Citizens & Northern (CZNC) 10-Q 2021 Q3 Quarterly report

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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 September 30, 2021

or

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

For the transition period from _______________ to _________________________.

Commission file number: 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) 15,751,005 Shares Outstanding on November 3, 2021

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) – September 30, 2021 and December 31, 2020	Page 3
Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2021 and 2020	Page 4
Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Nine-month Periods Ended September 30, 2021 and 2020	Page 5
Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, 2021 and 2020	Pages 6 – 7
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods September 30, 2021 and 2020	Pages 8 – 9
Notes to Unaudited Consolidated Financial Statements	Pages 10 – 41
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	Pages 42 – 68
Item 4. Controls and Procedures	Page 68
Part II. Other Information	Pages 69 – 72
Signatures	Page 73

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

	September 30,		December 31,
	2021		2020
ASSETS
Cash and due from banks:
Noninterest-bearing	$	26,589	$	24,780
Interest-bearing		172,406		77,077
Total cash and due from banks		198,995		101,857
Available-for-sale debt securities, at fair value		437,857		349,332
Loans receivable		1,575,708		1,644,209
Allowance for loan losses		(12,700)		(11,385)
Loans, net		1,563,008		1,632,824
Bank-owned life insurance		30,530		30,096
Accrued interest receivable		7,307		8,293
Bank premises and equipment, net		20,526		21,526
Foreclosed assets held for sale		1,374		1,338
Deferred tax asset, net		5,128		2,705
Goodwill		52,505		52,505
Core deposit intangibles, net		3,450		3,851
Other assets		34,216		34,773
TOTAL ASSETS	$	2,354,896	$	2,239,100
LIABILITIES
Deposits:
Noninterest-bearing	$	521,561	$	465,332
Interest-bearing		1,418,580		1,355,137
Total deposits		1,940,141		1,820,469
Short-term borrowings		1,875		20,022
Long-term borrowings - FHLB advances		38,680		54,608
Senior notes, net		14,685		0
Subordinated debt, net		32,988		16,553
Accrued interest and other liabilities		27,125		27,692
TOTAL LIABILITIES		2,055,494		1,939,344
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 15,750,250 at September 30, 2021;
issued 15,982,815 and outstanding 15,911,984 at December 31, 2020		16,030		15,983
Paid-in capital		144,172		143,644
Retained earnings		139,715		129,703
Treasury stock, at cost; 279,922 shares at September 30, 2021 and 70,831
shares at December 31, 2020		(6,920)		(1,369)
Accumulated other comprehensive income		6,405		11,795
TOTAL STOCKHOLDERS' EQUITY		299,402		299,756
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	2,354,896	$	2,239,100

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
INTEREST INCOME
Interest and fees on loans:
Taxable	$	18,529	$	19,158	$	56,095	$	47,745
Tax-exempt		450		450		1,300		1,348
Income from available-for-sale debt securities:
Taxable		1,304		1,483		3,604		4,451
Tax-exempt		668		561		1,973		1,505
Other interest and dividend income		122		99		283		252
Total interest and dividend income		21,073		21,751		63,255		55,301
INTEREST EXPENSE
Interest on deposits		1,063		1,787		3,558		5,726
Interest on short-term borrowings		0		73		22		335
Interest on long-term borrowings - FHLB advances		87		362		330		970
Interest on senior notes, net		118		0		175		0
Interest on subordinated debt, net		346		247		947		460
Total interest expense		1,614		2,469		5,032		7,491
Net interest income		19,459		19,282		58,223		47,810
Provision for loan losses		1,530		1,941		2,533		3,293
Net interest income after provision for loan losses		17,929		17,341		55,690		44,517
NONINTEREST INCOME
Trust revenue		1,821		1,595		5,254		4,639
Brokerage and insurance revenue		560		382		1,392		1,121
Service charges on deposit accounts		1,249		1,045		3,337		3,126
Interchange revenue from debit card transactions		975		828		2,854		2,277
Net gains from sale of loans		797		2,052		2,786		3,931
Loan servicing fees, net		153		(87)		547		(259)
Increase in cash surrender value of life insurance		139		159		434		361
Other noninterest income		665		996		2,837		2,583
Sub-total		6,359		6,970		19,441		17,779
Realized gains on available-for-sale debt securities, net		23		25		25		25
Total noninterest income		6,382		6,995		19,466		17,804
NONINTEREST EXPENSE
Salaries and employee benefits		9,427		8,703		27,821		23,064
Net occupancy and equipment expense		1,217		1,189		3,740		3,267
Data processing and telecommunications expense		1,475		1,482		4,342		3,959
Automated teller machine and interchange expense		357		340		1,049		912
Pennsylvania shares tax		482		422		1,463		1,267
Professional fees		538		422		1,683		1,265
Merger-related expenses		0		6,402		0		7,526
Other noninterest expense		1,850		2,090		6,356		6,100
Total noninterest expense		15,346		21,050		46,454		47,360
Income before income tax provision		8,965		3,286		28,702		14,961
Income tax provision		1,566		438		5,456		2,509
NET INCOME	$	7,399	$	2,848	$	23,246	$	12,452
EARNINGS PER COMMON SHARE - BASIC	$	0.47	$	0.18	$	1.46	$	0.86
EARNINGS PER COMMON SHARE - DILUTED	$	0.47	$	0.18	$	1.46	$	0.86

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Net income	$	7,399	$	2,848	$	23,246	$	12,452
Available-for-sale debt securities:
Unrealized holding (losses) gains on available-for-sale debt securities		(3,608)		(95)		(6,781)		9,980
Reclassification adjustment for (gains) realized in income		(23)		(25)		(25)		(25)
Other comprehensive (loss) income on available-for-sale debt securities		(3,631)		(120)		(6,806)		9,955
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		0		0		(5)		88
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(5)		(8)		(13)		(22)
Other comprehensive (loss) income on unfunded retirement obligations		(5)		(8)		(18)		66
Other comprehensive (loss) income before income tax		(3,636)		(128)		(6,824)		10,021
Income tax related to other comprehensive loss (income)		765		26		1,434		(2,103)
Net other comprehensive (loss) income		(2,871)		(102)		(5,390)		7,918
Comprehensive income	$	4,528	$	2,746	$	17,856	$	20,370

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

	Nine Months Ended
	September 30,		September 30,
	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	23,246	$	12,452
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,533		3,293
Realized gains on available-for-sale debt securities, net		(25)		(25)
Net amortization of securities		1,554		1,020
Increase in cash surrender value of life insurance		(434)		(361)
Depreciation and amortization of bank premises and equipment		1,602		1,429
Net accretion of purchase accounting adjustments		(1,827)		(1,547)
Stock-based compensation		970		672
Deferred income taxes		(989)		649
Decrease in fair value of servicing rights		9		617
Gains on sales of loans, net		(2,786)		(3,931)
Origination of loans held for sale		(86,428)		(123,547)
Proceeds from sales of loans held for sale		87,483		126,268
Decrease (increase) in accrued interest receivable and other assets		295		(1,194)
Decrease in accrued interest payable and other liabilities		(50)		(856)
Other		(18)		(339)
Net Cash Provided by Operating Activities		25,135		14,600
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents provided by business combination		0		75,955
Purchase of certificates of deposit		(3,000)		(2,500)
Proceeds from maturities of certificates of deposit		0		250
Proceeds from sales of available-for-sale debt securities		2,027		20,535
Proceeds from calls and maturities of available-for-sale debt securities		48,262		71,009
Purchase of available-for-sale debt securities		(145,445)		(65,853)
Redemption of Federal Home Loan Bank of Pittsburgh stock		1,934		5,712
Purchase of Federal Home Loan Bank of Pittsburgh stock		(1,614)		(4,571)
Net decrease (increase) in loans		68,018		(45,564)
Proceeds from bank owned life insurance		287		0
Proceeds from sales of premises and equipment		575		0
Purchase of premises and equipment		(1,173)		(2,550)
Proceeds from sale of foreclosed assets		303		1,347
Other		176		178
Net Cash (Used in) Provided by Investing Activities		(29,650)		53,948
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		120,386		137,543
Net decrease in short-term borrowings		(18,082)		(79,213)
Proceeds from long-term borrowings - FHLB advances		0		25,891
Repayments of long-term borrowings - FHLB advances		(15,571)		(5,136)
Proceeds from issuance of senior notes, net of issuance costs		14,663		0
Proceeds from issuance of subordinated debt, net of issuance costs		24,437		0
Redemption of subordinated debt		(8,000)		0
Sale of treasury stock		212		124
Purchases of treasury stock		(7,412)		(163)
Common dividends paid		(11,980)		(10,568)
Net Cash Provided by Financing Activities		98,653		68,478
INCREASE IN CASH AND CASH EQUIVALENTS		94,138		137,026
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		96,017		31,122
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	190,155	$	168,148

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

(Continued)

	Nine Months Ended
	September 30,		September 30,
	2021		2020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Increase in accrued purchase of available-for-sale debt securities	$	1,704	$	287
Accrued sale of available-for-sale securities	$	0	$	488
Accrued income from life insurance claim	$	0	$	279
Assets acquired through foreclosure of real estate loans	$	317	$	0
Leased assets obtained in exchange for new operating lease liabilities	$	739	$	167
Interest paid	$	6,063	$	7,635
Income taxes paid	$	8,076	$	2,975
NONCASH INVESTING ASSETS ACQUIRED IN BUSINESS COMBINATION:
Available-for-sale debt securities	$	0	$	10,754
Loans receivable	$	0	$	464,236
Bank-owned life insurance	$	0	$	11,170
Foreclosed assets held for sale	$	0	$	860
NONCASH FINANCING ACTIVITY RELATED TO BUSINESS COMBINATION:
Common stock issued	$	0	$	41,429
Liabilities assumed:
Deposits	$	0	$	481,796
Short-term borrowings	$	0	$	33,950
Long-term borrowings	$	0	$	30,025
Subordinated debt	$	0	$	10,091

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

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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 September 30, 2021	Shares	Shares	Stock		Capital		Earnings		Income		Stock		Total
Balance, June 30, 2021	16,030,172	72,660	$	16,030	$	143,817	$	136,756	$	9,276	$	(1,746)	$	304,133
Net income								7,399						7,399
Other comprehensive loss, net										(2,871)				(2,871)
Cash dividends declared on common stock, $.28 per share								(4,440)						(4,440)
Shares issued for dividend reinvestment plan		(16,833)				10						415		425
Shares issued from treasury and redeemed related to exercise of stock options		(7,000)										135		135
Stock-based compensation expense						345								345
Purchase of restricted stock for tax withholding		691										(17)		(17)
Treasury stock purchases		230,404										(5,707)		(5,707)
Balance, September 30, 2021	16,030,172	279,922	$	16,030	$	144,172	$	139,715	$	6,405	$	(6,920)	$	299,402
Three Months Ended September 30, 2020
Balance, June 30, 2020	13,934,996	127,839	$	13,935	$	103,954	$	128,661	$	11,711	$	(2,470)	$	255,791
Net income								2,848						2,848
Other comprehensive loss, net										(102)				(102)
Cash dividends declared on common stock, $.27 per share								(4,285)						(4,285)
Shares issued for dividend reinvestment plan		(21,949)				(36)						423		387
Restricted stock granted		(15,076)				(291)						291		0
Forfeiture of restricted stock		1,648				30						(30)		0
Stock-based compensation expense						248								248
Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs	2,047,819			2,048		39,381								41,429
Balance, September 30, 2020	15,982,815	92,462	$	15,983	$	143,286	$	127,224	$	11,609	$	(1,786)	$	296,316

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

(Continued)

										Accumulated
										Other
	Common	Treasury	Common		Paid-in		Retained			Comprehensive		Treasury
Nine Months Ended September 30, 2021	Shares	Shares	Stock		Capital		Earnings			Income		Stock		Total
Balance, December 31, 2020	15,982,815	70,831	$	15,983	$	143,644	$	129,703		$	11,795	$	(1,369)	$	299,756
Net income								23,246							23,246
Other comprehensive loss, net									��		(5,390)				(5,390)
Cash dividends declared on common stock, $.83 per share								(13,234)							(13,234)
Shares issued for dividend reinvestment plan	36,368	(16,833)		36		803							415		1,254
Shares issued from treasury and redeemed related to exercise of stock options		(12,414)				(28)							240		212
Restricted stock granted	10,989	(67,402)		11		(1,319)							1,308		0
Forfeiture of restricted stock		5,290				102							(102)		0
Stock-based compensation expense						970									970
Purchase of restricted stock for tax withholding		8,350											(174)		(174)
Treasury stock purchases		292,100											(7,238)		(7,238)
Balance, September 30, 2021	16,030,172	279,922	$	16,030	$	144,172	$	139,715		$	6,405	$	(6,920)	$	299,402
Nine Months Ended September 30, 2020
Balance, December 31, 2019	13,934,996	218,551	$	13,935	$	104,519	$	126,480		$	3,691	$	(4,173)	$	244,452
Net income								12,452							12,452
Other comprehensive income, net											7,918				7,918
Cash dividends declared on common stock, $.81 per share								(11,708)							(11,708)
Shares issued for dividend reinvestment plan		(56,649)				46							1,094		1,140
Shares issued from treasury and redeemed related to exercise of stock options		(9,652)				(62)							186		124
Restricted stock granted		(70,940)				(1,370)							1,370		0
Forfeiture of restricted stock		5,290				100							(100)		0
Stock-based compensation expense						672									672
Purchase of restricted stock for tax withholding		5,862											(163)		(163)
Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs	2,047,819			2,048		39,381									41,429
Balance, September 30, 2020	15,982,815	92,462	$	15,983	$	143,286	$	127,224		$	11,609	$	(1,786)	$	296,316

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

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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 Corporation and Northern Tier Holding LLC. C&N Bank is the sole member of 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, 2020, 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 2020 information has been reclassified for consistency with the 2021 presentation.

Operating results reported for the nine-month period ended September 30, 2021 might not be indicative of the results for the year ending December 31, 2021. 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 financial statements issued in the near future.

Recently Issued But Not Yet Effective Accounting Pronouncements

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on 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.

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

● Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.

The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Corporation has formed a cross functional management team to evaluate 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.

2. BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

On July 1, 2020, the Corporation completed its acquisition of Covenant Financial, Inc. (“Covenant”). Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. The Covenant acquisition has contributed significantly to growth in the size of the Corporation’s balance sheet and in net interest income and noninterest expenses.

In connection with the transaction, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Total loans acquired on July 1, 2020 were valued at $464.2 million, while total deposits assumed were valued at $481.8 million, borrowings were valued at $64.0 million and subordinated debt was valued at $10.1 million. The Corporation acquired available-for-sale debt securities valued at $10.8 million and bank-owned life insurance valued at $11.2 million. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets acquired or liabilities assumed in the nine months ended September 30, 2021.

Merger-related expenses related to the acquisition of Covenant totaled $6,402,000 in the third quarter 2020 and $7,526,000 in the nine months ended September 30, 2020. There were 0 merger-related expenses in the nine months ended September 30, 2021.

3. 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands, Except Share and Per Share Data)	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Basic
Net income	$	7,399	$	2,848	$	23,246	$	12,452
Less: Dividends and undistributed earnings allocated to participating securities		(63)		(18)		(189)		(74)
Net income attributable to common shares	$	7,336	$	2,830	$	23,057	$	12,378
Basic weighted-average common shares outstanding		15,703,932		15,778,391		15,806,897		14,388,797
Basic earnings per common share (a)	$	0.47	$	0.18	$	1.46	$	0.86
Diluted
Net income attributable to common shares	$	7,336	$	2,830	$	23,057	$	12,378
Basic weighted-average common shares outstanding		15,703,932		15,778,391		15,806,897		14,388,797
Dilutive effect of potential common stock arising from stock options		6,413		1,330		6,232		4,632
Diluted weighted-average common shares outstanding		15,710,345		15,779,721		15,813,129		14,393,429
Diluted earnings per common share (a)	$	0.47	$	0.18	$	1.46	$	0.86
Weighted-average nonvested restricted shares outstanding		133,053		102,629		129,456		85,611

(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 0 anti-dilutive instruments in the three-month and nine month periods ended September 30, 2021. Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended September 30, 2020 and 19,506 shares in the nine-month period ended September 30, 2020.

4. COMPREHENSIVE INCOME

Comprehensive 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). The components of other comprehensive income (loss), and the related tax effects, are as follows:

(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Three Months Ended September 30, 2021
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(3,608)	$	759	$	(2,849)
Reclassification adjustment for (gains) realized in income		(23)		5		(18)
Other comprehensive loss from available-for-sale debt securities		(3,631)		764		(2,867)
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(5)		1		(4)
Total other comprehensive loss	$	(3,636)	$	765	$	(2,871)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Three Months Ended September 30, 2020
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(95)	$	19	$	(76)
Reclassification adjustment for (gains) realized in income		(25)		5		(20)
Other comprehensive loss from available-for-sale debt securities		(120)		24		(96)
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(8)		2		(6)
Total other comprehensive loss	$	(128)	$	26	$	(102)

(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2021
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(6,781)	$	1,425	$	(5,356)
Reclassification adjustment for (gains) realized in income		(25)		5		(20)
Other comprehensive loss from available-for-sale debt securities		(6,806)		1,430		(5,376)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		(5)		1		(4)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(13)		3		(10)
Other comprehensive loss on unfunded retirement obligations		(18)		4		(14)
Total other comprehensive loss	$	(6,824)	$	1,434	$	(5,390)

(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2020
Available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities	$	9,980	$	(2,095)	$	7,885
Reclassification adjustment for (gains) realized in income		(25)		5		(20)
Other comprehensive income from available-for-sale debt securities		9,955		(2,090)		7,865
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		88		(18)		70
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(22)		5		(17)
Other comprehensive income on unfunded retirement obligations		66		(13)		53
Total other comprehensive income	$	10,021	$	(2,103)	$	7,918

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)					Accumulated
	Unrealized		Unfunded		Other
	Losses		Retirement		Comprehensive
	on Securities		Obligations		Income
Three Months Ended September 30, 2021
Balance, beginning of period	$	9,167	$	109	$	9,276
Other comprehensive loss during three months ended September 30, 2021		(2,867)		(4)		(2,871)
Balance, end of period	$	6,300	$	105	$	6,405
Three Months Ended September 30, 2020
Balance, beginning of period	$	11,472	$	239	$	11,711
Other comprehensive loss during three months ended September 30, 2020		(96)		(6)		(102)
Balance, end of period	$	11,376	$	233	$	11,609

(In Thousands)	Unrealized				Accumulated
	Gains		Unfunded		Other
	(Losses)		Retirement		Comprehensive
	on Securities		Obligations		Income
Nine Months Ended September 30, 2021
Balance, beginning of period	$	11,676	$	119	$	11,795
Other comprehensive loss during nine months ended September 30, 2021		(5,376)		(14)		(5,390)
Balance, end of period	$	6,300	$	105	$	6,405
Nine Months Ended September 30, 2020
Balance, beginning of period	$	3,511	$	180	$	3,691
Other comprehensive income during nine months ended September 30, 2020		7,865		53		7,918
Balance, end of period	$	11,376	$	233	$	11,609

5. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, 2021 and December 31, 2020 include the following:

(In Thousands)	September 30,		December 31,
	2021		2020
Cash and cash equivalents	$	190,155	$	96,017
Certificates of deposit		8,840		5,840
Total cash and due from banks	$	198,995	$	101,857

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 September 30, 2021 and December 31, 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, 2021 and December 31, 2020 are summarized as follows:

(In Thousands)	September 30, 2021
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value
Obligations of the U.S. Treasury	$	25,088	$	60	$	(80)	$	25,068
Obligations of U.S. Government agencies		23,935		666		(289)		24,312
Obligations of states and political subdivisions:
Tax-exempt		135,362		4,390		(508)		139,244
Taxable		69,426		1,516		(449)		70,493
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		59,920		978		(269)		60,629
Residential collateralized mortgage obligations		43,811		820		(38)		44,593
Commercial mortgage-backed securities		72,341		1,963		(786)		73,518
Total available-for-sale debt securities	$	429,883	$	10,393	$	(2,419)	$	437,857

(In Thousands)	December 31, 2020
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value
Obligations of the U.S. Treasury	$	12,184	$	0	$	(2)	$	12,182
Obligations of U.S. Government agencies		25,349		1,003		(8)		26,344
Obligations of states and political subdivisions:
Tax-exempt		116,427		6,000		(26)		122,401
Taxable		45,230		2,246		(24)		47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		36,853		1,323		0		38,176
Residential collateralized mortgage obligations		56,048		1,428		(9)		57,467
Commercial mortgage-backed securities		42,461		2,849		0		45,310
Total available-for-sale debt securities	$	334,552	$	14,849	$	(69)	$	349,332

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 September 30, 2021 and December 31, 2020:

September 30, 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	$	11,001	$	(80)	$	0	$	0	$	11,001	$	(80)
Obligations of U.S. Government agencies		12,210		(289)		0		0		12,210		(289)
Obligations of states and political subdivisions:
Tax-exempt		41,145		(508)		0		0		41,145		(508)
Taxable		25,561		(365)		2,200		(84)		27,761		(449)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		36,651		(269)		0		0		36,651		(269)
Residential collateralized mortgage obligations		4,745		(38)		0		0		4,745		(38)
Commercial mortgage-backed securities		34,931		(786)		0		0		34,931		(786)
Total temporarily impaired available-for-sale debt securities	$	166,244	$	(2,335)	$	2,200	$	(84)	$	168,444	$	(2,419)

December 31, 2020	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	$	9,159	$	(2)	$	0	$	0	$	9,159	$	(2)
Obligations of U.S. Government agencies		4,992		(8)		0		0		4,992		(8)
Obligations of states and political subdivisions:
Tax-exempt		3,811		(26)		0		0		3,811		(26)
Taxable		5,235		(24)		0		0		5,235		(24)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,
Residential collateralized mortgage obligations		2,861		(9)		0		0		2,861		(9)
Total temporarily impaired available-for-sale debt securities	$	26,058	$	(69)	$	0	$	0	$	26,058	$	(69)

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

(In Thousands)	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Gross realized gains from sales	$	23	$	26	$	27	$	78
Gross realized losses from sales		0		(1)		(2)		(53)
Net realized gains	$	23	$	25	$	25	$	25

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 2021. 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)	September 30, 2021
	Amortized		Fair
	Cost		Value
Due in one year or less	$	15,531	$	15,641
Due from one year through five years		51,151		52,150
Due from five years through ten years		65,651		67,498
Due after ten years		121,478		123,828
Sub-total		253,811		259,117
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		59,920		60,629
Residential collateralized mortgage obligations		43,811		44,593
Commercial mortgage-backed securities		72,341		73,518
Total	$	429,883	$	437,857

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.

Investment securities carried at $254,062,000 at September 30, 2021 and $247,373,000 at December 31, 2020 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements and Note 12 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 at September 30, 2021 is provided below.

Debt Securities

At September 30, 2021 and December 31, 2020, management performed an assessment for possible OTTI 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 of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at September 30, 2021 and December 31, 2020 to be temporary.

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 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 $9,400,000 at September 30, 2021 and $9,720,000 at December 31, 2020. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, 2021 and December 31, 2020. In making this determination, management concluded that

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 $981,000 at September 30, 2021 and $1,000,000 at December 31, 2020, consisting exclusively of 1 mutual fund. There was an unrealized loss on the mutual fund of $19,000 at September 30, 2021 and 0 unrealized gain or loss on the mutual fund at December 31, 2020. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

7. LOANS

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at September 30, 2021 and December 31, 2020 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)

	September 30,		December 31,
	2021		2020
Commercial:
Commercial loans secured by real estate	$	553,389	$	531,810
Commercial and industrial		152,244		159,577
Paycheck Protection Program - 1st Draw		5,747		132,269
Paycheck Protection Program - 2nd Draw		56,981		0
Political subdivisions		73,503		53,221
Commercial construction and land		53,267		42,874
Loans secured by farmland		10,812		11,736
Multi-family (5 or more) residential		52,962		55,811
Agricultural loans		3,092		3,164
Other commercial loans		17,312		17,289
Total commercial		979,309		1,007,751
Residential mortgage:
Residential mortgage loans - first liens		494,376		532,947
Residential mortgage loans - junior liens		24,303		27,311
Home equity lines of credit		38,465		39,301
1-4 Family residential construction		21,719		20,613
Total residential mortgage		578,863		620,172
Consumer		17,536		16,286
Total		1,575,708		1,644,209
Less: allowance for loan losses		(12,700)		(11,385)
Loans, net	$	1,563,008	$	1,632,824

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $5,719,000 at September 30, 2021 and $6,286,000 at December 31, 2020.

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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.  Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.

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

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

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 temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 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 PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of September 30, 2021, the recorded investment in 1st Draw PPP loans was $5,747,000, including contractual principal balances of $5,982,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $2,000 and reduced by net deferred origination fees of $237,000.  The recorded investment in 2nd Draw PPP loans was $56,981,000, including contractual principal balances of $59,190,000 reduced by net deferred origination fees of $2,208,000. Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $1,409,000 in the three-month period ended September 30, 2021 and $467,000 in the three-month period ended September 30, 2020. Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $3,975,000 in the nine-month period ended September 30, 2021 and $804,000 in the nine-month period ended September 30, 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual  or as TDRs at September 30, 2021. Most of the initial modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. At September 30, 2021, there were 0 loans in deferral status under the program. At December 31, 2020, there were 45 loans with a total recorded investment of $37,397,000, in deferral status under the program.

As described in Note 2, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant, and effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument Bancorp, Inc. (“Monument”). The acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequent to the acquisitions, 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) loans. For the three-month and nine-month periods ended September 30, 2021 and 2020, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

(In Thousands)
	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(5)	$	(1,103)	$	718	$	(1,415)
Market rate adjustment recorded in acquisition		0		2,909		0		2,909
Amortization recognized in interest income		(368)		(452)		(1,091)		(140)
Adjustments to gross amortized cost of loans at end of period	$	(373)	$	1,354	$	(373)	$	1,354
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(4,502)	$	(878)	$	(5,979)	$	(1,216)
Credit adjustment recorded in acquisition		0		(7,219)		0		(7,219)
Accretion recognized in interest income		666		970		2,143		1,308
Adjustments to gross amortized cost of loans at end of period	$	(3,836)	$	(7,127)	$	(3,836)	$	(7,127)

A summary of PCI loans held at September 30, 2021 and December 31, 2020 is as follows:

(In Thousands)	September 30,		December 31,
	2021		2020
Outstanding balance	$	10,064	$	10,316
Carrying amount		6,624		6,841

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 September 30, 2021 and December 31, 2020, management determined that 0 allowance for credit losses related to unfunded loan commitments was required.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30, 2021	June 30, 2021								September 30, 2021
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	3,452	$	0	$	0	$	368	$	3,820
Commercial and industrial		2,781		(1,194)		6		947		2,540
Commercial construction and land		452		0		0		107		559
Loans secured by farmland		113		0		0		(1)		112
Multi-family (5 or more) residential		150		0		0		46		196
Agricultural loans		25		0		0		8		33
Other commercial loans		145		0		0		28		173
Total commercial		7,118		(1,194)		6		1,503		7,433
Residential mortgage:
Residential mortgage loans - first liens		3,536		0		1		29		3,566
Residential mortgage loans - junior liens		327		0		0		(6)		321
Home equity lines of credit		294		0		0		(11)		283
1-4 Family residential construction		198		0		0		(9)		189
Total residential mortgage		4,355		0		1		3		4,359
Consumer		231		(26)		8		24		237
Unallocated		671		0		0		0		671
Total Allowance for Loan Losses	$	12,375	$	(1,220)	$	15	$	1,530	$	12,700

Three Months Ended September 30, 2020	June 30, 2020								September 30, 2020
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	2,426	$	0	$	0	$	(40)	$	2,386
Commercial and industrial		2,496		(2,219)		0		1,974		2,251
Commercial construction and land		420		0		0		20		440
Loans secured by farmland		146		0		0		(25)		121
Multi-family (5 or more) residential		163		0		0		64		227
Agricultural loans		40		0		0		(3)		37
Other commercial loans		167		0		0		0		167
Total commercial		5,858		(2,219)		0		1,990		5,629
Residential mortgage:
Residential mortgage loans - first liens		3,531		0		26		(92)		3,465
Residential mortgage loans - junior liens		365		0		0		(7)		358
Home equity lines of credit		287		0		1		1		289
1-4 Family residential construction		137		0		0		32		169
Total residential mortgage		4,320		0		27		(66)		4,281
Consumer		263		(30)		8		17		258
Unallocated		585		0		0		0		585
Total Allowance for Loan Losses	$	11,026	$	(2,249)	$	35	$	1,941	$	10,753

For the three months ended September 30, 2021, the provision for loan losses was $1,530,000, a decrease in expense of $411,000 as compared to $1,941,000 for the three months ended September 30, 2020. The third quarter 2021 provision included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. The

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

partial charge-off amount exceeded the specific allowance of $583,000 that had been established on this loan at June 30, 2021. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000.

	December 31,								September 30,
Nine Months Ended September 30, 2021	2020						Provision		2021
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	3,051	$	0	$	2	$	767	$	3,820
Commercial and industrial		2,245		(1,194)		20		1,469		2,540
Commercial construction and land		454		0		0		105		559
Loans secured by farmland		120		0		0		(8)		112
Multi-family (5 or more) residential		236		0		0		(40)		196
Agricultural loans		34		0		0		(1)		33
Other commercial loans		168		0		0		5		173
Total commercial		6,308		(1,194)		22		2,297		7,433
Residential mortgage:
Residential mortgage loans - first liens		3,524		(11)		3		50		3,566
Residential mortgage loans - junior liens		349		0		0		(28)		321
Home equity lines of credit		281		0		2		0		283
1-4 Family residential construction		99		0		0		90		189
Total residential mortgage		4,253		(11)		5		112		4,359
Consumer		239		(73)		33		38		237
Unallocated		585		0		0		86		671
Total Allowance for Loan Losses	$	11,385	$	(1,278)	$	60	$	2,533	$	12,700

	December 31,								September 30,
Nine Months Ended September 30, 2020	2019						Provision		2020
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	1,921	$	0	$	0	$	465	$	2,386
Commercial and industrial		1,391		(2,236)		0		3,096		2,251
Commercial construction and land		966		(107)		0		(419)		440
Loans secured by farmland		158		0		0		(37)		121
Multi-family (5 or more) residential		156		0		0		71		227
Agricultural loans		41		0		0		(4)		37
Other commercial loans		155		0		0		12		167
Total commercial		4,788		(2,343)		0		3,184		5,629
Residential mortgage:
Residential mortgage loans - first liens		3,405		0		28		32		3,465
Residential mortgage loans - junior liens		384		0		1		(27)		358
Home equity lines of credit		276		0		3		10		289
1-4 Family residential construction		117		0		0		52		169
Total residential mortgage		4,182		0		32		67		4,281
Consumer		281		(100)		35		42		258
Unallocated		585		0		0		0		585
Total Allowance for Loan Losses	$	9,836	$	(2,443)	$	67	$	3,293	$	10,753

22

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For the nine months ended September 30, 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded for the nine months ended September 30, 2020. The provision for the nine months ended September 30, 2021, includes the impact of a charge-off of $1,194,000 on a commercial loan with an ouststanding balance of $3,496,000, as previously discussed. In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000.

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.

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of September 30, 2021 and December 31, 2020:

September 30, 2021									Purchased
(In Thousands)			Special						Credit
	Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate	$	519,673	$	15,055	$	14,473	$	0	$	4,188	$	553,389
Commercial and Industrial		136,858		8,578		6,028		0		780		152,244
Paycheck Protection Program - 1st Draw		5,747		0		0		0		0		5,747
Paycheck Protection Program - 2nd Draw		56,981		0		0		0		0		56,981
Political subdivisions		73,503		0		0		0		0		73,503
Commercial construction and land		52,504		715		48		0		0		53,267
Loans secured by farmland		9,639		194		979		0		0		10,812
Multi-family (5 or more) residential		48,154		2,352		878		0		1,578		52,962
Agricultural loans		2,533		0		559		0		0		3,092
Other commercial loans		17,307		5		0		0		0		17,312
Total commercial		922,899		26,899		22,965		0		6,546		979,309
Residential Mortgage:											���
Residential mortgage loans - first liens		482,710		5,066		6,528		0		72		494,376
Residential mortgage loans - junior liens		23,676		107		514		0		6		24,303
Home equity lines of credit		37,889		59		517		0		0		38,465
1-4 Family residential construction		21,719		0		0		0		0		21,719
Total residential mortgage		565,994		5,232		7,559		0		78		578,863
Consumer		17,505		0		31		0		0		17,536
Totals	$	1,506,398	$	32,131	$	30,555	$	0	$	6,624	$	1,575,708

23

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020									Purchased
(In Thousands)			Special						Credit
	Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate	$	494,876	$	17,374	$	15,262	$	0	$	4,298	$	531,810
Commercial and Industrial		143,500		8,025		7,268		0		784		159,577
Paycheck Protection Program - 1st Draw		132,269		0		0		0		0		132,269
Political subdivisions		53,221		0		0		0		0		53,221
Commercial construction and land		42,110		715		49		0		0		42,874
Loans secured by farmland		10,473		405		858		0		0		11,736
Multi-family (5 or more) residential		50,563		2,405		1,229		0		1,614		55,811
Agricultural loans		2,569		0		595		0		0		3,164
Other commercial loans		17,289		0		0		0		0		17,289
Total commercial		946,870		28,924		25,261		0		6,696		1,007,751
Residential Mortgage:
Residential Mortgage loans - first liens		516,685		6,192		9,994		0		76		532,947
Residential Mortgage loans - junior liens		26,480		141		621		0		69		27,311
Home equity lines of credit		38,529		59		713		0		0		39,301
1-4 Family residential construction		20,613		0		0		0		0		20,613
Total residential mortgage		602,307		6,392		11,328		0		145		620,172
Consumer		16,172		0		114		0		0		16,286
Totals	$	1,565,349	$	35,316	$	36,703	$	0	$	6,841	$	1,644,209

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 September 30, 2021 and December 31, 2020.

September 30, 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	$	11,303	$	542,086	$	553,389	$	672	$	3,148	$	3,820
Commercial and industrial		3,598		148,646		152,244		72		2,468		2,540
Paycheck Protection Program - 1st Draw		0		5,747		5,747		0		0		0
Paycheck Protection Program - 2nd Draw		0		56,981		56,981		0		0		0
Political subdivisions		0		73,503		73,503		0		0		0
Commercial construction and land		0		53,267		53,267		0		559		559
Loans secured by farmland		84		10,728		10,812		0		112		112
Multi-family (5 or more) residential		1,578		51,384		52,962		0		196		196
Agricultural loans		0		3,092		3,092		0		33		33
Other commercial loans		0		17,312		17,312		0		173		173
Total commercial		16,563		962,746		979,309		744		6,689		7,433
Residential mortgage:
Residential mortgage loans - first liens		1,134		493,242		494,376		0		3,566		3,566
Residential mortgage loans - junior liens		317		23,986		24,303		139		182		321
Home equity lines of credit		0		38,465		38,465		0		283		283
1-4 Family residential construction		0		21,719		21,719		0		189		189
Total residential mortgage		1,451		577,412		578,863		139		4,220		4,359
Consumer		0		17,536		17,536		0		237		237
Unallocated												671
Total	$	18,014	$	1,557,694	$	1,575,708	$	883	$	11,146	$	12,700

24

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate	$	11,962	$	519,848	$	531,810	$	692	$	2,359	$	3,051
Commercial and industrial		1,359		158,218		159,577		71		2,174		2,245
Paycheck Protection Program - 1st Draw		0		132,269		132,269		0		0		0
Political subdivisions		0		53,221		53,221		0		0		0
Commercial construction and land		0		42,874		42,874		0		454		454
Loans secured by farmland		84		11,652		11,736		0		120		120
Multi-family (5 or more) residential		1,614		54,197		55,811		0		236		236
Agricultural loans		0		3,164		3,164		0		34		34
Other commercial loans		0		17,289		17,289		0		168		168
Total commercial		15,019		992,732		1,007,751		763		5,545		6,308
Residential mortgage:
Residential mortgage loans - first liens		2,385		530,562		532,947		9		3,515		3,524
Residential mortgage loans - junior liens		414		26,897		27,311		153		196		349
Home equity lines of credit		0		39,301		39,301		0		281		281
1-4 Family residential construction		0		20,613		20,613		0		99		99
Total residential mortgage		2,799		617,373		620,172		162		4,091		4,253
Consumer		0		16,286		16,286		0		239		239
Unallocated												585
Total	$	17,818	$	1,626,391	$	1,644,209	$	925	$	9,875	$	11,385

Summary information related to impaired loans at September 30, 2021 and December 31, 2020 is provided in the table immediately below.

(In Thousands)	September 30, 2021						December 31, 2020
	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	$	7,068	$	4,823	$	0	$	7,168	$	5,398	$	0
Commercial and industrial		5,930		3,526		0		1,781		1,287		0
Residential mortgage loans - first liens		786		760		0		1,248		1,248		0
Residential mortgage loans - junior liens		65		18		0		160		105		0
Loans secured by farmland		84		84		0		84		84		0
Multi-family (5 or more) residential		2,734		1,578		0		2,770		1,614		0
Total with no related allowance recorded		16,667		10,789		0		13,211		9,736		0
With a related allowance recorded:
Commercial loans secured by real estate		6,480		6,480		672		6,501		6,501		691
Commercial and industrial		72		72		72		72		72		72
Residential mortgage loans - first liens		374		374		0		1,200		1,200		9
Residential mortgage loans - junior liens		299		299		139		309		309		153
Total with a related allowance recorded		7,225		7,225		883		8,082		8,082		925
Total	$	23,892	$	18,014	$	883	$	21,293	$	17,818	$	925

25

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the table immediately above, loans to 2 borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by 1 property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these 2 borrowers was $139,000 at September 30, 2021 and $153,000 at December 31, 2020.

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				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Commercial:
Commercial loans secured by real estate	$	11,252	$	7,298	$	11,811	$	3,779	$	172	$	65	$	401	$	81
Commercial and industrial		3,844		2,235		2,566		3,178		4		1		25		21
Commercial construction and land		48		49		48		678		2		1		2		14
Loans secured by farmland		84		253		84		397		0		2		1		26
Multi-family (5 or more) residential		1,578		0		1,584		0		31		0		122		0
Agricultural loans		66		76		67		76		0		2		3		4
Other commercial loans		0		0		0		25		0		0		0		1
Total commercial		16,872		9,911		16,160		8,133		209		71		554		147
Residential mortgage:
Residential mortgage loans - first lien		1,322		2,159		1,830		1,579		11		27		68		70
Residential mortgage loans - junior lien		386		384		417		386		1		5		10		18
Home equity lines of credit		0		65		0		65		0		0		0		2
Total residential mortgage		1,708		2,608		2,247		2,030		12		32		78		90
Total	$	18,580	$	12,519	$	18,407	$	10,163	$	221	$	103	$	632	$	237

26

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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)	September 30, 2021				December 31, 2020
	Past Due				Past Due
	90+ Days and				90+ Days and
	Accruing		Nonaccrual		Accruing		Nonaccrual
Commercial:
Commercial loans secured by real estate	$	752	$	11,205	$	395	$	11,550
Commercial and industrial		99		3,232		142		970
Commercial construction and land		0		48		0		49
Loans secured by farmland		30		84		188		84
Multi-family (5 or more) residential		0		1,578		0		1,614
Agricultural loans		66		0		0		0
Other commercial		0		0		71		0
Total commercial		947		16,147		796		14,267
Residential mortgage:
Residential mortgage loans - first liens		832		4,569		838		6,387
Residential mortgage loans - junior liens		71		305		52		378
Home equity lines of credit		64		289		233		299
Total residential mortgage		967		5,163		1,123		7,064
Consumer		10		31		56		85
Totals	$	1,924	$	21,341	$	1,975	$	21,416

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 $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020 are classified as nonaccrual.

27

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of September 30, 2021 and December 31, 2020. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows.

(In Thousands)	As of September 30, 2021								As of December 31, 2020
	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	$	547,885	$	142	$	5,362	$	553,389	$	529,998	$	66	$	1,746	$	531,810
Commercial and industrial		151,119		218		907		152,244		158,523		55		999		159,577
Paycheck Protection Program - 1st Draw		5,747		0		0		5,747		132,269		0		0		132,269
Paycheck Protection Program - 2nd Draw		56,981		0		0		56,981		0		0		0		0
Political subdivisions		73,503		0		0		73,503		53,221		0		0		53,221
Commercial construction and land		53,125		142		0		53,267		42,590		284		0		42,874
Loans secured by farmland		10,667		31		114		10,812		11,419		95		222		11,736
Multi-family (5 or more) residential		52,962		0		0		52,962		53,860		1,951		0		55,811
Agricultural loans		3,026		0		66		3,092		3,091		2		71		3,164
Other commercial loans		17,312		0		0		17,312		17,289		0		0		17,289
Total commercial		972,327		533		6,449		979,309		1,002,260		2,453		3,038		1,007,751
Residential mortgage:
Residential mortgage loans - first liens		489,339		2,212		2,825		494,376		523,191		5,703		4,053		532,947
Residential mortgage loans - junior liens		24,200		32		71		24,303		27,009		111		191		27,311
Home equity lines of credit		38,059		342		64		38,465		38,919		101		281		39,301
1-4 Family residential construction		21,719		0		0		21,719		20,457		156		0		20,613
Total residential mortgage		573,317		2,586		2,960		578,863		609,576		6,071		4,525		620,172
Consumer		17,447		48		41		17,536		16,063		83		140		16,286
Totals	$	1,563,091	$	3,167	$	9,450	$	1,575,708	$	1,627,899	$	8,607	$	7,703	$	1,644,209

28

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, 2021 and December 31, 2020 is as follows:

(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
September 30, 2021 Nonaccrual Totals	$	12,787	$	1,028	$	7,526	$	21,341
December 31, 2020 Nonaccrual Totals	$	12,999	$	2,689	$	5,728	$	21,416

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, 2021 and December 31, 2020 is as follows:

(In Thousands)	Current &
	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Nonaccrual		Total
September 30, 2021 Totals	$	144	$	88	$	134	$	5,457	$	5,823
December 31, 2020 Totals	$	166	$	0	$	418	$	6,867	$	7,451

At September 30, 2021 and December 31, 2020, there were 0 commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

TDRs that occurred during the three-month and nine-month periods ended September 30, 2021 and 2020 are as follows:

(Balances in Thousands)	Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2020
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Home equity lines of credit,
Reduced monthly payments for an eighteen-month period	1	$	70	0	$	0
Commercial loans secured by real estate,
Principal and interest payment deferral non-COVID related	0		0	2		4,831
Multi-family (5 or more) residential,
Principal and interest payment deferral non-COVID related	0		0	3		2,170
Total	1	$	70	5	$	7,001

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(Balances in Thousands)	Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - first liens:
Reduced monthly payments and extended maturity date	1	$	12	0	$	0
Reduced monthly payments for a fifteen-month period	1		116	0		0
Residential mortgage - junior liens,
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted	0		0	1		30
Home equity lines of credit:
Reduced monthly payments and extended maturity date	1		24	0		0
Reduced monthly payments for an eighteen-month period	1		70	0		0
Commercial loans secured by real estate:
Interest only payments for a nine-month period	0		0	1		240
Principal and interest payment deferral non-COVID related	0		0	2		4,831
Multi-family (5 or more) residential,
Principal and interest payment deferral non-COVID related	0		0	3		2,170
Total	4	$	222	7	$	7,271

In the three-month and nine-month periods ended September 30, 2020, the Corporation recorded a specific allowance for loan losses of $134,000 related to a loan secured by commercial real estate for which a TDR concession was also made in the third quarter 2020 and included in the table above. At December 31, 2020, the Corporation increased the specific allowance for loan losses related to this credit to $416,000, where it remains at September 30, 2021. The other loans for which TDRs were granted in the three-month and nine-month periods ended September 30, 2021 and 2020 had 0 specific impact on the provision or allowance for loan losses.

In the three-month and nine-month periods ended September 30, 2021 and 2020, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:

(Balances in Thousands)	Three Months Ended			Three Months Ended
	September 30, 2021			September 30, 2020
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Commercial loans secured by real estate	0	$	0	1	$	240
Total	0	$	0	1	$	240

(Balances in Thousands)	Nine Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2020
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Commercial loans secured by real estate	1	$	3,392	1	$	240
Total	1	$	3,392	1	$	240

30

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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)	September 30,		December 31,
	2021		2020
Foreclosed residential real estate	$	179	$	80

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)	September 30,		December 31,
	2021		2020
Residential real estate in process of foreclosure	$	1,392	$	1,246

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:

(In Thousands)	September 30,		December 31,
	2021		2020
Gross amount	$	6,639	$	6,639
Accumulated amortization		(3,189)		(2,788)
Net	$	3,450	$	3,851

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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Amortization expense	$	133	$	208	$	401	$	332

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 2021 and December 31, 2020, the net carrying value of goodwill was $52,505,000. Changes in the carrying amount of goodwill are summarized in the following table:

(In Thousands)	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Balance, beginning of period	$	52,505	$	28,388	$	52,505	$	28,388
Goodwill arising in business combination		0		24,138		0		24,138
Balance, end of period	$	52,505	$	52,526	$	52,505	$	52,526

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

9. BORROWED FUNDS

SHORT-TERM BORROWINGS

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

(In Thousands)	September 30,		December 31,
	2021		2020
FHLB-Pittsburgh borrowings	$	0	$	18,066
Customer repurchase agreements		1,875		1,956
Total short-term borrowings	$	1,875	$	20,022

The Corporation had available credit with other correspondent banks totaling $45,000,000 at September 30, 2021 and December 31, 2020. These lines of credit are primarily unsecured. NaN amounts were outstanding at September 30, 2021 or December 31, 2020.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At September 30, 2021, the Corporation had available credit in the amount of $14,482,000 on this line with 0 outstanding advances. At December 31, 2020, the Corporation had available credit in the amount of $14,654,000 on this line with 0 outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $14,936,000 at September 30, 2021 and $15,126,000 at December 31, 2020.

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 September 30, 2021 and December 31, 2020. The carrying value of the underlying securities was $1,900,000 at September 30, 2021 and $1,980,000 at December 31, 2020.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,044,507,000 at September 30, 2021 and $1,049,690,000 at December 31, 2020. 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 $9,400,000 at September 30, 2021 and $9,720,000 at December 31, 2020. In addition to the short-term and long-term borrowings shown in these tables, there are letters of credit from FHLB-Pittsburgh outstanding in the amount of $5,584,000 at September 30, 2021 and $400,000 at December 31, 2020. The Corporation’s total credit facility with FHLB-Pittsburgh was $752,847,000 at September 30, 2021, including an unused (available) amount of $709,012,000. At December 31, 2020, the Corporation’s total credit facility with FHLB-Pittsburgh was $771,199,000, including an unused (available) amount of $698,977,000.

At September 30, 2021, there were 0 outstanding short-term borrowings from FHLB-Pittsburgh. At December 31, 2020, short-term borrowings from FHLB-Pittsburgh included 5 advances totaling $18,000,000 par value, with a weighted average effective interest rate of 0.43%.

LONG-TERM BORROWINGS – FHLB ADVANCES

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

(In Thousands)	September 30,		December 31,
	2021		2020
Loans maturing in 2021 with a weighted-average rate of 0.94%	$	10,520	$	26,098
Loans maturing in 2022 with a weighted-average rate of 0.60%		15,510		15,682
Loans maturing in 2023 with a weighted-average rate of 0.73%		7,145		7,224
Loans maturing in 2024 with a weighted-average rate of 0.75%		5,109		5,137
Loan maturing in 2025 with an average rate of 4.91%		396		467
Total long-term FHLB-Pittsburgh borrowings	$	38,680	$	54,608

Note: Weighted-average rates are presented as of September 30, 2021.

32

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SENIOR NOTES

On May 19, 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 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 $15,000 in the third quarter 2021 and $22,000 in the nine-month period ended September 30, 2021 was included in interest expense in the unaudited consolidated statements of income.  

At September 30, 2021 and December 31, 2020, outstanding Senior Notes are as follows:

(In Thousands)	September 30,		December 31,
	2021		2020
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	$	14,685	$	0
Total carrying value	$	14,685	$	0

SUBORDINATED DEBT

On May 19, 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.

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 $25,000 in the third quarter 2021 and $38,000 in the nine-month period ended September 30, 2021 was included in interest expense in the unaudited consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, the carrying amounts of subordinated debt agreements are as follows:

(In Thousands)	September 30,		December 31,
	2021		2020
Agreements with an aggregate par value of $8,000,000; bearing interest at 6.25% with an effective interest rate of 5.49%; redeemed at par in June 2021	$	0	$	8,027
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemable 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		2,013		2,026
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		24,475		0
Total carrying value	$	32,988	$	16,553

10. STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The 2021 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the 2021 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 nine-month period ended September 30, 2021:

(Dollars in Thousands)		Aggregate
		Grant
		Date
	Number of	Fair
	Shares	Value
1st quarter 2021 awards:
Time-based awards to independent directors	10,989	$	220
Time-based awards to employees	46,178		924
Performance-based awards to employees	17,224		345
2nd quarter 2021 awards,
Time-based awards to employees	4,000		100
Total	78,391	$	1,589

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, 2021 is estimated to total $1,314,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $345,000 in the third quarter 2021 and $248,000 in the third quarter 2020. Total stock-based compensation expense attributable to restricted stock awards amounted to $970,000 in the nine-month period ended September 30, 2021 and $672,000 in the nine-month period ended September 30, 2020.

34

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

11. CONTINGENCIES

Litigation Matters

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

Trust Department Tax Reporting Contingency

The Corporation has incurred operational losses from compliance oversight related to trust department tax preparation and administration activities that occurred prior to 2020. In 2020, the Corporation made changes in internal controls and personnel responsible for trust department tax administration activities. Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities. There were 0 losses related to trust department tax compliance matters in the third quarter 2021. Losses related to a state tax reporting matter totaled $200,000 in the third quarter 2020. Losses related to trust department tax compliance matters totaled $107,000 in the nine months ended September 30, 2021, and $500,000 in the nine-month period ended September 30, 2020. These losses are included in other noninterest expense in the consolidated statements of income. The balance of accrued interest and other liabilities in the consolidated balance sheets includes $429,000 at September 30, 2021 and $322,000 at December 31, 2020 related to specific tax compliance matters that have been identified; however, no estimate can be made of the amount of additional expenses that may be incurred related to these matters.

12. DERIVATIVE FINANCIAL INSTRUMENTS

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

Interest rate swaps with commercial 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 $123,990,000 at September 30, 2021 and $135,740,000 at December 31, 2020. There were 0 interest rate swaps originated in the nine-month periods ended September 30, 2021 and 2020. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at September 30, 2021. The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $335,000 in the third quarter 2021 and $1,013,000 in the nine months ended September 30, 2021 as compared to a reduction in interest income on loans of $351,000 in the third quarter 2020 and the nine months ended September 30, 2020.

35

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 September 30, 2021 and December 31, 2020:

(In Thousands)	At September 30, 2021								At December 31, 2020
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	61,995	$	3,902	$	61,995	$	3,902	$	67,870	$	6,566	$	67,870	$	6,566

(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 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 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 $7,069,000 were pledged as collateral against the Corporation’s liability related to the interest rate swaps at September 30, 2021.

13. 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 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.

36

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value and the valuation methods used are as follows:

	September 30, 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	$	0	$	25,068	$	0	$	25,068
Obligations of U.S. Government agencies		0		24,312		0		24,312
Obligations of states and political subdivisions:
Tax-exempt		0		139,244		0		139,244
Taxable		0		70,493		0		70,493
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		60,629		0		60,629
Residential collateralized mortgage obligations		0		44,593		0		44,593
Commercial mortgage-backed securities		0		73,518		0		73,518
Total available-for-sale debt securities		0		437,857		0		437,857
Marketable equity security		981		0		0		981
Servicing rights		0		0		2,247		2,247
Interest rate swap agreements, assets		0		3,902		0		3,902
Total recurring fair value measurements, assets	$	981	$	441,759	$	2,247	$	444,987
Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,902	$	0	$	3,902
Nonrecurring fair value measurements, assets:
Impaired loans with a valuation allowance	$	0	$	0	$	7,225	$	7,225
Valuation allowance		0		0		(883)		(883)
Impaired loans, net		0		0		6,342		6,342
Foreclosed assets held for sale		0		0		1,374		1,374
Total nonrecurring fair value measurements, assets	$	0	$	0	$	7,716	$	7,716

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	December 31, 2020
	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	$	0	$	12,182	$	0	$	12,182
Obligations of U.S. Government agencies		0		26,344		0		26,344
Obligations of states and political subdivisions:
Tax-exempt		0		122,401		0		122,401
Taxable		0		47,452		0		47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		38,176		0		38,176
Residential collateralized mortgage obligations		0		57,467		0		57,467
Commercial mortgage-backed securities		0		45,310		0		45,310
Total available-for-sale debt securities		0		349,332		0		349,332
Marketable equity security		1,000		0		0		1,000
Servicing rights		0		0		1,689		1,689
Interest rate swap agreements, assets		0		6,566		0		6,566
Total recurring fair value measurements, assets	$	1,000	$	355,898	$	1,689	$	358,587
Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	6,566	$	0	$	6,566
Nonrecurring fair value measurements, assets:
Impaired loans with a valuation allowance	$	0	$	0	$	8,082	$	8,082
Valuation allowance		0		0		(925)		(925)
Impaired loans, net		0		0		7,157		7,157
Foreclosed assets held for sale		0		0		1,338		1,338
Total nonrecurring fair value measurements, assets	$	0	$	0	$	8,495	$	8,495

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, 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
	9/30/2021		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				9/30/2021
Servicing rights	$	2,247	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		221.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

	Fair Value at
	12/31/2020		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/2020
Servicing rights	$	1,689	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		277.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						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				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Servicing rights balance, beginning of period	$	2,116	$	1,284	$	1,689	$	1,277
Originations of servicing rights		176		374		567		777
Unrealized loss included in earnings		(45)		(221)		(9)		(617)
Servicing rights balance, end of period	$	2,247	$	1,437	$	2,247	$	1,437

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

At September 30, 2021 and December 31, 2020, 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
			Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	9/30/2021		9/30/2021		9/30/2021		Technique	Inputs	9/30/2021
Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,480	$	672	$	5,808	Sales comparison	Discount to appraised value	27	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%
Residential mortgage loans - first and junior liens		673		139		534	Sales comparison	Discount to appraised value	33	%
Total impaired loans	$	7,225	$	883	$	6,342
Foreclosed assets held for sale - real estate:
Commercial real estate	$	1,195	$	0	$	1,195	Sales comparison	Discount to appraised value	47	%
Residential (1-4 family)		179		0		179	Sales comparison	Discount to appraised value	52	%
Total foreclosed assets held for sale	$	1,374	$	0	$	1,374

(Dollars In Thousands)									Weighted
			Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/2020		12/31/2020		12/31/2020		Technique	Inputs	12/31/2020
Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,501	$	691	$	5,810	Sales comparison	Discount to appraised value	28	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%
Residential mortgage loans - first and junior liens		1,509		162		1,347	Sales comparison	Discount to appraised value	31	%
Total impaired loans	$	8,082	$	925	$	7,157
Foreclosed assets held for sale - real estate:
Commercial real estate	$	1,258	$	0	$	1,258	Sales comparison	Discount to appraised value	44	%
Residential (1-4 family)		80		0		80	Sales comparison	Discount to appraised value	36	%
Total foreclosed assets held for sale	$	1,338	$	0	$	1,338

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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	September 30, 2021				December 31, 2020
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	190,155	$	190,155	$	96,017	$	96,017
Certificates of deposit	Level 2		8,840		8,949		5,840		6,054
Restricted equity securities (included in Other Assets)	Level 2		9,650		9,650		9,970		9,970
Loans, net	Level 3		1,563,008		1,586,592		1,632,824		1,646,207
Accrued interest receivable	Level 2		7,307		7,307		8,293		8,293
Financial liabilities:
Deposits with no stated maturity	Level 2		1,637,463		1,637,463		1,430,062		1,430,062
Time deposits	Level 2		302,678		304,330		390,407		393,566
Short-term borrowings	Level 2		1,875		1,685		20,022		19,974
Long-term borrowings	Level 2		38,680		39,229		54,608		55,723
Senior debt	Level 2		14,685		15,000		0		0
Subordinated debt	Level 2		32,988		33,150		16,553		16,680
Accrued interest payable	Level 2		633		633		390		390

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:

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

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

● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions

● changes in general economic conditions

● 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

● 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

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

CORONAVIRUS (COVID-19) RESPONSE AND PAYCHECK PROTECTION PROGRAM

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

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 temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates.  

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc. (“Covenant”) had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts are moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual  or as TDRs at September 30, 2021. Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days.

At September 30, 2021, there were no loans remaining in deferral status under the program. In comparison, at June 30, 2021, the Corporation had 12 loans with an aggregate recorded investment of $6.7 million in deferral status and at September 30, 2020, there were 44 loans with an aggregate recorded investment of $44.6 million in deferral status.

The recorded investment in Paycheck Protection Program (“PPP”) loans at September 30, 2021 was $62.7 million, with contractual principal balances totaling $65.2 million, reduced $2.5 million by the impact of net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant. The recorded investment of $5.7 million in first draw PPP loans at September 30, 2021 decreased $126.6 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”). In the third quarter 2021, the pace of repayments of second draw PPP loans increased as the recorded investment of second draw PPP loans fell to $57.0 million at September 30, 2021 from $72.4 million at June 30, 2021.The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven. Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven.

Capital Strength

While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens & Northern Bank (“C&N Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized.

C&N Bank’s leverage ratio (Tier 1 capital to average assets) at September 30, 2021 of 10.35% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $121.7 million. Similarly, the total capital to risk-weighted assets ratio at September 30, 2021 is 16.35%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $96.5 million.

Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

EARNINGS OVERVIEW

Net income was $0.47 per diluted share in the third quarter 2021, up from $0.44 in the second quarter 2021 and up $0.29 from $0.18 in the third quarter 2020. For the nine months ended September 30, 2021, net income per diluted share was $1.46, up from $0.86 per share for the first nine months of 2020. As described below, earnings of $0.47 per share for the third quarter 2021 were 6.0% lower than third

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

quarter 2020 non-U.S. generally accepted accounting principles (U.S. GAAP) earnings per share of $0.50 as adjusted to exclude the impact of merger-related expenses. For the nine months ended September 30, 2021, earnings of $1.46 per share were 15.0% higher than the first nine months of 2020 non-U.S. GAAP earnings per share of $1.27 as adjusted to exclude the impact of merger-related expenses.

The following table provides a reconciliation of the Corporation’s unaudited earnings results under U.S. GAAP to comparative non-U.S. GAAP results excluding merger-related expenses. Management believes disclosure of unaudited earnings results for the periods presented, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.

RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE

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

	3rd Quarter 2021								3rd Quarter 2020
	Income						Diluted		Income						Diluted
	Before						Earnings		Before						Earnings
	Income		Income				per		Income		Income				per
	Tax		Tax		Net		Common		Tax		Tax		Net		Common
	Provision		Provision		Income		Share		Provision		Provision		Income		Share
Earnings Under U.S. GAAP	$	8,965	$	1,566	$	7,399	$	0.47	$	3,286	$	438	$	2,848	$	0.18
Add: Merger-Related Expenses (1)		0		0		0				6,402		1,307		5,095
Adjusted Earnings (Non-U.S. GAAP)	$	8,965	$	1,566	$	7,399	$	0.47	$	9,688	$	1,745	$	7,943	$	0.50

	Nine Months Ended September 30, 2021								Nine Months Ended September 30, 2020
	Income						Diluted		Income						Diluted
	Before						Earnings		Before						Earnings
	Income		Income				per		Income		Income				per
	Tax		Tax		Net		Common		Tax		Tax		Net		Common
	Provision		Provision		Income		Share		Provision		Provision		Income		Share
Earnings Under U.S. GAAP	$	28,702	$	5,456	$	23,246	$	1.46	$	14,961	$	2,509	$	12,452	$	0.86
Add: Merger-Related Expenses (1)		0		0		0				7,526		1,536		5,990
Adjusted Earnings (Non-U.S. GAAP)	$	28,702	$	5,456	$	23,246	$	1.46	$	22,487	$	4,045	$	18,442	$	1.27

(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses.

Additional highlights related to the Corporation’s third quarter and September 30, 2021 year-to-date unaudited earnings results as compared to the corresponding periods of 2020 are presented below.

Third Quarter 2021 as Compared to Third Quarter 2020

Third quarter 2021 net income was $7,399,000. In comparison, third quarter 2020 net income was $2,848,000, and excluding merger-related expenses, adjusted (non-U.S. GAAP) earnings were $7,943,000. Other significant variances were as follows:

● Third quarter 2021 net interest income of $19,459,000 was $177,000 higher than the third quarter 2020 total. Average outstanding loans decreased $113.7 million, including a reduction in average PPP loans of $74.5 million, and average total deposits increased $52.2 million. The net interest margin for the third quarter 2021 was 3.59% as compared to 3.57% for the third quarter 2020. The average yield on earning assets of 3.89% for the third quarter 2021 was down 0.13% from the third quarter 2020, while the average rate on interest-bearing liabilities of 0.43% in the third quarter 2021 was 0.19% lower than the comparable third quarter 2020 average rate. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020 amount. Accretion and amortization of purchase accounting adjustments had

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

a net positive impact on net interest income of $563,000 in the third quarter 2021, a decrease of $735,000 from the net positive impact of $1,298,000 in the third quarter 2020

● The provision for loan losses was $1,530,000 in the third quarter 2021 as compared to $1,941,000 in the third quarter 2020. The provision for loan losses in the third quarter 2021 included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. The partial charge-off amount exceeded the specific allowance of $583,000 that had been established at June 30, 2021. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000.

● Noninterest income for the third quarter 2021 was down $611,000 from the third quarter 2020 total. Significant variances included the following:

o Net gains from sales of loans of $797,000 for the third quarter 2021 were down $1,255,000 from the total for the third quarter 2020, as the volume of residential mortgage loans sold in the third quarter 2021 was down from the third quarter 2020 level.

o Other noninterest income totaled $665,000, a decrease of $331,000 from the third quarter 2020 as the Corporation recognized income of $279,000 in the third quarter 2020 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee and dividend income from Federal Home Loan Bank stock decreased $55,000.

o Loan servicing fees, net, were $153,000 in the third quarter 2021, an increase of $240,000 over the third quarter 2020 reduction in revenue of $87,000. The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $45,000 in the third quarter 2021 as compared to a reduction in fair value of $221,000 in the third quarter 2020, as market assumptions regarding prepayment speeds have decreased.

o Trust revenue of $1,821,000 increased $226,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation.

o Service charges on deposit accounts of $1,249,000 in the third quarter 2021 were up $204,000 from the third quarter 2020 amount, as the volume of consumer and business overdraft and other activity increased.

o Brokerage and insurance revenue of $560,000 increased $178,000 from the third quarter 2020 total, due to commissions on higher transaction volume.

o Interchange revenue from debit card transactions totaled $975,000 in the third quarter 2021, an increase of $147,000 over the third quarter 2020 total, reflecting increases in transaction volumes and number of accounts due to the Covenant acquisition.

● Noninterest expense, excluding merger-related expenses, increased $698,000 in the third quarter 2021 over the third quarter 2020 amount. Significant variances included the following:

o Salaries and employee benefits of $9,427,000 increased $724,000, including the impact of increases in administrative, information technology, cash management services and lending personnel.

o Professional fees of $538,000 increased $116,000, including increases in recruiting services.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

o Other noninterest expense of $1,850,000 decreased $240,000, including other operational losses decreasing $195,000 as an estimated accrual of $200,000 related to a Trust Department tax compliance and preparation matter was recorded in the third quarter 2020 with no comparable charge in the third quarter 2021.

● The income tax provision of $1,566,000 for the third quarter 2021 was up $1,128,000 from $438,000 for the third quarter 2020, reflecting higher pre-tax income.

Nine Months Ended September 30, 2021 as Compared to Nine Months Ended September 30, 2020

Net income for the nine-month period ended September 30, 2021 was $23,246,000, or $1.46 per diluted share, while net income for the first nine months of 2020 was $12,452,000, or $0.86 per share. Excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings for the first nine months of 2020 would be $18,442,000 or $1.27 per share. Other significant variances were as follows:

● Net interest income was up $10,413,000 (21.8%) for the first nine months of 2021 over the same period in 2020, reflecting growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $241.3 million, and average total deposits increased $396.7 million. The net interest margin was 3.70% for the nine months ended September 30, 2021, up from 3.67% for the first nine months of 2020. Interest and fees on PPP loans totaled $4,886,000 for the first nine months of 2021, an increase of $3,457,000 compared to the first nine months of 2020. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,228,000 in the first nine months of 2021 as compared to a net positive impact of $1,999,000 in the first nine months of 2020.

● For the first nine months of 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded in the first nine months of 2020. The provision for the first nine months of 2021 includes the impact of a charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000, as previously discussed. In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000.

● Noninterest income for the first nine months of 2021 was up $1,662,000 from the total for the first nine months of 2020. Significant variances included the following:

o Loan servicing fees, net, were $547,000 in the first nine months of 2021, an increase of $806,000 over the 2020 total of negative $259,000 (a decrease in revenue). The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $9,000 in the first nine months of 2021 as compared to a reduction in fair value of $617,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans.

o Trust revenue of $5,254,000 increased $615,000 reflecting the impact of growth in average trust assets under management including the impact of market value appreciation.

o Interchange revenue from debit card transactions totaled $2,854,000 for the first nine months of 2021, an increase of $577,000, reflecting an increase in transaction volumes.

o Brokerage and insurance revenue of $1,392,000 increased $271,000, due to commissions on higher transaction volume.

o Other noninterest income totaled $2,837,000, an increase of $254,000 over 2020. Within this category, significant variances included the following:

o Income from realization of tax credits was $268,000 higher in the first nine months of 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations.

o Fee income for providing credit enhancement on sale of mortgage loans increased $158,000.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

o Credit card interchange income increased $69,000 due to higher transaction volume.

o Income from investment in a title agency increased $54,000.

o Merchant services income increased $43,000.

o Other noninterest income decreased $279,000 due to the impact of the life insurance transaction in 2020 in which benefits were split between the Corporation and heirs of a former employee.

o Dividend income from Federal Home Loan Bank stock decreased $76,000.

o Service charges on deposit accounts of $3,337,000 in the first nine months of 2021 increased $211,000 from the total for the first nine months of 2020, as consumer and business activity increased.

o Net gains from sales of loans totaled $2,786,000 in the first nine months of 2021, a decrease of $1,145,000 from the total for the first nine months of 2020. The decrease reflects a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions.

● Noninterest expense, excluding merger-related expenses, increased $6,620,000 for the nine months ended September 30, 2021 over the total for the first nine months of 2020. Significant variances included the following:

o Total salaries and wages and benefits expenses increased $4,757,000, reflecting inclusion of the former Covenant operations for nine months in 2021 as compared to three months in 2020, as well as increases in lending, human resources, information technology and other personnel needed to accommodate growth.

o Net occupancy and equipment expense increased $473,000, primarily reflecting an increase due to the Covenant acquisition.

o Data processing and telecommunications expenses increased $383,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs.

o Professional fees expense increased $418,000, mainly due to increases in recruiting services and PPP loan processing professional fees.

o Other noninterest expense increased $256,000. Within this category, significant variances included the following:

o FDIC insurance expense totaled $431,000, an increase of $244,000.

o Donations expense increased $230,000, mainly due to an increase in donations associated with the PA Educational Improvement Tax Credit program.

o Business development expenses totaled $345,000, an increase of $201,000, due primarily to an increase in public relations expense.

o Other operational losses totaled $159,000, a decrease of $394,000, including a reduction in charges related to Trust Department tax compliance and preparation matters.

o The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $208,000.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

● The income tax provision was $5,456,000 for the nine months ended September 30, 2021, up from $2,509,000 for the first nine months of 2020. Pre-tax income was $13,741,000 higher in the first nine months of 2021 as compared to 2020. The effective tax rate was 19.0% for the first nine months of 2021, higher than the 16.8% effective tax rate for the first nine months of 2020. The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in the first nine months of 2021 as compared to a 5.0% benefit in 2020.

More 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.

ACQUISITION OF COVENANT FINANCIAL, INC.

The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant follows the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million.

In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the nine months ended September 30, 2021.

TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,	For the Three Months Ended :
Except Per Share Data)	September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		March 31,
(Unaudited)	2021		2021		2021		2020		2020		2020		2020
Interest income	$	21,073	$	20,428	$	21,754	$	21,859	$	21,751	$	16,513	$	17,037
Interest expense		1,614		1,747		1,671		2,104		2,469		2,267		2,755
Net interest income		19,459		18,681		20,083		19,755		19,282		14,246		14,282
Provision (credit) for loan losses		1,530		744		259		620		1,941		(176)		1,528
Net interest income after provision (credit) for loan losses		17,929		17,937		19,824		19,135		17,341		14,422		12,754
Noninterest income		6,359		6,300		6,782		6,565		6,970		5,528		5,281
Net gains on securities		23		2		0		144		25		0		0
Loss on prepayment of borrowings		0		0		0		1,636		0		0		0
Merger-related expenses		0		0		0		182		6,402		983		141
Other noninterest expenses		15,346		15,399		15,709		15,775		14,648		12,274		12,912
Income before income tax provision		8,965		8,840		10,897		8,251		3,286		6,693		4,982
Income tax provision		1,566		1,780		2,110		1,481		438		1,255		816
Net income	$	7,399	$	7,060	$	8,787	$	6,770	$	2,848	$	5,438	$	4,166
Net income attributable to common shares	$	7,336	$	6,999	$	8,722	$	6,727	$	2,830	$	5,405	$	4,146
Basic earnings per common share	$	0.47	$	0.44	$	0.55	$	0.43	$	0.18	$	0.39	$	0.30
Diluted earnings per common share	$	0.47	$	0.44	$	0.55	$	0.43	$	0.18	$	0.39	$	0.30

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. 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. Management believes the allowance for loan losses is adequate and reasonable. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Business Combinations – We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable.

Fair Value of 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.

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 and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest 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 September 30, 2021 and 2020

For the three-month periods, fully taxable equivalent net interest income was $19,751,000 in 2021, which was $216,000 (1.1%) higher than in 2020. Interest income in the third quarter was $21,365,000 which was $639,000 lower in 2021 as compared to 2020, while interest expense was lower by $855,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.59% in 2021 as compared to 3.57% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.46% in 2021 from 3.40% in 2020. The average yield on earning assets of 3.89% was 0.13% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.43% in 2021 was 0.19% lower.

Income from purchase accounting-related adjustments in the third quarter 2021 had a positive effect on net interest income of $563,000, including an increase in income on loans of $298,000 and net reductions in interest expense on time deposits and borrowed funds totaling $265,000. The positive impact to the third quarter 2021 net interest margin from purchase accounting adjustments was 0.10%. In comparison, the positive impact of purchase accounting adjustments to the third quarter 2020 net interest margin was $1,298,000, or 0.24%.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $21,365,000 in 2021, a decrease of $639,000 from 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest and fees from loans receivable decreased $627,000 in 2021 as compared to 2020. Average outstanding loans receivable decreased $113,735,000 (6.7%) to $1,591,857,000 in 2021 from $1,705,592,000 in 2020, including a reduction in average PPP loans of $74,501,000. The average balance of other loans also decreased, as falling interest rates contributed to accelerated prepayments and demand for new commercial loans was muted over much of 2020 and 2021. In addition, the Corporation has sold an increased proportion of its residential mortgage loans into the secondary market over the past few years, which has helped to enhance noninterest income in 2020 and 2021 but has contributed to a net reduction in average outstanding loans.

The average yield on loans in the third quarter 2021 was 4.76%, up from 4.60% in the third quarter 2020. Although the average yield on taxable loans other than PPP loans fell to 4.70% in 2021 from 4.91% in 2020, and the average yield on tax-exempt loans fell to 2.90% in 2021 from 3.57% in 2020, the average yield on the total portfolio was affected by the comparatively high yield on PPP loans. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

Interest income from available-for-sale debt securities decreased $35,000 in 2021 from 2020. Total average available-for-sale debt securities (at amortized cost) increased to $391,148,000 in 2021 from $321,541,000 in 2020. The average balance of taxable securities increased by $36,199,000, while the average balance of tax-exempt securities increased $33,408,000. The average yield on available-for-sale debt securities was 2.18% for 2021, down from 2.70% in 2020. The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates.

Income from interest-bearing due from banks totaled $106,000 in 2021, an increase of $37,000 from 2020. The average yield on interest-bearing due from banks was 0.22% in 2021 and 0.19% in 2020. Within this category, the largest asset balance in 2021 and 2020 has been interest-bearing deposits held with the Federal Reserve. The average balance of $195,359,000, or 9.0% of total average earning assets in the third quarter 2021, was up $47,816,000 from $147,543,000, or 6.8% of total average earning assets in the third quarter 2020. The levels of cash held at the Federal Reserve in both periods were significantly higher as compared to customary levels prior to the onset of the COVID-19 pandemic. Throughout most of 2020 and 2021, funds received from PPP and other loan repayments and increases in deposits have outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense decreased $855,000 to $1,614,000 in 2021 from $2,469,000 in 2020. Interest expense on deposits decreased $724,000, as the average rate on interest-bearing deposits decreased to 0.30% in 2021 from 0.50% in 2020. The decrease in average rates on deposits includes decreases of 0.32% on time deposits, 0.14% on money market accounts, 0.06% on interest checking accounts and 0.01% on saving accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 16.2% of average total deposits in the third quarter 2021 from 23.9% in the third quarter 2020.

Average total deposits increased $52,215,000 (2.8%) to $1,936,758,000 in the third quarter from $1,884,543,000 in 2020. The increase in average balance on deposits reflects PPP-related activity and funding from other government stimulus programs.

Interest expense on short-term borrowings in the third quarter 2021 was less than $1,000 as compared to $73,000 in 2020. The average balance of short-term borrowings decreased to $2,185,000 in 2021 from $44,660,000 in 2020. The average rate on short-term borrowings was 0.65% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $275,000 to $87,000 in 2021 from $362,000 in 2020. The average balance of long-term borrowings was $41,083,000 in 2021, down from an average balance of $102,857,000 in 2020. 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 0.84% in 2021 compared to 1.40% in 2020.

In May 2021, the Corporation issued unsecured senior notes with a total carrying value at issuance of $14,663,000, net of issuance costs. The senior notes were issued to provide funding at a relatively attractive cost for the holding company, Citizens & Northern Corporation. Interest expense on the senior notes totaled $118,000 in the third quarter 2021. The average balance of the senior notes was $14,674,000 in the third quarter of 2021 at an average rate of 3.19%.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest expense on subordinated debt increased $99,000 to $346,000 in 2021 from $247,000 in 2020. The average balance of subordinated debt increased to $32,978,000 in 2021 from $16,540,000 in 2020, reflecting a new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021. The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026. If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity. The subordinated notes are a source of Tier 2 capital for the holding company. The average rate incurred on subordinated debt was 4.16% in 2021, down from 5.94% in 2020.

More information regarding the terms of borrowed funds is provided in Note 9 to the unaudited consolidated financial statements.

Nine-Month Periods Ended September 30, 2021 and 2020

For the nine-month periods, fully taxable equivalent net interest income was $59,056,000 in 2021, $10,532,000 (21.7%) higher than in 2020. Interest income was $8,073,000 higher in 2021 as compared to 2020, while interest expense was lower by $2,459,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.70% in 2021 as compared to 3.67% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.55% in 2021, up from 3.44% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program.

Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the nine months ended September 30, 2021 of $2,228,000, including an increase in income on loans of $1,052,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,176,000. In comparision, the net positive impact on net interest income of purchase accounting adjustments was $1,999,000 in the nine-month period ended September 30, 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.14% in the first nine months of 2021 as compared to 0.15% in the first nine months of 2020.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $64,088,000 in 2021, an increase of $8,073,000 from 2020. Interest and fees on loans receivable increased $8,296,000, or 16.8%, to $57,734,000 in 2021 from $49,438,000 in 2020. Table IV shows the increase in interest on loans includes an increase of $8,431,000 attributable to changes in volume and a decrease of $135,000 related to changes in average rates.

For the first nine months of 2021, average outstanding loans totaled $1,611,032,000, an increase of $241,296,000 (17.6%) over the comparative amount for the first nine months of 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as an increase in the average balance of PPP loans.

The fully taxable equivalent yield on loans in 2021 was 4.79% compared to 4.82% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. Similar to the third quarter comparision, the overall yield on loans in the nine-month period ended September 30, 2021 included the impact of the acceleration of fees recognized on PPP loans as repayments have been received from the SBA.  

Interest income on available-for-sale debt securities totaled $6,071,000 in 2021, a decrease of $254,000 from the total for 2020. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $364,452,000 in 2021, an increase of $36,935,000 from 2020. The average yield on available-for-sale debt securities decreased to 2.23% in 2021 from 2.58% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates.

For the nine-month periods, interest income from interest-bearing due from banks totaled $230,000 in 2021, an increase of $39,000 from $191,000 in 2020. The average balance increased $88,694,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

banks totaled 7.4% of average total earning assets for the nine months ended September 30, 2021 as compared to 3.9% in 2020. The average yield on interest-bearing due from banks was 0.20% in 2021 as compared to 0.37% in 2020, due to decreases in market rates.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense decreased $2,459,000 to $5,032,000 in 2021 from $7,491,000 in 2020. Table III shows that the overall cost of funds on interest-bearing liabilities decreased to 0.46% in 2021 from 0.79% in 2020. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. Table IV shows the reduction in interest expense related to changes in rate accounted for $2,912,000 of the decrease in expense, partially offset by an increase in expense of $453,000 attributable to volume.

For the nine-month period ended September 30, 2021, average total deposits increased $396,652,000 (26.5%) to $1,896,023,000 in 2021 from $1,499,371,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. The decrease in average rate on deposits includes decreases of 0.64% on time deposits, 0.15% on money market accounts, 0.09% on interest checking accounts and 0.03% on saving accounts. The average balance of time deposits fell to 17.9% of average total deposits in 2021 from 26.1% in 2020, further contributing to the reduction in average rate on deposits.

Interest expense on short-term borrowings decreased $313,000 to $22,000 in 2021 from $335,000 in 2020. The average balance of short-term borrowings decreased to $7,648,000 in 2021 from $36,492,000 in 2020. The average rate on short-term borrowings decreased to 0.38% in 2021 from 1.23% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $640,000 to $330,000 in 2021 from $970,000 in 2020. The average balance of long-term borrowings was $46,863,000 in 2021, down from an average balance of $80,030,000 in 2020. 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 0.94% in 2021 compared to 1.62% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020.

Interest expense on the senior notes issued in May 2021 totaled $175,000 in 2021. The average balance of the senior notes was $7,255,000 in 2021 with an average rate of 3.23%.

Interest expense on subordinated debt increased $487,000 to $947,000 in 2021 from $460,000 in 2020. The average balance of subordinated debt increased to $25,539,000 in 2021 from $9,871,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.96% in 2021 from 6.22% in 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

	Three Months Ended							Nine Months Ended
	September 30,				Increase/		.	September 30,				Increase/
(In Thousands)	2021		2020		(Decrease)			2021		2020		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	106	$	69	$	37		$	230	$	191	$	39
Available-for-sale debt securities:
Taxable		1,304		1,483		(179)			3,604		4,451		(847)
Tax-exempt		842		698		144			2,467		1,874		593
Total available-for-sale debt securities		2,146		2,181		(35)			6,071		6,325		(254)
Loans receivable:
Taxable		16,890		18,269		(1,379)			51,209		46,316		4,893
Paycheck Protection Program - 1st Draw		618		889		(271)			3,289		1,429		1,860
Paycheck Protection Program - 2nd Draw		1,021		0		1,021			1,597		0		1,597
Tax-exempt		568		566		2			1,639		1,693		(54)
Total loans receivable		19,097		19,724		(627)			57,734		49,438		8,296
Other earning assets		16		30		(14)			53		61		(8)
Total Interest Income		21,365		22,004		(639)			64,088		56,015		8,073
INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		230		271		(41)			686		716		(30)
Money market		269		368		(99)			895		863		32
Savings		58		57		1			170		175		(5)
Time deposits		506		1,091		(585)			1,807		3,972		(2,165)
Total interest-bearing deposits		1,063		1,787		(724)			3,558		5,726		(2,168)
Borrowed funds:
Short-term		0		73		(73)			22		335		(313)
Long-term - FHLB advances		87		362		(275)			330		970		(640)
Senior notes, net		118		0		118			175		0		175
Subordinated debt, net		346		247		99			947		460		487
Total borrowed funds		551		682		(131)			1,474		1,765		(291)
Total Interest Expense		1,614		2,469		(855)			5,032		7,491		(2,459)
Net Interest Income	$	19,751	$	19,535	$	216		$	59,056	$	48,524	$	10,532

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table III - Analysis of Average Daily Balances and Rates

(Dollars in Thousands)	Three Months				Three Months					Nine Months				Nine Months
	Ended		Rate of		Ended		Rate of		���	Ended		Rate of		Ended		Rate of
	9/30/2021		Return/		9/30/2020		Return/			9/30/2021		Return/		9/30/2020		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	$	195,359	0.22	%	$	147,543	0.19	%		$	157,231	0.20	%	$	68,537	0.37	%
Available-for-sale debt securities,
at amortized cost:
Taxable		263,682	1.96	%		227,483	2.59	%			241,716	1.99	%		245,487	2.42	%
Tax-exempt		127,466	2.62	%		94,058	2.95	%			122,736	2.69	%		82,030	3.05	%
Total available-for-sale debt securities		391,148	2.18	%		321,541	2.70	%			364,452	2.23	%		327,517	2.58	%
Loans receivable:
Taxable		1,426,503	4.70	%		1,480,247	4.91	%			1,424,457	4.81	%		1,228,521	5.04	%
Paycheck Protection Program - 1st Draw		19,625	12.49	%		162,234	2.18	%			58,900	7.47	%		80,322	2.38	%
Paycheck Protection Program - 2nd Draw		68,108	5.95	%		0	0.00	%			58,173	3.67	%		0	0.00	%
Tax-exempt		77,621	2.90	%		63,111	3.57	%			69,502	3.15	%		60,893	3.71	%
Total loans receivable		1,591,857	4.76	%		1,705,592	4.60	%			1,611,032	4.79	%		1,369,736	4.82	%
Other earning assets		2,355	2.70	%		3,361	3.55	%			2,556	2.77	%		2,346	3.47	%
Total Earning Assets		2,180,719	3.89	%		2,178,037	4.02	%			2,135,271	4.01	%		1,768,136	4.23	%
Cash		24,436				33,291					24,564				23,467
Unrealized gain on securities		12,411				15,277					11,831				12,021
Allowance for loan losses		(12,688)				(11,473)					(12,143)				(10,988)
Bank-owned life insurance		30,445				30,078					30,301				22,539
Bank premises and equipment		20,620				21,763					20,860				19,251
Intangible assets		56,021				57,008					56,153				38,786
Other assets		43,947				48,451					43,694				36,632
Total Assets	$	2,355,911			$	2,372,432				$	2,310,531			$	1,909,844
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	423,371	0.22	%	$	382,997	0.28	%		$	389,349	0.24	%	$	290,420	0.33	%
Money market		446,385	0.24	%		386,848	0.38	%			428,985	0.28	%		268,095	0.43	%
Savings		231,093	0.10	%		201,401	0.11	%			224,050	0.10	%		184,829	0.13	%
Time deposits		312,979	0.64	%		449,964	0.96	%			339,558	0.71	%		391,827	1.35	%
Total interest-bearing deposits		1,413,828	0.30	%		1,421,210	0.50	%			1,381,942	0.34	%		1,135,171	0.67	%
Borrowed funds:
Short-term		2,185	0.00	%		44,660	0.65	%			7,648	0.38	%		36,492	1.23	%
Long-term - FHLB advances		41,083	0.84	%		102,857	1.40	%			46,863	0.94	%		80,030	1.62	%
Senior notes, net		14,674	3.19	%		0	0.00	%			7,255	3.23	%		0	0.00	%
Subordinated debt, net		32,978	4.16	%		16,540	5.94	%			25,539	4.96	%		9,871	6.22	%
Total borrowed funds		90,920	2.40	%		164,057	1.65	%			87,305	2.26	%		126,393	1.87	%
Total Interest-bearing Liabilities		1,504,748	0.43	%		1,585,267	0.62	%			1,469,247	0.46	%		1,261,564	0.79	%
Demand deposits		522,930				463,333					514,081				364,200
Other liabilities		25,386				26,367					25,729				18,804
Total Liabilities		2,053,064				2,074,967					2,009,057				1,644,568
Stockholders' equity, excluding
other comprehensive income		292,936				285,158					292,017				255,545
Accumulated other comprehensive income		9,911				12,307					9,457				9,731
Total Stockholders' Equity		302,847				297,465					301,474				265,276
Total Liabilities and Stockholders' Equity	$	2,355,911			$	2,372,432				$	2,310,531			$	1,909,844
Interest Rate Spread			3.46	%			3.40	%				3.55	%			3.44	%
Net Interest Income/Earning Assets			3.59	%			3.57	%				3.70	%			3.67	%
Total Deposits (Interest-bearing
and Demand)	$	1,936,758			$	1,884,543				$	1,896,023			$	1,499,371

(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.

54

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)	Three Months Ended  9/30/21 vs. 9/30/20						.	Nine Months Ended  9/30/21 vs. 9/30/20
	Change in		Change in		Total			Change in		Change in		Total
	Volume		Rate		Change			Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks	$	1	$	36	$	37		$	162	$	(123)	$	39
Available-for-sale debt securities:
Taxable		200		(379)		(179)			(67)		(780)		(847)
Tax-exempt		226		(82)		144			838		(245)		593
Total available-for-sale debt securities		426		(461)		(35)			771		(1,025)		(254)
Loans receivable:
Taxable		(677)		(702)		(1,379)			7,085		(2,192)		4,893
Paycheck Protection Program - 1st Draw		(1,356)		1,085		(271)			(472)		2,332		1,860
Paycheck Protection Program - 2nd Draw		1,021		0		1,021			1,597		0		1,597
Tax-exempt		123		(121)		2			221		(275)		(54)
Total loans receivable		(889)		262		(627)			8,431		(135)		8,296
Other earning assets		(7)		(7)		(14)			5		(13)		(8)
Total Interest Income		(469)		(170)		(639)			9,369		(1,296)		8,073
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		20		(61)		(41)			206		(236)		(30)
Money market		37		(136)		(99)			402		(370)		32
Savings		8		(7)		1			33		(38)		(5)
Time deposits		(402)		(183)		(585)			(475)		(1,690)		(2,165)
Total interest-bearing deposits		(337)		(387)		(724)			166		(2,334)		(2,168)
Borrowed funds:
Short-term		(53)		(20)		(73)			(168)		(145)		(313)
Long-term - FHLB advances		(180)		(95)		(275)			(318)		(322)		(640)
Senior notes, net		118		0		118			175		0		175
Subordinated debt, net		172		(73)		99			598		(111)		487
Total borrowed funds		57		(188)		(131)			287		(578)		(291)
Total Interest Expense		(280)		(575)		(855)			453		(2,912)		(2,459)
Net Interest Income	$	(189)	$	405	$	216		$	8,916	$	1,616	$	10,532

(1) Changes in income on tax-exempt securities and loans are presented on a fully tax-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.

55

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE V – COMPARISON OF NONINTEREST INCOME

(Dollars in Thousands)	Three Months Ended
	September 30,					$	%
	2021		2020			Change	Change
Trust revenue	$	1,821	$	1,595	$	226	14.2	%
Brokerage and insurance revenue		560		382		178	46.6	%
Service charges on deposit accounts		1,249		1,045		204	19.5	%
Interchange revenue from debit card transactions		975		828		147	17.8	%
Net gains from sales of loans		797		2,052		(1,255)	(61.2)	%
Loan servicing fees, net		153		(87)		240	N/M
Increase in cash surrender value of life insurance		139		159		(20)	(12.6)	%
Other noninterest income		665		996		(331)	(33.2)	%
Total noninterest income, excluding realized gains on securities, net		6,359		6,970		(611)	(8.8)	%
Realized gains on available-for-sale debt securities, net		23		25		(2)	(8.0)	%
Total noninterest income	$	6,382	$	6,995	$	(613)	(8.8)	%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net in the third quarter 2021 decreased $611,000 (8.8%) from the third quarter 2020 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)	Nine Months Ended
	September 30,					$	%
	2021		2020			Change	Change
Trust revenue	$	5,254	$	4,639	$	615	13.3	%
Brokerage and insurance revenue		1,392		1,121		271	24.2	%
Service charges on deposit accounts		3,337		3,126		211	6.7	%
Interchange revenue from debit card transactions		2,854		2,277		577	25.3	%
Net gains from sales of loans		2,786		3,931		(1,145)	(29.1)	%
Loan servicing fees, net		547		(259)		806	N/M
Increase in cash surrender value of life insurance		434		361		73	20.2	%
Other noninterest income		2,837		2,583		254	9.8	%
Total noninterest income, excluding realized gains on securities, net		19,441		17,779		1,662	9.3	%
Realized gains on available-for-sale debt securities, net		25		25		0	0.0	%
Total noninterest income	$	19,466	$	17,804	$	1,662	9.3	%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net for the first nine months of 2021 increased $1,662,000 (9.3%) from the total for the first nine months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

56

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE

TABLE VI - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)	Three Months Ended
	September 30,				$		%
	2021		2020		Change		Change
Salaries and employee benefits	$	9,427	$	8,703	$	724	8.3	%
Net occupancy and equipment expense		1,217		1,189		28	2.4	%
Data processing and telecommunications expense		1,475		1,482		(7)	(0.5)	%
Automated teller machine and interchange expense		357		340		17	5.0	%
Pennsylvania shares tax		482		422		60	14.2	%
Professional fees		538		422		116	27.5	%
Other noninterest expense		1,850		2,090		(240)	(11.5)	%
Total noninterest expense, excluding merger-related expenses		15,346		14,648		698	4.8	%
Merger-related expenses		0		6,402		(6,402)	(100.0)	%
Total noninterest expense	$	15,346	$	21,050	$	(5,704)	(27.1)	%

Total noninterest expense in the third quarter 2021 decreased $5,704,000 (27.1%) from the third quarter 2020 total. Excluding merger-related expenses from the third quarter 2020, total noninterest expense in the third quarter 2021 increased $698,000 (4.8%) from the third quarter 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)	Nine Months Ended
	September 30,				$		%
	2021		2020		Change		Change
Salaries and employee benefits	$	27,821	$	23,064	$	4,757	20.6	%
Net occupancy and equipment expense		3,740		3,267		473	14.5	%
Data processing and telecommunications expense		4,342		3,959		383	9.7	%
Automated teller machine and interchange expense		1,049		912		137	15.0	%
Pennsylvania shares tax		1,463		1,267		196	15.5	%
Professional fees		1,683		1,265		418	33.0	%
Other noninterest expense		6,356		6,100		256	4.2	%
Total noninterest expense, excluding merger-related expenses		46,454		39,834		6,620	16.6	%
Merger-related expenses		0		7,526		(7,526)	(100.0)	%
Total noninterest expense	$	46,454	$	47,360	$	(906)	(1.9)	%

Total noninterest expense for the first nine months of 2021 decreased $906,000 (1.9%) from the total for the first nine months of 2020. Total noninterest expense for the first nine months of 2021 increased $6,620,000 (16.6%) from the total excluding merger-related expenses, for the first nine months of  2020. Changes of significance, including the impact of the Covenant acquisition that closed July 1, 2020, 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 nine months of 2021 was $5,456,000, which was $2,947,000 higher than the provision for the first nine months of 2020. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the first nine months of 2021 compared to 16.8% in the first nine months of 2020. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The higher effective tax rate in the first nine months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income.

57

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 September 30, 2021 and December 31, 2020 represents the following temporary difference components:

	September 30,		December 31,
(In Thousands)	2021		2020
Deferred tax assets:
Allowance for loan losses	$	2,678	$	2,154
Purchase accounting adjustments on loans		1,713		1,930
Net operating loss carryforward		807		896
Operating leases liability		846		724
Other deferred tax assets		3,102		3,089
Total deferred tax assets		9,146		8,793
Deferred tax liabilities:
Unrealized holding gains on securities		1,674		3,104
Defined benefit plans - ASC 835		28		32
Bank premises and equipment		492		1,216
Core deposit intangibles		754		840
Right-of-use assets from operating leases		846		724
Other deferred tax liabilities		224		172
Total deferred tax liabilities		4,018		6,088
Deferred tax asset, net	$	5,128	$	2,705

In connection with the Covenant merger, the Corporation received a net operating loss (“NOL”) available to be carried forward against federal taxable income of $4.6 million. Availability of the NOL does not expire; however, the amount that may be offset against taxable income is limited to approximately $563,000 per year and further limited annually to no more than 80% of taxable income without regard to the NOL. At December 31, 2020, the unused amount of the NOL was $4.3 million.

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 September 30, 2021 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.

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 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 September 30, 2021, and 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 2021.

58

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021, gross loans outstanding totaled $1,575,708,000, a decrease of $68,501,000 from December 31, 2020, including a reduction in PPP loans of $69,541,000 due to repayments and a net reduction in residential mortgage loans of $41,309,000. The net reduction in loans outstanding over the past 9 months reflects the impact of high levels of loan prepayments consistent with low interest rates and a high proportion of new mortgage loans being sold into the secondary market. Excluding PPP loans, total commercial loans at September 30, 2021 were up $41,099,000 from December 31, 2020. At September 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio.  

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 $57,918,000 at September 30, 2021, down from $65,741,000 at December 31, 2020. At September 30, 2021, the balance of participation loans outstanding includes a total of $33,530,000 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 of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,565,000 at September 30, 2021 and $8,437,000 at December 31, 2020.

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 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 September 30, 2021, the Corporation’s activity under the MPF Direct Program has been minimal.

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 September 30, 2021, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,584,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000.

At September 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $328,659,000, including loans sold through the MPF Xtra program of $167,914,000 and loans sold through the Original program of $160,745,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2021 and December 31, 2020.

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 September 30, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,273,000, and the Corporation has recorded a related allowance for credit losses in the amount of $550,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement

59

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(included in other noninterest income in the consolidated statements of income) totaled $265,000 for the nine months ended September 30, 2021 and $107,000 for the nine months ended September 30, 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the nine months ended September 30, 2021 with a provision for losses of $29,000 in the nine months ended September 30, 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

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. Covenant had also been a participating SBA lender. Pursuant to the Covenant 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 loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. 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 loans originated by Covenant was $11,458,000 at September 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $485,000 at September 30, 2021 and $730,000 at December 31, 2020. In the nine months ended September 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $208,000 representing amounts realized on SBA claims in excess of prior estimates.

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)	September 30,		December 31,
	2021		2020		2019		2018		2017		2016
Commercial:
Commercial loans secured by real estate	$	553,389	$	531,810	$	301,227	$	162,611	$	159,266	$	150,468
Commercial and industrial		152,244		159,577		126,374		91,856		88,276		83,854
Paycheck Protection Program - 1st Draw		5,747		132,269		0		0		0		0
Paycheck Protection Program - 2nd Draw		56,981		0		0		0		0		0
Political subdivisions		73,503		53,221		53,570		53,263		59,287		38,068
Commercial construction and land		53,267		42,874		33,555		11,962		14,527		14,287
Loans secured by farmland		10,812		11,736		12,251		7,146		7,255		7,294
Multi-family (5 or more) residential		52,962		55,811		31,070		7,180		7,713		7,896
Agricultural loans		3,092		3,164		4,319		5,659		6,178		3,998
Other commercial loans		17,312		17,289		16,535		13,950		10,986		11,475
Total commercial		979,309		1,007,751		578,901		353,627		353,488		317,340
Residential mortgage:
Residential mortgage loans - first liens		494,376		532,947		510,641		372,339	$	359,987		334,102
Residential mortgage loans - junior liens		24,303		27,311		27,503		25,450		25,325		23,706
Home equity lines of credit		38,465		39,301		33,638		34,319		35,758		38,057
1-4 Family residential construction		21,719		20,613		14,798		24,698		26,216		24,908
Total residential mortgage		578,863		620,172		586,580		456,806		447,286		420,773
Consumer		17,536		16,286		16,741		17,130		14,939		13,722
Total		1,575,708		1,644,209		1,182,222		827,563		815,713		751,835
Less: allowance for loan losses		(12,700)		(11,385)		(9,836)		(9,309)		(8,856)		(8,473)
Loans, net	$	1,563,008	$	1,632,824	$	1,172,386	$	818,254	$	806,857	$	743,362

60

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

The allowance for loan losses was $12,700,000 at September 30, 2021, up from $11,385,000 at December 31, 2020. Table IX shows total specific allowances on impaired loans decreased $42,000 to $883,000 at September 30, 2021 from $925,000 at December 31, 2020. Table IX also shows the increase in the allowance in 2021 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $6,689,000 at September 30, 2021 from $5,545,000 at December 31, 2020.

Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,324,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,482,000 at September 30, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.  

Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $300,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $354,000 at September 30, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Table X shows the allowance for loan losses totaled 0.81% of gross loans outstanding at September 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at September 30, 2021, in line with ratios from the previous years.

The provision (credit) for loan losses by segment in the three-month and nine-month periods ended September 30, 2021 and 2020 are as follows:

	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2021		2020		2021		2020
Commercial	$	1,503	$	1,990	$	2,297	$	3,184
Residential mortgage		3		(66)		112		67
Consumer		24		17		38		42
Unallocated		0		0		86		0
Total	$	1,530	$	1,941	$	2,533	$	3,293

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The provision (credit) for loan losses is further detailed as follows:

Commercial segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2021		2020		2021		2020
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	596	$	908	$	1,154	$	1,949
Increase in collectively determined portion of the allowance attributable to:
Changes in loan volume		568		194		1,061		84
Changes in historical loss experience factors		339		848		82		841
Changes in qualitative factors		0		40		0		310
Total provision for loan losses - Commercial segment	$	1,503	$	1,990	$	2,297	$	3,184

Residential mortgage segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2021		2020		2021		2020
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(2)	$	(21)	$	(17)	$	(38)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		11		(87)		222		(227)
Changes in historical loss experience factors		(6)		0		(48)		(82)
Changes in qualitative factors		0		42		(45)		414
Total provision (credit) for loan losses - Residential mortgage segment	$	3	$	(66)	$	112	$	67

Consumer segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2021		2020		2021		2020
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	17	$	22	$	39	$	65
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		9		12		13		(10)
Changes in historical loss experience factors		(7)		(14)		(15)		(14)
Changes in qualitative factors		5		(3)		1		1
Total provision for loan losses - Consumer segment	$	24	$	17	$	38	$	42

Total - All segments	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2021		2020		2021		2020
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	611	$	909	$	1,176	$	1,976
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		588		119		1,296		(153)
Changes in historical loss experience factors		326		834		19		745
Changes in qualitative factors		5		79		(44)		725
Sub-total		1,530		1,941		2,447		3,293
Unallocated		0		0		86		0
Total provision for loan losses - All segments	$	1,530	$	1,941	$	2,533	$	3,293

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results 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 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).

The provision for loan losses in the third quarter 2021 and 2020, and in the nine-month periods ended September 30, 2021 and 2020, included the impact of a large charge-off in the third quarter of each year.

In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. There was a specific allowance for loan losses of $583,000 on this commercial loan at June 30, 2021, with no specific allowance at December 31, 2020. At September 30, 2021, there was no specific allowance on the loan, and the Corporation’s recorded investment in the loan of $2,302,000 is reported as non-accrual and impaired.

In the third quarter 2020, the Corporation recorded a charge-off of $2,219,000 on a commercial loan for which an allowance of $1,193,000 had been recorded at June 30, 2020 but for which there was no specific allowance at December 31, 2019. The Corporation had no recorded investment in this loan at September 30, 2021 and December 31, 2020.

In the three months ended September 30, 2021, net charge-offs were $1,205,000, including recoveries of $15,000 and charge-offs of $1,220,000. For the nine months ended September 30, 2021, net charge-offs were $1,218,000 including recoveries of $60,000 and charge-offs of $1,278,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.08% in the nine months ended September 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.48% at September 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.05% at September 30, 2021, down from 1.10% at December 31, 2020. Table X presents data at the end of each of the years ended December 31, 2016 through 2020. Table X shows that total nonperforming loans as a percentage of loans of 1.48% at September 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the September 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.05% was lower than the corresponding ratio from 2016 through 2018.

Total impaired loans of $18,014,000 at September 30, 2021 are up $196,000 from the corresponding amount at December 31, 2020 of $17,818,000. Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020. Table X shows that the total balance of impaired loans at September 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020. Similarly, total nonperforming assets of $24,639,000 at September 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition.

As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,139,000 at September 30, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,775,000 at September 30, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable through the first nine months of 2021, in evaluating the allowance for loan losses at September 30, 2021.

Over the period 2016-2020 and the first nine months of 2021, 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 loans, and may significantly impact 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, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 2021. 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 losses.

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars In Thousands)	Nine Months Ended
	September 30,			September 30,			Years Ended December 31,
	2021			2020			2020			2019			2018			2017			2016
Balance, beginning of year	$	11,385		$	9,836		$	9,836		$	9,309		$	8,856		$	8,473		$	7,889
Charge-offs:
Commercial		(1,194)			(2,343)			(2,343)			(6)			(165)			(132)			(597)
Residential mortgage		(11)			0			0			(190)			(158)			(197)			(73)
Consumer		(73)			(100)			(122)			(183)			(174)			(150)			(87)
Total charge-offs		(1,278)			(2,443)			(2,465)			(379)			(497)			(479)			(757)
Recoveries:
Commercial		22			0			16			6			317			4			35
Residential mortgage		5			32			44			12			8			19			3
Consumer		33			35			41			39			41			38			82
Total recoveries		60			67			101			57			366			61			120
Net charge-offs		(1,218)			(2,376)			(2,364)			(322)			(131)			(418)			(637)
Provision for loan losses		2,533			3,293			3,913			849			584			801			1,221
Balance, end of period	$	12,700		$	10,753		$	11,385		$	9,836		$	9,309		$	8,856		$	8,473
Net charge-offs as a % of average loans		0.08	%		0.17	%		0.16	%		0.03	%		0.02	%		0.05	%		0.09	%

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)	September 30,		As of December 31,
	2021		2020		2019		2018		2017		2016
ASC 310 - Impaired loans	$	883	$	925	$	1,051	$	1,605	$	1,279	$	674
ASC 450 - Collective segments:
Commercial		6,689		5,545		3,913		3,102		3,078		3,373
Residential mortgage		4,220		4,091		4,006		3,870		3,841		3,890
Consumer		237		239		281		233		159		138
Unallocated		671		585		585		499		499		398
Total Allowance	$	12,700	$	11,385	$	9,836	$	9,309	$	8,856	$	8,473

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(Dollars In Thousands)	September 30,			As of December 31,
	2021			2020			2019			2018			2017			2016
Impaired loans with a valuation allowance	$	7,225		$	8,082		$	3,375		$	4,851		$	4,100		$	3,372
Impaired loans without a valuation allowance		4,165			2,895			1,670			4,923			5,411			7,488
Purchased credit impaired loans		6,624			6,841			441			0			0			0
Total impaired loans	$	18,014		$	17,818		$	5,486		$	9,774		$	9,511		$	10,860
Total loans past due 30-89 days and still accruing	$	2,139		$	5,918		$	8,889		$	7,142		$	9,449		$	7,735
Nonperforming assets:
Purchased credit impaired loans	$	6,624		$	6,841		$	441		$	0		$	0		$	0
Other nonaccrual loans		14,717			14,575			8,777			13,113			13,404			8,736
Total nonaccrual loans		21,341			21,416			9,218			13,113			13,404			8,736
Total loans past due 90 days or more and still accruing		1,924			1,975			1,207			2,906			3,724			6,838
Total nonperforming loans		23,265			23,391			10,425			16,019			17,128			15,574
Foreclosed assets held for sale (real estate)		1,374			1,338			2,886			1,703			1,598			2,180
Total nonperforming assets	$	24,639		$	24,729		$	13,311		$	17,722		$	18,726		$	17,754
Loans subject to troubled debt restructurings (TDRs):
Performing	$	232		$	166		$	889		$	655		$	636		$	5,803
Nonperforming		5,591			7,285			1,737			2,884			3,027			2,874
Total TDRs	$	5,823		$	7,451		$	2,626		$	3,539		$	3,663		$	8,677
Total nonperforming loans as a % of loans		1.48	%		1.42	%		0.88	%		1.94	%		2.10	%		2.07	%
Total nonperforming assets as a % of assets		1.05	%		1.10	%		0.80	%		1.37	%		1.47	%		1.43	%
Allowance for loan losses as a % of total loans		0.81	%		0.69	%		0.83	%		1.12	%		1.09	%		1.13	%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)		1.05	%		1.05	%		0.93	%		1.12	%		1.09	%		1.13	%
Allowance for loan losses as a % of nonperforming loans		54.59	%		48.67	%		94.35	%		58.11	%		51.70	%		54.40	%
(a) Credit adjustment on purchased non-impaired loans at end of period	$	3,836		$	5,979		$	1,216		$	0		$	0		$	0
Allowance for loan losses		12,700			11,385			9,836			9,309			8,856			8,473
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)	$	16,536		$	17,364		$	11,052		$	9,309		$	8,856		$	8,473
Total loans receivable	$	1,575,708		$	1,644,209		$	1,182,222		$	827,563		$	815,713		$	751,835
Credit adjustment on purchased non-impaired loans at end of period		3,836			5,979			1,216			0			0			0
Total (2)	$	1,579,544		$	1,650,188		$	1,183,438		$	827,563		$	815,713		$	751,835
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)		1.05	%		1.05	%		0.93	%		1.12	%		1.09	%		1.13	%

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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 September 30, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $163,565,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical 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 $14,936,000 at September 30, 2021.

The Corporation’s outstanding, available, and total credit facilities at September 30, 2021 and December 31, 2020 are as follows:

	Outstanding				Available				Total Credit
(In Thousands)	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2021		2020		2021		2020		2021		2020
Federal Home Loan Bank of Pittsburgh	$	43,835	$	72,222	$	709,012	$	698,977	$	752,847	$	771,199
Federal Reserve Bank Discount Window		0		0		14,482		14,654		14,482		14,654
Other correspondent banks		0		0		45,000		45,000		45,000		45,000
Total credit facilities	$	43,835	$	72,222	$	768,494	$	758,631	$	812,329	$	830,853

At September 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $38,251,000 and letters of credit totaling $5,584,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additional information regarding borrowed funds is included in Note 9 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. At September 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $214,072,000.

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 September 30, 2021; 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 September 30, 2021 and December 31, 2020 are presented below. Management believes, as of September 30, 2021, 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 September 30, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)											Minimum To Be
								Minimum To Maintain			Well
					Minimum			Capital Conservation			Capitalized Under			Minimum To Meet
					Capital			Buffer at Reporting			Prompt Corrective			the Corporation's
	Actual				Requirement			Date			Action Provisions			Policy Thresholds
	Amount		Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount		Ratio
September 30, 2021:
Total capital to risk-weighted assets:
Consolidated	$	283,197	18.57	%	N/A	N/A		N/A	N/A		N/A	N/A		$	160,164	≥10.5	%
C&N Bank		248,651	16.35	%	121,688	≥8	%	159,716	≥10.5	%	152,110	≥10	%		159,716	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		236,959	15.53	%	N/A	N/A		N/A	N/A		N/A	N/A			129,657	≥8.5	%
C&N Bank		235,401	15.48	%	91,266	≥6	%	129,294	≥8.5	%	121,688	≥8	%		129,294	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		236,959	15.53	%	N/A	N/A		N/A	N/A		N/A	N/A			106,776	≥7	%
C&N Bank		235,401	15.48	%	68,450	≥4.5	%	106,477	≥7.0	%	98,872	≥6.5	%		106,477	≥7	%
Tier 1 capital to average assets:
Consolidated		236,959	10.34	%	N/A	N/A		N/A	N/A		N/A	N/A			183,266	≥8	%
C&N Bank		235,401	10.35	%	90,961	≥4	%	N/A	N/A		113,702	≥5	%		181,923	≥8	%
December 31, 2020:
Total capital to risk-weighted assets:
Consolidated	$	260,015	17.49	%	N/A	N/A		N/A	N/A		N/A	N/A		$	156,113	≥10.5	%
C&N Bank		236,943	15.98	%	118,602	≥8	%	155,665	≥10.5	%	148,252	≥10	%		155,665	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		231,577	15.58	%	N/A	N/A		N/A	N/A		N/A	N/A			126,377	≥8.5	%
C&N Bank		225,058	15.18	%	88,951	≥6	%	126,015	≥8.5	%	118,602	≥8	%		126,015	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		231,577	15.58	%	N/A	N/A		N/A	N/A		N/A	N/A			104,075	≥7	%
C&N Bank		225,058	15.18	%	66,714	≥4.5	%	103,777	≥7.0	%	96,364	≥6.5	%		103,777	≥7	%
Tier 1 capital to average assets:
Consolidated		231,577	10.34	%	N/A	N/A		N/A	N/A		N/A	N/A			179,206	≥8	%
C&N Bank		225,058	10.12	%	88,959	≥4	%	N/A	N/A		111,199	≥5	%		177,919	≥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 third quarter 2021, 230,404 shares were repurchased for a total cost of $5,707,000, at an average price of $24.77 per share. Cumulatively through September 30, 2021, 292,100 shares have been repurchased for a total cost of $7,238,000, at an average price of $24.78 per share.

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.

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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 September 30, 2021, 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 September 30, 2021, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.35%.

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 Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $6,300,000 at September 30, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity.  If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at September 30, 2021.

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

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 March 5, 2021.

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 September 30, 2021, 292,100 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 third quarter 2021.

				Total Number of	Maximum
				Shares	Number of
				Purchased	Shares that May
				as Part of	Yet
				Publicly	be Purchased
	Total Number	Average		Announced	Under
	of Shares	Price Paid		Plans	the Plans or
Period	Purchased	per Share		or Programs	Programs
July 1 - 31, 2021	103,555	$	24.82	165,251	834,749
August 1 - 31, 2021	62,993	$	24.89	228,244	771,756
September 1 - 30, 2021	63,856	$	24.56	292,100	707,900

Item 3.       Defaults Upon Senior Securities

None

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 4.       Mine Safety Disclosures

Not applicable

Item 5.       Other Information

None

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6.       Exhibits

2.	Plan of acquisition, reorganization, arrangement, liquidation or succession:
2.1	Agreement and Plan of Merger dated September 27, 2018,  between the Corporation and Monument Bancorp, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018
2.2	Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019
3.	(i) Articles of Incorporation	Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009
3.	(ii) By-laws	Incorporated by reference to Exhibit 3.1(ii) of The Corporation’s Form S-4/A filed April 20, 2020
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.	Material contracts
10.1	Indemnification Agreement dated July 12, 2021 between the Corporation and Kate Shattuck	Filed herewith
10.2	Form of Subordinated Note Purchase Agreement	Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed May 19, 2021
10.3	Form of Registration Rights Agreement	Incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed May 19, 2021
10.4	Form of Senior Note Purchase Agreement	Incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed May 19, 2021
15.	Letter re: unaudited interim information	Not applicable
18.	Letter re: change in accounting principles	Not applicable
22.	Published report regarding matters submitted to vote of security holders	Not applicable
23.	Consents of experts and counsel	Not applicable

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

24.	Power of attorney	Not applicable
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
99.	Additional exhibits	Not applicable
100.	XBRL-related documents	Not applicable
101.	Interactive data file	Filed herewith
104.	Cover page interactive data file	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
November 8, 2021	By: /s/ J. Bradley Scovill
Date	President and Chief Executive Officer
November 8, 2021	By: /s/ Mark A. Hughes
Date	Treasurer and Chief Financial Officer

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