential

1-4 Family residential construction

Consumer loans, further broken down into the following classes:

Consumer lines of credit (including HELOCs)

All other consumer

In determining the pools for collective evaluation, management used a combination of loan purpose, collateral and payment type (for example, lines of credit vs. amortizing). The pools identified are similar to the loan classes used in the Corporation’s financial reporting for several years, with several exceptions including the following which are of the most significance:

●

~~Simplifies the assessment of hedge effectiveness~~Commercial real estate secured loans are broken out between non-owner occupied and ~~allows hedging relationships affected by reference rate reform to continue.~~owner-occupied

●

Loans secured by 1-4 family residential mortgages are broken out between consumer-purpose and commercial-purpose

●

Commercial lines of credit are broken out as an individual category

~~The amendments in ASU 2020-04 are effective as~~

Each of ~~March 12, 2020 through December 31, 2022. The Corporation has formed a cross functional management team~~these changes was made to ~~evaluate~~better sort loans into pools with similar risk and ~~implement changes to contracts with rates indexed to LIBOR and expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.~~cash flow characteristics.

Estimation Method - WARM (Weighted-Average Remaining Maturity Method)

In applying the WARM method, for each pool identified above, the Corporation determined the annual net charge-offs as a percentage of average total loan balances (net charge-off percentage). In the January 1, 2023 calculation, the Corporation used the annualized net charge-off percentage over the prior 5 calendar years. In the March 31, 2023 calculation, the Corporation used the net charge-off percentage for the 5.25-year period ended March 31, 2023. For each loan pool, the average annualized net charge-off percentage was multiplied by the estimated weighted-average remaining average life of the loans to calculate the loss rate.

The calculation of the estimated weighted-average remaining life of each loan pool was based on instrument-level data, with contractual principal payments adjusted for the estimated impact of prepayments. Commercial lines of credit and other revolving credit facilities were generally assumed to repay after 1 year. The estimated weighted-average remaining life of the entire portfolio was calculated to be 4.31 years at March 31, 2023 and 4.36 years at January 1, 2023. Management determined that use of the Corporation’s net charge-off experience over a 5.25-year period at March 31, 2023 and 5-year period at January 1, 2023 would provide a reasonable time period to include in the WARM expected loss rate calculations in relationship to the weighted-average life of the portfolio overall and to each of the pools.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Qualitative Factors

The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments generally increase allowance levels and include adjustments for factors deemed relevant, including: the nature and volume of portfolio changes, including loan portfolio growth; concentrations of credit based on loan type (such as non-owner occupied commercial real estate) or industry; the volume and severity of past due, nonaccrual or adversely classified loans; trends in real estate or other collateral values; lending policies and procedures, including changes in underwriting and collections practices; credit review function; lending, credit and other relevant management experience and risk tolerance; external factors and economic conditions not already captured.

Economic Forecast

ASC Topic 326 requires management to consider forward-looking information that is both reasonable and supportable and relevant to the collectability of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a financial asset or a period shorter than the contractual term. In that regard, management has selected a forecast period of 2 years, which is shorter than the estimated weighted-average remaining life of the loan portfolio.

The Corporation calculated an additional expected credit loss based on establishing a correlation between past loss experience and an economic statistic. This additional credit loss is added to the allowance calculation, conceptually for the first 2 years of the weighted-average remaining life of the portfolio after which time the credit loss for each pool is determined based on the WARM historical loss rate as adjusted for qualitative factors.

Allowance for Credit Losses on Off-Balance Sheet Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Corporation records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Corporation’s statements of income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for off-balance sheet exposures is included in accrued interest and other liabilities in the Corporation’s unaudited consolidated balance sheets and the related credit expense is recorded in the (credit) provision for credit losses in the unaudited consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2. PER SHARE DATA

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.


(In Thousands, Except Share and Per Share Data)	Three Months Ended				Three Months Ended
	March 31,		March 31,		March 31,		March 31,
	2022		2021		2023		2022
Basic
Net income	$	6,895	$	8,787	$	6,253	$	6,895
Less: Dividends and undistributed earnings allocated to participating securities		(60)		(65)		(52)		(60)
Net income attributable to common shares	$	6,835	$	8,722	$	6,201	$	6,835
Basic weighted-average common shares outstanding		15,645,474		15,850,217		15,409,680		15,645,474
Basic earnings per common share (a)	$	0.44	$	0.55	$	0.40	$	0.44
Diluted
Net income attributable to common shares	$	6,835	$	8,722	$	6,201	$	6,835
Basic weighted-average common shares outstanding		15,645,474		15,850,217		15,409,680		15,645,474
Dilutive effect of potential common stock arising from stock options		3,701		4,234		937		3,701
Diluted weighted-average common shares outstanding		15,649,175		15,854,451		15,410,617		15,649,175
Diluted earnings per common share (a)	$	0.44	$	0.55	$	0.40	$	0.44
Weighted-average nonvested restricted shares outstanding		138,141		118,442		128,435		138,141

(a)	Basic and diluted earnings per share under the two-class method are determined on net income reported on the consolidated statements of income, less earnings allocated to non-vested restricted shares with nonforfeitable dividends (participating securities).

Anti-dilutive stock options are excluded from earnings per share calculations. There were 0no anti-dilutive instruments in the three-month periods ended March 31, ~~2022~~2023 and ~~2021.~~

2022.

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3. COMPREHENSIVE INCOME (LOSS) ~~INCOME~~

Comprehensive income (loss) ~~income~~ is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss) ~~income.~~. The components of other comprehensive income (loss) ~~income,~~, and the related tax effects, are as follows:


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax		Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount		Amount		Effect		Amount
Three Months Ended March 31, 2022
Three Months Ended March 31, 2023
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(32,025)	$	6,726	$	(25,299)
Unrealized holding gains on available-for-sale debt securities							$	8,993	$	(1,888)	$	7,105
Reclassification adjustment for (gains) realized in income		(2)		0		(2)		(7)		1		(6)
Other comprehensive loss from available-for-sale debt securities		(32,027)		6,726		(25,301)
Other comprehensive income from available-for-sale debt securities								8,986		(1,887)		7,099
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		133		(27)		106		(8)		1		(7)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(11)		2		(9)		(14)		3		(11)
Other comprehensive income on unfunded retirement obligations		122		(25)		97
Total other comprehensive loss	$	(31,905)	$	6,701	$	(25,204)
Other comprehensive loss on unfunded retirement obligations								(22)		4		(18)
Total other comprehensive income							$	8,964	$	(1,883)	$	7,081


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax		Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount		Amount		Effect		Amount
Three Months Ended March 31, 2021
Available-for-sale debt securities,
Three Months Ended March 31, 2022
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(6,114)	$	1,285	$	(4,829)	$	(32,025)	$	6,726	$	(25,299)
Reclassification adjustment for (gains) realized in income								(2)		0		(2)
Other comprehensive loss from available-for-sale debt securities							$	(32,027)	$	6,726	$	(25,301)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		(5)		1		(4)		133		(27)		106
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(4)		1		(3)		(11)		2		(9)
Other comprehensive loss on unfunded retirement obligations		(9)		2		(7)
Other comprehensive income on unfunded retirement obligations								122		(25)		97
Total other comprehensive loss	$	(6,123)	$	1,287	$	(4,836)	$	(31,905)	$	6,701	$	(25,204)

The amounts shown in the table immediately above are included in the following line items in the consolidated statements of income:


		Affected Line Item in the
Description		Consolidated Statements of Income
Reclassification adjustment for (gains) realized in income (before-tax)		Realized gains on available-for-sale debt securities, net
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)		Other noninterest expense
Income tax effect		Income tax provision

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Changes in the components of accumulated other comprehensive (loss) income are as follows and are presented net of tax:


(In Thousands)	Unrealized				Accumulated		Unrealized				Accumulated
	(Losses)		Unfunded		Other		(Losses)		Unfunded		Other
	Gains		Retirement		Comprehensive		Gains		Retirement		Comprehensive
	on Securities		Obligations		(Loss) Income		on Securities		Obligations		(Loss) Income
Three Months Ended March 31, 2023
Balance, beginning of period							$	(50,370)	$	492	$	(49,878)
Other comprehensive income during three months ended March 31, 2023								7,099		(18)		7,081
Balance, end of period							$	(43,271)	$	474	$	(42,797)

Three Months Ended March 31, 2022
Balance, beginning of period	$	4,809	$	217	$	5,026	$	4,809	$	217	$	5,026
Other comprehensive (loss) income during three months ended March 31, 2022		(25,301)		97		(25,204)
Other comprehensive loss during three months ended March 31, 2022								(25,301)		97		(25,204)
Balance, end of period	$	(20,492)	$	314	$	(20,178)	$	(20,492)	$	314	$	(20,178)

Three Months Ended March 31, 2021
Balance, beginning of period	$	11,676	$	119	$	11,795
Other comprehensive loss during three months ended March 31, 2021		(4,829)		(7)		(4,836)
Balance, end of period	$	6,847	$	112	$	6,959

4. CASH AND DUE FROM BANKS

Cash and due from banks at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 include the following:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Cash and cash equivalents	$	105,246	$	95,848	$	46,112	$	47,698
Certificates of deposit		9,100		9,100		6,100		7,350
Total cash and due from banks	$	114,346	$	104,948	$	52,212	$	55,048

Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had 0 required reserves at March 31, 2022 or December 31, 2021.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

5. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized as follows:

(In Thousands)

March 31, 2022

Gross

Gross

Unrealized

Unrealized

Amortized

Holding

Holding

Fair


Cost

Gains

Losses

Value

Obligations of the U.S. Treasury

$
38,152

$
0

$
(1,658)

$
36,494
Obligations of U.S. Government agencies

24,455

150

(1,197)

23,408
Bank holding company debt securities

24,942

0

(899)

24,043
Obligations of states and political subdivisions:


Tax-exempt

149,140

963

(6,470)

143,633
Taxable

73,732

293

(4,396)

69,629
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

112,122

107

(5,661)

106,568
Residential collateralized mortgage obligations

45,628

4

(1,764)

43,868
Commercial mortgage-backed securities

90,682

119

(5,531)

85,270
Total available-for-sale debt securities

$
558,853

$
1,636

$
(27,576)

$
532,913

(In Thousands)

December 31, 2021

Gross

Gross

Unrealized

Unrealized

Amortized

Holding

Holding

Fair


Cost

Gains

Losses

Value

Obligations of the U.S. Treasury

$
25,058

$
52

$
(198)

$
24,912
Obligations of U.S. Government agencies

23,936

563

(408)

24,091
Bank holding company debt securities

18,000

18

(31)

17,987
Obligations of states and political subdivisions:


Tax-exempt

143,427

4,749

(148)

148,028
Taxable

72,182

1,232

(649)

72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

98,048

705

(572)

98,181
Residential collateralized mortgage obligations

44,015

437

(205)

44,247
Commercial mortgage-backed securities

86,926

1,548

(1,006)

87,468
Total available-for-sale debt securities

$
511,592

$
9,304

$
(3,217)

$
517,679


(In Thousands)	March 31, 2023
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value

Obligations of the U.S. Treasury	$	33,924	$	0	$	(2,761)	$	31,163
Obligations of U.S. Government agencies		25,479		0		(2,131)		23,348
Bank holding company debt securities		28,947		0		(4,224)		24,723
Obligations of states and political subdivisions:
Tax-exempt		128,285		330		(10,803)		117,812
Taxable		67,076		0		(9,504)		57,572
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		109,028		0		(11,221)		97,807
Residential collateralized mortgage obligations		42,296		0		(4,179)		38,117
Commercial mortgage-backed securities		84,449		10		(10,264)		74,195
Private label commercial mortgage-backed securities		8,105		10		(38)		8,077
Total available-for-sale debt securities	$	527,589	$	350	$	(55,125)	$	472,814

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


(In Thousands)	December 31, 2022
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value

Obligations of the U.S. Treasury	$	35,166	$	0	$	(3,330)	$	31,836
Obligations of U.S. Government agencies		25,938		0		(2,508)		23,430
Bank holding company debt securities		28,945		0		(3,559)		25,386
Obligations of states and political subdivisions:
Tax-exempt		146,149		319		(13,845)		132,623
Taxable		68,488		0		(11,676)		56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		112,782		0		(12,841)		99,941
Residential collateralized mortgage obligations		44,868		0		(4,572)		40,296
Commercial mortgage-backed securities		91,388		0		(11,702)		79,686
Private label commercial mortgage-backed securities		8,070		2		(49)		8,023
Total available-for-sale debt securities	$	561,794	$	321	$	(64,082)	$	498,033

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions ~~that are not deemed to be other-than-temporarily impaired,~~ aggregated by length of time that individual securities have been in a continuous unrealized loss position at March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

March 31, 2022

Less Than 12 Months

12 Months or More

Total
(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Obligations of the U.S. Treasury

$
36,494

$
(1,658)

$
0

$
0

$
36,494

$
(1,658)
Obligations of U.S. Government agencies

4,812

(61)

11,363

(1,136)

16,175

(1,197)
Bank holding company debt securities

21,043

(899)

0

0

21,043

(899)
Obligations of states and political subdivisions:

Tax-exempt

104,057

(6,341)

1,719

(129)

105,776

(6,470)
Taxable

46,674

(3,692)

5,814

(704)

52,488

(4,396)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:










Residential pass-through securities

98,253

(5,374)

3,737

(287)

101,990

(5,661)
Residential collateralized mortgage obligations

41,916

(1,764)

0

0

41,916

(1,764)
Commercial mortgage-backed securities

67,400

(4,568)

7,153

(963)

74,553

(5,531)
Total temporarily impaired available-for-sale debt securities

$
420,649

$
(24,357)

$
29,786

$
(3,219)

$
450,435

$
(27,576)

December 31, 2021

Less Than 12 Months

12 Months or More

Total
(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Obligations of the U.S. Treasury

$
18,886

$
(198)

$
0

$
0

$
18,886

$
(198)
Obligations of U.S. Government agencies

9,735

(264)

4,856

(144)

14,591

(408)
Bank holding company debt securities

12,969

(31)

0

0

12,969

(31)
Obligations of states and political subdivisions:

Tax-exempt

17,852

(141)

549

(7)

18,401

(148)
Taxable

31,261

(517)

3,277

(132)

34,538

(649)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:










Residential pass-through securities

71,451

(572)

0

0

71,451

(572)
Residential collateralized mortgage obligations

15,117

(205)

0

0

15,117

(205)
Commercial mortgage-backed securities

52,867

(1,006)

0

0

52,867

(1,006)
Total temporarily impaired available-for-sale debt securities

$
230,138

$
(2,934)

$
8,682

$
(283)

$
238,820

$
(3,217)

~~Gross realized gains and losses from available-for-sale debt securities were as follows:~~


March 31, 2023					Less Than 12 Months				12 Months or More				Total
(In Thousands)	Three Months Ended				Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	March 31,		March 31,		Value		Losses		Value		Losses		Value		Losses
	2022		2021
Gross realized gains from sales	$	2	$	0
Gross realized losses from sales		0		0
Net realized gains	$	2	$	0
Obligations of the U.S. Treasury					$	0	$	0	$	31,163	$	(2,761)	$	31,163	$	(2,761)
Obligations of U.S. Government agencies						8,867		(361)		14,481		(1,770)		23,348		(2,131)
Bank holding company debt securities						5,894		(1,106)		18,829		(3,118)		24,723		(4,224)
Obligations of states and political subdivisions:
Tax-exempt						12,891		(177)		97,284		(10,626)		110,175		(10,803)
Taxable						10,170		(380)		46,902		(9,124)		57,072		(9,504)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities						15,066		(419)		82,741		(10,802)		97,807		(11,221)
Residential collateralized mortgage obligations						7,821		(257)		30,296		(3,922)		38,117		(4,179)
Commercial mortgage-backed securities						14,886		(702)		56,963		(9,562)		71,849		(10,264)
Private label commercial mortgage-backed securities						4,790		(38)		0		0		4,790		(38)
Total temporarily impaired available-for-sale debt securities					$	80,385	$	(3,440)	$	378,659	$	(51,685)	$	459,044	$	(55,125)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2022	Less Than 12 Months				12 Months or More				Total
(In Thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of the U.S. Treasury	$	20,192	$	(1,939)	$	11,644	$	(1,391)	$	31,836	$	(3,330)
Obligations of U.S. Government agencies		8,509		(430)		12,921		(2,078)		21,430		(2,508)
Bank holding company debt securities		14,248		(1,697)		11,138		(1,862)		25,386		(3,559)
Obligations of states and political subdivisions:
Tax-exempt		106,204		(11,023)		15,153		(2,822)		121,357		(13,845)
Taxable		28,901		(4,739)		27,761		(6,937)		56,662		(11,676)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		45,410		(4,226)		54,531		(8,615)		99,941		(12,841)
Residential collateralized mortgage obligations		28,670		(2,042)		11,626		(2,530)		40,296		(4,572)
Commercial mortgage-backed securities		40,408		(2,585)		39,278		(9,117)		79,686		(11,702)
Private label commercial mortgage-backed securities		4,762		(49)		0		0		4,762		(49)
Total temporarily impaired available-for-sale debt securities	$	297,304	$	(28,730)	$	184,052	$	(35,352)	$	481,356	$	(64,082)

Gross realized gains and losses from available-for-sale debt securities were as follows:


(In Thousands)	Three Months Ended
	March 31,		March 31,
	2023		2022
Gross realized gains from sales	$	80	$	2
Gross realized losses from sales		(73)		0
Net realized gains	$	7	$	2

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of March 31, ~~2022.~~2023. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	March 31, 2022				March 31, 2023
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	12,457	$	12,483	$	11,807	$	11,688
Due from one year through five years		77,304		75,288		69,781		65,627
Due from five years through ten years		86,104		82,906		80,332		71,674
Due after ten years		134,556		126,530		121,791		105,629
Sub-total		310,421		297,207		283,711		254,618
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		112,122		106,568		109,028		97,807
Residential collateralized mortgage obligations		45,628		43,868		42,296		38,117
Commercial mortgage-backed securities		90,682		85,270		84,449		74,195
Private label commercial mortgage-backed securities						8,105		8,077
Total	$	558,853	$	532,913	$	527,589	$	472,814

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Investment securities carried at ~~$237,165,000~~$245,374,000 at March 31, ~~2022~~2023 and ~~$241,428,000~~$277,302,000 at December 31, ~~2021~~2022 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements and Note 11 for information related to securities pledged against interest rate swap obligations.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.

A summary of information management considered in evaluating debt and equity securities for ~~OTTI~~credit losses at March 31, 2023 and December 31, 2022 is provided below.

Debt Securities

As reflected in the table above, gross unrealized holding losses on available-for-sale debt securities totaled $55,125,000 at March 31, 2023 and $64,082,000 at December 31, 2022. At March 31, 2023, the Corporation does not have the intent to sell, nor is it more likely than not it will be required to sell, these securities before it is able to recover the amortized cost basis. The unrealized holding losses were consistent with significant increases in market interest rates that occurred in 2022.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, management performed an assessment for possible ~~OTTI~~credit losses of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. ~~The extent of individual analysis applied to each security depended on the size~~At March 31, 2023 and December 31, 2022, all of the Corporation’s ~~investment, as well as management’s perception~~holdings of ~~the credit risk associated with each security. As reflected in the table above, the fair value of available-for-sale~~bank holding company debt securities, asobligations of March 31, 2022 was lower than the amortized cost basis by $25,940,000, or 4.6%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. The unrealized decrease in fair value of the portfolio in the first quarter 2022 was consistent with the significant increase in market interest rates that occurred during the period. states and political subdivisions and private label commercial mortgage-backed securities were investment grade and there have been no payment defaults.

Based on the results of the assessment, ~~management believes~~ there ~~were~~was no ~~credit-related declines in fair value and that impairment of~~ACL required on available-for-sale debt securities in an unrealized loss position at March 31, ~~2022~~2023 and December 31, ~~2021 is temporary.~~2022.

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was ~~$9,258,000~~$15,996,000 at March 31, ~~2022~~2023 and ~~$9,313,000~~$14,168,000 at December 31, ~~2021.~~2022. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of ~~$926,000~~$873,000 at March 31, ~~2022~~2023 and ~~$971,000~~$859,000 at December 31, ~~2021,~~2022, consisting exclusively of 1one mutual fund. There was an unrealized loss on the mutual fund of ~~$45,000~~$127,000 at March 31, ~~2022~~2023 and ~~$29,000~~$141,000 at December 31, ~~2021.~~2022. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)

March 31,

December 31,

2022

2021
Commercial:




Commercial loans secured by real estate

$
585,677

$
569,840
Commercial and industrial

159,793

159,073
Paycheck Protection Program - 1st Draw

887

1,356
Paycheck Protection Program - 2nd Draw

11,490

25,508
Political subdivisions

81,975

81,301
Commercial construction and land

37,258

60,579
Loans secured by farmland

12,507

11,121
Multi-family (5 or more) residential

53,141

50,089
Agricultural loans

2,588

2,351
Other commercial loans

14,827

17,153
Total commercial

960,143

978,371
Residential mortgage:




Residential mortgage loans - first liens

481,119

483,629
Residential mortgage loans - junior liens

22,572

23,314
Home equity lines of credit

39,649

39,252
1-4 Family residential construction

16,945

23,151
Total residential mortgage

560,285

569,346
Consumer

17,762

17,132
Total

1,538,190

1,564,849
Less: allowance for loan losses

(14,271)

(13,537)
Loans, net

$
1,523,919

$
1,551,312


	March 31,		December 31,
	2023		2022⁽¹⁾
Commercial real estate - nonowner occupied	$	682,698	$	675,597
Commercial real estate - owner occupied		221,766		205,910
All other commercial loans		384,802		410,077
Residential mortgage loans		401,720		393,582
Consumer loans		54,153		54,874
Total		1,745,139		1,740,040
Less: allowance for credit losses on loans		(18,346)		(16,615)
Loans, net	$	1,726,793	$	1,723,425

(1) Total loans at December 31, 2022 include purchased credit impaired loans of $1,027,000.

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of ~~$3,735,000~~$4,506,000 at March 31, ~~2022~~2023 and ~~$4,427,000~~$4,725,000 at December 31, ~~2021.~~2022.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provided SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans are forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of relief from troubled debt restructurings reporting established under Section 4013 of the CARES Act to 60 days after the date on which the national COVID-19 emergency terminates. The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act. Information related to PPP loans advanced pursuant to the CAA are labeled “2nd Draw” within the tables.

The maximum term of PPP loans is five years. Most of the Corporation’s 1st Draw PPP loans have two-year terms, while 2nd Draw PPP loans have five-year terms and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation 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 and a market rate adjustment on acquired PPP loans, are recognized in interest income as a yield adjustment over the term of the loans.

As of March 31, 2022, the recorded investment in 1st Draw PPP loans was $887,000, including contractual principal balances of $905,000, reduced by net deferred origination fees of $18,000. The recorded investment in 2nd Draw PPP loans was $11,490,000, including contractual principal balances of $11,847,000 reduced by net deferred origination fees of $357,000. Interest and fees on PPP loans which are included in taxable interest and fees on loans in the unaudited consolidated statements of income totaled $575,000 in the three-month period ended March 31, 2022 and $1,998,000 in the three-month period ended March 31, 2021.

Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of ~~purchased credit impaired (PCI)~~PCI loans. For the three-month periods ended March 31, ~~2022~~2023 and ~~2021,~~2022, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

(In Thousands)

Three Months Ended

March 31,

March 31,

2022

2021
Market Rate Adjustment

Adjustments to gross amortized cost of loans at beginning of period

$
(637)

$
718
Amortization recognized in interest income

(248)

(366)
Adjustments to gross amortized cost of loans at end of period

$
(885)

$
352
Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$
(3,335)

$
(5,979)
Accretion recognized in interest income

553

797
Adjustments to gross amortized cost of loans at end of period

$
(2,782)

$
(5,182)

~~A summary of PCI loans held at March 31, 2022 and December 31, 2021 is as follows:~~


(In Thousands)	March 31,		December 31,		Three Months Ended
	2022		2021		March 31,		March 31,
Outstanding balance	$	5,966	$	9,802
Carrying amount		3,983		6,558
					2023		2022
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period					$	(916)	$	(637)
Amortization recognized in interest income						(52)		(248)
Adjustments to gross amortized cost of loans at end of period					$	(968)	$	(885)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period					$	(1,840)	$	(3,335)
Accretion recognized in interest income						198		553
Adjustments to gross amortized cost of loans at end of period					$	(1,642)	$	(2,782)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the three-month period ended March 31, 2022, the Corporation received repayments on PCI loans in excess of previous carrying amounts, resulting in income of $1,398,000. This amount is included in interest and fees on taxable loans in the unaudited consolidated statements of income. There was no corresponding income from repayments on PCI loans in the three-month period ended March 31, 2021.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of March 31, 2022 and December 31, 2021, management determined that 0 allowance for credit losses related to unfunded loan commitments was required.

~~Transactions within the allowance for loan losses, summarized by segment and class, for the three-month periods ended March 31, 2022 and 2021 were as follows:~~

Three Months Ended March 31, 2022

December 31, 2021










March 31, 2022
(In Thousands)

Balance

Charge-offs

Recoveries

Provision (Credit)

Balance
Allowance for Loan Losses:










Commercial:










Commercial loans secured by real estate

$
4,405

$
0

$
0

$
612

$
5,017
Commercial and industrial

2,723

(150)

0

268

2,841
Commercial construction and land

637

0

0

(246)

391
Loans secured by farmland

115

0

0

14

129
Multi-family (5 or more) residential

215

0

0

152

367
Agricultural loans

25

0

0

2

27
Other commercial loans

173

0

0

(23)

150
Total commercial

8,293

(150)

0

779

8,922
Residential mortgage:










Residential mortgage loans - first liens

3,650

0

1

159

3,810
Residential mortgage loans - junior liens

184

0

0

(3)

181
Home equity lines of credit

302

0

15

(11)

306
1-4 Family residential construction

202

0

0

(54)

148
Total residential mortgage

4,338

0

16

91

4,445
Consumer

235

(30)

7

25

237
Unallocated

671

0

0

(4)

667
Total Allowance for Loan Losses

$
13,537

$
(180)

$
23

$
891

$
14,271

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Three Months Ended March 31, 2021

December 31, 2020










March 31, 2021
(In Thousands)

Balance

Charge-offs

Recoveries

Provision (Credit)

Balance
Allowance for Loan Losses:










Commercial:










Commercial loans secured by real estate

$
3,051

$
0

$
0

$
299

$
3,350
Commercial and industrial

2,245

0

14

(72)

2,187
Commercial construction and land

454

0

0

22

476
Loans secured by farmland

120

0

0

(9)

111
Multi-family (5 or more) residential

236

0

0

19

255
Agricultural loans

34

0

0

(8)

26
Other commercial loans

168

0

0

(9)

159
Total commercial

6,308

0

14

242

6,564
Residential mortgage:










Residential mortgage loans - first liens

3,524

0

1

(18)

3,507
Residential mortgage loans - junior liens

349

0

0

(15)

334
Home equity lines of credit

281

0

1

(1)

281
1-4 Family residential construction

99

0

0

(21)

78
Total residential mortgage

4,253

0

2

(55)

4,200
Consumer

239

(11)

12

(20)

220
Unallocated

585

0

0

92

677
Total Allowance for Loan Losses

$
11,385

$
(11)

$
28

$
259

$
11,661

The following table presents an analysis of past due loans as of March 31, 2023:


(In Thousands)	As of March 31, 2023
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - nonowner occupied	$	233	$	365	$	6,017	$	676,083	$	682,698
Commercial real estate - owner occupied		484		141		1,612		219,529		221,766
All other commercial loans		827		147		1,680		382,148		384,802
Residential mortgage loans		3,666		398		3,251		394,405		401,720
Consumer loans		283		165		316		53,389		54,153
Total	$	5,493	$	1,216	$	12,876	$	1,725,554	$	1,745,139

~~For the three months ended March~~The following table presents an analysis of past due loans as of December 31, 2022, the provision for loan losses was $891,000, an increase in expense of $632,000 as compared to $259,000 for the three months ended March 31, 2021. The first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000), an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. The first quarter 2021 provision included a net charge of $182,000 related to specific loans (increase in specific allowances on loans of $199,000, partially offset by net recoveries of $17,000), an increase of $92,000 in the unallocated portion of the allowance and a reduction of $15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses.2022:


(In Thousands)	As of December 31, 2022
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - nonowner occupied	$	644	$	947	$	6,350	$	667,656	$	675,597
Commercial real estate - owner occupied		723		141		19		204,099		204,982
All other commercial loans		537		151		11,528		397,762		409,978
Residential mortgage loans		4,540		866		3,974		384,202		393,582
Consumer loans		635		132		187		53,920		54,874
Purchased credit impaired		0		0		1,027		0		1,027
Total	$	7,079	$	2,237	$	23,085	$	1,707,639	$	1,740,040

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” ~~column in the table that follows.~~

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of March 31, 2022 and December 31, 2021:~~

March 31, 2022









Purchased


(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total
Commercial:

Commercial loans secured by real estate

$
547,705

$
18,000

$
16,098

$
0

$
3,874

$
585,677
Commercial and Industrial

144,864

11,030

3,860

0

39

159,793
Paycheck Protection Program - 1st Draw

887

0

0

0

0

887
Paycheck Protection Program - 2nd Draw

11,490

0

0

0

0

11,490
Political subdivisions

81,975

0

0

0

0

81,975
Commercial construction and land

36,496

714

48

0

0

37,258
Loans secured by farmland

11,319

287

901

0

0

12,507
Multi-family (5 or more) residential

52,274

0

867

0

0

53,141
Agricultural loans

2,054

0

534

0

0

2,588
Other commercial loans

14,826

1

0

0

0

14,827
Total commercial

903,890

30,032

22,308

0

3,913

960,143
Residential Mortgage:












Residential mortgage loans - first liens

466,862

7,548

6,640

0

69

481,119
Residential mortgage loans - junior liens

22,182

57

332

0

1

22,572
Home equity lines of credit

38,961

59

629

0

0

39,649
1-4 Family residential construction

16,945

0

0

0

0

16,945
Total residential mortgage

544,950

7,664

7,601

0

70

560,285
Consumer

17,713

0

49

0

0

17,762
Totals

$
1,466,553

$
37,696

$
29,958

$
0

$
3,983

$
1,538,190

December 31, 2021









Purchased


(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total
Commercial:

Commercial loans secured by real estate

$
538,966

$
10,510

$
16,220

$
0

$
4,144

$
569,840
Commercial and Industrial

142,775

10,841

4,694

0

763

159,073
Paycheck Protection Program - 1st Draw

1,356

0

0

0

0

1,356
Paycheck Protection Program - 2nd Draw

25,508

0

0

0

0

25,508
Political subdivisions

81,301

0

0

0

0

81,301
Commercial construction and land

59,816

715

48

0

0

60,579
Loans secured by farmland

10,011

186

924

0

0

11,121
Multi-family (5 or more) residential

47,638

0

873

0

1,578

50,089
Agricultural loans

1,802

0

549

0

0

2,351
Other commercial loans

17,150

3

0

0

0

17,153
Total commercial

926,323

22,255

23,308

0

6,485

978,371
Residential Mortgage:












Residential mortgage loans - first liens

469,044

7,981

6,534

0

70

483,629
Residential mortgage loans - junior liens

22,914

114

283

0

3

23,314
Home equity lines of credit

38,652

59

541

0

0

39,252
1-4 Family residential construction

23,151

0

0

0

0

23,151
Total residential mortgage

553,761

8,154

7,358

0

73

569,346
Consumer

17,092

0

40

0

0

17,132
Totals

$
1,497,176

$
30,409

$
30,706

$
0

$
6,558

$
1,564,849

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of March 31, 2022 and December 31, 2021.

March 31, 2022

Loans:

Allowance for Loan Losses:
(In Thousands)

Individually

Collectively

Individually

Collectively




Evaluated

Evaluated

Totals

Evaluated

Evaluated

Totals
Commercial:

Commercial loans secured by real estate

$
10,593

$
575,084

$
585,677

$
658

$
4,359

$
5,017
Commercial and industrial

664

159,129

159,793

72

2,769

2,841
Paycheck Protection Program - 1st Draw

0

887

887

0

0

0
Paycheck Protection Program - 2nd Draw

0

11,490

11,490

0

0

0
Political subdivisions

0

81,975

81,975

0

0

0
Commercial construction and land

48

37,210

37,258

0

391

391
Loans secured by farmland

82

12,425

12,507

0

129

129
Multi-family (5 or more) residential

0

53,141

53,141

0

367

367
Agricultural loans

60

2,528

2,588

0

27

27
Other commercial loans

0

14,827

14,827

0

150

150
Total commercial

11,447

948,696

960,143

730

8,192

8,922
Residential mortgage:












Residential mortgage loans - first liens

523

480,596

481,119

0

3,810

3,810
Residential mortgage loans - junior liens

35

22,537

22,572

0

181

181
Home equity lines of credit

0

39,649

39,649

0

306

306
1-4 Family residential construction

0

16,945

16,945

0

148

148
Total residential mortgage

558

559,727

560,285

0

4,445

4,445
Consumer

0

17,762

17,762

0

237

237
Unallocated

667

Total

$
12,005

$
1,526,185

$
1,538,190

$
730

$
12,874

$
14,271

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

December 31, 2021

Loans:

Allowance for Loan Losses:
(In Thousands)

Individually

Collectively

Individually

Collectively




Evaluated

Evaluated

Totals

Evaluated

Evaluated

Totals
Commercial:

Commercial loans secured by real estate

$
10,926

$
558,914

$
569,840

$
669

$
3,736

$
4,405
Commercial and industrial

2,503

156,570

159,073

71

2,652

2,723
Paycheck Protection Program - 1st Draw

0

1,356

1,356

0

0

0
Paycheck Protection Program - 2nd Draw

0

25,508

25,508

0

0

0
Political subdivisions

0

81,301

81,301

0

0

0
Commercial construction and land

0

60,579

60,579

0

637

637
Loans secured by farmland

83

11,038

11,121

0

115

115
Multi-family (5 or more) residential

1,578

48,511

50,089

0

215

215
Agricultural loans

0

2,351

2,351

0

25

25
Other commercial loans

0

17,153

17,153

0

173

173
Total commercial

15,090

963,281

978,371

740

7,553

8,293
Residential mortgage:












Residential mortgage loans - first liens

630

482,999

483,629

0

3,650

3,650
Residential mortgage loans - junior liens

14

23,300

23,314

0

184

184
Home equity lines of credit

0

39,252

39,252

0

302

302
1-4 Family residential construction

0

23,151

23,151

0

202

202
Total residential mortgage

644

568,702

569,346

0

4,338

4,338
Consumer

0

17,132

17,132

0

235

235
Unallocated

671

Total

$
15,734

$
1,549,115

$
1,564,849

$
740

$
12,126

$
13,537

~~Summary information related to impaired loans at March 31, 2022 and December 31, 2021 is provided in the table immediately below.~~

(In Thousands)

March 31, 2022

December 31, 2021

Unpaid

Unpaid

Principal

Recorded

Related

Principal

Recorded

Related


Balance

Investment

Allowance

Balance

Investment

Allowance
With no related allowance recorded:












Commercial loans secured by real estate

$
6,253

$
4,137

$
0

$
6,600

$
4,458

$
0
Commercial and industrial

3,199

592

0

5,213

2,431

0
Residential mortgage loans - first liens

637

523

0

656

630

0
Residential mortgage loans - junior liens

142

35

0

124

14

0
Loans secured by farmland

82

82

0

83

83

0
Agricultural loans

60

60

0

0

0

0
Construction and other land loans

48

48

0

0

0

0
Multi-family (5 or more) residential

0

0

0

2,734

1,578

0
Total with no related allowance recorded

10,421

5,477

0

15,410

9,194

0

With a related allowance recorded:

Commercial loans secured by real estate

6,456

6,456

658

6,468

6,468

668
Commercial and industrial

72

72

72

72

72

72
Total with a related allowance recorded

6,528

6,528

730

6,540

6,540

740
Total

$
16,949

$
12,005

$
730

$
21,950

$
15,734

$
740

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~The average balance of impaired loans, excluding purchased credit impaired loans, and interest income recognized on these impaired loans is as follows:~~

(In Thousands)

Interest Income Recognized on

Average Investment in Impaired Loans

Impaired Loans on a Cash Basis

Three Months Ended

Three Months Ended

March 31,

March 31,

2022

2021

2022

2021
Commercial:

Commercial loans secured by real estate

$
10,735

$
12,203

$
129

$
143
Commercial and industrial

1,626

1,082

4

12
Commercial construction and land

48

49

1

1
Loans secured by farmland

82

84

0

1
Multi-family (5 or more) residential

789

1,596

0

61
Agricultural loans

63

69

2

2
Total commercial

13,343

15,083

136

220
Residential mortgage:

Residential mortgage loans - first lien

565

2,451

7

37
Residential mortgage loans - junior lien

37

437

1

5
Home equity lines of credit

0

18

1

0
Total residential mortgage

602

2,906

9

42
Total

$
13,945

$
17,989

$
145

$
262

~~The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:~~

(In Thousands)

March 31, 2022

December 31, 2021

Past Due

Past Due

90+ Days and

90+ Days and


Accruing

Nonaccrual

Accruing

Nonaccrual
Commercial:




Commercial loans secured by real estate

$
1,217

$
10,593

$
738

$
10,885
Commercial and industrial

788

376

30

2,299
Commercial construction and land

0

47

0

48
Loans secured by farmland

0

81

28

83
Multi-family (5 or more) residential

0

0

0

1,578
Agricultural loans

60

0

65

0
Total commercial

2,065

11,097

861

14,893
Residential mortgage:








Residential mortgage loans - first liens

1,139

3,638

1,144

4,005
Residential mortgage loans - junior liens

76

2

69

3
Home equity lines of credit

102

167

102

82
Total residential mortgage

1,317

3,807

1,315

4,090
Consumer

47

41

43

16
Totals

$
3,429

$
14,945

$
2,219

$
18,999

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $3,983,000 at March 31, 2022 and $6,558,000 at December 31, 2021 are classified as nonaccrual.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The table below presents a summary of the contractual aging of loans as of March 31, 2022 and December 31, 2021. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19 are included in the current and past due less than 30 days categoryrows in the table that follows.

(In Thousands)

As of March 31, 2022

As of December 31, 2021


Current &







Current &






Past Due

Past Due

Past Due

Past Due

Past Due

Past Due

Less than

30-89

90+

Less than

30-89

90+

30 Days

Days

Days

Total

30 Days

Days

Days

Total
Commercial:








Commercial loans secured by real estate

$
579,837

$
192

$
5,648

$
585,677

$
563,658

$
762

$
5,420

$
569,840
Commercial and industrial

159,613

75

105

159,793

158,188

72

813

159,073
Paycheck Protection Program - 1st Draw

145

0

742

887

1,339

17

0

1,356
Paycheck Protection Program - 2nd Draw

11,490

0

0

11,490

25,508

0

0

25,508
Political subdivisions

81,975

0

0

81,975

81,301

0

0

81,301
Commercial construction and land

37,083

128

47

37,258

60,509

70

0

60,579
Loans secured by farmland

12,426

0

81

12,507

11,010

0

111

11,121
Multi-family (5 or more) residential

53,141

0

0

53,141

48,532

0

1,557

50,089
Agricultural loans

2,528

0

60

2,588

2,279

7

65

2,351
Other commercial loans

14,827

0

0

14,827

17,153

0

0

17,153
Total commercial

953,065

395

6,683

960,143

969,477

928

7,966

978,371

Residential mortgage:
















Residential mortgage loans - first liens

473,710

5,142

2,267

481,119

475,637

5,038

2,954

483,629
Residential mortgage loans - junior liens

22,457

39

76

22,572

23,229

16

69

23,314
Home equity lines of credit

39,314

233

102

39,649

38,830

279

143

39,252
1-4 Family residential construction

16,945

0

0

16,945

23,151

0

0

23,151
Total residential mortgage

552,426

5,414

2,445

560,285

560,847

5,333

3,166

569,346
Consumer

17,626

48

88

17,762

17,001

72

59

17,132
Totals

$
1,523,117

$
5,857

$
9,216

$
1,538,190

$
1,547,325

$
6,333

$
11,191

$
1,564,849

2320

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Nonaccrual~~The following table presents the recorded investment in loans ~~are included~~by credit quality indicators by year of origination as of March 31, 2023:


(In Thousands)	Term Loans by Year of Origination
	2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial real estate - nonowner occupied
Pass	$	22,553	$	181,862	$	94,978	$	51,333	$	83,703	$	225,718	$	0	$	660,147
Special Mention		0		0		1,531		0		123		10,282		0		11,936
Substandard		0		0		0		20		625		9,970		0		10,615
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - nonowner occupied	$	22,553	$	181,862	$	96,509	$	51,353	$	84,451	$	245,970	$	0	$	682,698

Current period gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

Commercial real estate - owner occupied
Pass	$	17,090	$	33,112	$	52,442	$	13,905	$	18,071	$	80,580	$	0	$	215,200
Special Mention		0		0		2,717		0		0		1,659		0		4,376
Substandard		0		0		0		0		0		2,190		0		2,190
Doubtful		0		0		0		0		0		0		0		0
Total commercial real estate - owner occupied	$	17,090	$	33,112	$	55,159	$	13,905	$	18,071	$	84,429	$	0	$	221,766

Current period gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

All other commercial loans
Pass	$	11,961	$	88,513	$	64,892	$	40,119	$	20,443	$	33,290	$	108,892	$	368,110
Special Mention		0		45		12		146		0		513		1,720		2,436
Substandard		805		1,962		60		189		1,658		1,205		8,377		14,256
Doubtful		0		0		0		0		0		0		0		0
Total all other commercial loans	$	12,766	$	90,520	$	64,964	$	40,454	$	22,101	$	35,008	$	118,989	$	384,802

Current period gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	0	$	5	$	5

Residential mortgage loans
Pass	$	11,807	$	98,765	$	59,192	$	42,155	$	34,008	$	150,715	$	0	$	396,642
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		34		97		372		4,575		0		5,078
Doubtful		0		0		0		0		0		0		0		0
Total residential mortgage loans	$	11,807	$	98,765	$	59,226	$	42,252	$	34,380	$	155,290	$	0	$	401,720

Current period gross charge-offs	$	0	$	0	$	0	$	0	$	0	$	19	$	0	$	19

Consumer loans
Pass	$	2,639	$	6,387	$	3,107	$	1,725	$	432	$	1,243	$	37,876	$	53,409
Special Mention		0		0		0		0		0		0		0		0
Substandard		0		0		2		27		14		103		598		744
Doubtful		0		0		0		0		0		0		0		0
Total consumer loans	$	2,639	$	6,387	$	3,109	$	1,752	$	446	$	1,346	$	38,474	$	54,153

Current period gross charge-offs	$	0	$	21	$	0	$	0	$	0	$	3	$	19	$	43

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in ~~the contractual aging in the immediately preceding table. A~~loans by credit quality indicators as of December 31, 2022:



			Special
(In Thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial real estate - nonowner occupied	$	654,430	$	9,486	$	11,681	$	0	$	675,597
Commercial real estate - owner occupied		202,702		1,909		371		0		204,982
All other commercial loans		383,846		2,516		23,616		0		409,978
Residential mortgage loans		387,944		0		5,638		0		393,582
Consumer loans		54,353		0		521		0		54,874
Purchased credit impaired		0		0		1,027		0		1,027
Total	$	1,683,275	$	13,911	$	42,854	$	0	$	1,740,040

The following table is a summary of the ~~contractual aging of~~Corporation’s nonaccrual loans ~~at March 31, 2022 and December 31, 2021 is as follows:~~by major categories for the periods indicated.


(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+				March 31, 2023						December 31, 2022
	30 Days		Days		Days		Total		Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
March 31, 2022 Nonaccrual Totals	$	7,169	$	1,989	$	5,787	$	14,945
December 31, 2021 Nonaccrual Totals	$	8,800	$	1,227	$	8,972	$	18,999
(In Thousands)									No Allowance		with an Allowance		Loans		Nonaccrual Loans
Commercial real estate - nonowner occupied									$	1,236	$	4,781	$	6,017	$	6,350
Commercial real estate - owner occupied										800		812		1,612		19
All other commercial loans										1,471		209		1,680		11,528
Residential mortgage loans										3,251		0		3,251		3,974
Consumer loans										316		0		316		187
Purchased credit impaired										0		0		0		1,027
Total									$	7,074	$	5,802	$	12,876	$	23,085

~~Loans whose terms are modified are classified~~The Corporation recognized $231,000 of interest income on nonaccrual loans during the three months ended March 31, 2023.

The following table represents the accrued interest receivable written off by reversing interest income during the three months ended March 31, 2023:


	For the Three Months
(In Thousands)	Ended March 31, 2023
Commercial real estate - nonowner occupied	$	26
Residential mortgage loans		3
Consumer loans		2
Total	$	31

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation has certain loans for which repayment is dependent upon the operation or sale of collateral, as ~~troubled debt restructurings (TDRs) if~~ the ~~Corporation grants such borrowers concessions, and it~~borrower is ~~deemed that those borrowers are~~ experiencing financial difficulty. ~~Loans classified as TDRs~~The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

●

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

●

All other commercial loans are typically secured by business assets including inventory, equipment and receivables.

●

Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

●

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans, which are ~~designated as impaired. The outstanding balance of~~individually evaluated to determine expected credit losses, and the related allowance for credit losses on loans ~~subject~~allocated to ~~TDRs, as well as contractual aging information at March 31, 2022 and December 31, 2021 is as follows:~~these loans:


(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+						March 31, 2023
	30 Days		Days		Days		Nonaccrual		Total		Amortized
March 31, 2022 Totals	$	243	$	36	$	60	$	3,894	$	4,233
December 31, 2021 Totals	$	248	$	40	$	65	$	5,452	$	5,805
(In Thousands)											Cost		Allowance
Commercial real estate - nonowner occupied											$	6,017	$	609
Commercial real estate - owner occupied												1,612		183
All other commercial loans												1,680		103
Total											$	9,309	$	895

~~At March 31, 2022 and December 31, 2021, there were 0 commitments~~The following table summarizes the activity related to ~~loan additional funds to borrowers whose loans have been classified as TDRs.~~

~~TDRs that occurred during~~ the ~~three-month periods~~allowance for credit losses for the three months ended March 31, ~~2022 and 2021 are as follows:~~2023 under the CECL methodology.


(Balances in Thousands)	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
		Post-			Post-		Commercial		Commercial		All
	Number	Modification		Number	Modification		real estate -		real estate -		other		Residential
	of	Recorded		of	Recorded		nonowner		owner		commercial		mortgage		Consumer
	Loans	Investment		Loans	Investment
Residential mortgage - first liens,
Reduced monthly payments and extended maturity date	0	$	0	1	$	12
Consumer,
Reduced monthly payments and extended maturity date	0		0	1		24
Total	0	$	0	2	$	36
(In Thousands)							occupied		occupied		loans		loans		loans		Unallocated		Total
Balance, December 31, 2022							$	6,305	$	1,942	$	4,142	$	2,751	$	475	$	1,000	$	16,615
Adoption of ASU 2016-13 (CECL)								3,763		7		(88)		(344)		(234)		(1,000)		2,104
Charge-offs								0		0		(5)		(19)		(43)		0		(67)
Recoveries								0		0		0		1		5		0		6
(Credit) provision for credit losses on loans								(414)		(7)		(469)		475		103		0		(312)
Balance, March 31, 2023							$	9,654	$	1,942	$	3,580	$	2,864	$	306	$	0	$	18,346

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Prior to the ~~three-month periods ended March 31, 2022 and 2021, defaults~~adoption of ASC 326 on ~~loans~~January 1, 2023, the Corporation calculated the allowance for ~~which modifications that were considered~~loan losses under the incurred loss methodology. The following tables are disclosed related to ~~be TDR and were entered into within~~ the ~~previous 12 months are summarized as follows:~~allowance for loan losses in prior periods.


(Balances in Thousands)	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Three Months Ended March 31, 2022							December 31, 2021								March 31, 2022
(In Thousands)							Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	0	$	0	1	$	3,392	$	4,405	$	0	$	0	$	612	$	5,017
Total	0	$	0	1	$	3,392
Commercial and industrial								2,723		(150)		0		268		2,841
Commercial construction and land								637		0		0		(246)		391
Loans secured by farmland								115		0		0		14		129
Multi-family (5 or more) residential								215		0		0		152		367
Agricultural loans								25		0		0		2		27
Other commercial loans								173		0		0		(23)		150
Total commercial								8,293		(150)		0		779		8,922
Residential mortgage:
Residential mortgage loans - first liens								3,650		0		1		159		3,810
Residential mortgage loans - junior liens								184		0		0		(3)		181
Home equity lines of credit								302		0		15		(11)		306
1-4 Family residential construction								202		0		0		(54)		148
Total residential mortgage								4,338		0		16		91		4,445
Consumer								235		(30)		7		25		237
Unallocated								671		0		0		(4)		667
Total Allowance for Loan Losses							$	13,537	$	(180)	$	23	$	891	$	14,271

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2022.


December 31, 2022	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate	$	7,154	$	675,095	$	682,249	$	427	$	6,647	$	7,074
Commercial and industrial		11,223		167,048		178,271		26		2,883		2,909
Paycheck Protection Program - 1st Draw		0		5		5		0		0		0
Paycheck Protection Program - 2nd Draw		0		163		163		0		0		0
Political subdivisions		0		90,719		90,719		0		0		0
Commercial construction and land		244		73,719		73,963		0		647		647
Loans secured by farmland		76		12,874		12,950		0		112		112
Multi-family (5 or more) residential		0		55,886		55,886		0		411		411
Agricultural loans		57		2,378		2,435		0		21		21
Other commercial loans		0		14,857		14,857		0		124		124
Total commercial		18,754		1,092,744		1,111,498		453		10,845		11,298
Residential mortgage:
Residential mortgage loans - first liens		506		509,276		509,782		0		3,413		3,413
Residential mortgage loans - junior liens		30		24,919		24,949		0		167		167
Home equity lines of credit		68		43,730		43,798		0		282		282
1-4 Family residential construction		0		30,577		30,577		0		211		211
Total residential mortgage		604		608,502		609,106		0		4,073		4,073
Consumer		0		19,436		19,436		0		244		244
Unallocated												1,000

Total	$	19,358	$	1,720,682	$	1,740,040	$	453	$	15,162	$	16,615

Prior to the adoption of ASU 2016-13, loans were classified as impaired when, based on current information and events, it was probable that the Corporation would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment was measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they were impaired included all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there was at least one extension of credit graded Special Mention, Substandard or Doubtful. All loans classified as troubled debt restructurings and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, were individually evaluated for impairment.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Summary information related to impaired loans at December 31, 2022 is provided in the table immediately below.


(In Thousands)	December 31, 2022
	Unpaid
	Principal		Recorded		Related
	Balance		Investment		Allowance
With no related allowance recorded:
Commercial loans secured by real estate	$	8,563	$	3,754	$	0
Commercial and industrial		12,926		11,163		0
Residential mortgage loans - first liens		506		506		0
Residential mortgage loans - junior liens		68		30		0
Home equity lines of credit		68		68		0
Loans secured by farmland		76		76		0
Agricultural loans		57		57		0
Construction and other land loans		244		244		0
Total with no related allowance recorded		22,508		15,898		0

With a related allowance recorded:
Commercial loans secured by real estate		3,400		3,400		427
Commercial and industrial		60		60		26
Total with a related allowance recorded		3,460		3,460		453
Total	$	25,968	$	19,358	$	453

The average balance of impaired loans and interest income recognized on these impaired loans is as follows:


(In Thousands)	Average Investment in		Interest Income Recognized on
	Impaired Loans		Impaired Loans on a Cash Basis
	Three Months Ended		Three Months Ended
	March 31,		March 31,
	2022		2022
Commercial:
Commercial loans secured by real estate	$	10,735	$	129
Commercial and industrial		1,626		4
Commercial construction and land		48		1
Loans secured by farmland		82		0
Multi-family (5 or more) residential		789		0
Agricultural loans		63		2
Total commercial		13,343		136
Residential mortgage:
Residential mortgage loans - first lien		565		7
Residential mortgage loans - junior lien		37		1
Home equity lines of credit		0		1
Total residential mortgage		602		9
Total	$	13,945	$	145

The allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the estimate of the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification.

Because the effect of most modifications made to borrowers experiencing financial difficulty, such as extensions of terms, insignificant payment delays and interest rate reductions, is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Occasionally, the Corporation modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

There were no loans modified to borrowers experiencing financial difficulty in the first quarter 2023.

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Foreclosed residential real estate	$	256	$	256	$	184	$	0

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Residential real estate in process of foreclosure	$	1,547	$	1,260	$	1,154	$	1,229

The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The allowance for credit losses for off-balance sheet exposures of $1,178,000 at March 31, 2023 and $425,000 at December 31, 2022, is included in accrued interest and other liabilities on the unaudited, consolidated balance sheets.

The following table presents the balance and activity in the allowance for credit losses for off-balance sheet exposures for the three months ended March 31, 2023.


	Total Allowance for
	Credit Losses -
(In Thousands)	Off-Balance Sheet Exposures
Balance, December 31, 2022	$	425
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13		793
Credit for unfunded commitments		(40)
Balance, March 31, 2023	$	1,178

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At March 31, 2023 and December 31, 2022, the net carrying value of goodwill was $52,505,000.

Information related to core deposit intangibles is as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Gross amount	$	6,639	$	6,639	$	6,639	$	6,639
Accumulated amortization		(3,433)		(3,323)		(3,864)		(3,762)
Net	$	3,206	$	3,316	$	2,775	$	2,877

Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:


(In Thousands)	Three Months Ended				Three Months Ended
	March 31,		March 31,		March 31,		March 31,
	2022		2021		2023		2022
Amortization expense	$	110	$	134	$	102	$	110

~~Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At March 31, 2022 and December 31, 2021, the net carrying value of goodwill was $52,505,000.~~

8. BORROWED FUNDS

SHORT-TERM BORROWINGS

Short-term borrowings (initial maturity within one year) include the following:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
FHLB-Pittsburgh borrowings	$	0	$	0	$	91,000	$	77,000
Customer repurchase agreements		2,357		1,803		2,396		3,062
Total short-term borrowings	$	2,357	$	1,803	$	93,396	$	80,062

The Corporation had available credit with other correspondent banks totaling ~~$45,000,000~~$95,000,000 at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. These lines of credit are primarily unsecured. ~~NaN~~No amounts were outstanding at March 31, ~~2022~~2023 or December 31, ~~2021.~~2022.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At March 31, 2023, the Corporation had available credit in the amount of $22,340,000 on this line with no outstanding advances. At December 31, 2022, the Corporation had available credit in the amount of ~~$12,429,000~~$23,107,000 on this line with ~~0 outstanding advances. At December 31, 2021, the~~

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~Corporation had available credit in the amount of $13,642,000 on this line with 0~~no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of ~~$12,817,000~~$23,314,000 at March 31, ~~2022~~2023 and ~~$14,034,000~~$24,113,000 at December 31, ~~2021.~~2022.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10%at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. The carrying value of the underlying securities was ~~$2,380,000~~$2,410,000 at March 31, ~~2022~~2023 and ~~$1,820,000~~$3,080,000 at December 31, ~~2021.~~2022.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling ~~$1,077,215,000~~$1,244,696,000 at March 31, ~~2022~~2023 and ~~$1,046,242,000~~$1,209,179,000 at December 31, ~~2021.~~2022. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were ~~$9,258,000~~$15,996,000 at March 31, ~~2022~~2023 and ~~$9,313,000~~$14,168,000 at December 31, ~~2021.~~2022. The Corporation’s total credit facility with FHLB-Pittsburgh was ~~$757,811,000~~$856,934,000 at March 31, ~~2022,~~2023, including an unused (available)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

amount of ~~$731,429,000.~~$655,577,000. At December 31, ~~2021,~~2022, the Corporation’s total credit facility with FHLB-Pittsburgh was ~~$756,868,000,~~$839,378,000, including an unused (available) amount of ~~$723,557,000.~~$689,279,000.

At March 31, ~~2022 and~~2023, the overnight borrowing from FHLB-Pittsburgh was $91,000,000 at an interest rate of 5.15% with no other short-term advances. At December 31, ~~2021, there were~~2022, the overnight borrowing from FHLB-Pittsburgh was $77,000,000 at an interest rate of 4.45% with no ~~overnight borrowings or~~other short-term ~~advances from FHLB-Pittsburgh.~~advances.

LONG-TERM BORROWINGS – FHLB ADVANCES

Long-term borrowings from FHLB-Pittsburgh are as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Loans maturing in 2022 with a weighted-average rate of 0.58%	$	8,050	$	15,452
Loans maturing in 2023 with a weighted-average rate of 0.73%		7,093		7,119
Loan maturing in 2024 with a rate of 0.75%		5,090		5,099
Loan maturing in 2025 with a rate of 4.91%		348		372
Loan maturing in 2023 with a rate of 3.25%					$	2,290	$	9,303
Loans maturing in 2024 with a weighted-average rate of 2.89%						29,803		29,813
Loans maturing in 2025 with a weighted-average rate of 4.04%						28,205		23,231
Loans maturing in 2026 with a weighted-average rate of 4.67%						12,372		0
Loans maturing in 2027 with a weighted-average rate of 4.00%						24,031		0
Loan maturing in 2028 with a rate of 3.72%						2,000		0
Total long-term FHLB-Pittsburgh borrowings	$	20,581	$	28,042	$	98,701	$	62,347

Note: Weighted-average rates are presented as of March 31, ~~2022.~~2023.

SENIOR NOTES

~~On May 19,~~In 2021, the Corporation issued and sold $15.0 million in aggregate principal amount of 2.75% Fixed Rate Senior Unsecured Notes due 2026 (the "Senior Notes"). The Senior Notes mature on June 1, 2026 and bear interest at a fixed annual rate of 2.75%. The Corporation is not entitled to redeem the Senior Notes, in whole or in part, at any time prior to maturity and the Senior Notes are not subject to redemption by the holders. The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Senior Notes totaling $16,000 in the first quarter 2023 and $16,000 in the first quarter 2022, was included in interest expense in the unaudited consolidated statements of income.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, outstanding Senior Notes are as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026	$	14,717	$	14,701	$	14,781	$	14,765
Total carrying value	$	14,717	$	14,701	$	14,781	$	14,765

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

SUBORDINATED DEBT

~~On May 19,~~In 2021, the Corporation issued and sold $25.0 million in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Subordinated Notes"). The Subordinated Notes mature on June 1, 2031 and bear interest at a fixed annual rate of 3.25%, to June 1, 2026. From June 1, 2026 to maturity or early redemption, the interest rate will reset quarterly to an interest rate per annum equal to the three-month Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York plus 259 basis points. The Corporation is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after June 1, 2026, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation. The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above). The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Subordinated Notes totaling $27,000 in the first quarter 2023 and $26,000 in the first quarter 2022, was included in interest expense in the unaudited consolidated statements of income.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the carrying amounts of subordinated debt agreements are as follows:


(In Thousands)	March 31,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemed at par in April 2022	$	6,500	$	6,500
Agreement with a par value of $2,000,000; bearing interest at 6.50% with an effective interest rate of 5.60%; maturing in July 2027 and redeemable at par in July 2022		2,004		2,008
Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026		24,527		24,501	$	24,634	$	24,607
Total carrying value	$	33,031	$	33,009	$	24,634	$	24,607

9. STOCK-BASED COMPENSATION PLANS

The Corporation ~~has~~had a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The ~~2022~~2023 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the ~~2022~~2023 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Following is a summary of restricted stock awards granted in the three-month period ended March 31, ~~2022:~~2023:


(Dollars in Thousands)		Aggregate			Aggregate
		Grant			Grant
		Date			Date
	Number of	Fair		Number of	Fair
	Shares	Value		Shares	Value
1st quarter 2022 awards:
1st quarter 2023 awards:
Time-based awards to independent directors	9,588	$	240	11,000	$	257
Time-based awards to employees	51,638		1,293	31,684		740
Performance-based awards to employees	17,017		426	11,104		259
Total	78,243	$	1,959	53,788	$	1,256

Effective April 20, 2023, the Corporation’s shareholders approved a new plan, the Citizens & Northern Corporation 2023 Equity Incentive Plan (the “2023 Equity Incentive Plan”). New awards to employees and independent directors will be governed under the 2023 Equity Incentive Plan, while outstanding awards under the prior plans (including the awards made in the first quarter 2023) will be governed under the prior plans.

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, ~~2022~~2023 is estimated

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

to total ~~$1,622,000.~~$1,526,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $377,000 in the first quarter 2023 and $368,000 in the first quarter ~~2022 and $341,000 in the first quarter 2021.~~2022.

10. CONTINGENCIES

In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements and risk participation agreements (RPAs) which contain master netting and collateral provisions designed to protect the party at risk.

Interest rate swaps with commercial loan banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided 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.

The aggregate notional amount of interest rate swaps was ~~$122,138,000~~$154,878,000 at March 31, ~~2022~~2023 and ~~$123,904,000~~$155,214,000 at December 31, ~~2021.~~2022. There were 0no interest rate swaps originated in the ~~first quarter 2022 or first quarter 2021.~~three-month periods ended March 31, 2023 and 2022. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at March 31, ~~2022.~~2023. The net impact on the consolidated statements of income from interest rate swaps was ~~a reduction~~an increase in interest income on loans of ~~$317,000~~$345,000 in the first quarter ~~2022~~2023 as compared to a reduction in interest income on loans of ~~$338,000~~$317,000 in first quarter 2022.

The Corporation has entered into an RPA with another institution as a means to assume a portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.” The net impact on the consolidated statements of income from RPAs was an increase in other noninterest income of $16,000 in the first quarter ~~2021.~~2023 with no comparable amount in the first quarter 2022.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:


(In Thousands)	At March 31, 2022								At December 31, 2021								At March 31, 2023								At December 31, 2022
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	61,069	$	137	$	61,069	$	137	$	61,547	$	3,104	$	61,547	$	3,104	$	77,439	$	3,145	$	77,439	$	3,145	$	77,607	$	3,638	$	77,607	$	3,638
RPA Out																		7,200		21		0		0		7,200		0		0		0
RPA In																		0		0		10,000		24		0		0		10,000		19

(1)	Included in other assets in the consolidated balance sheets.

(2)	Included in accrued interest and other liabilities in the consolidated balance sheets.

The Corporation’s agreement with its derivative ~~counterparty provides~~counterparties provide that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the ~~counterparty~~counterparties could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of ~~$3,965,000~~$2,302,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at March 31, ~~2022.~~2023.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets and liabilities at fair value. Fair value is defined as 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. FASB topic 820, “Fair

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Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available.

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset or liability becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

~~At March 31, 2022 and December 31, 2021, assets and liabilities measured at fair value and the valuation methods used are as follows:~~

March 31, 2022


Quoted






Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair
(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value
Recurring fair value measurements, assets:








AVAILABLE-FOR-SALE DEBT SECURITIES:








Obligations of the U.S. Treasury

$
36,494

$
0

$
0

$
36,494
Obligations of U.S. Government agencies

0

23,408

0

23,408
Bank holding company debt securities

0

24,043

0

24,043
Obligations of states and political subdivisions:





Tax-exempt

0

143,633

0

143,633
Taxable

0

69,629

0

69,629
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

0

106,568

0

106,568
Residential collateralized mortgage obligations

0

43,868

0

43,868
Commercial mortgage-backed securities

0

85,270

0

85,270
Total available-for-sale debt securities

36,494

496,419

0

532,913
Marketable equity security

926

0

0

926
Servicing rights

0

0

2,429

2,429
Interest rate swap agreements, assets

0

137

0

137
Total recurring fair value measurements, assets

$
37,420

$
496,556

$
2,429

$
536,405

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$
0

$
137

$
0

$
137

Nonrecurring fair value measurements, assets:








Impaired loans, net

$
0

$
0

$
5,798

$
5,798
Foreclosed assets held for sale

0

0

531

531
Total nonrecurring fair value measurements, assets

$
0

$
0

$
6,329

$
6,329

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December 31, 2021


Quoted






Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair
(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value
Recurring fair value measurements, assets:








AVAILABLE-FOR-SALE DEBT SECURITIES:








Obligations of the U.S. Treasury

$
24,912

$
0

$
0

$
24,912
Obligations of U.S. Government agencies

0

24,091

0

24,091
Bank holding company debt securities

0

17,987

0

17,987
Obligations of states and political subdivisions:





Tax-exempt

0

148,028

0

148,028
Taxable

0

72,765

0

72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

0

98,181

0

98,181
Residential collateralized mortgage obligations

0

44,247

0

44,247
Commercial mortgage-backed securities

0

87,468

0

87,468
Total available-for-sale debt securities

24,912

492,767

0

517,679
Marketable equity security

971

0

0

971
Servicing rights

0

0

2,329

2,329
Interest rate swap agreements, assets

0

3,104

0

3,104
Total recurring fair value measurements, assets

$
25,883

$
495,871

$
2,329

$
524,083

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$
0

$
3,104

$
0

$
3,104

Nonrecurring fair value measurements, assets:








Impaired loans, net

$
0

$
0

$
5,800

$
5,800
Foreclosed assets held for sale

0

0

684

684
Total nonrecurring fair value measurements, assets

$
0

$
0

$
6,484

$
6,484

At March 31, 2023 and December 31, 2022, assets and liabilities measured at fair value and the valuation methods used are as follows:


	March 31, 2023
	Quoted
	Prices		Other
	in Active		Observable		Unobservable		Total
	Markets		Inputs		Inputs		Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury	$	31,163	$	0	$	0	$	31,163
Obligations of U.S. Government agencies		0		23,348		0		23,348
Bank holding company debt securities		0		24,723		0		24,723
Obligations of states and political subdivisions:
Tax-exempt		0		117,812		0		117,812
Taxable		0		57,572		0		57,572
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		97,807		0		97,807
Residential collateralized mortgage obligations		0		38,117		0		38,117
Commercial mortgage-backed securities		0		74,195		0		74,195
Private label commercial mortgage-backed securities		0		8,077		0		8,077
Total available-for-sale debt securities		31,163		441,651		0		472,814
Marketable equity security		873		0		0		873
Servicing rights		0		0		2,585		2,585
Interest rate swap agreements, assets		0		3,145		0		3,145
Total recurring fair value measurements, assets	$	32,036	$	444,796	$	2,585	$	479,417

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,145	$	0	$	3,145

Nonrecurring fair value measurements, assets:
Loans individually evaluated for credit loss, net	$	0	$	0	$	4,907	$	4,907
Foreclosed assets held for sale		0		0		459		459
Total nonrecurring fair value measurements, assets	$	0	$	0	$	5,366	$	5,366

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


	December 31, 2022
	Quoted
	Prices		Other
	in Active		Observable		Unobservable		Total
	Markets		Inputs		Inputs		Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury	$	31,836	$	0	$	0	$	31,836
Obligations of U.S. Government agencies		0		23,430		0		23,430
Bank holding company debt securities		0		25,386		0		25,386
Obligations of states and political subdivisions:
Tax-exempt		0		132,623		0		132,623
Taxable		0		56,812		0		56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		99,941		0		99,941
Residential collateralized mortgage obligations		0		40,296		0		40,296
Commercial mortgage-backed securities		0		79,686		0		79,686
Private label commercial mortgage-backed securities		0		8,023		0		8,023
Total available-for-sale debt securities		31,836		466,197		0		498,033
Marketable equity security		859		0		0		859
Servicing rights		0		0		2,653		2,653
Interest rate swap agreements, assets		0		3,638		0		3,638
Total recurring fair value measurements, assets	$	32,695	$	469,835	$	2,653	$	505,183

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,638	$	0	$	3,638

Nonrecurring fair value measurements, assets:
Impaired loans, net	$	0	$	0	$	3,007	$	3,007
Foreclosed assets held for sale		0		0		275		275
Total nonrecurring fair value measurements, assets	$	0	$	0	$	3,282	$	3,282

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

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At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:


	Fair Value at								Fair Value at
	3/31/2022		Valuation	Unobservable				Method or Value As of	3/31/2023		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				3/31/2022	(In Thousands)		Technique	Input(s)				3/31/2023
Servicing rights	$	2,429	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period	$	2,585	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		193.00	%	Weighted-average PSA				Loan prepayment speeds		138.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late						4.00	%	of payments are late
						5.00	%	late fees assessed						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs						3.00	%	annual increase in servicing costs


	Fair Value at								Fair Value at
	12/31/2021		Valuation	Unobservable				Method or Value As of	12/31/2022		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/2021	(In Thousands)		Technique	Input(s)				12/31/2022
Servicing rights	$	2,329	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period	$	2,653	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		209.00	%	Weighted-average PSA				Loan prepayment speeds		133.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late						4.00	%	of payments are late
						5.00	%	late fees assessed						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs						3.00	%	annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:


(In Thousands)	Three Months Ended				Three Months Ended
	March 31, 2022		March 31, 2021		March 31, 2023		March 31, 2022
Servicing rights balance, beginning of period	$	2,329	$	1,689	$	2,653	$	2,329
Originations of servicing rights		98		192		15		98
Unrealized gain included in earnings		2		75
Unrealized (loss) gain included in earnings						(83)		2
Servicing rights balance, end of period	$	2,429	$	1,956	$	2,585	$	2,429

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Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:


(Dollars In Thousands)									Weighted										Weighted
			Valuation						Average				Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	3/31/2022		3/31/2022		3/31/2022		Technique	Inputs	3/31/2022		3/31/2023		3/31/2023		3/31/2023		Technique	Inputs	3/31/2023

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,456	$	658	$	5,798	Sales comparison	Discount to appraised value	27	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%
Total impaired loans	$	6,528	$	730	$	5,798
Loans individually evaluated for credit loss:
Commercial real estate - nonowner occupied											$	4,781	$	609	$	4,172	Sales comparison	Discount to appraised value	27	%
Commercial real estate - owner occupied												812		183		629	Sales comparison & SBA guaranty	Discount to appraised value	56	%
All other commercial loans												209		103		106	Liquidation & SBA guaranty	Discount to appraised value	20	%
Total loans individually evaluated for credit loss											$	5,802	$	895	$	4,907
Foreclosed assets held for sale - real estate:
Residential (1-4 family)											$	184	$	0	$	184	Sales comparison	Discount to appraised value	36	%
Commercial real estate	$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%		275		0		275	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)		256		0		256	Sales comparison	Discount to appraised value	53	%
Total foreclosed assets held for sale	$	531	$	0	$	531					$	459	$	0	$	459


(Dollars In Thousands)									Weighted										Weighted
			Valuation						Average				Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/2021		12/31/2021		12/31/2021		Technique	Inputs	12/31/2021		12/31/2022		12/31/2022		12/31/2022		Technique	Inputs	12/31/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,468	$	668	$	5,800	Sales comparison	Discount to appraised value	27	%	$	3,400	$	427	$	2,973	Sales comparison	Discount to appraised value	25	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%		60		26		34	Liquidation of assets	Discount to appraised value	33	%
Total impaired loans	$	6,540	$	740	$	5,800					$	3,460	$	453	$	3,007
Foreclosed assets held for sale - real estate:
Commercial real estate	$	428	$	0	$	428	Sales comparison	Discount to appraised value	50	%	$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)		256		0		256	Sales comparison	Discount to appraised value	53	%
Total foreclosed assets held for sale	$	684	$	0	$	684					$	275	$	0	$	275

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. 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 instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

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The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:


(In Thousands)	Fair Value	March 31, 2022				December 31, 2021				Fair Value	March 31, 2023				December 31, 2022
	Hierarchy	Carrying		Fair		Carrying		Fair		Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value		Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	105,246	$	105,246	$	95,848	$	95,848	Level 1	$	46,112	$	46,112	$	47,698	$	47,698
Certificates of deposit	Level 2		9,100		8,911		9,100		9,142	Level 2		6,100		5,729		7,350		6,956
Restricted equity securities (included in Other Assets)	Level 2		9,508		9,508		9,562		9,562
Restricted equity securities (included in other assets)										Level 2		16,246		16,246		14,418		14,418
Loans, net	Level 3		1,523,919		1,533,430		1,551,312		1,573,955	Level 3		1,726,793		1,691,155		1,723,425		1,674,002
Accrued interest receivable	Level 2		7,507		7,507		7,235		7,235	Level 2		8,805		8,805		8,653		8,653

Financial liabilities:
Deposits with no stated maturity	Level 2		1,691,457		1,691,457		1,639,167		1,639,167	Level 2		1,584,383		1,584,383		1,702,404		1,702,404
Time deposits	Level 2		269,495		269,902		285,893		286,962	Level 2		331,657		329,780		295,189		293,814
Short-term borrowings	Level 2		2,357		1,956		1,803		1,603	Level 2		93,396		93,396		80,062		80,062
Long-term borrowings	Level 2		20,581		20,518		28,042		28,347	Level 2		98,701		97,992		62,347		60,944
Senior debt	Level 2		14,717		14,429		14,701		15,016	Level 2		14,781		13,346		14,765		9,712
Subordinated debt	Level 2		33,031		30,293		33,009		33,171	Level 2		24,634		21,491		24,607		16,186
Accrued interest payable	Level 2		633		633		205		205	Level 2		980		980		461		461

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

●	changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates

●	changes in general economic conditions

●

recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments (including potential increases in the cost of deposit insurance assessments)

●	the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses

●	~~the effect of the novel coronavirus (COVID-19) and related events~~

●	legislative or regulatory changes

●	downturn in demand for loan, deposit and other financial services in the Corporation’s market area

●	increased competition from other banks and non-bank providers of financial services

●	technological changes and increased technology-related costs

●	information security breach or other technology difficulties or failures

●	changes in accounting principles, or the application of generally accepted accounting principles

●	failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions

●	the effect of the novel coronavirus (COVID-19) and related events

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

EARNINGS OVERVIEW

First Quarter 2023 as Compared to First Quarter 2022

First quarter 2023 net income was $6,253,000, or $0.40 per diluted share. In comparison, first quarter 2022 net income was $6,895,000, or $0.44 ~~per diluted share. In comparison, first quarter 2021 net income was $8,787,000, or $0.55~~ per diluted share. Significant variances were as follows:

●

First quarter ~~2022~~2023 net interest income of ~~$20,332,000~~$20,781,000 was ~~$249,000~~$449,000 higher than the first quarter ~~2021~~2022 total. ~~Total~~The increase in net interest income was mainly driven by loan growth, as average earning assets increased $131,608,000, including an increase in average loans of $178,002,000, or 11.5%, while average interest-bearing due from banks decreased $52,478,000. Average total deposits of $1,931,126,000 were flat in the first quarter 2023 as compared to the first quarter 2022 while average borrowed funds increased $136,303,000. The net interest margin was 3.71% in the first quarter 2023, down from 3.86% in the first quarter 2022. The interest rate spread decreased 0.43%, as the average rate on interest-bearing liabilities increased 0.96%, while the average yield on earning assets increased 0.53%. Contributing to the comparatively lower margin and spread, total interest and fees on loans in the first quarter 2022 included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable ~~income~~amount in the first quarter 2021. Interest and fees on PPP loans totaled $575,000 in the first quarter 2022, a decrease of $1,423,000 compared to the first quarter 2021 amount. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $960,000 in the first quarter 2022 as compared to the first quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $199.4 million. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $450,000 in the first quarter 2022 as compared to a net positive impact of $952,000 in the first quarter 2021. Average outstanding loans decreased $86.7 million, including a reduction in average PPP loans of $119.7 million, and average total deposits increased $100.6 million (5.5%). The net interest margin for the first quarter 2022 was 3.86% as compared to 4.00% for the first quarter 2021. The average yield on earning assets of 4.13% was down 0.20% from the first quarter 2021, while the average rate on interest-bearing liabilities of 0.40% in the first quarter 2022 was 0.07% lower than the comparable first quarter 2021 average rate.2023.

●

The credit for credit losses (reduction in expense) was $352,000 in the first quarter 2023 as compared to the first quarter 2022 provision for loan losses ~~was $891,000~~of $891,000. The credit for credit losses in the first quarter ~~2022 as compared~~2023 resulted mainly from a reduction in

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

the allowance related to ~~$259,000~~the commercial segment of the portfolio. Within the net credit for credit losses on loans in the first quarter ~~2021. The~~2023, the provision related to specific loans was $205,000, including net charge-offs of $61,000 and an increase in specific allowances on loans of $144,000. In comparison, the first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000)~~, an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined~~

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. The first quarter 2021 provision included a net charge of $182,000 related to specific loans (increase in specific allowances on loans of $199,000, partially offset by net recoveries of $17,000), an increase of $92,000 in the unallocated portion of the allowance and a reduction of $15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses..

●

Noninterest income ~~for~~of $5,616,000 in the first quarter 2023 decreased $207,000 from the first quarter 2022 ~~was down $959,000 from the first quarter 2021 total.~~amount. Significant variances included the following:

~~Other noninterest income~~Net gains from sale of ~~$588,000~~loans of $74,000 decreased ~~$884,000~~$308,000 from the first quarter ~~2021 total. There was no income from tax credits~~2022, reflecting a reduction in the first quarter 2022 compared to $765,000 in the first quarter 2021. In 2022, the Corporation will make PA Educational Improvement Tax Credit Program donations in the second quarter comparable to total donations made in the first quarter 2021, generating tax credits in 2022 comparable to the first quarter 2021.

~~Net gains from sales of loans of $382,000 decreased $682,000 from the first quarter 2021 total, as the~~ volume of residential mortgage loans ~~sold in the first quarter 2022 was down from the first quarter 2021 level.~~

~~Service charges on deposit accounts of $1,235,000 increased $220,000 from the first quarter 2021 total, as the volume of consumer and business overdraft and other activity increased.~~sold.

Brokerage and insurance revenue of ~~$522,000 increased $196,000~~$430,000 decreased $92,000 from the first quarter ~~2021 total,~~2022, due to ~~commissions on higher transaction volume.~~lower volume of new transactions.

~~Trust revenue~~Loan servicing fees, net of ~~$1,786,000~~$122,000 decreased $88,000, as the fair value of servicing rights decreased $83,000 in the first quarter 2023 as compared to an increase of $2,000 in the first quarter 2022.

Other noninterest income of $771,000 increased ~~$160,000~~$183,000 from the first quarter ~~2021 total, reflecting~~2022, including dividends on FHLB-Pittsburgh stock totaling $217,000, an increase of $100,000 from the ~~impact~~first quarter 2022, and a gain on sale of ~~growth~~premises and equipment of $68,000 with no comparable amount in ~~trust assets under management.~~the first quarter 2022.

●

Noninterest expense ~~increased $1,177,000~~of $19,087,000 in the first quarter ~~2022 over~~2023 increased $2,201,000 from the first quarter ~~2021~~2022 amount. Significant variances included the following:

Salaries and employee benefits expense of ~~$10,607,000~~$11,427,000 increased ~~$1,712,000~~$820,000 from the first quarter ~~2021 total,~~2022, including an increase in base salaries expense of $1,018,000. In addition to the impact of merit-based salary increases, the number of employees increased, reflecting expansion of the Southcentral PA market with the opening of an office in Lancaster as well as additions to staffing for information technology (IT), human resources and other functions.$597,000. In total, the number of full-time equivalent employees (FTEs) increased ~~5.2%~~by 10 (2.5%) to ~~403~~412 in the first quarter ~~2022~~2023 as compared to the first quarter ~~2021. Additional increases include $241,000 due to a lower proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated in 2021~~2022. Total cash and ~~an increase in~~stock-based compensation expense increased $167,000 and health care expense ~~of $183,000~~increased $102,000 due to higher claims on the Corporation’s partially self-insured plan.

Other noninterest expense of $2,507,000 increased $623,000 from the first quarter 2022. Within this category, significant variances included the following:

●

In the first quarter 2022 the allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $242,000 with no comparable amount in the first quarter 2023.

●

Other operational losses totaled $206,000, an increase of $82,000.

●

Net collection expense totaled $44,000 in the first quarter 2023, an increase of $85,000 over net recoveries of $41,000 in the first quarter 2022.

●

Advertising expense totaled $213,000 in the first quarter 2023, an increase of $77,000 reflecting expenses related to social media strategy and brand monitoring analysis.

Professional fees of $937,000 increased $448,000, including $389,000 of conversion costs related to a change in Wealth Management platform for providing brokerage and investment advisory services.

Data processing and telecommunications ~~expense~~ of ~~$1,623,000~~$1,936,000 increased ~~$243,000~~$313,000 from the first quarter ~~2021 total,~~2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

Net occupancy and equipment expense of $1,411,000 increased $107,000 from the first quarter 2021 total, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA.

~~Other noninterest expense of $1,884,000 decreased $871,000 from the first quarter 2021 total. Within this category, significant variances included the following:~~

●

Donations expense totaled $29,000 in the first quarter 2022, down $785,000 from the first quarter 2021. As noted above, donations of approximately $800,000 related to the PA Educational Improvement Tax Credit Program will be made in the second quarter 2022, comparable to donations made in the first quarter 2021.

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●

The ~~allowance~~income tax provision was $1,409,000, or 18.4% of pre-tax income for ~~SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $242,000 in~~ the first quarter ~~2022 with no comparable amount in the first quarter 2021.~~

●

~~The income tax provision of~~2023, as compared to $1,483,000, or 17.7% of pre-tax income for the ~~first~~fourth quarter ~~2022 decreased $627,000 from $2,110,000, or 19.4% of~~2022. The decrease in income tax provision reflected the decrease in pre-tax income ~~for the first quarter 2021, reflecting lower pre-tax income.~~of $716,000.

~~More~~TABLE I – QUARTERLY FINANCIAL DATA


(Dollars In Thousands,	For the Three Months Ended :
Except Per Share Data)	March 31,		December 31,		September 30,		June 30,		March 31,
(Unaudited)	2023		2022		2022		2022		2022
Interest income	$	26,139	$	25,855	$	23,710	$	21,309	$	21,773
Interest expense		5,358		3,563		2,831		1,684		1,441
Net interest income		20,781		22,292		20,879		19,625		20,332
(Credit) provision for credit losses		(352)		2,262		3,794		308		891
Net interest income after (credit) provision for credit losses		21,133		20,030		17,085		19,317		19,441
Noninterest income		5,616		6,109		5,671		6,829		5,823
Noninterest expense		19,087		16,587		17,443		17,039		16,886
Income before income tax provision		7,662		9,552		5,313		9,107		8,378
Income tax provision		1,409		1,773		858		1,618		1,483
Net income	$	6,253	$	7,779	$	4,455	$	7,489	$	6,895
Net income attributable to common shares	$	6,201	$	7,711	$	4,416	$	7,419	$	6,835
Basic earnings per common share	$	0.40	$	0.50	$	0.29	$	0.48	$	0.44
Diluted earnings per common share	$	0.40	$	0.50	$	0.29	$	0.48	$	0.44

NONINTEREST INCOME

TABLE II – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Three Months Ended
	March 31,					$	%
	2023		2022			Change	Change
Trust revenue	$	1,777	$	1,786	$	(9)	(0.5)	%
Brokerage and insurance revenue		430		522		(92)	(17.6)	%
Service charges on deposit accounts		1,290		1,235		55	4.5	%
Interchange revenue from debit card transactions		1,007		963		44	4.6	%
Net gains from sales of loans		74		382		(308)	(80.6)	%
Loan servicing fees, net		122		210		(88)	(41.9)	%
Increase in cash surrender value of life insurance		138		135		3	2.2	%
Other noninterest income		771		588		183	31.1	%
Realized gains on available-for-sale debt securities, net		7		2		5	250.0	%
Total noninterest income	$	5,616	$	5,823	$	(207)	(3.6)	%

NONINTEREST EXPENSE

TABLE III - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Three Months Ended
	March 31,				$		%
	2023		2022		Change		Change
Salaries and employee benefits	$	11,427	$	10,607	$	820	7.7	%
Net occupancy and equipment expense		1,402		1,411		(9)	(0.6)	%
Data processing and telecommunications expense		1,936		1,623		313	19.3	%
Automated teller machine and interchange expense		475		384		91	23.7	%
Pennsylvania shares tax		403		488		(85)	(17.4)	%
Professional fees		937		489		448	91.6	%
Other noninterest expense		2,507		1,884		623	33.1	%
Total noninterest expense	$	19,087	$	16,886	$	2,201	13.0	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Additional detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis.

~~TABLE I – QUARTERLY FINANCIAL DATA~~

(Dollars In Thousands,

For the Three Months Ended :
Except Per Share Data)

March 31,

December 31,

September 30,

June 30,

March 31,
(Unaudited)

2022

2021

2021

2021

2021
Interest income

$
21,773

$
21,246

$
21,073

$
20,428

$
21,754
Interest expense

1,441

1,530

1,614

1,747

1,671
Net interest income

20,332

19,716

19,459

18,681

20,083
Provision for loan losses

891

1,128

1,530

744

259
Net interest income after provision for loan losses

19,441

18,588

17,929

17,937

19,824
Noninterest income

5,823

6,415

6,382

6,302

6,782
Noninterest expense

16,886

16,018

15,346

15,399

15,709
Income before income tax provision

8,378

8,985

8,965

8,840

10,897
Income tax provision

1,483

1,677

1,566

1,780

2,110
Net income

$
6,895

$
7,308

$
7,399

$
7,060

$
8,787
Net income attributable to common shares

$
6,835

$
7,256

$
7,336

$
6,999

$
8,722
Basic earnings per common share

$
0.44

$
0.46

$
0.47

$
0.44

$
0.55
Diluted earnings per common share

$
0.44

$
0.46

$
0.47

$
0.44

$
0.55

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.

Allowance for ~~Loan~~Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for ~~loan losses.~~credit losses (ACL) on loans. The Corporation maintains an ~~allowance for loan losses that~~ACL on loans which represents management’s estimate of expected net charge-offs over the ~~losses inherent in the loan portfolio as~~life of the ~~balance sheet date~~loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and ~~recorded as a reduction~~(ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ~~investment in loans. Management believes~~ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the ~~allowance for loan losses~~Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is ~~adequate and reasonable.~~based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for ~~evaluating and~~ determining the ~~allowance for loan losses,~~ACL, and additional discussion of the ~~allowance for loan losses~~ACL is provided in a separate section ~~later in~~of Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information

The ACL may increase or decrease due to ~~recognize losses on loans,~~ changes in economic conditions ~~may necessitate revisions~~affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the fair value of underlying collateral, unforeseen events such as natural disasters and pandemics, and other factors. Because current economic conditions and forecasts can change and future ~~years. In addition, various regulatory agencies, as an integral part~~events are inherently difficult to predict, the anticipated amount of ~~their examination process, periodically review~~estimated credit losses on loans, and therefore the ~~Corporation’s allowance for loan losses. Such agencies may require~~appropriateness of the ~~Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.~~ACL, could change significantly.

Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables ~~II, III~~IV, V and IVVI include information regarding the Corporation’s net interest income for the three-month periods ended March 31, ~~2022~~2023 and ~~2021.~~2022. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended March 31, ~~2022~~2023 and ~~2021~~2022

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was ~~$20,634,000~~$21,050,000 in ~~2022,~~2023, which was ~~$278,000 (1.4%~~$416,000 (2.0%) higher than in ~~2021.~~2022. Interest income in the first quarter 2023 was ~~$22,075,000~~$26,408,000 which was ~~$48,000~~$4,333,000 higher ~~in 2022~~ as compared to ~~2021, while interest~~2022. Interest expense of $5,358,000 in 2023 was ~~lower by $230,000~~$3,917,000 higher than in ~~comparing the same periods.~~2022. As presented in Table ~~III,~~V, the Net Interest Margin was ~~3.86%~~3.71% in ~~2022~~2023 as compared to ~~4.00%~~3.86% in ~~2021,~~2022, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.30% in 2023 from 3.73% in ~~2022 from 3.86% in 2021.~~2022. The average yield on earning assets of ~~4.13%~~4.66% was ~~0.20% lower~~0.53% higher in ~~2022~~2023 as compared to ~~2021,~~2022, and the average rate on ~~interest- bearing~~interest-bearing liabilities of ~~0.40%~~1.36% in ~~2022~~2023 was ~~0.07% lower.~~

~~Income from purchase accounting-related adjustments~~0.96% higher. Contributing to the comparatively lower margin and spread, total interest and fees on loans in the first quarter

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2022 ~~had a positive effect~~included $1,398,000 from repayments received on ~~net interest income~~purchased credit impaired loans in excess of ~~$450,000, including an increase~~previous carrying amounts with no comparable amount in ~~income on loans of $305,000 and net reductions in interest expense on time deposits and borrowed funds totaling $145,000. The positive impact to~~ the first quarter 2022 net interest margin from purchase accounting adjustments was 0.08%. In comparison, the positive impact of purchase accounting adjustments to the first quarter 2021 net interest margin was $952,000, or 0.19%.2023.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled ~~$22,075,000~~$26,408,000 in ~~2022,~~2023, an increase of ~~$48,000~~$4,333,000, or 19.6% from ~~2021.~~2022.

Interest and fees from loans receivable ~~decreased $922,000~~increased $4,022,000 in ~~2022~~2023 as compared to ~~2021. Interest and fees~~2022. The fully taxable equivalent yield on ~~PPP~~ loans ~~totaled $575,000~~ in ~~the first quarter 2022, a decrease of $1,423,000~~2023 was 5.44% compared to 5.01% in 2022. Average outstanding loans receivable increased $178,002,000 (11.5%) to $1,725,863,000 in 2023 from ~~the first quarter 2021, as previously deferred fees were recognized~~$1,547,861,000 in ~~income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.~~ 2022. In the first quarter 2022, total interest and fees on loans included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in ~~the first quarter 2021.~~2023.

Average outstanding loans receivable decreased $86,725,000 (5.3%) to $1,547,861,000 in 2022 from $1,634,586,000 in 2021, including a reduction in average PPP loans of $119,715,000. Average total loans outstanding, excluding PPP loans, increased $32,990,000 (2.2%).

The average yield on loans in the first quarter 2022 was 5.01%, up from 4.97% in the first quarter 2021. The average yield on loans included the positive impact of the income on PCI loans in the first quarter 2022 and the comparatively high yield on PPP loans in both quarters.

Interest income from available-for-sale debt securities increased $960,000 in 2022 from 2021. Total average available-for-sale debt securities (at amortized cost) increased to $534,635,000 in 2022 from $335,265,000 in 2021. The increase in available-for-sale debt securities reflects the investment of otherwise excess cash. The average yield on available-for-sale debt securities was 2.18% for 2022, down from 2.32% in 2021.

Income from interest-bearing due from banks totaled ~~$67,000~~$278,000 in ~~2022,~~2023, an increase of ~~$17,000~~$211,000 from ~~2021.~~the total for 2022. The average yield on interest-bearing due from banks was 3.56% in 2023 and 0.32% in ~~2022 and 0.22% in 2021.~~2022. The average balance of interest-bearing due from banks was ~~$84,115,000~~$31,637,000 in ~~the first quarter 2022~~2023 as compared to ~~$92,619,000~~$84,115,000 in ~~the first quarter 2021.~~2022. Within this category, the largest asset balance in ~~2022~~2023 and ~~2021~~2022 has been interest-bearing deposits held with the Federal Reserve.

~~Table~~Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $104,000 in 2023 as compared to 2022, as the average balance (at amortized cost) of ~~Contents~~available-for-sale debt securities increased $6,867,000. The average yield on available-for-sale debt securities was 2.23% for 2023, up slightly from 2.18% in 2022.

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

~~For the three-month periods, interest~~Interest expense ~~decreased $230,000~~increased $3,917,000 to $5,358,000 in 2023 from $1,441,000 in ~~2022 from $1,671,000 in 2021.~~2022. Interest expense on deposits ~~decreased $368,000,~~increased $2,320,000, as the average rate on interest-bearing deposits ~~decreased~~increased to 0.94% in 2023 from 0.26% in ~~2022 from 0.38% in 2021.~~2022. The ~~decrease~~increase in average ~~rates~~rate on deposits includes ~~decreases~~increases of ~~0.19%~~1.13% on time deposits, ~~0.08%~~0.74% on money market accounts and ~~0.06%~~0.69% on interest checking accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 14.4% of average total deposits in the first quarter 2022 from 20.2% in the first quarter 2021.

Average total deposits ~~increased $100,569,000 (5.5%) to $1,931,681,000 in~~(interest-bearing and noninterest-bearing) remained stable with $1,931,126,000 for the first quarter ~~2022 from $1,831,112,000 in~~2023 compared to $1,931,681,000 for the first quarter ~~2021. The increase in~~2022. Average interest checking deposits increased $38,147,000, average time deposits ~~includes~~increased $35,092,000 and the ~~impact~~average total balance of ~~PPP-related activity~~other categories of noninterest-bearing demand and ~~funding from~~ other ~~government stimulus programs.~~deposits increased $18,464,000, while average money market accounts decreased $92,258,000.

Interest expense on short-term borrowings in ~~the first quarter 2022~~2023 was ~~$1,000~~$1,097,000 in 2023 as compared to ~~$15,000~~$1,000 in ~~2021.~~2022. The average balance of short-term borrowings ~~decreased~~increased to $91,767,000 in 2023 from $1,746,000 in ~~2022 from $14,365,000 in 2021.~~2022. The average rate on short-term borrowings was 4.85% in 2023 compared to 0.23% in ~~2021 compared to 0.42% in 2021.~~2022.

Interest expense on long-term borrowings (FHLB advances) ~~decreased $85,000~~increased $632,000 to $681,000 in 2023 from $49,000 in ~~2022 from $134,000 in 2021.~~2022. The average balance of long-term borrowings was ~~$26,102,000~~$80,648,000 in ~~2022, down~~2023, up from an average balance of ~~$52,847,000~~$26,102,000 in ~~2021.~~2022. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 3.42% in 2023 compared to 0.76% in ~~2022 compared to 1.03% in 2021.~~

~~Interest expense on senior notes issued in May 2021 totaled $118,000 in the first quarter~~ 2022. ~~The average balance of the senior notes was $14,709,000 in the first quarter of 2022 at an average rate of 3.25%.~~

Interest expense on subordinated debt ~~increased $119,000~~decreased $133,000 to $230,000 in 2023 from $363,000 in ~~2022 from $244,000 in 2021.~~2022. The average balance of subordinated debt ~~increased~~decreased to $24,620,000 in 2023 from $32,948,000 in 2022 from $16,543,000 in 2021, reflecting the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021.2022. The average rate on subordinated debt decreased to 3.79% in 2023 from 4.47% in 2022. In the second quarter 2022, ~~from 5.98% in 2021.~~the Corporation redeemed subordinated debt with aggregate par values of $8.5 million and a weighted average interest rate of 6.29%.

More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IIIV - ANALYSIS OF INTEREST INCOME AND EXPENSE


	Three Months Ended						Three Months Ended
	March 31,				Increase/		March 31,				Increase/
(In Thousands)	2022		2021		(Decrease)		2023		2022		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	67	$	50	$	17	$	278	$	67	$	211
Available-for-sale debt securities:
Taxable		1,969		1,113		856		2,211		1,969		242
Tax-exempt		905		801		104		767		905		(138)
Total available-for-sale debt securities		2,874		1,914		960		2,978		2,874		104
Loans receivable:
Taxable		17,974		17,493		481		22,428		17,974		4,454
Paycheck Protection Program - 1st Draw		38		1,812		(1,774)
Paycheck Protection Program - 2nd Draw		537		186		351
Paycheck Protection Program								3		575		(572)
Tax-exempt		573		553		20		713		573		140
Total loans receivable		19,122		20,044		(922)		23,144		19,122		4,022
Other earning assets		12		19		(7)		8		12		(4)
Total Interest Income		22,075		22,027		48		26,408		22,075		4,333

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		194		221		(27)		987		194		793
Money market		262		306		(44)		873		262		611
Savings		61		55		6		63		61		2
Time deposits		393		696		(303)		1,307		393		914
Total interest-bearing deposits		910		1,278		(368)		3,230		910		2,320
Borrowed funds:
Short-term		1		15		(14)		1,097		1		1,096
Long-term - FHLB advances		49		134		(85)		681		49		632
Senior notes, net		118		0		118		120		118		2
Subordinated debt, net		363		244		119		230		363		(133)
Total borrowed funds		531		393		138		2,128		531		1,597
Total Interest Expense		1,441		1,671		(230)		5,358		1,441		3,917

Net Interest Income	$	20,634	$	20,356	$	278	$	21,050	$	20,634	$	416

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.


(In Thousands)	Three Months Ended
	March 31,				Increase/
	2023		2022		(Decrease)
Net Interest Income Under U.S. GAAP	$	20,781	$	20,332	$	449
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities		127		183		(56)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans		142		119		23
Net Interest Income as adjusted to a fully taxable-equivalent basis	$	21,050	$	20,634	$	416

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Table~~ ~~III~~TABLE V - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)	Three Months				Three Months				Three Months				Three Months
	Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of
	3/31/2022		Return/		3/31/2021		Return/		3/31/2023		Return/		3/31/2022		Return/
	Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of
	Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %
EARNING ASSETS
Interest-bearing due from banks	$	84,115	0.32	%	$	92,619	0.22	%	$	31,637	3.56	%	$	84,115	0.32	%
Available-for-sale debt securities, at amortized cost:
Taxable		390,301	2.05	%		217,733	2.07	%		410,110	2.19	%		390,301	2.05	%
Tax-exempt		144,334	2.54	%		117,532	2.76	%		131,392	2.37	%		144,334	2.54	%
Total available-for-sale debt securities		534,635	2.18	%		335,265	2.32	%		541,502	2.23	%		534,635	2.18	%
Loans receivable:
Taxable		1,445,353	5.04	%		1,428,721	4.97	%		1,633,850	5.57	%		1,445,353	5.04	%
Paycheck Protection Program - 1st Draw		1,049	14.69	%		104,367	7.04	%
Paycheck Protection Program - 2nd Draw		17,800	12.24	%		34,197	2.21	%
Paycheck Protection Program										162	7.51	%		18,849	12.37	%
Tax-exempt		83,659	2.78	%		67,301	3.33	%		91,851	3.15	%		83,659	2.78	%
Total loans receivable		1,547,861	5.01	%		1,634,586	4.97	%		1,725,863	5.44	%		1,547,861	5.01	%
Other earning assets		1,983	2.45	%		2,851	2.70	%		1,200	2.70	%		1,983	2.45	%
Total Earning Assets		2,168,594	4.13	%		2,065,321	4.33	%		2,300,202	4.66	%		2,168,594	4.13	%
Cash		20,703				23,796				22,276				20,703
Unrealized (loss) gain on securities		(2,508)				12,890
Unrealized loss on securities										(60,055)				(2,508)
Allowance for loan losses		(13,783)				(11,739)				(17,053)				(13,783)
Bank-owned life insurance		30,720				30,154				31,267				30,720
Bank premises and equipment		21,043				21,348				21,518				21,043
Intangible assets		55,765				56,288				55,331				55,765
Other assets		44,952				44,628				67,333				44,952
Total Assets	$	2,325,486			$	2,242,686			$	2,420,819			$	2,325,486

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	419,130	0.19	%	$	355,993	0.25	%	$	457,277	0.88	%	$	419,130	0.19	%
Money market		456,904	0.23	%		406,841	0.31	%		364,646	0.97	%		456,904	0.23	%
Savings		249,165	0.10	%		213,437	0.10	%		257,047	0.10	%		249,165	0.10	%
Time deposits		277,405	0.57	%		370,555	0.76	%		312,497	1.70	%		277,405	0.57	%
Total interest-bearing deposits		1,402,604	0.26	%		1,346,826	0.38	%		1,391,467	0.94	%		1,402,604	0.26	%
Borrowed funds:
Short-term		1,746	0.23	%		14,365	0.42	%		91,767	4.85	%		1,746	0.23	%
Long-term - FHLB advances		26,102	0.76	%		52,847	1.03	%		80,648	3.42	%		26,102	0.76	%
Senior notes, net		14,709	3.25	%		0	0.00	%		14,773	3.29	%		14,709	3.25	%
Subordinated debt, net		32,948	4.47	%		16,543	5.98	%		24,620	3.79	%		32,948	4.47	%
Total borrowed funds		75,505	2.85	%		83,755	1.90	%		211,808	4.07	%		75,505	2.85	%
Total Interest-bearing Liabilities		1,478,109	0.40	%		1,430,581	0.47	%		1,603,275	1.36	%		1,478,109	0.40	%
Demand deposits		529,077				484,286				539,659				529,077
Other liabilities		24,046				27,930				25,247				24,046
Total Liabilities		2,031,232				1,942,797				2,168,181				2,031,232
Stockholders' equity, excluding accumulated other comprehensive (loss) income		295,996				289,591
Accumulated other comprehensive (loss) income		(1,742)				10,298
Stockholders' equity, excluding accumulated other comprehensive loss										299,599				295,996
Accumulated other comprehensive loss										(46,961)				(1,742)
Total Stockholders' Equity		294,254				299,889				252,638				294,254
Total Liabilities and Stockholders' Equity	$	2,325,486			$	2,242,686			$	2,420,819			$	2,325,486
Interest Rate Spread			3.73	%			3.86	%			3.30	%			3.73	%
Net Interest Income/Earning Assets			3.86	%			4.00	%			3.71	%			3.86	%

Total Deposits (Interest-bearing and Demand)	$	1,931,681			$	1,831,112	��		$	1,931,126			$	1,931,681

(1)	Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.

(2)	Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

(3)	Rates of return on earning assets and costs of funds are presented on an annualized basis.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IVVI - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)	Three Months Ended 3/31/22 vs. 3/31/21						Three Months Ended 3/31/23 vs. 3/31/22
	Change in		Change in		Total		Change in		Change in		Total
	Volume		Rate		Change		Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks	$	(5)	$	22	$	17	$	(67)	$	278	$	211
Available-for-sale debt securities:
Taxable		871		(15)		856		103		139		242
Tax-exempt		172		(68)		104		(78)		(60)		(138)
Total available-for-sale debt securities		1,043		(83)		960		25		79		104
Loans receivable:
Taxable		205		276		481		2,480		1,974		4,454
Paycheck Protection Program - 1st Draw		(2,723)		949		(1,774)
Paycheck Protection Program - 2nd Draw		(128)		479		351
Paycheck Protection Program								(410)		(162)		(572)
Tax-exempt		121		(101)		20		59		81		140
Total loans receivable		(2,525)		1,603		(922)		2,129		1,893		4,022
Other earning assets		(5)		(2)		(7)		(5)		1		(4)
Total Interest Income		(1,492)		1,540		48		2,082		2,251		4,333

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		35		(62)		(27)		20		773		793
Money market		35		(79)		(44)		(63)		674		611
Savings		9		(3)		6		2		0		2
Time deposits		(153)		(150)		(303)		56		858		914
Total interest-bearing deposits		(74)		(294)		(368)		15		2,305		2,320
Borrowed funds:
Short-term		(9)		(5)		(14)		792		304		1,096
Long-term - FHLB advances		(56)		(29)		(85)		236		396		632
Senior notes, net		118		0		118		1		1		2
Subordinated debt, net		193		(74)		119		(83)		(50)		(133)
Total borrowed funds		246		(108)		138		946		651		1,597
Total Interest Expense		172		(402)		(230)		961		2,956		3,917

Net Interest Income	$	(1,664)	$	1,942	$	278	$	1,121	$	(705)	$	416

(1)	Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.

(2)	The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~NONINTEREST INCOME~~

~~TABLE V – COMPARISON OF NONINTEREST INCOME~~

(Dollars in Thousands)

Three Months Ended

March 31,

$

%

2022

2021

Change

Change

Trust revenue

$
1,786

$
1,626

$
160

9.8
%
Brokerage and insurance revenue

522

326

196

60.1
%
Service charges on deposit accounts

1,235

1,015

220

21.7
%
Interchange revenue from debit card transactions

963

881

82

9.3
%
Net gains from sales of loans

382

1,064

(682)

(64.1)
%
Loan servicing fees, net

210

248

(38)

(15.3)
%
Increase in cash surrender value of life insurance

135

150

(15)

(10.0)
%
Other noninterest income

588

1,472

(884)

(60.1)
%
Realized gains on available-for-sale debt securities, net

2

0

2

%
Total noninterest income

$
5,823

$
6,782

$
(959)

(14.1)
%

~~Total noninterest income decreased $959,000 (14.1%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.~~

~~NONINTEREST EXPENSE~~

~~TABLE VI~~ - ~~COMPARISON OF NONINTEREST EXPENSE~~

(Dollars in Thousands)

Three Months Ended

March 31,

$

%

2022

2021

Change

Change

Salaries and employee benefits

$
10,607

$
8,895

$
1,712

19.2
%
Net occupancy and equipment expense

1,411

1,304

107

8.2
%
Data processing and telecommunications expense

1,623

1,380

243

17.6
%
Automated teller machine and interchange expense

384

337

47

13.9
%
Pennsylvania shares tax

488

491

(3)

(0.6)
%
Professional fees

489

547

(58)

(10.6)
%
Other noninterest expense

1,884

2,755

(871)

(31.6)
%
Total noninterest expense

$
16,886

$
15,709

$
1,177

7.5
%

Total noninterest expense in the first quarter 2022 increased $1,177,000 (7.5%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first ~~three months of 2022~~quarter 2023 was ~~$1,483,000,~~$1,409,000, which was ~~$627,000~~$74,000 lower than the provision for the first ~~three months of 2021.~~quarter 2022. The effective tax rate (tax provision as a percentage of pre-tax income) was 18.4% in the first quarter 2023 compared to 17.7% in the first ~~three months of 2022 compared to 19.4% in the first three months of 2021.~~quarter 2022. The Corporation’s effective tax rates differ from the statutory rate of 21% ~~in the first three months of 2022 and 2021~~ principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 represents the following temporary difference components:


	March 31,		December 31,		March 31,		December 31,
(In Thousands)	2022		2021		2023		2022
Deferred tax assets:
Unrealized holding losses on securities	$	5,448	$	0	$	11,504	$	13,391
Allowance for loan losses		3,124		2,935
Allowance for credit losses on loans						4,029		3,648
Purchase accounting adjustments on loans		1,237		1,621		573		938
Deferred compensation		1,060		965		1,198		1,149
Operating leases liability		762		821		876		907
Deferred loan origination fees						710		779
Net operating loss carryforward		748		778		630		659
Accrued incentive compensation		129		529		170		354
Other deferred tax assets		1,473		1,766		1,212		1,115
Total deferred tax assets		13,981		9,415		20,902		22,940

Deferred tax liabilities:
Unrealized holding gains on securities		0		1,278
Defined benefit plans - ASC 835		82		57		125		129
Bank premises and equipment		425		460		283		298
Core deposit intangibles		702		725		610		633
Right-of-use assets from operating leases		762		821		876		907
Other deferred tax liabilities		192		187		94		89
Total deferred tax liabilities		2,163		3,528		1,988		2,056
Deferred tax asset, net	$	11,818	$	5,887	$	18,914	$	20,884

The Corporation regularly reviews 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.

Management believes the recorded net deferred tax asset at March 31, ~~2022~~2023 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

SECURITIES

Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs and maximizing return on earning assets within reasonable risk ~~parameters and providing a means to hedge the Corporation’s overall interest rate risk exposure, while maintaining high credit quality.~~

~~The composition of the available-for-sale debt securities portfolio at March 31, 2022, December 31, 2021 and December 31, 2020 is as follows:~~

(Dollars In Thousands)

March 31, 2022

December 31, 2021

December 31, 2020

Amortized

Fair

Amortized

Fair

Amortized

Fair

Cost

Value

Cost

Value

Cost

Value

Obligations of the U.S. Treasury

$
38,152

$
36,494

$
25,058

$
24,912

$
12,184

$
12,182

Obligations of U.S. Government agencies

24,455

23,408

23,936

24,091

25,349

26,344

Bank holding company debt securities

24,942

24,043

18,000

17,987

0

0

Obligations of states and political subdivisions:

Tax-exempt

149,140

143,633

143,427

148,028

116,427

122,401

Taxable

73,732

69,629

72,182

72,765

45,230

47,452

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:













Residential pass-through securities

112,122

106,568

98,048

98,181

36,853

38,176

Residential collateralized mortgage obligations

45,628

43,868

44,015

44,247

56,048

57,467

Commercial mortgage-backed securities

90,682

85,270

86,926

87,468

42,461

45,310

Total Available-for-Sale Debt Securities

$
558,853

$
532,913

$
511,592

$
517,679

$
334,552

$
349,332

Aggregate Unrealized (Loss) Gain

$
(25,940)

$
6,087

$
14,780

Aggregate Unrealized (Loss) Gain as a % of Amortized Cost

(4.6)
%

1.2
%

4.4
%
Market Yield on 5-Year U.S. Treasury Obligations (a)

2.42
%

1.26
%

0.36
%

~~(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)~~

The amortized cost of available-for-sale debt securities increased to $558,853,000 at March 31, 2022 from $511,592,000 at December 31, 2021 and $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020, 2021 and the first quarter 2022.

As reflected in the table above, the fair value of available-for-sale securities as of March 31, 2022 was lower than the amortized cost basis by $25,940,000, or 4.6%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021 and $14,780,000 (4.4%) at December 31, 2020. The unrealized decrease in fair value of the portfolio in the first quarter 2022 and in 2021 resulted from an increase in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 1.16% higher at March 31, 2022 in comparison to December 31, 2021, and 2.06% higher than at December 31, 2020.

Management reviewed the Corporation’s holdings as of March 31, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.parameters.

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The composition of the available-for-sale debt securities portfolio at March 31, 2023, December 31, 2022 and December 31, 2021 is as follows:


(Dollars In Thousands)	March 31, 2023					December 31, 2022					December 31, 2021
	Amortized		Fair			Amortized		Fair			Amortized		Fair
	Cost		Value			Cost		Value			Cost		Value
Obligations of the U.S. Treasury	$	33,924	$	31,163		$	35,166	$	31,836		$	25,058	$	24,912
Obligations of U.S. Government agencies		25,479		23,348			25,938		23,430			23,936		24,091
Bank holding company debt securities		28,947		24,723			28,945		25,386			18,000		17,987
Obligations of states and political subdivisions:
Tax-exempt		128,285		117,812			146,149		132,623			143,427		148,028
Taxable		67,076		57,572			68,488		56,812			72,182		72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		109,028		97,807			112,782		99,941			98,048		98,181
Residential collateralized mortgage obligations		42,296		38,117			44,868		40,296			44,015		44,247
Commercial mortgage-backed securities		84,449		74,195			91,388		79,686			86,926		87,468
Private label commercial mortgage-backed securities		8,105		8,077			8,070		8,023			0		0
Total Available-for-Sale Debt Securities	$	527,589	$	472,814		$	561,794	$	498,033		$	511,592	$	517,679

Aggregate Unrealized (Loss) Gain			$	(54,775)				$	(63,761)				$	6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost				(10.4)	%				(11.3)	%				1.2	%
Market Yield on 5-Year U.S. Treasury Obligations (a)				3.60	%				3.99	%				1.26	%

(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)

As reflected in the table above, the fair value of available-for-sale securities was lower than the amortized cost basis by $54,775,000, or 10.4% at March 31, 2023 and $63,761,000 (11.3%) at December 31, 2022. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. The volatility in the fair value of the portfolio, including the significant reduction in fair value in 2022, resulted from changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 0.39% lower at March 31, 2023 in comparison to December 31, 2022, and 2.34% higher than at December 31, 2021.

Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.

As described in Note 5 to the unaudited, consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at March 31, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of March 31, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at March 31, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:

●

Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At March 31, 2023, the securities have external ratings ranging from BBB-/Baa3 to A-.

●

Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at March 31, 2023, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or prerefunded – 23% of the portfolio; AA – 70%; A – 7%.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

●

Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.

Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at March 31, 2023.

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for ~~loan~~credit losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. ~~There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at March 31, 2022, and management~~Management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in ~~2022.~~2023.

Table VII shows the composition of the loan portfolio at March 31, ~~2022~~2023 and at year-end from ~~2017~~2018 through ~~2021.~~2022. The ~~significant loan growth~~segments presented in ~~2019 and 2020 reflects~~Table VII have been revised from those used in prior year disclosures to be consistent with the ~~impact~~pools used in determining the collectively evaluated portion of ~~acquisitions. Also,~~ the ~~Corporation has increased~~allowance for credit losses based on the ~~proportion of residential mortgage loans sold into the secondary market, contributing to a reduction of $59,887,000~~CECL methodology in ~~residential mortgage~~2023.

As presented in Table VII, total loans outstanding at March 31, ~~2022 compared to~~2023 of $1,745,139,000 was more than double the corresponding total at December 31, ~~2020.~~2018. The increase in loans outstanding includes the impact of acquisitions of banks located in Southeastern Pennsylvania in 2018 and 2019. Primarily as a result of the acquisitions, as well as expansion by opening 2 offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature. At March 31, ~~2022,~~2023, commercial loans represented ~~approximately 62%~~74% of the portfolio while residential ~~mortgage~~ loans totaled ~~36%~~23% of the ~~portfolio.~~portfolio; in comparison, commercial loans totaled 48% and residential loans totaled 47% of the portfolio at December 31, 2018.

Table VII shows an increase in commercial and industrial loans to $222,923,000 at December 31, 2020 followed by reductions in 2021, 2022 and the first quarter 2023. The elevated balance of commercial and industrial loans at December 31, 2020 included Paycheck Protection Program (PPP) loans of $132,269,000, a substantial portion of which were subsequently repaid. The outstanding balance of PPP loans was $155,000 at March 31, 2023.

At March 31, ~~2022,~~2023, gross loans outstanding ~~totaled $1,538,190,000, a decrease of $26,659,000~~increased $5,099,000 from December 31, ~~2021, including a reduction in PPP~~2022. Gross loans ~~of $14,487,000 due to repayments and a net reduction in residential mortgage loans of $9,061,000. Excluding PPP loans, total commercial loans~~outstanding at ~~March~~December 31, 2022 ~~were down $3,741,000~~increased $175,191,000, or 11.2%, from the total at December 31, 2021. Recently, residential mortgage lending activity has slowed, consistent with the rapid increase in interest rates. The “pipeline” of commercial lending opportunities has grown substantially in recent months as portions of the economy have shown signs of recovery from the pandemic. The pace of loan growth ~~for the remainder of 2022~~in 2023 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and ~~many~~ other factors.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to ~~$46,083,000~~$42,047,000 at March 31, ~~2022,~~2023, down from ~~$54,372,000~~$44,723,000 at December 31, ~~2021.~~ 2022.

At March 31, ~~2022,~~2023, the ~~balance of participation~~total recorded investment in non-owner occupied commercial real estate loans outstanding includes a total of $25,767,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the ~~extent~~primary purpose is utilization of ~~collateral available is limited, though typically at the time~~office space by third parties was $95,524,000, or 5.5% of ~~origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation~~total gross loans ~~totaled $6,742,000~~receivable. Within this segment, at March 31, ~~2022~~2023, there was 1 loan with a recorded investment of $2,615,000 risk rated as Special Mention with no related ACL, and ~~$7,469,000~~1 loan with a recorded investment of $1,379,000 risk rated as Substandard and nonaccrual with an ACL of $182,000. The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $91,530,000 were accruing interest and risk rated Pass at ~~December~~March 31, ~~2021.~~2023.

The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through March 31, ~~2022,~~2023, the Corporation’s activity under the MPF Direct Program has been minimal.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At March 31, ~~2022,~~2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to ~~$1,557,000,~~$1,376,000, and the corresponding total outstanding balance of repurchased loans at December 31, ~~2021~~2022 was ~~$1,571,000.~~$1,515,000.

At March 31, ~~2022,~~2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled ~~$338,482,000,~~$331,326,000, including loans sold through the MPF Xtra program of ~~$163,199,000~~$153,437,000 and loans sold through the Original program of ~~$175,283,000.~~$167,889,000. At December 31, ~~2021,~~2022, outstanding balances of loans sold and serviced through the two programs totaled ~~$334,741,000,~~$325,677,000, including loans sold through the MPF Xtra program of ~~$165,668,000~~$155,506,000 and loans sold through the Original Program of ~~$169,073,000.~~$170,171,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of March 31, ~~2022~~2023 and December 31, ~~2021.~~

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At March 31, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,998,000, and the Corporation has recorded a related allowance for credit losses in the amount of $660,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $90,000 for the three months ended March 31, 2022 and $115,000 for the three months ended March 31, 2021. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $25,000 was recorded in the three months ended March 31, 2022 with a provision for losses of $30,000 in the three months ended March 31, 2021. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.2022.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was ~~$8,907,000~~$4,799,000 at March 31, ~~2022~~2023 and ~~$12,856,000~~$4,847,000 at December 31, ~~2021~~2022 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of ~~$215,000~~$90,000 at March 31, ~~2022~~2023 and ~~$457,000 at~~ December 31, ~~2021.~~2022. In the three months ended March 31, ~~2022,~~2023, the Corporation ~~recorded a~~did not record an increase or reduction in other noninterest expense ~~of $242,000 representing~~related to amounts realized on SBA claims in excess of prior estimates, ~~with no corresponding expense or~~as compared to a reduction ~~in expense~~of $242,000 in the ~~first quarter 2021.~~three months ended March 31, 2022.

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TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

March 31,

December 31,


2022

2021

2020

2019

2018

2017
Commercial:










Commercial loans secured by real estate

$
585,677

$
569,840

$
531,810

$
301,227

$
162,611

$
159,266
Commercial and industrial

159,793

159,073

159,577

126,374

91,856

88,276
Paycheck Protection Program - 1st Draw

887

1,356

132,269

0

0

0
Paycheck Protection Program - 2nd Draw

11,490

25,508

0

0

0

0
Political subdivisions

81,975

81,301

53,221

53,570

53,263

59,287
Commercial construction and land

37,258

60,579

42,874

33,555

11,962

14,527
Loans secured by farmland

12,507

11,121

11,736

12,251

7,146

7,255
Multi-family (5 or more) residential

53,141

50,089

55,811

31,070

7,180

7,713
Agricultural loans

2,588

2,351

3,164

4,319

5,659

6,178
Other commercial loans

14,827

17,153

17,289

16,535

13,950

10,986
Total commercial

960,143

978,371

1,007,751

578,901

353,627

353,488
Residential mortgage:












Residential mortgage loans - first liens

481,119

483,629

532,947

510,641

372,339

$
359,987
Residential mortgage loans - junior liens

22,572

23,314

27,311

27,503

25,450

25,325
Home equity lines of credit

39,649

39,252

39,301

33,638

34,319

35,758
1-4 Family residential construction

16,945

23,151

20,613

14,798

24,698

26,216
Total residential mortgage

560,285

569,346

620,172

586,580

456,806

447,286
Consumer

17,762

17,132

16,286

16,741

17,130

14,939
Total

1,538,190

1,564,849

1,644,209

1,182,222

827,563

815,713
Less: allowance for loan losses

(14,271)

(13,537)

(11,385)

(9,836)

(9,309)

(8,856)
Loans, net

$
1,523,919

$
1,551,312

$
1,632,824

$
1,172,386

$
818,254

$
806,857


(In Thousands)	March 31,		December 31,
	2023		2022		2021		2020		2019		2018
Commercial real estate - nonowner occupied:
Nonowner occupied	$	457,814	$	454,386	$	358,352	$	328,662	$	208,579	$	115,128
Multi-family (5 or more) residential		58,111		55,406		49,054		54,893		30,474		7,104
1-4 Family - commercial purpose		166,773		165,805		175,027		198,918		147,121		35,176
Total commercial real estate - nonowner occupied		682,698		675,597		582,433		582,473		386,174		157,408
Commercial real estate - owner occupied		221,766		205,910		196,083		191,075		78,729		38,478
All other commercial loans:
Commercial and industrial		83,420		95,368		118,488		222,923		67,288		49,947
Commercial lines of credit		119,109		141,444		106,338		105,802		92,509		65,492
Political subdivisions		85,555		86,663		75,401		46,295		46,054		49,037
Commercial construction and land		70,612		60,892		59,505		41,000		32,717		11,126
Other commercial loans		26,106		25,710		26,498		29,310		28,735		23,130
Total all other commercial loans		384,802		410,077		386,230		445,330		267,303		198,732
Residential mortgage loans:
1-4 Family - residential		372,241		363,005		327,593		356,532		388,415		360,195
1-4 Family residential construction		29,479		30,577		23,151		18,736		14,640		24,698
Total residential mortgage		401,720		393,582		350,744		375,268		403,055		384,893
Consumer loans:
Consumer lines of credit (including HELOCs)		35,245		36,650		33,522		34,566		30,810		31,955
All other consumer		18,908		18,224		15,837		15,497		16,151		16,097
Total consumer		54,153		54,874		49,359		50,063		46,961		48,052
Total		1,745,139		1,740,040		1,564,849		1,644,209		1,182,222		827,563
Less: allowance for credit losses on loans		(18,346)		(16,615)		(13,537)		(11,385)		(9,836)		(9,309)
Loans, net	$	1,726,793	$	1,723,425	$	1,551,312	$	1,632,824	$	1,172,386	$	818,254

PROVISION AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

~~The~~On January 1, 2023, the Corporation ~~maintains~~adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an ~~allowance for loan losses~~expected loss methodology that ~~represents management’s~~is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the ~~losses inherent in the loan portfolio as~~remaining estimated life of the ~~balance sheet date~~financial asset using historical experience, current conditions, and ~~recorded as a reduction of the investment in loans.~~reasonable and supportable forecasts. Note 61 to the unaudited consolidated financial statements provides ~~an overview~~a detailed explanation of the ~~process management uses~~Corporation’s adopted accounting policies related to the application of CECL.

Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for ~~evaluating~~all financial assets measured at amortized cost and ~~determining~~off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). At January 1, 2023, the impact of adopting CECL included an increase in gross loans receivable of $806,000 as compared to December 31, 2022 and an increase in the allowance for credit losses of $2,104,000 as compared to the allowance for loan ~~losses.~~losses determined under the Incurred Loss method at December 31, 2022.

~~While management uses available information to recognize~~The credit for credit losses ~~on loans, changes~~(reduction in ~~economic conditions may necessitate revisions~~expense) was $352,000 in ~~future years. In addition, various regulatory agencies,~~the first quarter 2023 as ~~an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments~~compared to the ~~allowance based on their judgments of information available to them at the time of their examination.~~

~~The allowance~~first quarter 2022 provision for loan losses ~~was $14,271,000 at March 31, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans~~ of ~~$730,000 at March 31, 2022, down slightly from $740,000 at December 31, 2021. Table IX also shows the increase~~$891,000. The credit for credit losses in the ~~allowance~~first quarter 2023 resulted mainly from a reduction in ~~2022 is mainly related to commercial loans, as the collectively evaluated portion of~~ the allowance related to the commercial segment ~~increased~~of the portfolio. The net credit for loan losses in the first quarter 2023 included the impact of a reduction in qualitative factors applied to ~~$8,192,000~~commercial loan pools, mainly due to an improvement in data used to evaluate commercial real estate values in the Corporation’s relevant market areas at March 31, ~~2022 from $7,553,000 at December 31, 2021. The net increase~~2023 as compared to January 1, 2023, along with a reduction in the collectively determined portion of the allowance includes increases related to management’s updated assessments of purchased performing loans. The impact of changes in the collectively determined portion of the allowance related to purchased performing loans is included in “Changes in loan volume” in the accompanying analysis of the provision.

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~~Table X shows~~historical net charge-off percentage for non-owner occupied commercial real estate. These adjustments were partially offset by the ~~allowance for loan losses totaled 0.93%~~impact of ~~gross loans outstanding~~an increase in the allowance at March 31, ~~2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 2018. Table X also shows that the total of the allowance and the credit adjustment~~2023 as compared to January 1, 2023 based on ~~purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.11% at March 31, 2022, in line with ratios from the previous years.~~

~~The provision (credit) for loan losses by segment~~changes in the ~~three-month periods ended March 31, 2022 and 2021 are as follows:~~

Three Months Ended

March 31,

March 31,
(In Thousands)

2022

2021
Commercial

$
779

$
242
Residential mortgage

91

(55)
Consumer

25

(20)
Unallocated

(4)

92
Total

$
891

$
259

~~The provision (credit)~~economic forecast. Within the net credit for ~~loan~~credit losses ~~is further detailed as follows:~~

Commercial segment

Three Months Ended

March 31,

March 31,
(In Thousands)

2022

2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
140

$
193
Increase (decrease) in collectively determined portion of the allowance attributable to:

Changes in loan volume

577

142
Changes in historical loss experience factors

62

(49)
Changes in qualitative factors

0

(44)
Total provision for loan losses - Commercial segment

$
779

$
242

Residential mortgage segment

Three Months Ended

March 31,

March 31,
(In Thousands)

2022

2021
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
(16)

$
(10)
Increase (decrease) in collectively determined portion of the allowance attributable to:

Changes in loan volume

68

(7)
Changes in historical loss experience factors

(10)

(38)
Changes in qualitative factors

49

0
Total provision for loan losses - Residential mortgage segment

$
91

$
(55)

Consumer segment

Three Months Ended

March 31,

March 31,
(In Thousands)

2022

2021
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
23

$
(1)
Increase (decrease) in collectively determined portion of the allowance attributable to:

Changes in loan volume

0

(10)
Changes in historical loss experience factors

(3)

(10)
Changes in qualitative factors

5

1
Total provision for loan losses - Consumer segment

$
25

$
(20)

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Total - All segments

Three Months Ended

March 31,

March 31,
(In Thousands)

2022

2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
147

$
182
Increase (decrease) in collectively determined portion of the allowance attributable to:

Changes in loan volume

645

125
Changes in historical loss experience factors

49

(97)
Changes in qualitative factors

54

(43)
Sub-total

895

167
Unallocated

(4)

92
Total provision for loan losses - All segments

$
891

$
259

~~For the periods shown~~on loans in the ~~tables immediately above,~~first quarter 2023, the provision related to ~~increases or decreases~~specific loans was $205,000, including net charge-offs of $61,000 and an increase in specific allowances on ~~impaired~~ loans ~~was affected by changes in~~of $144,000. In comparison, the ~~results~~first quarter 2022 provision included a net charge of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller$147,000 related to specific loans ~~that had not been individually evaluated for impairment prior to charge-off.~~

In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding purchased loans and loans specifically evaluated for impairment) for the period.

The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).

~~In the three months ended March 31, 2022, net charge-offs were $157,000, including recoveries of $23,000 and~~(net charge-offs of ~~$180,000. Table VIII shows the average rate~~$157,000 offset by a net decrease in specific allowances on loans of ~~net charge-offs as a percentage of loans was 0.01% in the three months ended March 31, 2022, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.~~$10,000).

Table X ~~presents information related to past due and impaired loans, and loans~~shows that ~~have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.19% at March 31, 2022, down from 1.36% at December 31, 2021, and~~total nonperforming assets as a percentage of total assets was ~~0.81%~~0.60% at March 31, ~~2022,~~2023, down from ~~0.94%~~1.04% at December 31, ~~2021. Table X presents data~~2022 and lower than that at ~~the end of each of the years ended December 31, 2017~~year-end 2018 through 2021. ~~Table X shows that total~~Total nonperforming ~~loans as a percentage of loans of 1.19%~~assets were $14.6 million at March 31, ~~2022, though up~~2023, down from $25.6 million at December 31, ~~2019, was lower than the corresponding year-end ratio~~2022. Similarly, total loans individually evaluated for all other years presented. Similarly, the March 31, 2022 ratio of total nonperforming assets as a percentage of assets of 0.81% was lower than the corresponding ratio for all years presented except December 31, 2019.

~~Total impaired loans of $12,005,000~~credit loss decreased to $9.3 million at March 31, ~~2022 are down $3,729,000~~2023 from ~~the corresponding amount~~$19.4 million at December 31, ~~2021 of $15,734,000. Purchased credit impaired loans were included~~2022. The net decrease in ~~impaired loans and had carrying values totaling $3,983,000~~nonperforming assets at March 31, 2023 compared to December 31, 2022 ~~and $6,558,000~~included the impact of a $10.0 million payoff in the first quarter 2023 on a commercial loan relationship that was classified as nonaccrual at December 31, ~~2021.~~ 2022. The reduction also included a paydown of $2,180,000 in the first quarter 2023 on a commercial loan for which partial charge-offs totaling $3,942,000 were recorded in 2022. The remaining carrying value of this loan was $474,000 at March 31, 2023. These reductions were partially offset by the addition to nonaccrual of a commercial loan relationship totaling $1,931,000 at March 31, 2023. Based on an estimate of the liquidation value of the real estate collateralizing the relationship, an allowance of $182,000 was recorded at March 31, 2023.

In the first quarter 2023, net charge-offs were minimal by historical standards, totaling $61,000. Table VIII shows annual average net charge-off rates ranging from a high of 0.26% in 2022 ~~the Corporation received pay-offs on~~to a ~~few purchased credit impaired loans and recognized interest income~~low of ~~$1,398,000 for the excess received over previous carrying amounts.~~0.02% in 2018.

Over the period ~~2017-2021~~2018-2022 and the first three months of ~~2022,~~2023, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on ~~impaired~~individual loans, and may significantly impact the provision for credit losses and the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of ~~impaired~~ loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

of March 31, ~~2022.~~2023. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

Tables VIII through X present historical data related to loans and the allowance for ~~loan~~credit losses.

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

(Dollars In Thousands)

Three Months Ended

March 31,

March 31,

Years Ended December 31,


2022

2021


2021

2020

2019

2018

2017

Balance, beginning of year

$
13,537

$
11,385

$
11,385

$
9,836

$
9,309

$
8,856

$
8,473

Charge-offs:











Commercial

(150)

0

(1,464)

(2,343)

(6)

(165)

(132)

Residential mortgage

0

0

(11)

0

(190)

(158)

(197)

Consumer

(30)

(11)

(100)

(122)

(183)

(174)

(150)

Total charge-offs

(180)

(11)

(1,575)

(2,465)

(379)

(497)

(479)

Recoveries:











Commercial

0

14

22

16

6

317

4

Residential mortgage

16

2

6

44

12

8

19

Consumer

7

12

38

41

39

41

38

Total recoveries

23

28

66

101

57

366

61

Net (charge-offs) recoveries

(157)

17

(1,509)

(2,364)

(322)

(131)

(418)

Provision for loan losses

891

259

3,661

3,913

849

584

801

Balance, end of period

$
14,271

$
11,661

$
13,537

$
11,385

$
9,836

$
9,309

$
8,856

Net charge-offs as a % of average loans

0.01
%

0.00
%

0.09
%

0.16
%

0.03
%

0.02
%

0.05
%

~~TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES~~

(In Thousands)

March 31,

As of December 31,


2022

2021

2020

2019

2018

2017
ASC 310 - Impaired loans - individually evaluated

$
730

$
740

$
925

$
1,051

$
1,605

$
1,279
ASC 450 - Collectively evaluated:












Commercial

8,192

7,553

5,545

3,913

3,102

3,078
Residential mortgage

4,445

4,338

4,091

4,006

3,870

3,841
Consumer

237

235

239

281

233

159
Unallocated

667

671

585

585

499

499
Total Allowance

$
14,271

$
13,537

$
11,385

$
9,836

$
9,309

$
8,856


(Dollars In Thousands)	Three Months Ended
	March 31,			March 31,			Years Ended December 31,
	2023			2022			2022			2021			2020			2019			2018
Balance, beginning of year	$	16,615		$	13,537		$	13,537		$	11,385		$	9,836		$	9,309		$	8,856
Increase due to adoption of CECL		2,104			0			0			0			0			0			0
Charge-offs		(67)			(180)			(4,245)			(1,575)			(2,465)			(379)			(497)
Recoveries		6			23			68			66			101			57			366
Net charge-offs		(61)			(157)			(4,177)			(1,509)			(2,364)			(322)			(131)
(Credit) provision for credit losses		(312)			891			7,255			3,661			3,913			849			584
Balance, end of period	$	18,346		$	14,271		$	16,615		$	13,537		$	11,385		$	9,836		$	9,309
Net charge-offs as a % of average loans		0.00	%		0.01	%		0.26	%		0.09	%		0.16	%		0.03	%		0.02	%

5051

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR CREDIT LOSSES

UPON ADOPTION OF CECL


(In Thousands)	March 31,		January 1,
	2023		2023
Loans individually evaluated	$	895	$	751
Loans collectively evaluated:
Commercial real estate - nonowner occupied		9,045		9,641
Commercial real estate - owner occupied		1,759		1,765
All other commercial loans		3,477		3,914
Residential mortgage		2,864		2,407
Consumer		306		241
Total Allowance	$	18,346	$	18,719

PRIOR TO CECL ADOPTION


(In Thousands)	As of December 31,
	2022		2021		2020		2019		2018
ASC 310 - Impaired loans - individually evaluated	$	453	$	740	$	925	$	1,051	$	1,605
ASC 450 - Collectively evaluated:
Commercial		10,845		7,553		5,545		3,913		3,102
Residential mortgage		4,073		4,338		4,091		4,006		3,870
Consumer		244		235		239		281		233
Unallocated		1,000		671		585		585		499
Total Allowance	$	16,615	$	13,537	$	11,385	$	9,836	$	9,309

TABLE X - PAST DUE LOANS AND ~~IMPAIRED LOANS,~~ NONPERFORMING ASSETS

~~AND TROUBLED DEBT RESTRUCTURINGS (TDRs)~~


(Dollars In Thousands)	March 31,			As of December 31,															March 31,			As of December 31,
	2022			2021			2020			2019			2018			2017			2023			2022			2021			2020			2019			2018
Impaired loans with a valuation allowance	$	6,528		$	6,540		$	8,082		$	3,375		$	4,851		$	4,100
Impaired loans without a valuation allowance		1,494			2,636			2,895			1,670			4,923			5,411
Loans individually evaluated with a valuation allowance																			$	5,802		$	3,460		$	6,540		$	8,082		$	3,375		$	4,851
Loans individually evaluated without a valuation allowance																				3,507			14,871			2,636			2,895			1,670			4,923
Purchased credit impaired loans		3,983			6,558			6,841			441			0			0			0			1,027			6,558			6,841			441			0
Total impaired loans	$	12,005		$	15,734		$	17,818		$	5,486		$	9,774		$	9,511		$	9,309		$	19,358		$	15,734		$	17,818		$	5,486		$	9,774
Total loans past due 30-89 days and still accruing	$	3,868		$	5,106		$	5,918		$	8,889		$	7,142		$	9,449		$	5,493		$	7,079		$	5,106		$	5,918		$	8,889		$	7,142
Nonperforming assets:
Purchased credit impaired loans	$	3,983		$	6,558		$	6,841		$	441		$	0		$	0	��	$	0		$	1,027		$	6,558		$	6,841		$	441		$	0
Other nonaccrual loans		10,962			12,441			14,575			8,777			13,113			13,404			12,876			22,058			12,441			14,575			8,777			13,113
Total nonaccrual loans		14,945			18,999			21,416			9,218			13,113			13,404			12,876			23,085			18,999			21,416			9,218			13,113
Total loans past due 90 days or more and still accruing		3,429			2,219			1,975			1,207			2,906			3,724			1,216			2,237			2,219			1,975			1,207			2,906
Total nonperforming loans		18,374			21,218			23,391			10,425			16,019			17,128			14,092			25,322			21,218			23,391			10,425			16,019
Foreclosed assets held for sale (real estate)		531			684			1,338			2,886			1,703			1,598			459			275			684			1,338			2,886			1,703
Total nonperforming assets	$	18,905		$	21,902		$	24,729		$	13,311		$	17,722		$	18,726		$	14,551		$	25,597		$	21,902		$	24,729		$	13,311		$	17,722
Loans subject to troubled debt restructurings (TDRs):
Performing	$	279		$	288		$	166		$	889		$	655		$	636
Nonperforming		3,954			5,517			7,285			1,737			2,884			3,027
Total TDRs	$	4,233		$	5,805		$	7,451		$	2,626		$	3,539		$	3,663

Total nonperforming loans as a % of loans		1.19	%		1.36	%		1.42	%		0.88	%		1.94	%		2.10	%		0.81	%		1.46	%		1.36	%		1.42	%		0.88	%		1.94	%
Total nonperforming assets as a % of assets		0.81	%		0.94	%		1.10	%		0.80	%		1.37	%		1.47	%		0.60	%		1.04	%		0.94	%		1.10	%		0.80	%		1.37	%
Allowance for loan losses as a % of total loans		0.93	%		0.87	%		0.69	%		0.83	%		1.12	%		1.09	%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)		1.11	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for loan losses as a % of nonperforming loans		77.67	%		63.80	%		48.67	%		94.35	%		58.11	%		51.70	%

(a) Credit adjustment on purchased non-impaired loans at end of period	$	2,783		$	3,335		$	5,979		$	1,216		$	0		$	0
Allowance for loan losses		14,271			13,537			11,385			9,836			9,309			8,856
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)	$	17,054		$	16,872		$	17,364		$	11,052		$	9,309		$	8,856
Total loans receivable	$	1,538,190		$	1,564,849		$	1,644,209		$	1,182,222		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans at end of period		2,783			3,335			5,979			1,216			0			0
Total (2)	$	1,540,973		$	1,568,184		$	1,650,188		$	1,183,438		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)		1.11	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for credit losses as a % of total loans																				1.05	%		0.95	%		0.87	%		0.69	%		0.83	%		1.12	%

5152

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At March 31, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $85,775,000. The Corporation’s cash position at March 31, 2022 was elevated in comparison to historical (pre-pandemic) levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.

The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of ~~$12,817,000~~$23,314,000 at March 31, ~~2022.~~2023.

The Corporation’s outstanding, available, and total credit facilities at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:


	Outstanding				Available				Total Credit				Outstanding				Available				Total Credit
(In Thousands)	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2022		2021		2022		2021		2022		2021		2023		2022		2023		2022		2023		2022
Federal Home Loan Bank of Pittsburgh	$	26,382	$	33,311	$	731,429	$	723,557	$	757,811	$	756,868	$	201,357	$	150,099	$	655,577	$	689,279	$	856,934	$	839,378
Federal Reserve Bank Discount Window		0		0		12,429		13,642		12,429		13,642		0		0		22,340		23,107		22,340		23,107
Other correspondent banks		0		0		45,000		45,000		45,000		45,000		0		0		95,000		95,000		95,000		95,000
Total credit facilities	$	26,382	$	33,311	$	788,858	$	782,199	$	815,240	$	815,510	$	201,357	$	150,099	$	772,917	$	807,386	$	974,274	$	957,485

At March 31, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $91,000,000, long-term borrowings of $98,649,000 and letters of credit totaling $11,708,000. At December 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowing of $77,000,000, long-term borrowings of ~~$20,348,000~~$62,272,000 and letters of credit totaling $6,034,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000.$10,827,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. In light of the unrealized loss at March 31, 2023 resulting from increases in interest rates in 2022, as described in more detail in the Securities section of Management’s Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. At March 31, ~~2022,~~2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was ~~$328,909,000.~~$269,763,000.

~~Management~~Deposits totaled $1,916,040,000 at March 31, 2023, down $81,553,000 (4.1%) from $1,997,593,000 at December 31, 2022. Average total deposits of $1,931,126,000 for the first quarter 2023 were down $96,020,000 (4.7%) from the fourth quarter 2022 and were flat as compared to average deposits of $1,931,681,000 for the first quarter 2022. The reduction in total deposits included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $75.6 million as compared to December 31, 2022. The net reduction in deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and seasonal reductions in municipal deposits. At March 31, 2023, the Corporation’s estimated uninsured deposits totaled $613.9 million, or 31.7% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $189.2 million, or 9.8% of total deposits at March 31, 2023.

The highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.043 billion at March 31, 2023. Available funding from these sources exceeded the amount of uninsured deposits noted above by 69.9% at March 31, 2023.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Despite the reduction in deposit balances in the first quarter 2023, based on the ample sources of highly liquid funds as described above, management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at March 31, ~~2022;~~2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Details concerning capital ratios at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are presented below. Management believes, as of March 31, ~~2022,~~2023, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 exceed the Corporation’s Board policy threshold levels.


(Dollars in Thousands)											Minimum To Be																	Minimum To Be
								Minimum To Maintain			Well														Minimum To Maintain			Well
					Minimum			Capital Conservation			Capitalized Under			Minimum To Meet								Minimum			Capital Conservation			Capitalized Under			Minimum To Meet
					Capital			Buffer at Reporting			Prompt Corrective			the Corporation's								Capital			Buffer at Reporting			Prompt Corrective			the Corporation's
	Actual				Requirement			Date			Action Provisions			Policy Thresholds				Actual				Requirement			Date			Action Provisions			Policy Thresholds
	Amount		Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount		Ratio
March 31, 2022:
March 31, 2023:
Total capital to risk-weighted assets:
Consolidated	$	288,530	18.23	%	N/A	N/A		N/A	N/A		N/A	N/A		$	166,142	≥10.5	%	$	287,182	16.49	%	N/A	N/A		N/A	N/A		N/A	N/A		$	182,849	≥10.5	%
C&N Bank		256,215	16.26	%	126,278	≥8	%	165,740	≥10.5	%	157,848	≥10	%		165,740	≥10.5	%		268,292	15.44	%	138,989	≥8	%	182,423	≥10.5	%	173,736	≥10	%		182,423	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		240,568	15.20	%	N/A	N/A		N/A	N/A		N/A	N/A			134,496	≥8.5	%		243,024	13.96	%	N/A	N/A		N/A	N/A		N/A	N/A			148,021	≥8.5	%
C&N Bank		241,284	15.29	%	94,709	≥6	%	134,171	≥8.5	%	126,278	≥8	%		134,171	≥8.5	%		248,768	14.32	%	104,242	≥6	%	147,676	≥8.5	%	138,989	≥8	%		147,676	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		240,568	15.20	%	N/A	N/A		N/A	N/A		N/A	N/A			110,762	≥7	%		243,024	13.96	%	N/A	N/A		N/A	N/A		N/A	N/A			121,900	≥7	%
C&N Bank		241,284	15.29	%	71,032	≥4.5	%	110,494	≥7.0	%	102,601	≥6.5	%		110,494	≥7	%		248,768	14.32	%	78,181	≥4.5	%	121,615	≥7.0	%	112,928	≥6.5	%		121,615	≥7	%
Tier 1 capital to average assets:
Consolidated		240,568	10.59	%	N/A	N/A		N/A	N/A		N/A	N/A			181,748	≥8	%		243,024	10.07	%	N/A	N/A		N/A	N/A		N/A	N/A			193,026	≥8	%
C&N Bank		241,284	10.70	%	90,215	≥4	%	N/A	N/A		112,769	≥5	%		180,430	≥8	%		248,768	10.38	%	95,868	≥4	%	N/A	N/A		119,835	≥5	%		191,737	≥8	%

December 31, 2021:
December 31, 2022:
Total capital to risk-weighted assets:
Consolidated	$	287,614	18.21	%	N/A	N/A		N/A	N/A		N/A	N/A		$	165,846	≥10.5	%	$	285,397	15.72	%	N/A	N/A		N/A	N/A		N/A	N/A		$	190,590	≥10.5	%
C&N Bank		252,606	16.04	%	126,012	≥8	%	165,390	≥10.5	%	157,514	≥10	%		165,390	≥10.5	%		265,784	14.68	%	144,873	≥8	%	190,145	≥10.5	%	181,091	≥10	%		190,145	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		240,433	15.22	%	N/A	N/A		N/A	N/A		N/A	N/A			134,256	≥8.5	%		243,750	13.43	%	N/A	N/A		N/A	N/A		N/A	N/A			154,287	≥8.5	%
C&N Bank		238,434	15.14	%	94,509	≥6	%	133,887	≥8.5	%	126,012	≥8	%		133,887	≥8.5	%		248,744	13.74	%	108,654	≥6	%	153,927	≥8.5	%	144,873	≥8	%		153,927	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		240,433	15.22	%	N/A	N/A		N/A	N/A		N/A	N/A			110,564	≥7	%		243,750	13.43	%	N/A	N/A		N/A	N/A		N/A	N/A			127,060	≥7	%
C&N Bank		238,434	15.14	%	70,881	≥4.5	%	110,260	≥7.0	%	102,384	≥6.5	%		110,260	≥7	%		248,744	13.74	%	81,491	≥4.5	%	126,764	≥7.0	%	117,709	≥6.5	%		126,764	≥7	%
Tier 1 capital to average assets:
Consolidated		240,433	10.53	%	N/A	N/A		N/A	N/A		N/A	N/A			182,683	≥8	%		243,750	10.11	%	N/A	N/A		N/A	N/A		N/A	N/A			192,941	≥8	%
C&N Bank		238,434	10.52	%	90,688	≥4	%	N/A	N/A		113,360	≥5	%		181,376	≥8	%		248,744	10.38	%	95,826	≥4	%	N/A	N/A		119,783	≥5	%		191,652	≥8	%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. In the first quarter ~~2022, 129,867~~2023, 77,430 shares were repurchased for a total cost of ~~$3,227,000,~~$1,662,000, at an average price of ~~$24.85~~$21.47 per share. Cumulatively through March 31, ~~2022, 428,926~~2023, 752,130 shares have been repurchased for a total cost of ~~$10,639,000,~~$18,249,000, at an average price of ~~$24.80~~$24.26 per share.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, ~~2022,~~2023, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:


Minimum common equity tier 1 capital ratio	4.5	%
Minimum common equity tier 1 capital ratio plus capital conservation buffer	7.0	%
Minimum tier 1 capital ratio	6.0	%
Minimum tier 1 capital ratio plus capital conservation buffer	8.5	%
Minimum total capital ratio	8.0	%
Minimum total capital ratio plus capital conservation buffer	10.5	%

A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:


Capital Conservation Buffer	Maximum Payout
(as a % of risk-weighted assets)	(as a % of eligible retained income)
Greater than 2.5%	No payout limitation applies
≤2.5% and >1.875%	60	%
≤1.875% and >1.25%	40	%
≤1.25% and >0.625%	20	%
≤0.625%	0	%

At March 31, ~~2022,~~2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was ~~8.23%~~7.44%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to ~~$20,492,000~~$43,271,000 at March 31, ~~2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000~~2023 and $50,370,000 at December 31, ~~2021.~~2022. The ~~decrease~~increase in stockholders’ equity in the first ~~quarter 2022~~three months of 2023 from the change in accumulated other comprehensive ~~(loss) income~~loss resulted from ~~an increase~~a decrease in interest rates. Changes in accumulated other comprehensive ~~(loss) income~~loss are excluded from earnings and directly increase or decrease stockholders’ equity. IfTo the extent unrealized losses on available-for-sale debt securities ~~are deemed to be other-than-temporarily impaired,~~result from credit losses, unrealized losses are recorded as a charge against ~~earnings, and amortized cost for the affected securities is reduced.~~earnings. The securities section of Management’s Discussion and Analysis and ~~Note~~Notes 1 and 5 to the unaudited consolidated financial statements ~~provides~~provide additional information concerning management’s evaluation of available-for-sale debt securities for ~~other-than-temporary impairment~~credit losses at March 31, ~~2022.~~2023.

~~INFLATION~~

Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies, have led to high inflation. The annual inflation rate for the 12-month period ended March 31, 2022, based on changes in the Consumer Price Index, was 8.5%. The 8.5% increase was the largest 12-month advance since 1981.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate (at the high end of the range) from 1.75% to 0.25% and resumed injections of massive amounts of liquidity into the nation’s monetary system through a variety of programs including purchases of large amounts of securities. At its March 15-16, 2022 meeting, the Federal Open Market Committee (FOMC) changed course, raising the high end of the fed funds target rate to 0.50% and announcing that it anticipates ongoing increases to its target rate will be appropriate and that it expects to begin reducing its holdings of securities at a coming meeting. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run.

Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s available-for-sale debt securities ~~within the available-for-sale securities portfolio~~ are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).

The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.

INTEREST RATE RISK

Business risk arising from changes in interest rates is an inherent factor in operating a bank. A significant portion of the Corporation’s assets are long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the ~~market~~economic value of ~~portfolio~~ equity. For purposes of these calculations, the ~~market~~economic value of ~~portfolio~~ equity includes the ~~fair~~discounted present values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.

The projected results based on the model ~~makes~~includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and ~~market~~economic value of ~~portfolio~~ equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates. As described in more detail below, the Corporation made changes in the estimated rate sensitivity of nonmaturity deposits in the March 31, 2023 analysis presented in Table XI.

The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the ~~market~~economic value of ~~portfolio~~ equity from the baseline values based on current rates.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of March 31, ~~2022~~2023 and December 31, ~~2021. The table shows~~2022. In the ~~Corporation is asset-sensitive, meaning~~analysis based on March 31, 2023 data, the amounts of net interest income and ~~market~~economic value of ~~portfolio~~ equity ~~increase~~decrease in the upward rate ~~scenarios and decrease~~scenarios. Further, net interest income also decreases slightly in the downward rate ~~scenarios.~~scenarios, reflecting the limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor. The ~~table~~results based on March 31, 2023 data as presented in Table XI are significantly different from the results based on the modeling performed using December 31, 2022 data which showed the net interest income profile to be asset-sensitive. In the analysis based on March 31, 2023 data, management assumed that, in rising rate scenarios, the average rate to be paid on interest checking, savings and money market accounts would increase by a higher percentage of the baseline scenario as compared to the assumptions used in the December 31, 2022 analysis. This change reflects management’s assessment that, in light of significant increases in short-term interest rates that have occurred over the course of 2022 and year-to-date in 2023, the Corporation’s deposit rates would increase to a greater extent if such scenarios would occur. The Table also shows that as of the respective dates, despite the impact of the modeling changes related to deposits, the changes in net interest income and changes in ~~market~~economic value were within the policy limits in all scenarios.

~~TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES~~

March 31, 2022 Data

(In Thousands)

Period Ending March 31, 2023

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$
101,995

$
17,804

$
84,191

19.5
%

25.0
%
+300

95,469

14,798

80,671

14.5
%

20.0
%
+200

89,022

11,793

77,229

9.6
%

15.0
%
+100

82,584

8,788

73,796

4.7
%

10.0
%
0

76,265

5,783

70,482

0.0
%

0.0
%
-100

72,037

4,664

67,373

(4.4)
%

10.0
%
-200

69,795

4,238

65,557

(7.0)
%

15.0
%

Market Value of Portfolio Equity at March 31, 2022

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$
498,635

10.0
%

50.0
%

+300

488,691

7.8
%

45.0
%

+200

478,667

5.6
%

35.0
%

+100

466,970

3.0
%

25.0
%

0

453,227

0.0
%

0.0
%

-100

435,057

(4.0)
%

25.0
%

-200

409,709

(9.6)
%

35.0
%

Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2021 Data

(In Thousands)

Period Ending December 31, 2022

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$
98,839

$
18,142

$
80,697

19.1
%

25.0
%
+300

92,438

15,061

77,377

14.2
%

20.0
%
+200

86,112

11,981

74,131

9.4
%

15.0
%
+100

79,740

8,900

70,840

4.5
%

10.0
%
0

73,536

5,760

67,776

0.0
%

0.0
%
-100

70,118

4,820

65,298

(3.7)
%

10.0
%
-200

68,824

4,503

64,321

(5.1)
%

15.0
%

Market Value of Portfolio Equity at December 31, 2021

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$
471,951

14.1
%

50.0
%

+300

459,810

11.1
%

45.0
%

+200

447,354

8.1
%

35.0
%

+100

431,856

4.4
%

25.0
%

0

413,767

0.0
%

0.0
%

-100

388,721

(6.1)
%

25.0
%

-200

365,331

(11.7)
%

35.0
%

in accumulated other comprehensive income (loss) within stockholders’ equity. Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss of $43.3 million at March 31, 2023. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES


March 31, 2023 Data
(In Thousands)	Period Ending March 31, 2024

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	135,866	$	58,067		$	77,799		(13.6)	%	25.0	%
+300		130,871		47,820			83,051		(7.7)	%	20.0	%
+200		125,884		38,979			86,905		(3.5)	%	15.0	%
+100		120,817		31,419			89,398		(0.7)	%	10.0	%
0		115,538		25,510			90,028		0.0	%	0.0	%
-100		110,114		21,921			88,193		(2.0)	%	10.0	%
-200		104,633		18,562			86,071		(4.4)	%	15.0	%

	Economic Value of Equity at March 31, 2023

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	328,395		(24.8)	%		50.0	%
+300		364,273		(16.6)	%		45.0	%
+200		395,634		(9.4)	%		35.0	%
+100		421,298		(3.5)	%		25.0	%
0		436,769		0.0	%		0.0	%
-100		439,414		0.6	%		25.0	%
-200		439,736		0.7	%		35.0	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2022 Data
(In Thousands)	Period Ending December 31, 2023

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	131,145	$	34,767		$	96,378		8.9	%	25.0	%
+300		125,127		30,816			94,311		6.6	%	20.0	%
+200		119,561		26,864			92,697		4.8	%	15.0	%
+100		113,703		22,912			90,791		2.6	%	10.0	%
0		107,451		18,961			88,490		0.0	%	0.0	%
-100		101,048		15,516			85,532		(3.3)	%	10.0	%
-200		94,854		13,240			81,614		(7.8)	%	15.0	%

	Economic Value of Equity at December 31, 2022

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	498,368		0.3	%		50.0	%
+300		496,186		(0.1)	%		45.0	%
+200		501,422		1.0	%		35.0	%
+100		501,991		1.1	%		25.0	%
0		496,650		0.0	%		0.0	%
-100		485,332		(2.3)	%		25.0	%
-200		468,195		(5.7)	%		35.0	%

ITEM 4. CONTROLS AND PROCEDURES

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31, 2023, the Corporation implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other significant changes inmade to the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and C&N Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation’s financial condition or results of operations.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed ~~February 22, 2022.~~March 16, 2023 except for the following:

Risks Related to Recent Banking Industry Turmoil

The Corporation is exposed to the risk that when a bank or other financial institution experiences financial difficulties, there could be an adverse “contagion” impact on other banking institutions. The recent failures of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California during the first and second quarters of 2023 have caused an element of panic and uncertainty in the investor community and among bank customers generally, including, specifically, deposit customers. While the Corporation does not believe that the circumstances of these three failures are necessarily indicators of broader issues for concern with all other banks or with the banking system itself, the failures are likely to reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have negative reputational ramifications for institutions in the banking industry, including, possibly, the Corporation. The Corporation will continue to closely monitor the ongoing events and volatility in the financial services industry, together with any responsive measures taken by the banking regulators to mitigate or manage the turmoil.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. As of March 31, ~~2022, 428,926~~2023, 752,130 shares have been repurchased under the repurchase program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that: (1) the treasury stock repurchase program, as amended to increase the repurchase authorization to 1,000,000 shares, shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Company's Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.

The following table sets forth a summary of the purchases by the Corporation of its common stock during the first quarter ~~2022.~~2023.

Total Number of

Maximum

Total Number of

Maximum

Shares

Number of

Shares

Number of

Purchased

Shares that May

Purchased

Shares that May

as Part of

Yet

as Part of

Yet

Publicly

be Purchased

Publicly

be Purchased

Total Number

Average

Announced

Under

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

Purchased

per Share

or Programs

Programs

January 1 - 31, 2022

10,000

25.00

309,059

690,941

February 1 - 28, 2022

23,413

24.88

332,472

667,528

March 1 - 31, 2022

96,454

24.83

428,926

571,074

January 1 - 31, 2023

N/A

674,700

325,300

February 1 - 28, 2023

N/A

674,700

325,300

March 1 - 31, 2023

77,430

21.47

752,130

247,870

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

5860

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Item��~~Item 6. Exhibits

3.1	Articles of Incorporation	~~Filed herewith~~Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 10-Q filed May 6, 2022

3.2	By-laws	Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 8-K filed February 18, 2022

4.	Instruments defining the rights of Security holders, including Indentures

4.1	Indenture, dated May 19, 2021 between Citizens & Northern Corporation and UMB Bank, National Association, as trustee	Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.2	Form of Subordinated Note	Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.3	Form of Senior Note	Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021

10.1	Employment agreement dated February 1, 2023 between the Corporation and Kelley A. Cwiklinski	Filed herewith

31.	Rule 13a-14(a)/15d-14(a) certifications:

31.1	Certification of Chief Executive Officer	Filed herewith

31.2	Certification of Chief Financial Officer	Filed herewith

32.	Section 1350 certifications	Filed herewith

~~101.~~101.INS	~~Interactive data file~~Inline XBRL Instance Document.	Filed herewith

~~104.~~101.SCH	~~Cover page interactive data file~~Inline XBRL Schema Document.	Filed herewith

101.CAL	Inline XBRL Calculation Linkbase Document.	Filed herewith

101.DEF	Inline XBRL Definition Linkbase Document.	Filed herewith

101.LAB	Inline XBRL Label Linkbase Document.	Filed herewith

101.PRE	Inline XBRL Presentation Linkbase Document.	Filed herewith

104	The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (contained in Exhibit 101).	Filed herewith

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


May ~~6, 2022~~5, 2023		By: /s/ J. Bradley Scovill
Date		President and Chief Executive Officer



May ~~6, 2022~~5, 2023		By: /s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

6062


Three Months Ended March 31, 2021	December 31, 2020								March 31, 2021
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	3,051	$	0	$	0	$	299	$	3,350
Commercial and industrial		2,245		0		14		(72)		2,187
Commercial construction and land		454		0		0		22		476
Loans secured by farmland		120		0		0		(9)		111
Multi-family (5 or more) residential		236		0		0		19		255
Agricultural loans		34		0		0		(8)		26
Other commercial loans		168		0		0		(9)		159
Total commercial		6,308		0		14		242		6,564
Residential mortgage:
Residential mortgage loans - first liens		3,524		0		1		(18)		3,507
Residential mortgage loans - junior liens		349		0		0		(15)		334
Home equity lines of credit		281		0		1		(1)		281
1-4 Family residential construction		99		0		0		(21)		78
Total residential mortgage		4,253		0		2		(55)		4,200
Consumer		239		(11)		12		(20)		220
Unallocated		585		0		0		92		677
Total Allowance for Loan Losses	$	11,385	$	(11)	$	28	$	259	$	11,661


(In Thousands)					Interest Income Recognized on
	Average Investment in Impaired Loans				Impaired Loans on a Cash Basis
	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Commercial:
Commercial loans secured by real estate	$	10,735	$	12,203	$	129	$	143
Commercial and industrial		1,626		1,082		4		12
Commercial construction and land		48		49		1		1
Loans secured by farmland		82		84		0		1
Multi-family (5 or more) residential		789		1,596		0		61
Agricultural loans		63		69		2		2
Total commercial		13,343		15,083		136		220
Residential mortgage:
Residential mortgage loans - first lien		565		2,451		7		37
Residential mortgage loans - junior lien		37		437		1		5
Home equity lines of credit		0		18		1		0
Total residential mortgage		602		2,906		9		42
Total	$	13,945	$	17,989	$	145	$	262


(In Thousands)	As of March 31, 2022								As of December 31, 2021
	Current &								Current &
	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Commercial:
Commercial loans secured by real estate	$	579,837	$	192	$	5,648	$	585,677	$	563,658	$	762	$	5,420	$	569,840
Commercial and industrial		159,613		75		105		159,793		158,188		72		813		159,073
Paycheck Protection Program - 1st Draw		145		0		742		887		1,339		17		0		1,356
Paycheck Protection Program - 2nd Draw		11,490		0		0		11,490		25,508		0		0		25,508
Political subdivisions		81,975		0		0		81,975		81,301		0		0		81,301
Commercial construction and land		37,083		128		47		37,258		60,509		70		0		60,579
Loans secured by farmland		12,426		0		81		12,507		11,010		0		111		11,121
Multi-family (5 or more) residential		53,141		0		0		53,141		48,532		0		1,557		50,089
Agricultural loans		2,528		0		60		2,588		2,279		7		65		2,351
Other commercial loans		14,827		0		0		14,827		17,153		0		0		17,153
Total commercial		953,065		395		6,683		960,143		969,477		928		7,966		978,371

Residential mortgage:
Residential mortgage loans - first liens		473,710		5,142		2,267		481,119		475,637		5,038		2,954		483,629
Residential mortgage loans - junior liens		22,457		39		76		22,572		23,229		16		69		23,314
Home equity lines of credit		39,314		233		102		39,649		38,830		279		143		39,252
1-4 Family residential construction		16,945		0		0		16,945		23,151		0		0		23,151
Total residential mortgage		552,426		5,414		2,445		560,285		560,847		5,333		3,166		569,346
Consumer		17,626		48		88		17,762		17,001		72		59		17,132
Totals	$	1,523,117	$	5,857	$	9,216	$	1,538,190	$	1,547,325	$	6,333	$	11,191	$	1,564,849


Commercial segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	140	$	193
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		577		142
Changes in historical loss experience factors		62		(49)
Changes in qualitative factors		0		(44)
Total provision for loan losses - Commercial segment	$	779	$	242


Residential mortgage segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(16)	$	(10)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		68		(7)
Changes in historical loss experience factors		(10)		(38)
Changes in qualitative factors		49		0
Total provision for loan losses - Residential mortgage segment	$	91	$	(55)


Consumer segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	23	$	(1)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		0		(10)
Changes in historical loss experience factors		(3)		(10)
Changes in qualitative factors		5		1
Total provision for loan losses - Consumer segment	$	25	$	(20)


Total - All segments	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	147	$	182
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		645		125
Changes in historical loss experience factors		49		(97)
Changes in qualitative factors		54		(43)
Sub-total		895		167
Unallocated		(4)		92
Total provision for loan losses - All segments	$	891	$	259


March 31, 2022 Data
(In Thousands)	Period Ending March 31, 2023

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	101,995	$	17,804		$	84,191		19.5	%	25.0	%
+300		95,469		14,798			80,671		14.5	%	20.0	%
+200		89,022		11,793			77,229		9.6	%	15.0	%
+100		82,584		8,788			73,796		4.7	%	10.0	%
0		76,265		5,783			70,482		0.0	%	0.0	%
-100		72,037		4,664			67,373		(4.4)	%	10.0	%
-200		69,795		4,238			65,557		(7.0)	%	15.0	%

	Market Value of Portfolio Equity at March 31, 2022

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	498,635		10.0	%		50.0	%
+300		488,691		7.8	%		45.0	%
+200		478,667		5.6	%		35.0	%
+100		466,970		3.0	%		25.0	%
0		453,227		0.0	%		0.0	%
-100		435,057		(4.0)	%		25.0	%
-200		409,709		(9.6)	%		35.0	%


December 31, 2021 Data
(In Thousands)	Period Ending December 31, 2022

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	98,839	$	18,142		$	80,697		19.1	%	25.0	%
+300		92,438		15,061			77,377		14.2	%	20.0	%
+200		86,112		11,981			74,131		9.4	%	15.0	%
+100		79,740		8,900			70,840		4.5	%	10.0	%
0		73,536		5,760			67,776		0.0	%	0.0	%
-100		70,118		4,820			65,298		(3.7)	%	10.0	%
-200		68,824		4,503			64,321		(5.1)	%	15.0	%

	Market Value of Portfolio Equity at December 31, 2021

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	471,951		14.1	%		50.0	%
+300		459,810		11.1	%		45.0	%
+200		447,354		8.1	%		35.0	%
+100		431,856		4.4	%		25.0	%
0		413,767		0.0	%		0.0	%
-100		388,721		(6.1)	%		25.0	%
-200		365,331		(11.7)	%		35.0	%