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: ● the effect of the novel coronavirus (COVID-19) and related events ● changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates ● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions ● changes in general economic conditions ● legislative or regulatory changes ● downturn in demand for loan, deposit and other financial services in the Corporation’s market area ● increased competition from other banks and non-bank providers of financial services ● technological changes and increased technology-related costs ● changes in accounting principles, or the application of generally accepted accounting principles ● failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions ​ These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. CORONAVIRUS (COVID-19) RESPONSE AND PAYCHECK PROTECTION PROGRAM Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic. On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need 40 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual. To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc. (“Covenant”) had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2021. Most of the modifications under the program became effective in March or the second quarter 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. Most of the loans for which deferrals were granted returned to full payment status prior to June 30, 2021, while additional deferrals have been granted on certain loans. At June 30, 2021, there were 12 loans in deferral status subject to CARES Act Section 4013 guidance with a total recorded investment of $6.7 million. Total loans in deferral status at June 30, 2021 is down from $26.0 million at March 31, 2021 and down significantly from 693 loans and $241.2 million (including 152 loans and $82.5 million reported by Covenant) at June 30, 2020. The amount of loans in deferral status has fallen over the past several quarters as the local and U.S. economy has reopened. At June 30, 2021, a breakdown of the loans in deferral status, along with a summary of their risk ratings, is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deferrals Remaining ​ ​ As of June 30, 2021 (Dollars in Thousands) ​ Number ​ ​ ​ ​ ​ Purchased ​ ​ ​ ​ ​ of ​ ​ ​ Special ​ Credit ​ ​ ​ Loans Pass Mention ​ Impaired Total COVID-19-related loan modifications: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accommodation and food services - hotels ​ 1 ​ $ 0 ​ $ 3,094 ​ $ 0 ​ $ 3,094 Lessors of residential buildings and dwellings ​ 3 ​ ​ 113 ​ ​ 0 ​ ​ 1,557 ​ ​ 1,670 Transportation and warehousing ​ 4 ​ ​ 1,197 ​ ​ 0 ​ ​ 0 ​ ​ 1,197 Real estate rental and leasing - other ​ 1 ​ ​ 438 ​ ​ 0 ​ ​ 0 ​ ​ 438 Total commercial ​ 9 ​ ​ 1,748 ​ ​ 3,094 ​ ​ 1,557 ​ ​ 6,399 Residential mortgage ​ 3 ​ ​ 254 ​ ​ 0 ​ ​ 0 ​ ​ 254 Total ​ 12 ​ $ 2,002 ​ $ 3,094 ​ $ 1,557 ​ $ 6,653 ​ For the loans in the table above, the deferral periods as of June 30, 2021 expire in the third quarter of 2021. The Corporation will continue to evaluate requests for additional deferrals on a case-by-case basis. ​ The recorded investment in Paycheck Protection Program (“PPP”) loans at June 30, 2021 of $110.3 million included a first draw amount of $37.9 million and a second draw amount of $72.4 million with contractual principal balances totaling $38.7 million and $75.4 million, respectively, adjusted by net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant. The recorded investment of $37.9 million in first draw PPP loans at June 30, 2021 decreased $94.4 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”). The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven. Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven. 41 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Capital Strength While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens & Northern Bank (“C&N Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized. C&N Bank’s leverage ratio (Tier 1 capital to average assets) at June 30, 2021 of 10.31% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $119.6 million. Similarly, the total capital to risk-weighted assets ratio at June 30, 2021 is 16.40%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $95.6 million. Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). EARNINGS OVERVIEW Net income was $0.44 per diluted share in the second quarter 2021, down from $0.55 in the first quarter 2021 and up $0.05 (12.8%) from $0.39 in the second quarter 2020. For the six months ended June 30, 2021, net income per diluted share was $0.99, up from $0.70 per share for the first six months of 2020. As described below, earnings of $0.44 per share for the second quarter 2021 were 0.2% lower than second quarter 2020 non-U.S. generally accepted accounting principles (U.S. GAAP) earnings per share of $0.45 as adjusted to exclude the impact of merger-related expenses. For the six months ended June 30, 2021, earnings of $0.99 per share were 30.3% higher than the first six months of 2020 non-U.S. GAAP earnings per share of $0.76 as adjusted to exclude the impact of merger-related expenses. The following table provides a reconciliation of the Corporation’s unaudited earnings results under U.S. GAAP to comparative non-U.S. GAAP results excluding merger-related expenses. Management believes disclosure of unaudited earnings results for the periods presented, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes. RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE (Dollars In Thousands, Except Per Share Data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2nd Quarter 2021 ​ 2nd Quarter 2020 ​ ​ Income ​ ​ ​ ​ ​ Diluted ​ Income ​ ​ ​ ​ ​ ​ ​ Diluted ​ ​ Before ​ ​ ​ ​ ​ Earnings ​ Before ​ ​ ​ ​ ​ ​ Earnings ​ ​ Income ​ Income ​ ​ ​ per ​ Income ​ Income ​ ​ ​ ​ per ​ ​ Tax ​ Tax ​ Net ​ Common ​ Tax ​ Tax ​ Net ​ Common ​ ​ Provision ​ Provision ​ Income ​ Share ​ Provision ​ Provision ​ Income ​ Share Results as Presented Under U.S. GAAP ​ $ 8,840 ​ $ 1,780 ​ $ 7,060 ​ $ 0.44 ​ $ 6,693 ​ $ 1,255 ​ $ 5,438 ​ $ 0.39 Add: Merger-Related Expenses (1) ​ 0 ​ 0 ​ 0 ​ ​ ​ 983 ​ 200 ​ 783 ​ Adjusted Earnings (Non-U.S. GAAP) ​ $ 8,840 ​ $ 1,780 ​ $ 7,060 ​ $ 0.44 ​ $ 7,676 ​ $ 1,455 ​ $ 6,221 ​ $ 0.45 ​ ​ 42 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Six Months Ended June 30, 2021 Six Months Ended June 30, 2020 ​ ​ Income ​ ​ ​ ​ ​ Diluted ​ Income ​ ​ ​ ​ ​ ​ ​ Diluted ​ ​ Before ​ ​ ​ ​ ​ Earnings ​ Before ​ ​ ​ ​ ​ ​ Earnings ​ ​ Income ​ Income ​ ​ ​ per ​ Income ​ Income ​ ​ ​ ​ per ​ ​ Tax ​ Tax ​ Net ​ Common ​ Tax ​ Tax ​ Net ​ Common ​ ​ Provision ​ Provision ​ Income ​ Share ​ Provision ​ Provision ​ Income ​ Share Results as Presented Under U.S. GAAP ​ $ 19,737 ​ $ 3,890 ​ $ 15,847 ​ $ 0.99 ​ $ 11,675 ​ $ 2,071 ​ $ 9,604 ​ $ 0.70 Add: Merger-Related Expenses (1) ​ 0 ​ 0 ​ 0 ​ ​ ​ 1,124 ​ 229 ​ 895 ​ Adjusted Earnings (Non-U.S. GAAP) ​ $ 19,737 ​ $ 3,890 ​ $ 15,847 ​ $ 0.99 ​ $ 12,799 ​ $ 2,300 ​ $ 10,499 ​ $ 0.76 (1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses. Additional highlights related to the Corporation’s second quarter and June 30, 2021 year-to-date unaudited earnings results as compared to the corresponding periods of 2020 are presented below. Second Quarter 2021 as Compared to Second Quarter 2020 Second quarter 2021 net income was $7,060,000. In comparison, second quarter 2020 net income was $5,438,000, and excluding merger-related expenses, adjusted (non-U.S. GAAP) earnings were $6,221,000. Other significant variances were as follows: ● Second quarter 2021 net interest income of $18,681,000 was $4,435,000 higher than the second quarter 2020 total, reflecting the impact of growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $375.7 million, and average total deposits increased $569.9 million. The net interest margin for the second quarter 2021 was 3.52% as compared to 3.65% for the second quarter 2020. The average yield on earning assets of 3.85% for the second quarter 2021 was down 0.37% from the second quarter 2020, while the average rate on interest-bearing liabilities of 0.48% in the second quarter 2021 was 0.35% lower than the comparable second quarter 2020 average rate. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $713,000 in the second quarter 2021 as compared to a net positive impact of $285,000 in the second quarter 2020. ● The provision for loan losses was $744,000 in the second quarter 2021 as compared to a credit for loan losses of $176,000 in the second quarter 2020. The provision for loan losses in the second quarter 2021 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. The credit for loan losses in the second quarter 2020 included the benefit of repayment of a loan for less than the full principal balance, resulting in a charge-off of $107,000 on a commercial loan for which an allowance for loan losses of $674,000 had been recorded at March 31, 2020. ● Noninterest income for the second quarter 2021 was up $772,000 from the second quarter 2020 total. Significant variances included the following: o Loan servicing fees, net, were $146,000 in the second quarter 2021, an increase of $304,000 over the second quarter 2020 reduction in revenue of $158,000. The fair value of servicing rights decreased $39,000 in the second quarter 2021 as compared to a reduction in fair value of $270,000 in the second quarter 2020, mainly due to changes in assumptions related to prepayments of loans. o Interchange revenue from debit card transactions totaled $998,000 in the second quarter 2021, an increase of $280,000 over the second quarter 2020 total, reflecting an increase in transaction volumes. o Service charges on deposit accounts of $1,073,000 in the second quarter 2021 were up $242,000 from the second quarter 2020 amount, as the volume of consumer and business overdraft activity increased. 43 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q o Trust revenue of $1,807,000 increased $242,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation. o Other noninterest income totaled $700,000, an increase of $174,000 from the second quarter 2020. In the second quarter 2021, fee income for providing credit enhancement on sale of mortgage loans increased $45,000, credit card interchange income increased $41,000, merchant services income increased $28,000 and income from title services increased $26,000. o Brokerage and insurance revenue of $506,000 increased $122,000 from the second quarter 2020 total, due to commissions on higher transaction volume. o Net gains from sales of loans of $925,000 for the second quarter 2021 were down $639,000 from the total for the second quarter 2020, as the volume of residential mortgage loans sold in the second quarter 2021 was down from the second quarter 2020 level. ● Noninterest expense, excluding merger-related expenses, increased $3,125,000 in the second quarter 2021 over the second quarter 2020 amount. Significant variances included the following: o Salaries and employee benefits expense of $9,499,000 increased $2,516,000. In addition to merit-based salary increases, there were increases in personnel from the Covenant acquisition and for expansion of services in the Southeastern and Southcentral Pennsylvania locations and additional support staff to accommodate overall growth. o Net occupancy and equipment expense increased $244,000, primarily reflecting an increase due to the Covenant acquisition. o Data processing and telecommunications expenses increased $234,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs. ● The income tax provision of $1,780,000 for the second quarter 2021 was up $525,000 from $1,255,000 for the second quarter 2020, reflecting higher pre-tax income and an increase in city of Philadelphia and state tax provisions. ​ Six Months Ended June 30, 2021 as Compared to Six Months Ended June 30, 2020 ​ Net income for the six-month period ended June 30, 2021 was $15,847,000, or $0.99 per diluted share, while net income for the first six months of 2020 was $9,604,000, or $0.70 per share. Excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share. Other significant variances were as follows: ● Net interest income was up $10,236,000 (35.9%) for the first six months of 2021 over the same period in 2020, reflecting the growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $420.8 million, and average total deposits increased $570.6 million. The net interest margin was 3.75% for the six months ended June 30, 2021, up from 3.73% for the first six months of 2020. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $1,665,000 in the first six months of 2021 as compared to a net positive impact of $702,000 in the first six months of 2020. ● For the first six months of 2021, the provision for loan losses was $1,003,000, a decrease in expense of $349,000 as compared to $1,352,000 recorded in the first six months of 2020. The provision for 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. In comparison, the provision for loan losses in the first six months of 2020 included the effects of recording a specific allowance of $1,193,000 on a commercial loan for which a charge-off of $2,219,000 was subsequently recorded in the third quarter 2020. 44 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ● Noninterest income for the first six months of 2021 was up $2,273,000 from the total for the first six months of 2020. Significant variances included the following: o Other noninterest income totaled $2,172,000, an increase of $585,000 over 2020. Income from realization of tax credits was $265,000 higher in the first six months of 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations. Other increases include: fee income for providing credit enhancement on sale of mortgage loans increased $144,000, income from title services increased $73,000, credit card interchange income increased $69,000 and merchant services income increased $43,000. o Loan servicing fees, net, were $394,000 in the first six months of 2021, an increase of $566,000 over the 2020 total of negative $172,000 (a decrease in revenue). The fair value of servicing rights increased $36,000 in the first six months of 2021 as compared to a reduction in fair value of $396,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans. o Interchange revenue from debit card transactions totaled $1,879,000 for the first six months of 2021, an increase of $430,000, reflecting an increase in transaction volumes. o Trust revenue of $3,433,000 increased $389,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation. o Net gains from sales of loans totaled $1,989,000 in the first six months of 2021, an increase of $110,000 over the total for the first six months of 2020. The increase reflects an increase in volume of mortgage loans sold, resulting mainly from lower interest rates. ● Noninterest expense, excluding merger-related expenses, increased $5,922,000 for the six months ended June 30, 2021 over the total for the first six months of 2020. Significant variances included the following: o Total salaries and employee benefits expense increased $4,033,000. In addition to merit-based salary increases, there were increases in personnel from the Covenant acquisition and for expansion of services in the Southeastern and Southcentral Pennsylvania locations and additional support staff to accommodate overall growth. o Other noninterest expense increased $496,000. Within this category, significant variances included the following: o Donations expense increased $232,000, mainly due to an increase in donations associated with the PA Educational Improvement Tax Credit program. o Business development expenses totaled $260,000, an increase of $169,000, due primarily to an increase in public relations expense. o FDIC insurance expense totaled $275,000, an increase of $162,000. o Amortization of core deposit intangibles increased $144,000 related to the Covenant acquisition. o Other operational losses totaled $149,000, a decrease of $195,000. Expenses associated with trust department tax compliance matters totaled $107,000 in the first six months of 2021 as compared to $300,000 in the first six months of 2020. o Net occupancy and equipment expense increased $445,000, primarily reflecting an increase due to the Covenant acquisition. 45 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q o Data processing and telecommunications expenses increased $390,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs. o Professional fees expense increased $302,000, mainly due to increases in recruiting services and PPP loan processing professional fees. ● The income tax provision was $3,890,000 for the six months ended June 30, 2021, up from $2,071,000 for the first six months of 2020. Pre-tax income was $8,062,000 higher in the first six months of 2021 as compared to 2020. The effective tax rate was 19.7% for the first six months of 2021, higher than the 17.7% effective tax rate for the first six months of 2020. The tax benefit of tax-exempt interest income was 2.3% of pre-tax income in the first six months of 2021 as compared to a 3.3% benefit in 2020. Also, city and state income taxes, net of federal benefit, totaled 1.6% of pre-tax income in the first six months of 2021, up from 0.7% in 2020. ​ More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis. ACQUISITION OF COVENANT FINANCIAL, INC. The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant follows the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million. In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the six months ended June 30, 2021. 46 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE I – QUARTERLY FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three Months Ended : (Dollars In Thousands, Except Per Share Data) ​ June 30, ​ March 31, ​ December 31, ​ September 30, ​ June 30, ​ March 31, (Unaudited) 2021 ​ 2021 2020 ​ 2020 2020 2020 Interest income ​ $ 20,428 ​ $ 21,754 ​ $ 21,859 ​ $ 21,751 ​ $ 16,513 ​ $ 17,037 Interest expense ​ 1,747 ​ 1,671 ​ 2,104 ​ 2,469 ​ 2,267 ​ 2,755 Net interest income ​ 18,681 ​ 20,083 ​ 19,755 ​ 19,282 ​ 14,246 ​ 14,282 Provision (credit) for loan losses ​ 744 ​ 259 ​ 620 ​ 1,941 ​ (176) ​ 1,528 Net interest income after provision (credit) for loan losses ​ 17,937 ​ 19,824 ​ 19,135 ​ 17,341 ​ 14,422 ​ 12,754 Noninterest income ​ 6,300 ​ 6,782 ​ 6,565 ​ 6,970 ​ 5,528 ​ 5,281 Net gains on securities ​ 2 ​ 0 ​ 144 ​ 25 ​ 0 ​ 0 Loss on prepayment of borrowings ​ ​ 0 ​ ​ 0 ​ ​ 1,636 ​ ​ 0 ​ ​ 0 ​ ​ 0 Merger-related expenses ​ 0 ​ 0 ​ 182 ​ 6,402 ​ 983 ​ 141 Other noninterest expenses ​ 15,399 ​ 15,709 ​ 15,775 ​ 14,648 ​ 12,274 ​ 12,912 Income before income tax provision ​ 8,840 ​ 10,897 ​ 8,251 ​ 3,286 ​ 6,693 ​ 4,982 Income tax provision ​ 1,780 ​ 2,110 ​ 1,481 ​ 438 ​ 1,255 ​ 816 Net income ​ $ 7,060 ​ $ 8,787 ​ $ 6,770 ​ $ 2,848 ​ $ 5,438 ​ $ 4,166 Net income attributable to common shares ​ $ 6,999 ​ $ 8,722 ​ $ 6,727 ​ $ 2,830 ​ $ 5,405 ​ $ 4,146 Basic earnings per common share ​ $ 0.44 ​ $ 0.55 ​ $ 0.43 ​ $ 0.18 ​ $ 0.39 ​ $ 0.30 Diluted earnings per common share ​ $ 0.44 ​ $ 0.55 ​ $ 0.43 ​ $ 0.18 ​ $ 0.39 ​ $ 0.30 ​ CRITICAL ACCOUNTING POLICIES The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. Business Combinations – We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable. Fair Value of Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. 47 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q NET INTEREST INCOME The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and six-month periods ended June 30, 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables. Three-Month Periods Ended June 30, 2021 and 2020 For the three-month periods, fully taxable equivalent net interest income was $18,949,000 in 2021, which was $4,466,000 (30.8%) higher than in 2020. Interest income in the second quarter was $20,696,000 which was $3,946,000 (23.6%) higher in 2021 as compared to 2020, while interest expense was lower by $520,000 in comparing the same periods. The increase in net interest income reflects the impact of growth mainly attributable to the Covenant acquisition. Table IV shows the net effect of changes in volume resulted in an increase in net interest income of $4,022,000, while changes in interest rates had a net positive impact of $444,000. As presented in Table III, the Net Interest Margin was 3.52% in 2021 as compared to 3.65% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.37% in 2021 from 3.39% in 2020. The average yield on earning assets of 3.85% was 0.37% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.48% in 2021 was 0.35% lower. Income from purchase accounting-related adjustments in the second quarter 2021 had a positive effect on net interest income of $713,000, including an increase in income on loans of $323,000 and net reductions in interest expense on time deposits and borrowed funds totaling $390,000. The positive impact to the second quarter 2021 net interest margin from purchase accounting adjustments was 0.13%. In comparison, the positive impact to the second quarter 2020 net interest margin was $285,000, or 0.07%. INTEREST INCOME AND EARNING ASSETS Interest income totaled $20,696,000 in 2021, an increase of $3,946,000 (23.6%) from 2020. Interest and fees from loans receivable increased $3,915,000, or 26.7%, in 2021 as compared to 2020. Table IV shows the increase in interest and fees on loans includes the net impact of $4,121,000 related to an increase in average volume and a reduction of $206,000 attributable to a decrease in average rate. Average outstanding loans receivable increased $375,680,000 (30.5%) to $1,607,121,000 in 2021 from $1,231,441,000 in 2020. The increase in loans outstanding is due largely to the Covenant acquisition and the significant growth of PPP loans over the course of 2020 and the first quarter 2021. The average balance of PPP loans totaled $125,480,000 in the second quarter 2021 compared to $77,832,000 in 2020. The average yield on loans in the second quarter 2021 was 4.64%, down from 4.79% in the second quarter 2020, as rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, due to decreases in market interest rates throughout most of 2020. Further, yields on loans acquired from Covenant reflect market yields at the acquisition date (July 1, 2020), which were lower than the Corporation’s average portfolio yield before the transaction. The average yield on loans in the second quarter 2021 was also affected by the comparatively low average yield on 2nd Draw PPP loans with a total average balance of $71,841,000 and a yield of 2.18%. The yield of 6.42% on 1st Draw PPP loans with an average balance of $53,639,000 helped to bolster the average yield on loans in 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. Interest income from available-for-sale debt securities remained flat in 2021 from 2020. Total average available-for-sale debt securities (at amortized cost) increased to $366,329,000 in 2021 from $326,069,000 in 2020. The average balance of tax-exempt securities increased $41,051,000, while the average balance of mortgage-backed securities and other taxable securities decreased by $791,000. The average yield on available-for-sale debt securities was 2.20% for 2021, down from 2.48% in 2020. The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates. 48 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Income from interest-bearing due from banks totaled $74,000 in 2021, an increase of $33,000 (80.5%) from $41,000 in 2020. The average yield on interest-bearing due from banks decreased to 0.16% in 2021 from 0.44% in 2020, consistent with the decrease in market rates. The average balance increased $144,787,000 as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES For the three-month periods, interest expense decreased $520,000 to $1,747,000 in 2021 from $2,267,000 in 2020. Interest expense on deposits decreased $567,000, as the average rate on interest-bearing deposits decreased to 0.35% in 2021 from 0.72% in 2020. The decrease in average rates on deposits includes decreases of 0.80% on time deposits, 0.13% on money market accounts, 0.07% on interest checking accounts and 0.02% on saving accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 17.5% of total deposits in the second quarter 2021 from 25.4% in the second quarter 2020. Average total deposits increased $570,035,000 (42.2%) to $1,919,038,000 in the second quarter from $1,349,003,000 in 2020. The increase in average balance on deposits reflects the impact of deposits assumed in the Covenant acquisition, PPP-related activity and funding from other government stimulus programs. Interest expense on total borrowed funds increased $47,000 in 2021 as compared to 2020. The average balance of total borrowed funds decreased to $87,162,000 in the second quarter 2021 from $99,261,000 in the second quarter 2020, while the average rate on borrowed funds increased to 2.44% in the second quarter 2021 from 1.96% in the second quarter 2020. The net decrease in average balance of borrowed funds includes the impact of the prepayment of higher cost FHLB advances of $48.0 million completed in December 2020, partially offset by net increases in senior notes and subordinated debt. Interest expense on short-term borrowings decreased $57,000 to $7,000 in 2021 from $64,000 in 2020. The average balance of short-term borrowings decreased to $6,528,000 in 2021 from $19,844,000 in 2020. The average rate on short-term borrowings decreased to 0.43% in 2021 from 1.30% in 2020, reflecting the impact of lower short term rates. Interest expense on long-term borrowings (FHLB advances) decreased $204,000 to $109,000 in 2021 from $313,000 in 2020. The average balance of long-term borrowings was $46,788,000 in 2021, down from an average balance of $72,917,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.93% in 2021 compared to 1.73% in 2020. In May 2021, the Corporation issued unsecured senior notes with a total carrying value at issuance of $14,663,000, net of issuance costs. Interest expense on the senior notes totaled $57,000 in 2021. The average balance of the senior notes was $6,930,000 in the second quarter of 2021 at an average rate of 3.30%. Interest expense on subordinated debt increased $251,000 to $357,000 in 2021 from $106,000 in 2020. The average balance of subordinated debt increased to $26,916,000 in 2021 from $6,500,000 in 2020 as a result of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020 and the new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021. The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026. If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity. The average rate incurred on subordinated debt was 5.32% in 2021, down from 6.56% in 2020. More information regarding the terms of borrowed funds is provided in Note 9 to the unaudited consolidated financial statements. Six-Month Periods Ended June 30, 2021 and 2020 For the six-month periods, fully taxable equivalent net interest income was $39,305,000 in 2021, $10,316,000 (35.6%) higher than in 2020. Interest income was $42,723,000 or $8,712,000 (25.6%) higher in 2021 as compared to 2020, while interest expense was $3,418,000 or lower by $1,604,000 (31.9%) in comparing the same periods. As presented in Table III, the Net Interest Margin was 49 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q 3.75% in 2021 as compared to 3.73% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.61% in 2021, up from 3.46% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and growth of the PPP loan program. Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the six months ended June 30, 2021 of $1,665,000, including an increase in income on loans of $754,000 and net reductions in interest expense on time deposits and borrowed funds totaling $911,000. The net positive impact to the net interest margin from purchase accounting adjustments was 0.16% in the first six months of 2021 as compared to 0.09% in the first six months of 2020. INTEREST INCOME AND EARNING ASSETS Interest income totaled $42,723,000 in 2021, an increase of $8,712,000 (25.6%) from 2020. Interest and fees on loans receivable increased $8,923,000, or 30.0%, to $38,637,000 in 2021 from $29,714,000 in 2020. Table IV shows the increase in interest on loans includes an increase of $9,320,000 attributable to changes in volume and a decrease of $397,000 related to changes in average rates. For the first six months of 2021, average outstanding loans totaled $1,620,778,000, an increase of $420,815,000 (35.1%) over the comparative amount for the first six months of 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as subsequent loan growth in the PPP loan program. The fully taxable equivalent yield on loans in 2021 was 4.81% compared to 4.98% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before acquisition. For the six months ended June 30, 2021, 2nd Draw PPP loans had an average balance of $53,123,000 and an average yield of 2.19%. The average balance of 1st Draw PPP loans was $78,863,000 at an average yield of 6.83% in the first six months of 2021 as fees were recognized due to the loans being repaid by the SBA upon forgiveness of the underlying borrowers. In comparison, the average balance of 1st Draw PPP loans in the six months ended June 30, 2020 was $38,916,000 at an average yield of 2.79%. Interest income on available-for-sale debt securities totaled $3,925,000 in 2021, a decrease of $219,000 from the total for 2020. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $350,883,000 in 2021, an increase of $20,345,000 (6.2%) from 2020. The average yield on available-for-sale debt securities decreased to 2.26% in 2021 from 2.52% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent market rates. For the six-month periods, interest income from interest-bearing due from banks totaled $124,000 in 2021, an increase of $2,000 from $122,000 in 2020. The average balance increased $109,251,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average yield on interest-bearing due from banks was 0.18% in 2021 as compared to 0.86% in 2020, due to decreases in market rates. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense decreased $1,604,000 to $3,418,000 in 2021 from $5,022,000 in 2020. Table III shows that the overall cost of funds on interest-bearing liabilities decreased to 0.47% in 2021 from 0.92% in 2020. The average rate on interest-bearing deposits decreased to 0.37% in 2021 from 0.80% in 2020. Table IV shows the reduction in interest expense related to changes in rate accounted for $2,337,000 of the decrease in expense, partially offset by an increase in expense of $733,000 attributable to volume. For the six-month period ended June 30, 2021, average total deposits increased $570,649,000 (43.7%) to $1,875,318,000 in 2021 from $1,304,669,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.37% in 2021 from 0.80% in 2020. The decrease in average rate on deposits includes decreases of 0.86% on time deposits, 0.18% on money market accounts, 0.12% on interest checking accounts and 0.03% on saving accounts. The average 50 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q balance of time deposits fell to 18.8% of average total deposits in 2021 from 27.8% in 2020, further contributing to the reduction in average rate on deposits. Interest expense on borrowed funds decreased $160,000 in 2021 as compared to 2020. Total average borrowed funds decreased $21,886,000 to $85,468,000 in 2021 from $107,354,000 in 2020, while the average rate on borrowed funds increased to 2.18% in 2021 from 2.03% in 2020. Interest expense on short-term borrowings decreased $240,000 to $22,000 in 2021 from $262,000 in 2020. The average balance of short-term borrowings decreased to $10,425,000 in 2021 from $32,363,000 in 2020. The average rate on short-term borrowings decreased to 0.43% in 2021 from 1.63% in 2020. Interest expense on long-term borrowings (FHLB advances) decreased $365,000 to $243,000 in 2021 from $608,000 in 2020. The average balance of long-term borrowings was $49,801,000 in 2021, down from an average balance of $68,491,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.98% in 2021 compared to 1.79% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings done in December 2020. Interest expense on the senior notes totaled $57,000 in 2021. The average balance of the senior notes was $3,484,000 in 2021 with an average rate of 3.30%. Interest expense on subordinated debt increased $388,000 to $601,000 in 2021 from $213,000 in 2020. The average balance of subordinated debt increased to $21,758,000 in 2021 from $6,500,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 5.57% in 2021 from 6.59% in 2020. ​ 51 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) 2021 2020 (Decrease) ​ 2021 2020 (Decrease) INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 74 ​ $ 41 ​ $ 33 ​ ​ $ 124 ​ $ 122 ​ $ 2 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 1,187 ​ 1,380 ​ (193) ​ ​ 2,300 ​ 2,968 ​ (668) Tax-exempt ​ 824 ​ 631 ​ 193 ​ ​ 1,625 ​ 1,176 ​ 449 Total available-for-sale debt securities ​ 2,011 ​ 2,011 ​ 0 ​ ​ 3,925 ​ 4,144 ​ (219) Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 16,826 ​ 13,586 ​ 3,240 ​ ​ 34,319 ​ 28,047 ​ 6,272 Paycheck Protection Program - 1st Draw ​ ​ 859 ​ ​ 540 ​ ​ 319 ​ ​ ​ 2,671 ​ ​ 540 ​ ​ 2,131 Paycheck Protection Program - 2nd Draw ​ ​ 390 ​ ​ 0 ​ ​ 390 ​ ​ ​ 576 ​ ​ 0 ​ ​ 576 Tax-exempt ​ 518 ​ 552 ​ (34) ​ ​ 1,071 ​ 1,127 ​ (56) Total loans receivable ​ 18,593 ​ 14,678 ​ 3,915 ​ ​ 38,637 ​ 29,714 ​ 8,923 Other earning assets ​ 18 ​ 20 ​ (2) ​ ​ 37 ​ 31 ​ 6 Total Interest Income ​ 20,696 ​ 16,750 ​ 3,946 ​ ​ 42,723 ​ 34,011 ​ 8,712 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 235 ​ 202 ​ 33 ​ ​ 456 ​ 445 ​ 11 Money market ​ 320 ​ 232 ​ 88 ​ ​ 626 ​ 495 ​ 131 Savings ​ 57 ​ 54 ​ 3 ​ ​ 112 ​ 118 ​ (6) Time deposits ​ 605 ​ 1,296 ​ (691) ​ ​ 1,301 ​ 2,881 ​ (1,580) Total interest-bearing deposits ​ 1,217 ​ 1,784 ​ (567) ​ ​ 2,495 ​ 3,939 ​ (1,444) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ 7 ​ 64 ​ (57) ​ ​ 22 ​ 262 ​ (240) Long-term - FHLB advances ​ 109 ​ 313 ​ (204) ​ ​ 243 ​ 608 ​ (365) Senior notes, net ​ ​ 57 ​ ​ 0 ​ ​ 57 ​ ​ ​ 57 ​ ​ 0 ​ ​ 57 Subordinated debt, net ​ 357 ​ 106 ​ 251 ​ ​ 601 ​ 213 ​ 388 Total borrowed funds ​ 530 ​ 483 ​ 47 ​ ​ 923 ​ 1,083 ​ (160) Total Interest Expense ​ 1,747 ​ 2,267 ​ (520) ​ ​ 3,418 ​ 5,022 ​ (1,604) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 18,949 ​ $ 14,483 ​ $ 4,466 ​ ​ $ 39,305 ​ $ 28,989 ​ $ 10,316 ​ Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% 52 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 ​ ​ 6/30/2021 ​ Return/ ​ 6/30/2020 ​ Return/ ​ 6/30/2021 ​ Return/ ​ 6/30/2020 ​ Return/ ​ ​ Average ​ Cost of ​ Average ​ Cost of ​ Average ​ Cost of ​ Average ​ Cost of ​ Balance Funds % Balance Funds % Balance Funds % Balance Funds % EARNING ASSETS ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 182,586 0.16 % $ 37,799 0.44 % $ 137,851 0.18 % $ 28,600 0.86 % Available-for-sale debt securities, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ at amortized cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 243,228 1.96 % ​ 244,019 2.27 % ​ ​ 230,551 2.01 % ​ 254,588 2.34 % Tax-exempt ​ 123,101 2.68 % 82,050 3.09 % ​ 120,332 2.72 % 75,950 3.11 % Total available-for-sale debt securities ​ 366,329 2.20 % 326,069 2.48 % ​ 350,883 2.26 % 330,538 2.52 % Loans receivable: ​ ​ ​ ​ ​ ​ Taxable ​ 1,418,171 4.76 % 1,094,432 4.99 % ​ 1,423,417 4.86 % 1,101,275 5.12 % Paycheck Protection Program - 1st Draw ​ ​ 53,639 ​ 6.42 % ​ 77,832 ​ 2.79 % ​ ​ 78,863 ​ 6.83 % ​ 38,916 ​ 2.79 % Paycheck Protection Program - 2nd Draw ​ ​ 71,841 ​ 2.18 % ​ 0 ​ 0.00 % ​ ​ 53,123 ​ 2.19 % ​ 0 ​ 0.00 % Tax-exempt ​ 63,470 3.27 % 59,177 3.75 % ​ 65,375 3.30 % 59,772 3.79 % Total loans receivable ​ 1,607,121 4.64 % 1,231,441 4.79 % ​ 1,620,778 4.81 % 1,199,963 4.98 % Other earning assets ​ 2,467 2.93 % 2,206 3.65 % ​ 2,658 2.81 % 1,833 3.40 % Total Earning Assets ​ 2,158,503 3.85 % 1,597,515 4.22 % ​ 2,112,170 4.08 % 1,560,934 4.38 % Cash ​ 25,453 ​ 18,960 ​ ​ 24,629 ​ 18,501 ​ Unrealized gain on securities ​ 10,197 ​ 12,574 ​ ​ 11,536 ​ 10,375 ​ Allowance for loan losses ​ (11,992) ​ (11,471) ​ ​ (11,866) ​ (10,743) ​ Bank-owned life insurance ​ ​ 30,301 ​ ​ ​ ​ 18,779 ​ ​ ​ ​ ​ 30,228 ​ ​ ​ ​ 18,728 ​ ​ ​ Bank premises and equipment ​ 20,620 ​ 18,230 ​ ​ 20,982 ​ 17,981 ​ Intangible assets ​ 56,153 ​ 29,543 ​ ​ 56,220 ​ 29,575 ​ Other assets ​ 42,516 ​ 30,723 ​ ​ 43,566 ​ 30,658 ​ Total Assets ​ $ 2,331,751 ​ $ 1,714,853 ​ ​ $ 2,287,465 ​ $ 1,676,009 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ Interest checking ​ $ 387,942 0.24 % $ 260,177 0.31 % ​ $ 372,056 0.25 % $ 243,623 0.37 % Money market ​ 433,295 0.30 % 215,441 0.43 % ​ 420,141 0.30 % 208,066 0.48 % Savings ​ 227,426 0.10 % 183,933 0.12 % ​ 220,470 0.10 % 176,452 0.13 % Time deposits ​ 335,773 0.72 % 343,257 1.52 % ​ 353,068 0.74 % 362,439 1.60 % Total interest-bearing deposits ​ 1,384,436 0.35 % 1,002,808 0.72 % ​ 1,365,735 0.37 % 990,580 0.80 % Borrowed funds: ​ ​ ​ ​ ​ ​ Short-term ​ 6,528 0.43 % 19,844 1.30 % ​ 10,425 0.43 % 32,363 1.63 % Long-term - FHLB advances ​ 46,788 0.93 % 72,917 1.73 % ​ 49,801 0.98 % 68,491 1.79 % Senior notes, net ​ ​ 6,930 ​ 3.30 % ​ 0 ​ 0.00 % ​ ​ 3,484 ​ 3.30 % ​ 0 ​ 0.00 % Subordinated debt, net ​ 26,916 5.32 % 6,500 6.56 % ​ 21,758 5.57 % 6,500 6.59 % Total borrowed funds ​ 87,162 2.44 % 99,261 1.96 % ​ 85,468 2.18 % 107,354 2.03 % Total Interest-bearing Liabilities ​ 1,471,598 0.48 % 1,102,069 0.83 % ​ 1,451,203 0.47 % 1,097,934 0.92 % Demand deposits ​ 534,602 ​ 346,285 ​ ​ 509,583 ​ 314,089 ​ Other liabilities ​ 23,898 ​ 15,891 ​ ​ 25,903 ​ 14,981 ​ Total Liabilities ​ 2,030,098 ​ 1,464,245 ​ ​ 1,986,689 ​ 1,427,004 ​ Stockholders' equity, excluding ​ ​ ​ ​ ​ ​ other comprehensive income ​ 293,487 ​ 240,434 ​ ​ 291,550 ​ 240,576 ​ Accumulated other comprehensive income ​ 8,166 ​ 10,174 ​ ​ 9,226 ​ 8,429 ​ Total Stockholders' Equity ​ 301,653 ​ 250,608 ​ ​ 300,776 ​ 249,005 ​ Total Liabilities and Stockholders' Equity ​ $ 2,331,751 ​ $ 1,714,853 ​ ​ $ 2,287,465 ​ $ 1,676,009 ​ Interest Rate Spread ​ 3.37 % 3.39 % ​ 3.61 % 3.46 % Net Interest Income/Earning Assets ​ 3.52 % 3.65 % ​ 3.75 % 3.73 % ​ ​ ​ ​ ​ ​ ​ Total Deposits (Interest-bearing ​ ​ ​ ​ ​ ​ and Demand) ​ $ 1,919,038 ​ $ 1,349,093 ​ ​ $ 1,875,318 ​ $ 1,304,669 ​ (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. 53 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ Three Months Ended 6/30/21 vs. 6/30/20 . ​ Six Months Ended 6/30/21 vs. 6/30/20 ​ ​ Change in ​ Change in ​ Total ​ Change in ​ Change in ​ Total ​ Volume Rate Change ​ Volume Rate Change EARNING ASSETS ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 72 ​ $ (39) ​ $ 33 ​ ​ $ 161 ​ $ (159) ​ $ 2 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 0 ​ (193) ​ (193) ​ ​ (267) ​ (401) ​ (668) Tax-exempt ​ 285 ​ (92) ​ 193 ​ ​ 612 ​ (163) ​ 449 Total available-for-sale debt securities ​ 285 ​ (285) ​ 0 ​ ​ 345 ​ (564) ​ (219) Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 3,902 ​ (662) ​ 3,240 ​ ​ 7,762 ​ (1,490) ​ 6,272 Paycheck Protection Program - 1st Draw ​ ​ (210) ​ ​ 529 ​ ​ 319 ​ ​ ​ 884 ​ ​ 1,247 ​ ​ 2,131 Paycheck Protection Program - 2nd Draw ​ ​ 390 ​ ​ 0 ​ ​ 390 ​ ​ ​ 576 ​ ​ 0 ​ ​ 576 Tax-exempt ​ 39 ​ (73) ​ (34) ​ ​ 98 ​ (154) ​ (56) Total loans receivable ​ 4,121 ​ (206) ​ 3,915 ​ ​ 9,320 ​ (397) ​ 8,923 Other earning assets ​ 3 ​ (5) ​ (2) ​ ​ 12 ​ (6) ​ 6 Total Interest Income ​ 4,481 ​ (535) ​ 3,946 ​ ​ 9,838 ​ (1,126) ​ 8,712 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 83 ​ (50) ​ 33 ​ ​ 186 ​ (175) ​ 11 Money market ​ 179 ​ (91) ​ 88 ​ ​ 365 ​ (234) ​ 131 Savings ​ 11 ​ (8) ​ 3 ​ ​ 25 ​ (31) ​ (6) Time deposits ​ (28) ​ (663) ​ (691) ​ ​ (73) ​ (1,507) ​ (1,580) Total interest-bearing deposits ​ 245 ​ (812) ​ (567) ​ ​ 503 ​ (1,947) ​ (1,444) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ (28) ​ (29) ​ (57) ​ ​ (115) ​ (125) ​ (240) Long-term - FHLB advances ​ (93) ​ (111) ​ (204) ​ ​ (138) ​ (227) ​ (365) Senior notes, net ​ ​ 57 ​ ​ 0 ​ ​ 57 ​ ​ ​ 57 ​ ​ 0 ​ ​ 57 Subordinated debt, net ​ 278 ​ (27) ​ 251 ​ ​ 426 ​ (38) ​ 388 Total borrowed funds ​ 214 ​ (167) ​ 47 ​ ​ 230 ​ (390) ​ (160) Total Interest Expense ​ 459 ​ (979) ​ (520) ​ ​ 733 ​ (2,337) ​ (1,604) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 4,022 ​ $ 444 ​ $ 4,466 ​ ​ $ 9,105 ​ $ 1,211 ​ $ 10,316 (1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 54 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, ​ ​ $ ​ % ​ 2021 ​ 2020 ​ Change ​ Change Trust revenue ​ $ 1,807 ​ $ 1,565 ​ $ 242 ​ 15.5 % Brokerage and insurance revenue ​ 506 ​ ​ 384 ​ ​ 122 ​ 31.8 % Service charges on deposit accounts ​ 1,073 ​ ​ 831 ​ ​ 242 ​ 29.1 % Interchange revenue from debit card transactions ​ 998 ​ ​ 718 ​ ​ 280 ​ 39.0 % Net gains from sales of loans ​ 925 ​ ​ 1,564 ​ ​ (639) ​ (40.9) % Loan servicing fees, net ​ 146 ​ ​ (158) ​ ​ 304 ​ N/M ​ Increase in cash surrender value of life insurance ​ 145 ​ ​ 98 ​ ​ 47 ​ 48.0 % Other noninterest income ​ 700 ​ ​ 526 ​ ​ 174 ​ 33.1 % Total noninterest income, excluding realized gains on securities, net ​ ​ 6,300 ​ ​ 5,528 ​ ​ 772 ​ 14.0 % Realized gains on available-for-sale debt securities, net ​ ​ 2 ​ ​ 0 ​ ​ 2 ​ ​ ​ Total noninterest income ​ $ 6,302 ​ $ 5,528 ​ $ 774 ​ 14.0 % ​ N/M = Not Meaningful Total noninterest income, excluding realized gains on securities, net in the second quarter 2021 increased $772,000 (14.0%) from the second quarter 2020 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, ​ ​ $ ​ % ​ 2021 2020 ​ Change ​ Change Trust revenue ​ $ 3,433 ​ $ 3,044 ​ $ 389 ​ 12.8 % Brokerage and insurance revenue ​ 832 ​ 739 ​ ​ 93 ​ 12.6 % Service charges on deposit accounts ​ 2,088 ​ 2,081 ​ ​ 7 ​ 0.3 % Interchange revenue from debit card transactions ​ 1,879 ​ 1,449 ​ ​ 430 ​ 29.7 % Net gains from sales of loans ​ 1,989 ​ 1,879 ​ ​ 110 ​ 5.9 % Loan servicing fees, net ​ 394 ​ (172) ​ ​ 566 ​ N/M ​ Increase in cash surrender value of life insurance ​ 295 ​ 202 ​ ​ 93 ​ 46.0 % Other noninterest income ​ 2,172 ​ 1,587 ​ ​ 585 ​ 36.9 % Total noninterest income, excluding realized gains on securities, net ​ 13,082 ​ 10,809 ​ ​ 2,273 ​ 21.0 % Realized gains on available-for-sale debt securities, net ​ 2 ​ 0 ​ ​ 2 ​ ​ ​ Total noninterest income ​ $ 13,084 ​ $ 10,809 ​ $ 2,275 ​ 21.0 % ​ N/M = Not Meaningful Total noninterest income, excluding realized gains on securities, net for the first six months of 2021 increased $2,273,000 (21.0%) from the total for the first six months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis ​ 55 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, ​ $ ​ % ​ 2021 2020 Change Change ​ Salaries and employee benefits $ 9,499 $ 6,983 $ 2,516 36.0 % Net occupancy and equipment expense ​ 1,219 ​ 975 ​ 244 25.0 % Data processing and telecommunications expense ​ 1,487 ​ 1,253 ​ 234 18.7 % Automated teller machine and interchange expense ​ 355 ​ 275 ​ 80 29.1 % Pennsylvania shares tax ​ 490 ​ 423 ​ 67 15.8 % Professional fees ​ 598 ​ 464 ​ 134 28.9 % Other noninterest expense ​ ​ 1,751 ​ ​ 1,901 ​ ​ (150) ​ (7.9) % Total noninterest expense, excluding merger-related expenses ​ ​ 15,399 ​ ​ 12,274 ​ ​ 3,125 ​ 25.5 % Merger-related expenses ​ ​ 0 ​ ​ 983 ​ ​ (983) ​ (100.0) % Total noninterest expense ​ $ 15,399 ​ $ 13,257 ​ $ 2,142 16.2 % ​ Total noninterest expense in the second quarter 2021 increased $2,142,000 (16.2%) from the second quarter 2020 total. Excluding merger-related expenses from the second quarter 2020, total noninterest expense in the second quarter 2021 increased $3,125,000 (25.5%) from the second quarter 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Six Months Ended ​ ​ ​ ​ ​ ​ ​ June 30, ​ $ ​ % ​ ​ 2021 ​ 2020 ​ Change ​ Change Salaries and employee benefits $ 18,394 $ 14,361 $ 4,033 28.1 % Net occupancy and equipment expense ​ 2,523 ​ 2,078 ​ 445 21.4 % Data processing and telecommunications expense ​ 2,867 ​ 2,477 ​ 390 15.7 % Automated teller machine and interchange expense ​ 692 ​ 572 ​ 120 21.0 % Pennsylvania shares tax ​ 981 ​ 845 ​ 136 16.1 % Professional fees ​ 1,145 ​ 843 ​ 302 35.8 % Other noninterest expense ​ 4,506 ​ 4,010 ​ 496 12.4 % Total noninterest expense, excluding merger-related expenses ​ 31,108 ​ 25,186 ​ 5,922 23.5 % Merger-related expenses ​ 0 ​ 1,124 ​ (1,124) (100.0) % Total noninterest expense ​ $ 31,108 ​ $ 26,310 ​ $ 4,798 18.2 % ​ Total noninterest expense for the first six months of 2021 increased $4,798,000 (18.2%) from the total for the first six months of 2020. Total noninterest expense for the first six months of 2021 increased $5,922,000 (23.5%) from the total excluding merger-related expenses, for the first six months of 2020. 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 2021 was $3,890,000, which was $1,819,000 higher than the provision for the first six months of 2020. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.7% in the first six months of 2021 compared to 17.7% in the first six months of 2020. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first six months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The higher effective tax rate in the first six months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income and an increase in city and state income taxes. 56 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, 2021 and December 31, 2020 represents the following temporary difference components: ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, December 31, (In Thousands) ​ 2021 ​ 2020 Deferred tax assets: ​ ​ Allowance for loan losses ​ $ 2,537 ​ $ 2,154 Purchase accounting adjustments on loans ​ 1,784 ​ 1,930 Net operating loss carryforward ​ ​ 837 ​ ​ 896 Operating leases liability ​ 680 ​ 724 Other deferred tax assets ​ 2,850 ​ 3,089 Total deferred tax assets ​ 8,688 ​ 8,793 ​ ​ ​ Deferred tax liabilities: ​ ​ Unrealized holding gains on securities ​ 2,438 ​ 3,104 Defined benefit plans - ASC 835 ​ 29 ​ 32 Bank premises and equipment ​ 1,082 ​ 1,216 Core deposit intangibles ​ 783 ​ 840 Right-of-use assets from operating leases ​ 680 ​ 724 Other deferred tax liabilities ​ 268 ​ 172 Total deferred tax liabilities ​ 5,280 ​ 6,088 Deferred tax asset, net ​ $ 3,408 ​ $ 2,705 ​ In connection with the Covenant merger, the Corporation received a net operating loss (“NOL”) available to be carried forward against federal taxable income of $4.6 million. Availability of the NOL does not expire; however, the amount that may be offset against taxable income is limited to approximately $563,000 per year and further limited annually to no more than 80% of taxable income without regard to the NOL. At December 31, 2020, the unused amount of the NOL was $4.3 million. The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income. Management believes the recorded net deferred tax asset at June 30, 2021 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings . FINANCIAL CONDITION This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at June 30, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021. 57 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q At June 30, 2021, gross loans outstanding totaled $1,597,856,000, an increase of $356.4 million (28.7%) from June 30, 2020. On July 1, 2020, the Corporation acquired loans valued at $464.2 million pursuant to the Covenant acquisition. The net reduction in loans outstanding over the past 12 months, excluding the impact of the Covenant acquisition, reflects the impact of high levels of loan prepayments consistent with low interest rates, slow demand for new commercial loans (excluding PPP) and a high proportion of new mortgage loans being sold into the secondary market. At June 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio. While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $57,858,000 at June 30, 2021, down from $65,741,000 at December 31, 2020. At June 30, 2021, the balance of participation loans outstanding includes a total of $34,465,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,642,000 at June 30, 2021 and $8,437,000 at December 31, 2020. Since 2009, the Corporation has originated and sold 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. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also 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, 2021, the Corporation’s activity under the MPF Direct Program has been minimal. For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At June 30, 2021, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,599,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000. At June 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $314,174,000, including loans sold through the MPF Xtra program of $160,535,000 and loans sold through the Original program of $153,639,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of June 30, 2021 and December 31, 2020. For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At June 30, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $7,695,000, and the Corporation has recorded a related allowance for credit losses in the amount of $550,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement (included 58 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q in other noninterest income in the consolidated statements of income) totaled $199,000 for the six months ended June 30, 2021 and $55,000 for the six months ended June 30, 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the six months ended June 30, 2021 with a credit for losses of $50,000 in the six months ended June 30, 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program. ​ The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $12,974,000 at June 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $530,000 at June 30, 2021 and $730,000 at December 31, 2020. In the six months ended June 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $163,000 representing amounts realized on SBA claims in excess of prior estimates. TABLE VII - SUMMARY OF LOANS BY TYPE Summary of Loans by Type ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ June 30, ​ December 31, ​ 2021 2020 2019 2018 2017 2016 Commercial: ​ ​ ​ ​ ​ ​ ​ Commercial loans secured by real estate ​ $ 544,202 ​ $ 531,810 ​ $ 301,227 ​ $ 162,611 ​ $ 159,266 ​ $ 150,468 Commercial and industrial ​ 158,907 ​ 159,577 ​ 126,374 ​ 91,856 ​ 88,276 ​ 83,854 Paycheck Protection Program - 1st Draw ​ ​ 37,902 ​ ​ 132,269 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 Paycheck Protection Program - 2nd Draw ​ ​ 72,409 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 Political subdivisions ​ 48,849 ​ 53,221 ​ 53,570 ​ 53,263 ​ 59,287 ​ 38,068 Commercial construction and land ​ 43,178 ​ 42,874 ​ 33,555 ​ 11,962 ​ 14,527 ​ 14,287 Loans secured by farmland ​ 10,950 ​ 11,736 ​ 12,251 ​ 7,146 ​ 7,255 ​ 7,294 Multi-family (5 or more) residential ​ 51,916 ​ 55,811 ​ 31,070 ​ 7,180 ​ 7,713 ​ 7,896 Agricultural loans ​ 2,379 ​ 3,164 ​ 4,319 ​ 5,659 ​ 6,178 ​ 3,998 Other commercial loans ​ 14,711 ​ 17,289 ​ 16,535 ​ 13,950 ​ 10,986 ​ 11,475 Total commercial ​ 985,403 ​ 1,007,751 ​ 578,901 ​ 353,627 ​ 353,488 ​ 317,340 Residential mortgage: ​ ​ ​ ​ ​ ​ Residential mortgage loans - first liens ​ ​ 507,579 ​ ​ 532,947 ​ ​ 510,641 ​ ​ 372,339 ​ $ 359,987 ​ ​ 334,102 Residential mortgage loans - junior liens ​ 25,287 ​ 27,311 ​ 27,503 ​ 25,450 ​ 25,325 ​ 23,706 Home equity lines of credit ​ 39,432 ​ 39,301 ​ 33,638 ​ 34,319 ​ 35,758 ​ 38,057 1-4 Family residential construction ​ 23,567 ​ 20,613 ​ 14,798 ​ 24,698 ​ 26,216 ​ 24,908 Total residential mortgage ​ 595,865 ​ 620,172 ​ 586,580 ​ 456,806 ​ 447,286 ​ 420,773 Consumer ​ 16,588 ​ 16,286 ​ 16,741 ​ 17,130 ​ 14,939 ​ 13,722 Total ​ 1,597,856 ​ 1,644,209 ​ 1,182,222 ​ 827,563 ​ 815,713 ​ 751,835 Less: allowance for loan losses ​ (12,375) ​ (11,385) ​ (9,836) ​ (9,309) ​ (8,856) ​ (8,473) Loans, net ​ $ 1,585,481 ​ $ 1,632,824 ​ $ 1,172,386 ​ $ 818,254 ​ $ 806,857 ​ $ 743,362 ​ 59 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q PROVISION AND ALLOWANCE FOR LOAN LOSSES The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. The allowance for loan losses was $12,375,000 at June 30, 2021, up from $11,385,000 at December 31, 2020. Table IX shows total specific allowances on impaired loans increased $552,000 to $1,477,000 at June 30, 2021 from $925,000 at December 31, 2020. This net increase included the impact of recording specific allowances totaling $850,000 on loans to two commercial customers with total outstanding principal balances of $6,440,000 at June 30, 2021. These increases in specific allowances were partially offset by the elimination in the second quarter 2021 of specific allowances of $285,000 at December 31, 2020 on loans to a customer with outstanding balances totaling $3,900,000 at June 30, 2021 and $3,927,000 at December 31, 2020. Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,431,000 at June 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $4,071,000 at June 30, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $302,000 at June 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $431,000 at June 30, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Table X shows the allowance for loan losses totaled 0.77% of gross loans outstanding at June 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at June 30, 2021, in line with ratios from the previous years. The provision (credit) for loan losses by segment in the three-month and six-month periods ended June 30, 2021 and 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Six Months Ended ​ ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, ​ (In Thousands) 2021 ​ 2020 2021 2020 Commercial ​ $ 552 ​ $ (124) ​ $ 794 ​ $ 1,194 ​ Residential mortgage ​ ​ 164 ​ ​ (65) ​ ​ 109 ​ ​ 133 ​ Consumer ​ 34 ​ 13 ​ 14 ​ 25 ​ Unallocated ​ (6) ​ 0 ​ 86 ​ 0 ​ Total ​ $ 744 ​ $ (176) ​ $ 1,003 ​ $ 1,352 ​ ​ 60 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The provision (credit) 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) 2021 ​ 2020 2021 2020 Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 365 ​ $ (134) ​ $ 558 ​ $ 1,041 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 351 ​ ​ (117) ​ 493 ​ (110) Changes in historical loss experience factors ​ ​ (208) ​ ​ 14 ​ (257) ​ (7) Changes in qualitative factors ​ ​ 44 ​ ​ 113 ​ 0 ​ 270 Total provision for loan losses - Commercial segment ​ $ 552 ​ $ (124) ​ $ 794 ​ $ 1,194 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage segment ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2021 ​ 2020 2021 2020 Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (5) ​ $ (32) ​ $ (15) ​ $ (17) Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 218 ​ ​ (126) ​ 211 ​ (140) Changes in historical loss experience factors ​ ​ (4) ​ ​ (42) ​ (42) ​ (82) Changes in qualitative factors ​ ​ (45) ​ ​ 135 ​ (45) ​ 372 Total provision (credit) for loan losses - Residential mortgage segment ​ $ 164 ​ $ (65) ​ $ 109 ​ $ 133 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consumer segment ​ Three Months Ended Six Months Ended ​ ​ June 30, ​ June 30, ​ June 30, ​ June 30, (In Thousands) 2021 ​ 2020 2021 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 23 ​ $ 23 ​ $ 22 ​ $ 43 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 14 ​ ​ (12) ​ 4 ​ (22) Changes in historical loss experience factors ​ ​ 2 ​ ​ 6 ​ (8) ​ 0 Changes in qualitative factors ​ ​ (5) ​ ​ (4) ​ (4) ​ 4 Total provision for loan losses - Consumer segment ​ $ 34 ​ $ 13 ​ $ 14 ​ $ 25 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total - All segments ​ Three Months Ended ​ Six Months Ended ​ ​ June 30, ​ June 30, June 30, ​ June 30, (In Thousands) 2021 ​ 2020 ​ 2021 ​ 2020 Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 383 ​ $ (143) $ 565 ​ $ 1,067 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 583 ​ ​ (255) ​ 708 ​ (272) Changes in historical loss experience factors ​ ​ (210) ​ ​ (22) ​ (307) ​ (89) Changes in qualitative factors ​ ​ (6) ​ ​ 244 ​ (49) ​ 646 Sub-total ​ ​ 750 ​ ​ (176) ​ 917 ​ 1,352 Unallocated ​ ​ (6) ​ ​ 0 ​ 86 ​ 0 Total provision for loan losses - All segments ​ $ 744 ​ $ (176) ​ $ 1,003 ​ $ 1,352 ​ 61 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off. In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding purchased loans and loans specifically evaluated for impairment) for the period. The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment). In the three months ended June 30, 2021, net charge-offs were $30,000, including recoveries of $17,000 and charge-offs of $47,000. For the six months ended June 30, 2021, net charge-offs were $13,000 including recoveries of $45,000 and charge-offs of $58,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.00% in the six months ended June 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018. Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.56% at June 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.12% at June 30, 2021, up from 1.10% at December 31, 2020. Table X presents data at the end of each of the years ended December 31, 2016 through 2020. Table X shows that total nonperforming loans as a percentage of loans of 1.56% at June 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the June 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.12% was lower than the corresponding ratio from 2016 through 2018. Total impaired loans of $19,146,000 at June 30, 2021 are up $1,328,000 from the corresponding amount at December 31, 2020 of $17,818,000. Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,733,000 at June 30, 2021 and $6,841,000 at December 31, 2020. Table X shows that the total balance of impaired loans at June 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020. Similarly, total nonperforming assets of $26,184,000 at June 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition. As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,478,000 at June 30, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,836,000 at June 30, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable through the first six months of 2021, in evaluating the allowance for loan losses at June 30, 2021. Over the period 2016-2020 and the first six months of 2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period. Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate. 62 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q 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, ​ ​ 2021 2020 2020 2019 2018 2017 2016 Balance, beginning of year ​ $ 11,385 ​ $ 9,836 ​ ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ $ 7,889 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ 0 ​ (124) ​ ​ (2,343) ​ (6) ​ (165) ​ (132) ​ (597) ​ Residential mortgage ​ (11) ​ 0 ​ ​ 0 ​ (190) ​ (158) ​ (197) ​ (73) ​ Consumer ​ (47) ​ (70) ​ ​ (122) ​ (183) ​ (174) ​ (150) ​ (87) ​ Total charge-offs ​ (58) ​ (194) ​ ​ (2,465) ​ (379) ​ (497) ​ (479) ​ (757) ​ Recoveries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ 16 ​ 0 ​ ​ 16 ​ 6 ​ 317 ​ 4 ​ 35 ​ Residential mortgage ​ 4 ​ 5 ​ ​ 44 ​ 12 ​ 8 ​ 19 ​ 3 ​ Consumer ​ 25 ​ 27 ​ ​ 41 ​ 39 ​ 41 ​ 38 ​ 82 ​ Total recoveries ​ 45 ​ 32 ​ ​ 101 ​ 57 ​ 366 ​ 61 ​ 120 ​ Net charge-offs ​ (13) ​ (162) ​ ​ (2,364) ​ (322) ​ (131) ​ (418) ​ (637) ​ Provision for loan losses ​ 1,003 ​ 1,352 ​ ​ 3,913 ​ 849 ​ 584 ​ 801 ​ 1,221 ​ Balance, end of period ​ $ 12,375 ​ $ 11,026 ​ ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Net charge-offs as a % of average loans ​ 0.00 % 0.01 % ​ 0.16 % 0.03 % 0.02 % 0.05 % 0.09 % ​ TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ June 30, ​ As of December 31, ​ 2021 2020 2019 2018 2017 2016 ASC 310 - Impaired loans ​ $ 1,477 ​ $ 925 ​ $ 1,051 ​ $ 1,605 ​ $ 1,279 ​ $ 674 ASC 450 - Collective segments: ​ ​ ​ ​ ​ ​ Commercial ​ 5,781 ​ 5,545 ​ 3,913 ​ 3,102 ​ 3,078 ​ 3,373 Residential mortgage ​ 4,215 ​ 4,091 ​ 4,006 ​ 3,870 ​ 3,841 ​ 3,890 Consumer ​ 231 ​ 239 ​ 281 ​ 233 ​ 159 ​ 138 Unallocated ​ 671 ​ 585 ​ 585 ​ 499 ​ 499 ​ 398 Total Allowance ​ $ 12,375 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ ​ 63 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, ​ 2021 2020 2019 2018 2017 2016 Impaired loans with a valuation allowance ​ $ 10,594 ​ $ 8,082 ​ $ 3,375 ​ $ 4,851 ​ $ 4,100 ​ $ 3,372 ​ Impaired loans without a valuation allowance ​ 1,819 ​ 2,895 ​ 1,670 ​ 4,923 ​ 5,411 ​ 7,488 ​ Purchased credit impaired loans ​ ​ 6,733 ​ ​ 6,841 ​ ​ 441 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ Total impaired loans ​ $ 19,146 ​ $ 17,818 ​ $ 5,486 ​ $ 9,774 ​ $ 9,511 ​ $ 10,860 ​ Total loans past due 30-89 days and still accruing ​ $ 2,478 ​ $ 5,918 ​ $ 8,889 ​ $ 7,142 ​ $ 9,449 ​ $ 7,735 ​ Nonperforming assets: ​ ​ ​ ​ ​ ​ ​ ​ Purchased credit impaired loans ​ $ 6,733 ​ $ 6,841 ​ $ 441 ​ $ 0 ​ $ 0 ​ $ 0 ​ Other nonaccrual loans ​ ​ 16,238 ​ ​ 14,575 ​ ​ 8,777 ​ ​ 13,113 ​ ​ 13,404 ​ ​ 8,736 ​ Total nonaccrual loans ​ ​ 22,971 ​ ​ 21,416 ​ ​ 9,218 ​ ​ 13,113 ​ ​ 13,404 ​ ​ 8,736 ​ Total loans past due 90 days or more and still accruing ​ 1,881 ​ 1,975 ​ 1,207 ​ 2,906 ​ 3,724 ​ 6,838 ​ Total nonperforming loans ​ 24,852 ​ 23,391 ​ 10,425 ​ 16,019 ​ 17,128 ​ 15,574 ​ Foreclosed assets held for sale (real estate) ​ 1,332 ​ 1,338 ​ 2,886 ​ 1,703 ​ 1,598 ​ 2,180 ​ Total nonperforming assets ​ $ 26,184 ​ $ 24,729 ​ $ 13,311 ​ $ 17,722 ​ $ 18,726 ​ $ 17,754 ​ Loans subject to troubled debt restructurings (TDRs): ​ ​ ​ ​ ​ ​ ​ ​ Performing ​ $ 199 ​ $ 166 ​ $ 889 ​ $ 655 ​ $ 636 ​ $ 5,803 ​ Nonperforming ​ 5,624 ​ 7,285 ​ 1,737 ​ 2,884 ​ 3,027 ​ 2,874 ​ Total TDRs ​ $ 5,823 ​ $ 7,451 ​ $ 2,626 ​ $ 3,539 ​ $ 3,663 ​ $ 8,677 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total nonperforming loans as a % of loans ​ 1.56 % 1.42 % 0.88 % 1.94 % 2.10 % 2.07 % Total nonperforming assets as a % of assets ​ 1.12 % 1.10 % 0.80 % 1.37 % 1.47 % 1.43 % Allowance for loan losses as a % of total loans ​ 0.77 % 0.69 % 0.83 % 1.12 % 1.09 % 1.13 % Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a) ​ ​ 1.05 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ 1.13 % Allowance for loan losses as a % of nonperforming loans ​ 49.79 % 48.67 % 94.35 % 58.11 % 51.70 % 54.40 % (a) Credit adjustment on purchased non-impaired loans at end of period ​ $ 4,502 ​ $ 5,979 ​ $ 1,216 ​ $ 0 ​ $ 0 ​ $ 0 ​ Allowance for loan losses ​ ​ 12,375 ​ ​ 11,385 ​ ​ 9,836 ​ ​ 9,309 ​ ​ 8,856 ​ ​ 8,473 ​ Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1) ​ $ 16,877 ​ $ 17,364 ​ $ 11,052 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Total loans receivable ​ $ 1,597,856 ​ $ 1,644,209 ​ $ 1,182,222 ​ $ 827,563 ​ $ 815,713 ​ $ 751,835 ​ Credit adjustment on purchased non-impaired loans at end of period ​ ​ 4,502 ​ ​ 5,979 ​ ​ 1,216 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ Total (2) ​ $ 1,602,358 ​ $ 1,650,188 ​ $ 1,183,438 ​ $ 827,563 ​ $ 815,713 ​ $ 751,835 ​ Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2) ​ ​ 1.05 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ 1.13 % ​ 64 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, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $178,616,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash. The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans. The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $15,035,000 at June 30, 2021. The Corporation’s outstanding, available, and total credit facilities at June 30, 2021 and December 31, 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ Available ​ Total Credit (In Thousands) June 30, December 31, June 30, December 31, June 30, December 31, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 ​ 2021 ​ 2020 Federal Home Loan Bank of Pittsburgh ​ $ 44,175 ​ $ 72,222 ​ $ 705,819 ​ $ 698,977 ​ $ 749,994 ​ $ 771,199 Federal Reserve Bank Discount Window ​ 0 ​ 0 ​ 14,588 ​ 14,654 ​ 14,588 ​ 14,654 Other correspondent banks ​ 0 ​ 0 ​ 45,000 ​ 45,000 ​ 45,000 ​ 45,000 Total credit facilities ​ $ 44,175 ​ $ 72,222 ​ $ 765,407 ​ $ 758,631 ​ $ 809,582 ​ $ 830,853 ​ At June 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $43,775,000 and a letter of credit of $400,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements. Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At June 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $182,489,000. 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, 2021; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. 65 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Details concerning capital ratios at June 30, 2021 and December 31, 2020 are presented below. Management believes, as of June 30, 2021, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at June 30, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum To Be ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum To Maintain ​ Well ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ Capital Conservation ​ Capitalized Under ​ Minimum To Meet ​ ​ ​ ​ ​ ​ ​ Capital ​ Buffer at Reporting ​ Prompt Corrective ​ the Corporation's ​ ​ Actual ​ Requirement ​ Date ​ Action Provisions ​ Policy Thresholds ​ Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio June 30, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ $ 284,576 ​ 18.99 % N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ $ 157,351 ​ ≥10.5 % C&N Bank ​ 245,054 16.40 % 119,543 ≥8 % 156,900 ≥10.5 % 149,428 ≥10 % ​ 156,900 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,684 15.93 % N/A N/A N/A N/A N/A N/A ​ 127,380 ≥8.5 % C&N Bank ​ 232,129 15.53 % 89,657 ≥6 % 127,014 ≥8.5 % 119,543 ≥8 % ​ 127,014 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,684 15.93 % N/A N/A N/A N/A N/A N/A ​ 104,901 ≥7 % C&N Bank ​ 232,129 15.53 % 67,243 ≥4.5 % 104,600 ≥7.0 % 97,128 ≥6.5 % ​ 104,600 ≥7 % Tier 1 capital to average assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 238,684 10.52 % N/A N/A N/A N/A N/A N/A ​ 181,440 ≥8 % C&N Bank ​ 232,129 10.31 % 90,049 ≥4 % N/A N/A 112,561 ≥5 % ​ 180,097 ≥8 % ​ ​ ​ ​ December 31, 2020: ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ Consolidated ​ $ 260,015 17.49 % N/A N/A ​ N/A N/A N/A N/A ​ $ 156,113 ≥10.5 % C&N Bank ​ 236,943 15.98 % 118,602 ≥8 % 155,665 ≥10.5 % 148,252 ≥10 % 155,665 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ Consolidated ​ 231,577 15.58 % N/A N/A N/A N/A N/A N/A ​ 126,377 ≥8.5 % C&N Bank ​ 225,058 15.18 % 88,951 ≥6 % 126,015 ≥8.5 % 118,602 ≥8 % 126,015 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ Consolidated ​ 231,577 15.58 % N/A N/A N/A N/A N/A N/A ​ 104,075 ≥7 % C&N Bank ​ 225,058 15.18 % 66,714 ≥4.5 % 103,777 ≥7.0 % 96,364 ≥6.5 % 103,777 ≥7 % Tier 1 capital to average assets: ​ ​ ​ Consolidated ​ 231,577 10.34 % N/A N/A N/A N/A N/A N/A ​ 179,206 ≥8 % C&N Bank ​ 225,058 10.12 % 88,959 ≥4 % N/A N/A 111,199 ≥5 % 177,919 ≥8 % ​ In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. Through June 30, 2021, 61,696 shares were repurchased for a total cost of $1,531,000, at an average price of $24.81 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. 66 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, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows: ​ ​ ​ ​ ​ Minimum common equity tier 1 capital ratio 4.5 % Minimum common equity tier 1 capital ratio plus capital conservation buffer 7.0 % Minimum tier 1 capital ratio 6.0 % Minimum tier 1 capital ratio plus capital conservation buffer 8.5 % Minimum total capital ratio 8.0 % Minimum total capital ratio plus capital conservation buffer 10.5 % ​ A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows: ​ ​ ​ ​ ​ Capital Conservation Buffer Maximum Payout (as a % of risk-weighted assets) ​ (as a % of eligible retained income) Greater than 2.5% ​ No payout limitation applies ​ ≤2.5% and >1.875% ​ 60 % ≤1.875% and >1.25% ​ 40 % ≤1.25% and >0.625% ​ 20 % ≤0.625% ​ 0 % ​ At June 30, 2021, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.40%. The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $9,167,000 at June 30, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at June 30, 2021. ​