CITIZENS & NORTHERN CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following: ● changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates ● changes in general economic conditions ● the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses ● the effect of the novel coronavirus (COVID-19) and related events ● legislative or regulatory changes ● downturn in demand for loan, deposit and other financial services in the Corporation’s market area ● increased competition from other banks and non-bank providers of financial services ● technological changes and increased technology-related costs ● information security breach or other technology difficulties or failures ● changes in accounting principles, or the application of generally accepted accounting principles ● failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions ​ These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. EARNINGS OVERVIEW Second Quarter 2022 as Compared to Second Quarter 2021 Second quarter 2022 net income was $7,489,000, or $0.48 per diluted share. In comparison, second quarter 2021 net income was $7,060,000, or $0.44 per diluted share. Significant variances were as follows: ● Second quarter 2022 net interest income of $19,625,000 was $944,000 higher than the second quarter 2021 total. The net interest rate spread increased 0.10%, as the average yield on earning assets increased 0.07% to 3.92%, while the average rate on interest-bearing liabilities decreased 0.03% to 0.45%. The net interest margin was 3.62% in the second quarter 2022, up from 3.52% in the second quarter 2021. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $984,000 in the second quarter 2022 as compared to the second quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $205.2 million. Total interest and fees from loans originated under the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) were $206,000 in the second quarter 2022, a decrease of $1,043,000 from the second quarter 2021 total of $1,249,000. Total interest and fees from loans excluding PPP was $18,309,000 in the second quarter 2022, an increase of $965,000 from the second quarter 2021 total of $17,344,000. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $497,000 in the second quarter 2022 as compared to a net positive impact of $713,000 in the second quarter 2021. Average outstanding loans decreased $18.2 million, as average PPP loans decreased $116.2 million. Average loans, excluding PPP loans, were up $98.0 million in the second quarter 2022 over the second quarter 2021, an increase of 6.6%. Average total deposits increased $44.0 million (2.3%). 38 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ● The provision for loan losses was $308,000 in the second quarter 2022 as compared to $744,000 in the second quarter 2021. The second quarter 2022 provision included a net recovery of $271,000 related to specific loans (net decrease in specific allowances on loans of $303,000 offset by net charge-offs of $32,000), an increase of $246,000 in the collectively determined portion of the allowance and an increase of $333,000 in the unallocated portion of the allowance. The second quarter 2021 provision included a net charge of $383,000 related to specific loans (net increase in specific allowances on loans of $353,000 and net charge-offs of $30,000), an increase of $367,000 in the collectively determined portion of the allowance and a $6,000 decrease in the unallocated portion. ● Noninterest income for the second quarter 2022 was up $527,000 from the second quarter 2021 total. Significant variances included the following: o Other noninterest income of $1,456,000 increased $756,000 from the second quarter 2021 total including an increase in income from tax credits of $795,000. The increase in income from tax credits resulted from a timing difference related to PA Educational Improvement Tax Credit Program donations. In the second quarter 2022, the Corporation made PA Educational Improvement Tax Credit Program donations totaling $800,000, comparable to the amount of such donations made in the first quarter 2021 and for which the associated income from tax credits was recognized in the first quarter 2021. o Service charges on deposit accounts of $1,322,000 increased $249,000 from the second quarter 2021 total, as the volume of consumer and business overdraft and other activity increased. o Loan Servicing fees, net of $358,000 increased $212,000 from the second quarter 2021.The fair value of servicing rights increased $150,000 in the second quarter 2022 as compared to a decrease of $39,000 in the second quarter 2021 mainly due to changes in assumptions related to prepayments of mortgage loans. o Net gains from sales of loans of $220,000 decreased $705,000 from the second quarter 2021, reflecting a reduction in volume of residential mortgage loans sold. ● Noninterest expense increased $1,640,000 in the second quarter 2022 over the second quarter 2021 amount. Significant variances included the following: o Salaries and employee benefits of $10,265,000 increased $766,000 from the second quarter 2021 total, including an increase in base salaries expense of $774,000. In addition to the impact of merit-based salary increases, the number of employees increased, reflecting expansion of the Southcentral PA market with the opening of an office in Lancaster as well as additions to staffing for information technology (IT), human resources and other functions. In total, the number of full-time equivalent employees (FTEs) increased by 17 (4.4%) to 405 in the second quarter 2022 as compared to the second quarter 2021. Also within this category, there was an increase in health care expense of $269,000 due to higher claims on the Corporation’s partially self-insured plan. Decreases include a reduction in estimated total cash and stock-based incentive compensation expense of $234,000 and severance expense of $233,000 in 2021 with no comparable amount in 2022. o Other noninterest expense of $2,431,000 increased $680,000 from the second quarter 2021 total. Within this category, significant variances included the following: ● Donations expense totaled $848,000 in the second quarter 2022, up $838,000 from the second quarter 2021 total, including donations relating to the PA Educational Improvement Tax Credit Program as described above. ● Reductions in the allowance for SBA claim adjustments attributable to more favorable claim results than previously estimated resulted in a reduction in expense of $48,000 in the second quarter 2022 as compared to a reduction in expense of $163,000 in the second quarter 2021. 39 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ● There was a net reduction in other operational losses of $272,000 in the second quarter 2022, as compared to expense of $26,000 in the second quarter 2021. In the second quarter 2022, there was a reversal of previously accrued amounts of $301,000 from abatement of Trust Department tax compliance penalties that were previously accrued or paid. ​ o Data processing and telecommunications of $1,720,000 increased $233,000 from the second quarter 2021 total, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. ● The income tax provision of $1,618,000, or 17.8% of pre-tax income for the second quarter 2022 decreased $162,000 from $1,780,000, or 20.1% of pre-tax income for the second quarter 2021. City and state tax provisions totaled $107,000 in the second quarter 2022, down $207,000 from the second quarter 2021 amount as the second quarter 2021 total included catch-up adjustments from the previous year and estimates totaling approximately $100,000 that were reduced in the third quarter of 2021. Further, the lower effective tax rate for the second quarter 2022 includes the benefit of the $301,000 reversal of Trust Department tax compliance penalties being non-taxable. ​ Six Months Ended June 30, 2022 as Compared to Six Months Ended June 30, 2021 Net income for the six-month period ended June 30, 2022 was $14,384,000, or $0.92 per diluted share, while net income for the first six months of 2021 was $15,847,000 or $0.99 per diluted share. Significant variances were as follows: ● For the six-month period ended June 30, 2022, net interest income of $39,957,000 was $1,193,000 higher than in the same period in 2021. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $1,944,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $202.3 million. Total interest and fees on loans decreased $1,000,000 in 2022 as compared to 2021. Interest and fees on loans included $1,412,000 in 2022 and $18,000 in 2021 from repayments received on purchased credit impaired loans in excess of previous carrying amounts. Total interest and fees from loans originated under the SBA PPP were $781,000 in 2022, a decrease of $2,466,000 from the 2021 total of $3,247,000. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $947,000 in 2022 as compared to a net positive impact of $1,665,000 in 2021. Average outstanding loans decreased $52.3 million, including a reduction in average PPP loans of $118.0 million. Average loans, excluding PPP loans, were up $65.7 million (4.4%) in the first six months of 2022 as compared to the first six months of 2021. Average total deposits increased $72.1 million (3.8%) in comparing the first six months of 2022 over the total for the first six months of 2021. ● For the first six months of 2022, the provision for loan losses was $1,199,000, an increase in expense of $196,000 as compared to $1,003,000 recorded in the first six months of 2021. The provision for the first six months of 2022 includes a net recovery of $124,000 related to specific loans (net decrease in specific allowances on loans of $313,000 offset by net charge-offs of $189,000), an increase of $994,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first six months of 2021 includes a net charge of $565,000 related to specific loans (increase in specific allowances on loans of $552,000 and net charge-offs of $13,000), an increase of $352,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion. ● Noninterest income of $12,652,000 for the first six months of 2022 decreased $432,000 from the total for the first six months of 2021. Significant variances included the following: o Net gains from sales of loans of $602,000 decreased $1,387,000 reflecting a reduction in volume of residential mortgage loans sold. o Service charges on deposit accounts of $2,557,000 increased $469,000 as the volume of consumer and business overdraft and other activity increased. o Brokerage and insurance revenue of $1,088,000 increased $256,000, due to commissions on higher transaction volumes. 40 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q o Loan Servicing fees, net of $568,000 increased $174,000, reflecting growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights increased $152,000 in 2022 as compared to an increase of $36,000 in 2021 mainly due to changes in assumptions related to prepayments of mortgage loans. ● Noninterest expense of $33,925,000 for the first six months of 2022 increased $2,817,000 from the total for the first six months of 2021. Significant variances included the following: o Salaries and employee benefits of $20,872,000 increased $2,478,000, including an increase in base salaries expense of $1.8 million reflecting merit-based salary increases and an increase in number of personnel related to expansion as mentioned above. Additional increases include an increase in health care expense of $445,000 due to higher claims on the Corporation’s partially self-insured plan and $267,000 due to a lower portion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated in 2021. Decreases include a reduction in estimated cash and stock-based incentive compensation expense of $113,000 and severance expense of $233,000 in 2021 with no comparable amount in 2022. o Data processing and telecommunications of $3,343,000 increased $476,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities. o Net occupancy and equipment expense of $2,719,000 increased $196,000, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA. o Other noninterest expense of $4,315,000 decreased $191,000. Within this category, significant variances included the following: ● There was a reduction in expense for other operational losses of $254,000 in 2022, down $403,000 from expense of $149,000 in 2021, including a reduction in expense in 2022 of $301,000 from reversal of previously accrued Trust Department tax compliance penalties. ● The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $290,000 in 2022 as compared to a reduction in expense of $163,000 in 2021. ● Travel and entertainment expenses totaled $185,000 in the first six months of 2022, an increase of $125,000 over 2021. ​ o Professional fees of $969,000 decreased $176,000, mainly due to decreases in recruiting services and PPP loan processing-related professional fees. ● The income tax provision of $3,101,000, or 17.7% of pre-tax income for the first six months ended June 30, 2022 decreased $789,000 from $3,890,000, or 19.7% of pre-tax income for the first six months ended June 30, 2021. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of a $201,000 reduction in city and state tax expense as well as the benefit of the $301,000 reduction in expense from the reversal of tax penalties being non-taxable. 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. 41 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE I – QUARTERLY FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands, ​ For the Three Months Ended : Except Per Share Data) ​ June 30, ​ March 31, ​ December 31, ​ September 30, ​ June 30, ​ March 31, (Unaudited) 2022 ​ 2022 2021 ​ 2021 2021 2021 Interest income ​ $ 21,309 ​ $ 21,773 ​ $ 21,246 ​ $ 21,073 ​ $ 20,428 ​ $ 21,754 Interest expense ​ 1,684 ​ 1,441 ​ 1,530 ​ 1,614 ​ 1,747 ​ 1,671 Net interest income ​ 19,625 ​ 20,332 ​ 19,716 ​ 19,459 ​ 18,681 ​ 20,083 Provision for loan losses ​ 308 ​ 891 ​ 1,128 ​ 1,530 ​ 744 ​ 259 Net interest income after provision for loan losses ​ 19,317 ​ 19,441 ​ 18,588 ​ 17,929 ​ 17,937 ​ 19,824 Noninterest income ​ 6,829 ​ 5,823 ​ 6,415 ​ 6,382 ​ 6,302 ​ 6,782 Noninterest expense ​ 17,039 ​ 16,886 ​ 16,018 ​ 15,346 ​ 15,399 ​ 15,709 Income before income tax provision ​ 9,107 ​ 8,378 ​ 8,985 ​ 8,965 ​ 8,840 ​ 10,897 Income tax provision ​ 1,618 ​ 1,483 ​ 1,677 ​ 1,566 ​ 1,780 ​ 2,110 Net income ​ $ 7,489 ​ $ 6,895 ​ $ 7,308 ​ $ 7,399 ​ $ 7,060 ​ $ 8,787 Net income attributable to common shares ​ $ 7,419 ​ $ 6,835 ​ $ 7,256 ​ $ 7,336 ​ $ 6,999 ​ $ 8,722 Basic earnings per common share ​ $ 0.48 ​ $ 0.44 ​ $ 0.46 ​ $ 0.47 ​ $ 0.44 ​ $ 0.55 Diluted earnings per common share ​ $ 0.48 ​ $ 0.44 ​ $ 0.46 ​ $ 0.47 ​ $ 0.44 ​ $ 0.55 ​ CRITICAL ACCOUNTING POLICIES The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. Allowance for Loan 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 6 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. Fair Value of Available-For-Sale Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. 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 six-month periods ended June 30, 2022 and 2021. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables. ​ 42 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Three-Month Periods Ended June 30, 2022 and 2021 For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was $19,937,000 in 2022, which was $988,000 (5.2%) higher than in 2021. Interest income in the second quarter was $21,621,000 which was $925,000 higher in 2022 as compared to 2021, while interest expense was lower by $63,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.62% in 2022 as compared to 3.52% in 2021, 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 3.47% in 2022 from 3.37% in 2021. The average yield on earning assets of 3.92% was 0.07% higher in 2022 as compared to 2021, and the average rate on interest-bearing liabilities of 0.45% in 2022 was 0.03% lower. Income from purchase accounting-related adjustments in the second quarter 2022 had a positive effect on net interest income of $497,000, including an increase in income on loans of $398,000 and net reductions in interest expense on time deposits and borrowed funds totaling $99,000. The positive impact to the second quarter 2022 net interest margin from purchase accounting adjustments was 0.09%. In comparison, the positive impact of purchase accounting adjustments to the second quarter 2021 net interest margin was $713,000, or 0.13%. INTEREST INCOME AND EARNING ASSETS Interest income totaled $21,621,000 in 2022, an increase of $925,000 from 2021. Interest income from available-for-sale debt securities increased $984,000 in 2022 from 2021. The average balance of available-for-sale debt securities (at amortized cost) increased to $571,577,000 in 2022 from $366,329,000 in 2021. The increase in available-for-sale debt securities reflects the investment of funds that would otherwise have represented excess cash, particularly throughout most of 2021 and the first quarter 2022. The average yield on available-for-sale debt securities was 2.10% for 2022, down from 2.20% in 2021. Income from interest-bearing due from banks totaled $92,000 in 2022, an increase of $18,000 from 2021. The average yield on interest-bearing due from banks was 0.78% in 2022 and 0.16% in 2021. The average balance of interest-bearing due from banks was $47,428,000 in the second quarter 2022 as compared to $182,586,000 in the second quarter 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve. Interest and fees from loans receivable decreased $78,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $206,000 in the second quarter 2022, a decrease of $1,043,000 from the second quarter 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. Average outstanding loans receivable decreased $18,237,000 (1.1%) to $1,588,884,000 in 2022 from $1,607,121,000 in 2021, including a reduction in average PPP loans of $116,208,000. Average total loans outstanding, excluding PPP loans, increased $97,971,000 (6.6%). The average yield on loans in the second quarter 2022 was 4.67%, up from 4.64% in the second quarter 2021. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES For the three-month periods, interest expense decreased $63,000 to $1,684,000 in 2022 from $1,747,000 in 2021. Interest expense on deposits decreased $87,000, as the average rate on interest-bearing deposits decreased to 0.32% in 2022 from 0.35% in 2021. The decrease in average rate on deposits includes a decrease of 0.14% on time deposits and increases of 0.05% on interest checking accounts and 0.03% on money market accounts. Average total deposits increased $43,953,000 (2.3%) to $1,962,991,000 in the second quarter 2022 from $1,919,038,000 in the second quarter 2021. Average time deposits decreased $67,020,000, while the average total balance of other categories of noninterest-bearing demand and other deposits increased $110,973,000, or 7.0%. The increase in average deposits includes the impact of PPP-related activity and funding received over the last three quarters of 2020 and throughout 2021 from other government stimulus programs as well as growth in commercial deposits from new business. 43 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Interest expense on short-term borrowings in the second quarter 2022 was $122,000 as compared to $7,000 in 2021. The average balance of short-term borrowings increased to $36,848,000 in 2022 from $6,528,000 in 2021 reflecting an increase in overnight borrowings to provide temporary funding to support significant loan growth in the second quarter 2022. The average rate on short-term borrowings was 1.33% in 2022, up from 0.43% in 2021, consistent with recent increases in Fed Funds and other short-term interest rates. Interest expense on long-term borrowings (FHLB advances) decreased $54,000 to $55,000 in 2022 from $109,000 in 2021. The average balance of long-term borrowings was $19,516,000 in 2022, down from an average balance of $46,788,000 in 2021. 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 1.13% in 2022 compared to 0.93% in 2021. Interest expense on senior notes issued in May 2021 totaled $120,000 in the second quarter 2022 as compared to $57,000 in 2021. The average balance of the senior notes increased to $14,725,000 in 2022 from $6,930,000 in 2021. The average rate on senior notes was 3.27% in 2022 compared to 3.30% in 2021. Interest expense on subordinated debt decreased $100,000 to $257,000 in 2022 from $357,000 in 2021. The average balance of subordinated debt decreased slightly to $26,476,000 in 2022 from $26,916,000 in 2021. The average rate on subordinated debt decreased to 3.89% in 2022 from 5.32% in 2021. In May 2021, the Corporation issued subordinated debt with a par value of $25.0 million with an effective interest rate of 3.74%. In the second quarter 2021, the Corporation redeemed subordinated debt with an aggregate par value of $8.0 million and an effective interest rate of 5.49%. In the second quarter 2022, the Corporation redeemed subordinated debt with an aggregate par value of $6.5 million and an effective interest rate of 6.50%, and also redeemed an agreement with a par value of $2.0 million and an effective interest rate of 5.60% More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements. Six-Month Periods Ended June 30, 2022 and 2021 For the six-month periods, fully taxable equivalent net interest income was $40,571,000 in 2022, which was $1,266,000 (3.2%) higher than in 2021. Interest income in 2022 was $43,696,000 which was $973,000 higher in 2022 as compared to 2021, while interest expense of $3,125,000 was lower by $293,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.74% in 2022 as compared to 3.75% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased slightly to 3.60% in 2022 from 3.61% in 2021. The average yield on earning assets of 4.02% was 0.06% lower in 2022 as compared to 2021, and the average rate on interest-bearing liabilities of 0.42% in 2022 was 0.05% lower. Income from purchase accounting-related adjustments in the six months ended June 30, 2022 had a positive effect on net interest income of $947,000, including an increase in income on loans of $703,000 and net reductions in interest expense on time deposits and borrowed funds totaling $244,000. The positive impact of purchase accounting-related adjustments to the net interest margin was 0.09% in the first six months of 2022. In comparison, the net positive impact of purchase accounting-related adjustments was $1,665,000, with a positive impact on the net interest margin of 0.16% in the first six months of 2021. INTEREST INCOME AND EARNING ASSETS Interest income totaled $43,696,000 in 2022, an increase of $973,000 from 2021. Interest income from available-for-sale debt securities increased $1,944,000 in 2022 from 2021. The average balance of available-for-sale debt securities (at amortized cost) increased to $553,208,000 in 2022 from $350,883,000 in 2021. The increase in available-for-sale debt securities reflects the investment of funds that would otherwise have represented excess cash throughout most of 2021 and the first quarter 2022. The average yield on available-for-sale debt securities was 2.14% for 2022, down from 2.26% in 2021. 44 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Income from interest-bearing due from banks totaled $159,000 in 2022, an increase of $35,000 from 2021. The average yield on interest-bearing due from banks was 0.49% in 2022 and 0.18% in 2021. The average balance of interest-bearing due from banks was $65,670,000 in 2022 as compared to $137,851,000 in 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve. Interest and fees from loans receivable decreased $1,000,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $781,000 in 2022, a decrease of $2,466,000 from 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In 2022, total interest and fees on loans included $1,412,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts as compared to income of $18,000 in 2021. Average outstanding loans receivable decreased $52,292,000 (3.2%) to $1,568,486,000 in 2022 from $1,620,778,000 in 2021, including a reduction in average PPP loans of $117,952,000. Average total loans outstanding, excluding PPP loans, increased $65,660,000 (4.4%). The average yield on loans in 2022 was 4.84%, up from 4.81% in 2021. The average yield on loans included the positive impact of the income on PCI loans in 2022 and the comparatively high yield on PPP loans. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES For the six-month periods, interest expense decreased $293,000 to $3,125,000 in 2022 from $3,418,000 in 2021. Interest expense on deposits decreased $455,000, as the average rate on interest-bearing deposits decreased to 0.29% in 2022 from 0.37% in 2021. The decrease in average rates on deposits included a decrease of 0.16% on time deposits. Average total deposits increased $72,104,000 (3.8%) to $1,947,422,000 in 2022 from $1,875,318,000 in 2021. Average time deposits decreased $80,013,000, while the average total balance of other categories of deposits increased $152,717,000, or 10.0%. The increase in average deposits includes the impact of PPP-related activity and funding received over the last three quarters of 2020 and throughout 2021 from other government stimulus programs as well as growth in commercial deposits from new business. Interest expense on short-term borrowings in 2022 was $123,000 as compared to $22,000 in 2021. The average balance of short-term borrowings increased to $19,394,000 in 2022 from $10,425,000 in 2021. The average rate on short-term borrowings was 1.28% in 2022 compared to 0.43% in 2021. Interest expense on long-term borrowings (FHLB advances) decreased $139,000 to $104,000 in 2022 from $243,000 in 2021. The average balance of long-term borrowings was $22,791,000 in 2022, down from an average balance of $49,801,000 in 2021. 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 0.92% in 2022 compared to 0.98% in 2021. Interest expense on senior notes issued in May 2021 totaled $238,000 in 2022 as compared to $57,000 in 2021. The average balance of the senior notes increased to $14,717,000 in 2022 from $3,484,000 in 2021. The average rate on senior notes was 3.26% in 2022 compared to 3.30% in 2021. Interest expense on subordinated debt increased $19,000 to $620,000 in 2022 from $601,000 in 2021. The average balance of subordinated debt increased to $29,694,000 in 2022 from $21,758,000 in 2021. The average rate on subordinated debt decreased to 4.21% in 2022 from 5.57% in 2021 including the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in the second quarter 2021 and $8,500,000 in the second quarter 2022. ​ 45 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ June 30, ​ Increase/ . ​ June 30, ​ Increase/ (In Thousands) 2022 2021 (Decrease) ​ 2022 2021 (Decrease) INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 92 ​ $ 74 ​ $ 18 ​ ​ $ 159 ​ $ 124 ​ $ 35 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 2,036 ​ 1,187 ​ 849 ​ ​ 4,005 ​ 2,300 ​ 1,705 Tax-exempt ​ 959 ​ 824 ​ 135 ​ ​ 1,864 ​ 1,625 ​ 239 Total available-for-sale debt securities ​ 2,995 ​ 2,011 ​ 984 ​ ​ 5,869 ​ 3,925 ​ 1,944 Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 17,721 ​ 16,826 ​ 895 ​ ​ 35,695 ​ 34,319 ​ 1,376 Paycheck Protection Program - 1st Draw ​ ​ 11 ​ ​ 859 ​ ​ (848) ​ ​ ​ 49 ​ ​ 2,671 ​ ​ (2,622) Paycheck Protection Program - 2nd Draw ​ ​ 195 ​ ​ 390 ​ ​ (195) ​ ​ ​ 732 ​ ​ 576 ​ ​ 156 Tax-exempt ​ 588 ​ 518 ​ 70 ​ ​ 1,161 ​ 1,071 ​ 90 Total loans receivable ​ 18,515 ​ 18,593 ​ (78) ​ ​ 37,637 ​ 38,637 ​ (1,000) Other earning assets ​ 19 ​ 18 ​ 1 ​ ​ 31 ​ 37 ​ (6) Total Interest Income ​ 21,621 ​ 20,696 ​ 925 ​ ​ 43,696 ​ 42,723 ​ 973 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 308 ​ 235 ​ 73 ​ ​ 502 ​ 456 ​ 46 Money market ​ 369 ​ 320 ​ 49 ​ ​ 631 ​ 626 ​ 5 Savings ​ 64 ​ 57 ​ 7 ​ ​ 125 ​ 112 ​ 13 Time deposits ​ 389 ​ 605 ​ (216) ​ ​ 782 ​ 1,301 ​ (519) Total interest-bearing deposits ​ 1,130 ​ 1,217 ​ (87) ​ ​ 2,040 ​ 2,495 ​ (455) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ 122 ​ 7 ​ 115 ​ ​ 123 ​ 22 ​ 101 Long-term - FHLB advances ​ 55 ​ 109 ​ (54) ​ ​ 104 ​ 243 ​ (139) Senior notes, net ​ ​ 120 ​ ​ 57 ​ ​ 63 ​ ​ ​ 238 ​ ​ 57 ​ ​ 181 Subordinated debt, net ​ 257 ​ 357 ​ (100) ​ ​ 620 ​ 601 ​ 19 Total borrowed funds ​ 554 ​ 530 ​ 24 ​ ​ 1,085 ​ 923 ​ 162 Total Interest Expense ​ 1,684 ​ 1,747 ​ (63) ​ ​ 3,125 ​ 3,418 ​ (293) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 19,937 ​ $ 18,949 ​ $ 988 ​ ​ $ 40,571 ​ $ 39,305 ​ $ 1,266 ​ Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ Three Months Ended ​ ​ ​ ​ ​ Six Months Ended ​ ​ ​ ​ ​ June 30, ​ Increase/ ​ ​ June 30, ​ Increase/ ​ ​ 2022 2021 (Decrease) ​ ​ 2022 2021 ​ (Decrease) Net Interest Income Under U.S. GAAP ​ $ 19,625 ​ $ 18,681 ​ $ 944 ​ ​ $ 39,957 ​ $ 38,764 ​ $ 1,193 Add: fully taxable-equivalent interest income adjustment from tax-exempt securities ​ ​ 191 ​ ​ 162 ​ ​ 29 ​ ​ ​ 374 ​ ​ 321 ​ ​ 53 Add: fully taxable-equivalent interest income adjustment from tax-exempt loans ​ ​ 121 ​ ​ 106 ​ ​ 15 ​ ​ ​ 240 ​ ​ 220 ​ ​ 20 Net Interest Income as adjusted to a fully taxable-equivalent basis ​ $ 19,937 ​ $ 18,949 ​ $ 988 ​ ​ $ 40,571 ​ $ 39,305 ​ $ 1,266 46 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Table III - Analysis of Average Daily Balances and Rates ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months ​ ​ ​ Three Months ​ ​ ​ Six Months ​ ​ ​ Six Months ​ ​ ​ ​ Ended ​ Rate of ​ Ended ​ Rate of ​ Ended ​ Rate of ​ Ended ​ Rate of ​ ​ 6/30/2022 ​ Return/ ​ 6/30/2021 ​ Return/ ​ 6/30/2022 ​ Return/ ​ 6/30/2021 ​ 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 ​ $ 47,428 0.78 % $ 182,586 0.16 % $ 65,670 0.49 % $ 137,851 0.18 % Available-for-sale debt securities, at amortized cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 419,824 1.95 % ​ 243,228 1.96 % ​ ​ 405,144 1.99 % ​ 230,551 2.01 % Tax-exempt ​ 151,753 2.53 % 123,101 2.68 % ​ 148,064 2.54 % 120,332 2.72 % Total available-for-sale debt securities ​ 571,577 2.10 % 366,329 2.20 % ​ 553,208 2.14 % 350,883 2.26 % Loans receivable: ​ ​ ​ ​ ​ ​ Taxable ​ 1,494,165 4.76 % 1,418,171 4.76 % ​ 1,469,894 4.90 % 1,423,417 4.86 % Paycheck Protection Program - 1st Draw ​ ​ 707 ​ 6.24 % ​ 53,639 ​ 6.42 % ​ ​ 877 ​ 11.27 % ​ 78,863 ​ 6.83 % Paycheck Protection Program - 2nd Draw ​ ​ 8,565 ​ 9.13 % ​ 71,841 ​ 2.18 % ​ ​ 13,157 ​ 11.22 % ​ 53,123 ​ 2.19 % Tax-exempt ​ 85,447 2.76 % 63,470 3.27 % ​ 84,558 2.77 % 65,375 3.30 % Total loans receivable ​ 1,588,884 4.67 % 1,607,121 4.64 % ​ 1,568,486 4.84 % 1,620,778 4.81 % Other earning assets ​ 2,321 3.28 % 2,467 2.93 % ​ 2,153 2.90 % 2,658 2.81 % Total Earning Assets ​ 2,210,210 3.92 % 2,158,503 3.85 % ​ 2,189,517 4.02 % 2,112,170 4.08 % Cash ​ 23,114 ​ 25,453 ​ ​ 21,915 ​ 24,629 ​ Unrealized (loss) gain on securities ​ (36,675) ​ 10,197 ​ ​ (19,686) ​ 11,536 ​ Allowance for loan losses ​ (14,509) ​ (11,992) ​ ​ (14,148) ​ (11,866) ​ Bank-owned life insurance ​ ​ 30,857 ​ ​ ​ ​ 30,301 ​ ​ ​ ​ ​ 30,789 ​ ​ ​ ​ 30,228 ​ ​ ​ Bank premises and equipment ​ 21,556 ​ 20,620 ​ ​ 21,301 ​ 20,982 ​ Intangible assets ​ 55,656 ​ 56,153 ​ ​ 55,710 ​ 56,220 ​ Other assets ​ 55,735 ​ 42,516 ​ ​ 50,373 ​ 43,566 ​ Total Assets ​ $ 2,345,944 ​ $ 2,331,751 ​ ​ $ 2,335,771 ​ $ 2,287,465 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ Interest checking ​ $ 431,997 0.29 % $ 387,942 0.24 % ​ $ 425,599 0.24 % $ 372,056 0.25 % Money market ​ 449,656 0.33 % 433,295 0.30 % ​ 453,260 0.28 % 420,141 0.30 % Savings ​ 255,578 0.10 % 227,426 0.10 % ​ 252,389 0.10 % 220,470 0.10 % Time deposits ​ 268,753 0.58 % 335,773 0.72 % ​ 273,055 0.58 % 353,068 0.74 % Total interest-bearing deposits ​ 1,405,984 0.32 % 1,384,436 0.35 % ​ 1,404,303 0.29 % 1,365,735 0.37 % Borrowed funds: ​ ​ ​ ​ ​ ​ Short-term ​ 36,848 1.33 % 6,528 0.43 % ​ 19,394 1.28 % 10,425 0.43 % Long-term - FHLB advances ​ 19,516 1.13 % 46,788 0.93 % ​ 22,791 0.92 % 49,801 0.98 % Senior notes, net ​ ​ 14,725 ​ 3.27 % ​ 6,930 ​ 3.30 % ​ ​ 14,717 ​ 3.26 % ​ 3,484 ​ 3.30 % Subordinated debt, net ​ 26,476 3.89 % 26,916 5.32 % ​ 29,694 4.21 % 21,758 5.57 % Total borrowed funds ​ 97,565 2.28 % 87,162 2.44 % ​ 86,596 2.53 % 85,468 2.18 % Total Interest-bearing Liabilities ​ 1,503,549 0.45 % 1,471,598 0.48 % ​ 1,490,899 0.42 % 1,451,203 0.47 % Demand deposits ​ 557,007 ​ 534,602 ​ ​ 543,119 ​ 509,583 ​ Other liabilities ​ 20,066 ​ 23,898 ​ ​ 22,045 ​ 25,903 ​ Total Liabilities ​ 2,080,622 ​ 2,030,098 ​ ​ 2,056,063 ​ 1,986,689 ​ Stockholders' equity, excluding accumulated other comprehensive (loss) income ​ 293,985 ​ 293,487 ​ ​ 294,985 ​ 291,550 ​ Accumulated other comprehensive (loss) income ​ (28,663) ​ 8,166 ​ ​ (15,277) ​ 9,226 ​ Total Stockholders' Equity ​ 265,322 ​ 301,653 ​ ​ 279,708 ​ 300,776 ​ Total Liabilities and Stockholders' Equity ​ $ 2,345,944 ​ $ 2,331,751 ​ ​ $ 2,335,771 ​ $ 2,287,465 ​ Interest Rate Spread ​ 3.47 % 3.37 % ​ 3.60 % 3.61 % Net Interest Income/Earning Assets ​ 3.62 % 3.52 % ​ 3.74 % 3.75 % ​ ​ ​ ​ ​ ​ ​ Total Deposits (Interest-bearing and Demand) ​ $ 1,962,991 ​ $ 1,919,038 ​ ​ $ 1,947,422 ​ $ 1,875,318 ​ (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. 47 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ Three Months Ended 6/30/22 vs. 6/30/21 . ​ Six Months Ended 6/30/22 vs. 6/30/21 ​ ​ Change in ​ Change in ​ Total ​ Change in ​ Change in ​ Total ​ Volume Rate Change ​ Volume Rate Change EARNING ASSETS ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ (86) ​ $ 104 ​ $ 18 ​ ​ $ (91) ​ $ 126 ​ $ 35 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 855 ​ (6) ​ 849 ​ ​ 1,726 ​ (21) ​ 1,705 Tax-exempt ​ 183 ​ (48) ​ 135 ​ ​ 355 ​ (116) ​ 239 Total available-for-sale debt securities ​ 1,038 ​ (54) ​ 984 ​ ​ 2,081 ​ (137) ​ 1,944 Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 923 ​ (28) ​ 895 ​ ​ 1,128 ​ 248 ​ 1,376 Paycheck Protection Program - 1st Draw ​ ​ (954) ​ ​ 106 ​ ​ (848) ​ ​ ​ (3,677) ​ ​ 1,055 ​ ​ (2,622) Paycheck Protection Program - 2nd Draw ​ ​ (581) ​ ​ 386 ​ ​ (195) ​ ​ ​ (709) ​ ​ 865 ​ ​ 156 Tax-exempt ​ 160 ​ (90) ​ 70 ​ ​ 281 ​ (191) ​ 90 Total loans receivable ​ (452) ​ 374 ​ (78) ​ ​ (2,977) ​ 1,977 ​ (1,000) Other earning assets ​ (2) ​ 3 ​ 1 ​ ​ (7) ​ 1 ​ (6) Total Interest Income ​ 498 ​ 427 ​ 925 ​ ​ (994) ​ 1,967 ​ 973 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 29 ​ 44 ​ 73 ​ ​ 64 ​ (18) ​ 46 Money market ​ 12 ​ 37 ​ 49 ​ ​ 47 ​ (42) ​ 5 Savings ​ 7 ​ 0 ​ 7 ​ ​ 16 ​ (3) ​ 13 Time deposits ​ (109) ​ (107) ​ (216) ​ ​ (262) ​ (257) ​ (519) Total interest-bearing deposits ​ (61) ​ (26) ​ (87) ​ ​ (135) ​ (320) ​ (455) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ 39 ​ 76 ​ 115 ​ ​ 30 ​ 71 ​ 101 Long-term - FHLB advances ​ (68) ​ 14 ​ (54) ​ ​ (124) ​ (15) ​ (139) Senior notes, net ​ ​ 64 ​ ​ (1) ​ ​ 63 ​ ​ ​ 182 ​ ​ (1) ​ ​ 181 Subordinated debt, net ​ (6) ​ (94) ​ (100) ​ ​ 187 ​ (168) ​ 19 Total borrowed funds ​ 29 ​ (5) ​ 24 ​ ​ 275 ​ (113) ​ 162 Total Interest Expense ​ (32) ​ (31) ​ (63) ​ ​ 140 ​ (433) ​ (293) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 530 ​ $ 458 ​ $ 988 ​ ​ $ (1,134) ​ $ 2,400 ​ $ 1,266 (1) Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 48 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q NONINTEREST INCOME TABLE V – COMPARISON OF NONINTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ ​ $ ​ % ​ 2022 ​ 2021 ​ Change ​ Change Trust revenue ​ $ 1,715 ​ $ 1,807 ​ $ (92) ​ (5.1) % Brokerage and insurance revenue ​ 566 ​ ​ 506 ​ ​ 60 ​ 11.9 % Service charges on deposit accounts ​ 1,322 ​ ​ 1,073 ​ ​ 249 ​ 23.2 % Interchange revenue from debit card transactions ​ 1,056 ​ ​ 998 ​ ​ 58 ​ 5.8 % Net gains from sales of loans ​ 220 ​ ​ 925 ​ ​ (705) ​ (76.2) % Loan servicing fees, net ​ 358 ​ ​ 146 ​ ​ 212 ​ 145.2 % Increase in cash surrender value of life insurance ​ 137 ​ ​ 145 ​ ​ (8) ​ (5.5) % Other noninterest income ​ 1,456 ​ ​ 700 ​ ​ 756 ​ 108.0 % Realized (losses) gains on available-for-sale debt securities, net ​ ​ (1) ​ ​ 2 ​ ​ (3) ​ (150.0) % Total noninterest income ​ $ 6,829 ​ $ 6,302 ​ $ 527 ​ 8.4 % ​ Total noninterest income increased $527,000 (8.4%) from the second quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ ​ $ ​ % ​ 2022 ​ 2021 ​ Change ​ Change Trust revenue ​ $ 3,501 ​ $ 3,433 ​ $ 68 ​ 2.0 % Brokerage and insurance revenue ​ 1,088 ​ ​ 832 ​ ​ 256 ​ 30.8 % Service charges on deposit accounts ​ 2,557 ​ ​ 2,088 ​ ​ 469 ​ 22.5 % Interchange revenue from debit card transactions ​ 2,019 ​ ​ 1,879 ​ ​ 140 ​ 7.5 % Net gains from sales of loans ​ 602 ​ ​ 1,989 ​ ​ (1,387) ​ (69.7) % Loan servicing fees, net ​ 568 ​ ​ 394 ​ ​ 174 ​ 44.2 % Increase in cash surrender value of life insurance ​ 272 ​ ​ 295 ​ ​ (23) ​ (7.8) % Other noninterest income ​ 2,044 ​ ​ 2,172 ​ ​ (128) ​ (5.9) % Realized gains on available-for-sale debt securities, net ​ ​ 1 ​ ​ 2 ​ ​ (1) ​ (50.0) % Total noninterest income ​ $ 12,652 ​ $ 13,084 ​ $ (432) ​ (3.3) % ​ Total noninterest income for the first six months of 2022 decreased $432,000 (3.3%) from the total for the first six months of 2021. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ 49 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q NONINTEREST EXPENSE TABLE VI - COMPARISON OF NONINTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ $ ​ % ​ 2022 2021 Change Change ​ Salaries and employee benefits $ 10,265 $ 9,499 $ 766 8.1 % Net occupancy and equipment expense ​ 1,308 ​ 1,219 ​ 89 7.3 % Data processing and telecommunications expense ​ 1,720 ​ 1,487 ​ 233 15.7 % Automated teller machine and interchange expense ​ 347 ​ 355 ​ (8) (2.3) % Pennsylvania shares tax ​ 488 ​ 490 ​ (2) (0.4) % Professional fees ​ 480 ​ 598 ​ (118) (19.7) % Other noninterest expense ​ ​ 2,431 ​ ​ 1,751 ​ ​ 680 ​ 38.8 % Total noninterest expense ​ $ 17,039 ​ $ 15,399 ​ $ 1,640 10.7 % ​ Total noninterest expense in the second quarter 2022 increased $1,640,000 (10.7%) from the second quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ $ ​ % ​ 2022 2021 Change Change ​ Salaries and employee benefits $ 20,872 $ 18,394 $ 2,478 13.5 % Net occupancy and equipment expense ​ 2,719 ​ 2,523 ​ 196 7.8 % Data processing and telecommunications expense ​ 3,343 ​ 2,867 ​ 476 16.6 % Automated teller machine and interchange expense ​ 731 ​ 692 ​ 39 5.6 % Pennsylvania shares tax ​ 976 ​ 981 ​ (5) (0.5) % Professional fees ​ 969 ​ 1,145 ​ (176) (15.4) % Other noninterest expense ​ ​ 4,315 ​ ​ 4,506 ​ ​ (191) ​ (4.2) % Total noninterest expense ​ $ 33,925 ​ $ 31,108 ​ $ 2,817 9.1 % Total noninterest expense for the first six months of 2022 increased $2,817,000 (9.1%) from the total for the first six months of 2021. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. INCOME TAXES The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first six months of 2022 was $3,101,000, which was $789,000 lower than the provision for the first six months of 2021. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first six months of 2022 compared to 19.7% in the first six months of 2021. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first six months of 2022 and 2021 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of a $201,000 reduction in city and state tax expense as well as the benefit of the $301,000 reduction in expense from the reversal of tax penalties being non-taxable. 50 Table of Contents 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 June 30, 2022 and December 31, 2021 represents the following temporary difference components: ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, December 31, (In Thousands) ​ 2022 ​ 2021 Deferred tax assets: ​ ​ Unrealized holding losses on securities ​ $ 9,650 ​ $ 0 Allowance for loan losses ​ ​ 3,184 ​ ​ 2,935 Purchase accounting adjustments on loans ​ 1,130 ​ 1,621 Deferred compensation ​ ​ 1,104 ​ ​ 965 Operating leases liability ​ 927 ​ 821 Net operating loss carryforward ​ ​ 719 ​ ​ 778 Accrued incentive compensation ​ ​ 223 ​ ​ 529 Other deferred tax assets ​ 1,631 ​ 1,766 Total deferred tax assets ​ 18,568 ​ 9,415 ​ ​ ​ Deferred tax liabilities: ​ ​ Unrealized holding gains on securities ​ 0 ​ 1,278 Defined benefit plans - ASC 835 ​ 80 ​ 57 Bank premises and equipment ​ 395 ​ 460 Core deposit intangibles ​ 677 ​ 725 Right-of-use assets from operating leases ​ 927 ​ 821 Other deferred tax liabilities ​ 158 ​ 187 Total deferred tax liabilities ​ 2,237 ​ 3,528 Deferred tax asset, net ​ $ 16,331 ​ $ 5,887 ​ 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 June 30, 2022 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 . SECURITIES Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall asset-sensitive interest rate risk exposure, while maintaining high credit quality. ​ 51 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The composition of the available-for-sale debt securities portfolio at June 30, 2022, December 31, 2021 and December 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ June 30, 2022 ​ December 31, 2021 December 31, 2020 ​ ​ ​ Amortized ​ Fair ​ Amortized ​ Fair Amortized ​ Fair ​ ​ Cost Value Cost Value ​ Cost Value ​ Obligations of the U.S. Treasury ​ $ 38,151 ​ $ 35,774 ​ $ 25,058 ​ $ 24,912 ​ $ 12,184 ​ $ 12,182 ​ Obligations of U.S. Government agencies ​ ​ 24,454 ​ ​ 22,785 ​ ​ 23,936 ​ ​ 24,091 ​ ​ 25,349 ​ ​ 26,344 ​ Bank holding company debt securities ​ ​ 28,942 ​ ​ 27,415 ​ ​ 18,000 ​ ​ 17,987 ​ ​ 0 ​ ​ 0 ​ Obligations of states and political subdivisions: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Tax-exempt ​ 152,063 ​ 139,400 ​ 143,427 ​ 148,028 ​ 116,427 ​ 122,401 ​ Taxable ​ 72,204 ​ 63,898 ​ 72,182 ​ 72,765 ​ 45,230 ​ 47,452 ​ Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies: ​ ​ ​ ​ ​ ​ ​ Residential pass-through securities ​ 114,367 ​ 106,043 ​ 98,048 ​ 98,181 ​ 36,853 ​ 38,176 ​ Residential collateralized mortgage obligations ​ 47,295 ​ 44,761 ​ 44,015 ​ 44,247 ​ 56,048 ​ 57,467 ​ Commercial mortgage-backed securities ​ 95,318 ​ 86,761 ​ 86,926 ​ 87,468 ​ 42,461 ​ 45,310 ​ Total Available-for-Sale Debt Securities ​ $ 572,794 ​ $ 526,837 ​ $ 511,592 ​ $ 517,679 ​ $ 334,552 ​ $ 349,332 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Aggregate Unrealized (Loss) Gain ​ ​ ​ ​ $ (45,957) ​ ​ ​ ​ $ 6,087 ​ ​ ​ ​ $ 14,780 ​ Aggregate Unrealized (Loss) Gain as a % of Amortized Cost ​ ​ ​ ​ ​ (8.0) % ​ ​ ​ ​ 1.2 % ​ ​ ​ ​ 4.4 % Market Yield on 5-Year U.S. Treasury Obligations (a) ​ ​ ​ ​ ​ 3.01 % ​ ​ ​ ​ 1.26 % ​ ​ ​ ​ 0.36 % ​ (a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates) The amortized cost of available-for-sale debt securities increased to $572,794,000 at June 30, 2022 from $511,592,000 at December 31, 2021 and $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020, 2021 and the first quarter 2022. As reflected in the table above, the fair value of available-for-sale securities as of June 30, 2022 was lower than the amortized cost basis by $45,957,000, or 8.0%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021 and $14,780,000 (4.4%) at December 31, 2020. The unrealized decrease in fair value of the portfolio in the first half of 2022 and in 2021 resulted from an increase in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 1.75% higher at June 30, 2022 in comparison to December 31, 2021, and 2.65% higher than at December 31, 2020. Management reviewed the Corporation’s holdings as of June 30, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk. ​ 52 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q 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 June 30, 2022, 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 2022. Table VII shows the composition of the loan portfolio at June 30, 2022 and at year-end from 2017 through 2021. The significant loan growth in 2019 and 2020 reflects the impact of acquisitions. Also, the Corporation has increased the proportion of residential mortgage loans sold into the secondary market, contributing to a reduction of $47,673,000 in residential mortgage loans outstanding at June 30, 2022 compared to December 31, 2020. At June 30, 2022, commercial loans represented approximately 64% of the portfolio while residential mortgage loans totaled 35% of the portfolio. At June 30, 2022, gross loans outstanding totaled $1,657,604,000, an increase of $92,755,000 from December 31, 2021, despite a reduction in PPP loans of $20,612,000 due to repayments. Excluding PPP loans, total commercial loans at June 30, 2022 were up $108,797,000 from December 31, 2021. Commercial lending activity was particularly robust in the second quarter 2022 as commercial real estate investors and other business borrowers generally displayed a sense of urgency to execute transactions prior to potential additional increases in interest rates. The pace of loan growth for the remainder of 2022 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and other factors. While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $44,979,000 at June 30, 2022, down from $54,372,000 at December 31, 2021. At June 30, 2022, the balance of participation loans outstanding includes a total of $25,590,000 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 $6,683,000 at June 30, 2022 and $7,469,000 at December 31, 2021. 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 June 30, 2022, 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 June 30, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,544,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000. 53 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q At June 30, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $336,681,000, including loans sold through the MPF Xtra program of $160,367,000 and loans sold through the Original program of $176,314,000. At December 31, 2021, outstanding balances of loans sold and serviced through the two programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original Program of $169,073,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of June 30, 2022 and December 31, 2021. For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At June 30, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $9,146,000, and the Corporation has recorded a related allowance for credit losses in the amount of $610,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $200,000 for the six months ended June 30, 2022 and $199,000 for the six months ended June 30, 2021. A credit for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $25,000 was recorded in the six months ended June 30, 2022 with a provision for losses of $50,000 in the six months ended June 30, 2021. 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. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was $6,127,000 at June 30, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $167,000 at June 30, 2022 and $457,000 at December 31, 2021. In the six months ended June 30, 2022, the Corporation recorded a reduction in other noninterest expense of $290,000 representing amounts realized on SBA claims in excess of prior estimates, as compared to a reduction of $163,000 in the six months ended June 30, 2021. ​ 54 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE VII - SUMMARY OF LOANS BY TYPE Summary of Loans by Type ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ June 30, ​ December 31, ​ 2022 2021 2020 2019 2018 2017 Commercial: ​ ​ ​ ​ ​ ​ ​ Commercial loans secured by real estate ​ $ 656,892 ​ $ 569,840 ​ $ 531,810 ​ $ 301,227 ​ $ 162,611 ​ $ 159,266 Commercial and industrial ​ 171,999 ​ 159,073 ​ 159,577 ​ 126,374 ​ 91,856 ​ 88,276 Paycheck Protection Program - 1st Draw ​ ​ 44 ​ ​ 1,356 ​ ​ 132,269 ​ ​ 0 ​ ​ 0 ​ ​ 0 Paycheck Protection Program - 2nd Draw ​ ​ 6,208 ​ ​ 25,508 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 Political subdivisions ​ 87,512 ​ 81,301 ​ 53,221 ​ 53,570 ​ 53,263 ​ 59,287 Commercial construction and land ​ 58,786 ​ 60,579 ​ 42,874 ​ 33,555 ​ 11,962 ​ 14,527 Loans secured by farmland ​ 12,967 ​ 11,121 ​ 11,736 ​ 12,251 ​ 7,146 ​ 7,255 Multi-family (5 or more) residential ​ 53,753 ​ 50,089 ​ 55,811 ​ 31,070 ​ 7,180 ​ 7,713 Agricultural loans ​ 2,628 ​ 2,351 ​ 3,164 ​ 4,319 ​ 5,659 ​ 6,178 Other commercial loans ​ 15,767 ​ 17,153 ​ 17,289 ​ 16,535 ​ 13,950 ​ 10,986 Total commercial ​ 1,066,556 ​ 978,371 ​ 1,007,751 ​ 578,901 ​ 353,627 ​ 353,488 Residential mortgage: ​ ​ ​ ​ ​ ​ Residential mortgage loans - first liens ​ ​ 482,505 ​ ​ 483,629 ​ ​ 532,947 ​ ​ 510,641 ​ ​ 372,339 ​ $ 359,987 Residential mortgage loans - junior liens ​ 23,036 ​ 23,314 ​ 27,311 ​ 27,503 ​ 25,450 ​ 25,325 Home equity lines of credit ​ 40,887 ​ 39,252 ​ 39,301 ​ 33,638 ​ 34,319 ​ 35,758 1-4 Family residential construction ​ 26,071 ​ 23,151 ​ 20,613 ​ 14,798 ​ 24,698 ​ 26,216 Total residential mortgage ​ 572,499 ​ 569,346 ​ 620,172 ​ 586,580 ​ 456,806 ​ 447,286 Consumer ​ 18,549 ​ 17,132 ​ 16,286 ​ 16,741 ​ 17,130 ​ 14,939 Total ​ 1,657,604 ​ 1,564,849 ​ 1,644,209 ​ 1,182,222 ​ 827,563 ​ 815,713 Less: allowance for loan losses ​ (14,547) ​ (13,537) ​ (11,385) ​ (9,836) ​ (9,309) ​ (8,856) Loans, net ​ $ 1,643,057 ​ $ 1,551,312 ​ $ 1,632,824 ​ $ 1,172,386 ​ $ 818,254 ​ $ 806,857 ​ 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 6 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 $14,547,000 at June 30, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $427,000 at June 30, 2022, down from $740,000 at December 31, 2021. Table IX also shows the increase in the allowance in 2022 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $8,467,000 at June 30, 2022 from $7,553,000 at December 31, 2021. Table X shows the allowance for loan losses totaled 0.88% of gross loans outstanding at June 30, 2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.02% at June 30, 2022, in line with ratios from the previous years. 55 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The (credit) provision for loan losses by segment in the three-month and six-month periods ended June 30, 2022 and 2021 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2022 ​ 2021 2022 2021 Commercial ​ $ (28) ​ $ 552 ​ $ 751 ​ $ 794 Residential mortgage ​ ​ (54) ​ ​ 164 ​ ​ 37 ​ ​ 109 Consumer ​ 57 ​ 34 ​ 82 ​ 14 Unallocated ​ 333 ​ (6) ​ 329 ​ 86 Total ​ $ 308 ​ $ 744 ​ $ 1,199 ​ $ 1,003 ​ The (credit) provision for loan losses is further detailed as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial segment ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2022 ​ 2021 2022 2021 (Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (303) ​ $ 365 ​ $ (163) ​ $ 558 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 1,512 ​ ​ 351 ​ 2,089 ​ 493 Changes in historical loss experience factors ​ ​ (37) ​ ​ (208) ​ 25 ​ (257) Changes in qualitative factors ​ ​ (1,200) ​ ​ 44 ​ (1,200) ​ 0 Total (credit) provision for loan losses - Commercial segment ​ $ (28) ​ $ 552 ​ $ 751 ​ $ 794 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage segment ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2022 ​ 2021 2022 2021 Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (1) ​ $ (5) ​ $ (17) ​ $ (15) Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 240 ​ ​ 218 ​ 308 ​ 211 Changes in historical loss experience factors ​ ​ (44) ​ ​ (4) ​ (54) ​ (42) Changes in qualitative factors ​ ​ (249) ​ ​ (45) ​ (200) ​ (45) Total (credit) provision for loan losses - Residential mortgage segment ​ $ (54) ​ $ 164 ​ $ 37 ​ $ 109 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consumer segment ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2022 ​ 2021 2022 2021 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 33 ​ $ 23 ​ $ 56 ​ $ 22 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 26 ​ ​ 14 ​ 26 ​ 4 Changes in historical loss experience factors ​ ​ 8 ​ ​ 2 ​ 5 ​ (8) Changes in qualitative factors ​ ​ (10) ​ ​ (5) ​ (5) ​ (4) Total provision for loan losses - Consumer segment ​ $ 57 ​ $ 34 ​ $ 82 ​ $ 14 ​ ​ 56 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total - All segments ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, June 30, ​ June 30, (In Thousands) 2022 ​ 2021 ​ 2022 ​ 2021 (Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (271) ​ $ 383 $ (124) ​ $ 565 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 1,778 ​ ​ 583 ​ 2,423 ​ 708 Changes in historical loss experience factors ​ ​ (73) ​ ​ (210) ​ (24) ​ (307) Changes in qualitative factors ​ ​ (1,459) ​ ​ (6) ​ (1,405) ​ (49) Sub-total ​ ​ (25) ​ ​ 750 ​ 870 ​ 917 Unallocated ​ ​ 333 ​ ​ (6) ​ 329 ​ 86 Total provision for loan losses - All segments ​ $ 308 ​ $ 744 ​ $ 1,199 ​ $ 1,003 ​ As presented in the tables above, the provision amounts for the second quarter 2022 and six months ended June 30, 2022 include significant provisions due to increases in loan volume, partially offset by credits for the effect of reductions in the allowance associated with qualitative factors. The portion of the provision attributable to increases in loan volume includes the impact of significant loan growth, particularly for the commercial segment, as well as an increase in the collectively determined portion of the allowance related to management’s updated assessment of purchased performing loans. The reduction in the provision related to changes in qualitative factors reflects management’s judgment that, generally, the credit quality of the portfolio has been improving over the past several quarters, as reflected in the lower balances of impaired and nonperforming loans at June 30, 2022 as described below. 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 loans specifically evaluated for impairment) for the period. The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment). In the six months ended June 30, 2022, net charge-offs were $189,000, including recoveries of $32,000 and charge-offs of $221,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.01% in the six months ended June 30, 2022, 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 of $14,336,000 at June 30, 2022 was down from $21,218,000 at December 31, 2021. The reduction in nonperforming loans included the impact of a commercial loan with a balance of $2,907,000 at June 30, 2022 and $3,063,000 at December 31, 2021 being removed from nonaccrual and impaired status in the second quarter 2022 due to improved performance. Relatedly, there was no allowance on this loan at June 30, 2022 and an allowance of $242,000 at December 31, 2021. The reduction in nonperforming loans also included the impact of a reduction in purchased credit impaired loans, as described below. Total nonperforming loans as a percentage of outstanding loans was 0.86% at June 30, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.62% at June 30, 2022, down from 0.94% at December 31, 2021. Table X presents data at the end of each of the years ended December 31, 2017 through 2021. Table X shows that total nonperforming loans as a percentage of loans of 0.86% at June 30, 2022, though up from December 31, 2019, was lower than the corresponding year-end ratio for all other years presented. Similarly, the June 30, 2022 ratio of total nonperforming assets as a percentage of assets of 0.62% was lower than the corresponding ratio for all years presented except December 31, 2019. 57 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Total impaired loans of $8,647,000 at June 30, 2022 are down $7,087,000 from the corresponding amount at December 31, 2021 of $15,734,000. The reduction in total impaired loans included the impact of removing the commercial loan noted above from impaired status. Purchased credit impaired loans were included in impaired loans and had carrying values totaling $3,879,000 at June 30, 2022 and $6,558,000 at December 31, 2021. In the six months ended June 30, 2022, the Corporation received pay-offs on a few purchased credit impaired loans and recognized interest income of $1,412,000 for the excess received over previous carrying amounts. Over the period 2017-2021 and the first six months of 2022, 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 June 30, 2022. 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) ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ June 30, ​ ​ Years Ended December 31, ​ ​ 2022 2021 2021 2020 2019 2018 2017 Balance, beginning of year ​ $ 13,537 ​ $ 11,385 ​ ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ (150) ​ 0 ​ ​ (1,464) ​ (2,343) ​ (6) ​ (165) ​ (132) ​ Residential mortgage ​ 0 ​ (11) ​ ​ (11) ​ 0 ​ (190) ​ (158) ​ (197) ​ Consumer ​ (71) ​ (47) ​ ​ (100) ​ (122) ​ (183) ​ (174) ​ (150) ​ Total charge-offs ​ (221) ​ (58) ​ ​ (1,575) ​ (2,465) ​ (379) ​ (497) ​ (479) ​ Recoveries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ 0 ​ 16 ​ ​ 22 ​ 16 ​ 6 ​ 317 ​ 4 ​ Residential mortgage ​ 17 ​ 4 ​ ​ 6 ​ 44 ​ 12 ​ 8 ​ 19 ​ Consumer ​ 15 ​ 25 ​ ​ 38 ​ 41 ​ 39 ​ 41 ​ 38 ​ Total recoveries ​ 32 ​ 45 ​ ​ 66 ​ 101 ​ 57 ​ 366 ​ 61 ​ Net charge-offs ​ (189) ​ (13) ​ ​ (1,509) ​ (2,364) ​ (322) ​ (131) ​ (418) ​ Provision for loan losses ​ 1,199 ​ 1,003 ​ ​ 3,661 ​ 3,913 ​ 849 ​ 584 ​ 801 ​ Balance, end of period ​ $ 14,547 ​ $ 12,375 ​ ​ $ 13,537 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ Net charge-offs as a % of average loans ​ 0.01 % 0.00 % ​ 0.09 % 0.16 % 0.03 % 0.02 % 0.05 % ​ TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ June 30, ​ As of December 31, ​ 2022 2021 2020 2019 2018 2017 ASC 310 - Impaired loans - individually evaluated ​ $ 427 ​ $ 740 ​ $ 925 ​ $ 1,051 ​ $ 1,605 ​ $ 1,279 ASC 450 - Collectively evaluated: ​ ​ ​ ​ ​ ​ Commercial ​ 8,467 ​ 7,553 ​ 5,545 ​ 3,913 ​ 3,102 ​ 3,078 Residential mortgage ​ 4,392 ​ 4,338 ​ 4,091 ​ 4,006 ​ 3,870 ​ 3,841 Consumer ​ 261 ​ 235 ​ 239 ​ 281 ​ 233 ​ 159 Unallocated ​ 1,000 ​ 671 ​ 585 ​ 585 ​ 499 ​ 499 Total Allowance ​ $ 14,547 ​ $ 13,537 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ 58 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ June 30, ​ As of December 31, ​ 2022 2021 2020 2019 2018 2017 Impaired loans with a valuation allowance ​ $ 3,392 ​ $ 6,540 ​ $ 8,082 ​ $ 3,375 ​ $ 4,851 ​ $ 4,100 ​ Impaired loans without a valuation allowance ​ 1,376 ​ 2,636 ​ 2,895 ​ 1,670 ​ 4,923 ​ 5,411 ​ Purchased credit impaired loans ​ ​ 3,879 ​ ​ 6,558 ​ ​ 6,841 ​ ​ 441 ​ ​ 0 ​ ​ 0 ​ Total impaired loans ​ $ 8,647 ​ $ 15,734 ​ $ 17,818 ​ $ 5,486 ​ $ 9,774 ​ $ 9,511 ​ Total loans past due 30-89 days and still accruing ​ $ 5,082 ​ $ 5,106 ​ $ 5,918 ​ $ 8,889 ​ $ 7,142 ​ $ 9,449 ​ Nonperforming assets: ​ ​ ​ ​ ​ ​ ​ ​ Purchased credit impaired loans ​ $ 3,879 ​ $ 6,558 ​ $ 6,841 ​ $ 441 ​ $ 0 ​ $ 0 ​ Other nonaccrual loans ​ ​ 7,763 ​ ​ 12,441 ​ ​ 14,575 ​ ​ 8,777 ​ ​ 13,113 ​ ​ 13,404 ​ Total nonaccrual loans ​ ​ 11,642 ​ ​ 18,999 ​ ​ 21,416 ​ ​ 9,218 ​ ​ 13,113 ​ ​ 13,404 ​ Total loans past due 90 days or more and still accruing ​ 2,694 ​ 2,219 ​ 1,975 ​ 1,207 ​ 2,906 ​ 3,724 ​ Total nonperforming loans ​ 14,336 ​ 21,218 ​ 23,391 ​ 10,425 ​ 16,019 ​ 17,128 ​ Foreclosed assets held for sale (real estate) ​ 505 ​ 684 ​ 1,338 ​ 2,886 ​ 1,703 ​ 1,598 ​ Total nonperforming assets ​ $ 14,841 ​ $ 21,902 ​ $ 24,729 ​ $ 13,311 ​ $ 17,722 ​ $ 18,726 ​ Loans subject to troubled debt restructurings (TDRs): ​ ​ ​ ​ ​ ​ ​ ​ Performing ​ $ 239 ​ $ 288 ​ $ 166 ​ $ 889 ​ $ 655 ​ $ 636 ​ Nonperforming ​ 3,965 ​ 5,517 ​ 7,285 ​ 1,737 ​ 2,884 ​ 3,027 ​ Total TDRs ​ $ 4,204 ​ $ 5,805 ​ $ 7,451 ​ $ 2,626 ​ $ 3,539 ​ $ 3,663 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total nonperforming loans as a % of loans ​ 0.86 % 1.36 % 1.42 % 0.88 % 1.94 % 2.10 % Total nonperforming assets as a % of assets ​ 0.62 % 0.94 % 1.10 % 0.80 % 1.37 % 1.47 % Allowance for loan losses as a % of total loans ​ 0.88 % 0.87 % 0.69 % 0.83 % 1.12 % 1.09 % Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a) ​ ​ 1.02 % ​ 1.08 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % Allowance for loan losses as a % of nonperforming loans ​ 101.47 % 63.80 % 48.67 % 94.35 % 58.11 % 51.70 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (a) Credit adjustment on purchased non-impaired loans at end of period ​ $ 2,403 ​ $ 3,335 ​ $ 5,979 ​ $ 1,216 ​ $ 0 ​ $ 0 ​ Allowance for loan losses ​ ​ 14,547 ​ ​ 13,537 ​ ​ 11,385 ​ ​ 9,836 ​ ​ 9,309 ​ ​ 8,856 ​ Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1) ​ $ 16,950 ​ $ 16,872 ​ $ 17,364 ​ $ 11,052 ​ $ 9,309 ​ $ 8,856 ​ Total loans receivable ​ $ 1,657,604 ​ $ 1,564,849 ​ $ 1,644,209 ​ $ 1,182,222 ​ $ 827,563 ​ $ 815,713 ​ Credit adjustment on purchased non-impaired loans at end of period ​ ​ 2,403 ​ ​ 3,335 ​ ​ 5,979 ​ ​ 1,216 ​ ​ 0 ​ ​ 0 ​ Total (2) ​ $ 1,660,007 ​ $ 1,568,184 ​ $ 1,650,188 ​ $ 1,183,438 ​ $ 827,563 ​ $ 815,713 ​ Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2) ​ ​ 1.02 % ​ 1.08 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ 59 Table of Contents 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 June 30, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $22,602,000. 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 $18,267,000 at June 30, 2022. The Corporation’s outstanding, available, and total credit facilities at June 30, 2022 and December 31, 2021 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ Available ​ Total Credit (In Thousands) June 30, December 31, June 30, December 31, June 30, December 31, ​ ​ 2022 ​ 2021 ​ 2022 ​ 2021 ​ 2022 ​ 2021 Federal Home Loan Bank of Pittsburgh ​ $ 131,647 ​ $ 33,311 ​ $ 648,294 ​ $ 723,557 ​ $ 779,941 ​ $ 756,868 Federal Reserve Bank Discount Window ​ 0 ​ 0 ​ 17,491 ​ 13,642 ​ 17,491 ​ 13,642 Other correspondent banks ​ 0 ​ 0 ​ 95,000 ​ 45,000 ​ 95,000 ​ 45,000 Total credit facilities ​ $ 131,647 ​ $ 33,311 ​ $ 760,785 ​ $ 782,199 ​ $ 892,432 ​ $ 815,510 ​ At June 30, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $88,500,000, long-term borrowings of $36,613,000 and letters of credit totaling $6,534,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements. Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At June 30, 2022, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $304,272,000. 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 June 30, 2022; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. 60 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Details concerning capital ratios at June 30, 2022 and December 31, 2021 are presented below. Management believes, as of June 30, 2022, 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 June 30, 2022 and December 31, 2021 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 June 30, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ $ 278,635 ​ 16.10 % N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ $ 181,706 ​ ≥10.5 % C&N Bank ​ 259,904 15.05 % 138,136 ≥8 % 181,304 ≥10.5 % 172,670 ≥10 % ​ 181,304 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,925 13.81 % N/A N/A N/A N/A N/A N/A ​ 147,095 ≥8.5 % C&N Bank ​ 244,747 14.17 % 103,602 ≥6 % 146,770 ≥8.5 % 138,136 ≥8 % ​ 146,770 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,925 13.81 % N/A N/A N/A N/A N/A N/A ​ 121,137 ≥7 % C&N Bank ​ 244,747 14.17 % 77,702 ≥4.5 % 120,869 ≥7.0 % 112,236 ≥6.5 % ​ 120,869 ≥7 % Tier 1 capital to average assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,925 10.30 % N/A N/A N/A N/A N/A N/A ​ 185,565 ≥8 % C&N Bank ​ 244,747 10.63 % 92,124 ≥4 % N/A N/A 115,154 ≥5 % ​ 184,247 ≥8 % ​ ​ ​ ​ December 31, 2021: ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ Consolidated ​ $ 287,614 18.21 % N/A N/A ​ N/A N/A N/A N/A ​ $ 165,846 ≥10.5 % C&N Bank ​ 252,606 16.04 % 126,012 ≥8 % 165,390 ≥10.5 % 157,514 ≥10 % 165,390 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ Consolidated ​ 240,433 15.22 % N/A N/A N/A N/A N/A N/A ​ 134,256 ≥8.5 % C&N Bank ​ 238,434 15.14 % 94,509 ≥6 % 133,887 ≥8.5 % 126,012 ≥8 % 133,887 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ ​ Consolidated ​ 240,433 15.22 % N/A N/A N/A N/A N/A N/A ​ 110,564 ≥7 % C&N Bank ​ 238,434 15.14 % 70,881 ≥4.5 % 110,260 ≥7.0 % 102,384 ≥6.5 % 110,260 ≥7 % Tier 1 capital to average assets: ​ ​ ​ Consolidated ​ 240,433 10.53 % N/A N/A N/A N/A N/A N/A ​ 182,683 ≥8 % C&N Bank ​ 238,434 10.52 % 90,688 ≥4 % N/A N/A 113,360 ≥5 % 181,376 ≥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 second quarter 2022, 235,505 shares were repurchased for a total cost of $5,701,000, at an average price of $24.21 per share. Cumulatively through June 30, 2022, 664,431 shares have been repurchased for a total cost of $16,340,000, at an average price of $24.59 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. 61 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At June 30, 2022, 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 June 30, 2022, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.05%. The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $36,307,000 at June 30, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000 at December 31, 2021. The decrease in stockholders’ equity in the first six months of 2022 from the change in accumulated other comprehensive (loss) income resulted from an increase in interest rates. Changes in accumulated other comprehensive (loss) 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. The securities section of Management’s Discussion and Analysis and Note 5 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 June 30, 2022. INFLATION Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic, government policies and Russia’s war against Ukraine, have led to high inflation. The annual inflation rate for the 12-month period ended June 30, 2022, based on changes in the Consumer Price Index, was 9.1%. The 9.1% increase was the largest 12-month advance since the period ending November 1981. 62 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate (at the high end of the range) from 1.75% to 0.25% and resumed injections of massive amounts of liquidity into the nation’s monetary system through a variety of programs including purchases of large amounts of securities. In 2022, the Federal Open Market Committee (FOMC) has changed course, raising the fed funds target rate in March, May, June and July, with the high end of the range at 2.50% at July 27, 2022. Further, at its July 27, 2022 meeting, the FOMC announced that it anticipates ongoing increases to its target rate will be appropriate and that it expects to continue reducing its holdings of securities. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks. ​