What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-08 compared with 2021-08-06 · 288 added, 255 removed, 606 unchanged (47% of the section changed)

22 unchanged sentences

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.

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief.

Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates.

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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.

To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program.

Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc.

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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)

COVID-19-related loan modifications:

Accommodation and food services - hotels

Lessors of residential buildings and dwellings

Transportation and warehousing

Real estate rental and leasing - other

Total commercial

Residential mortgage

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.

For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts are moved to the end of the loan term.

Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at September 30, 2021.

Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days.

At September 30, 2021, there were no loans remaining in deferral status under the program.

In comparison, at June 30, 2021, the Corporation had 12 loans with an aggregate recorded investment of $6.7 million in deferral status and at September 30, 2020, there were 44 loans with an aggregate recorded investment of $44.6 million in deferral status.

The recorded investment in Paycheck Protection Program (“PPP”) loans at September 30, 2021 was $62.7 million, with contractual principal balances totaling $65.2 million, reduced $2.5 million by the impact of net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant.

The recorded investment of $5.7 million in first draw PPP loans at September 30, 2021 decreased $126.6 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”).

In the third quarter 2021, the pace of repayments of second draw PPP loans increased as the recorded investment of second draw PPP loans fell to $57.0 million at September 30, 2021 from $72.4 million at June 30, 2021.The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven.

Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Capital Strength

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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.

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

Similarly, the total capital to risk-weighted assets ratio at September 30, 2021 is 16.35%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $96.5 million.

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

EARNINGS OVERVIEW

Net income was $0.44 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.

Net income was $0.47 per diluted share in the third quarter 2021, up from $0.44 in the second quarter 2021 and up $0.29 from $0.18 in the third quarter 2020.

For the nine months ended September 30, 2021, net income per diluted share was $1.46, up from $0.86 per share for the first nine months of 2020.

As described below, earnings of $0.47 per share for the third quarter 2021 were 6.0% lower than third

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

quarter 2020 non-U.S.

generally accepted accounting principles (U.S.

GAAP) earnings per share of $0.50 as adjusted to exclude the impact of merger-related expenses.

For the 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.

For the nine months ended September 30, 2021, earnings of $1.46 per share were 15.0% higher than the first nine months of 2020 non-U.S.

GAAP earnings per share of $1.27 as adjusted to exclude the impact of merger-related expenses.

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

2nd Quarter 2021

2nd Quarter 2020

Results as Presented Under U.S.

3rd Quarter 2021

3rd Quarter 2020

Earnings Under U.S.

Merger-Related Expenses (1)

Adjusted Earnings (Non-U.S.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Six Months Ended June 30, 2021

Six Months Ended June 30, 2020

Results as Presented Under U.S.

Nine Months Ended September 30, 2021

Nine Months Ended September 30, 2020

Earnings Under U.S.

Merger-Related Expenses (1)

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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.

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

Third Quarter 2021 as Compared to Third Quarter 2020

Third quarter 2021 net income was $7,399,000.

In comparison, third quarter 2020 net income was $2,848,000, and excluding merger-related expenses, adjusted (non-U.S.

GAAP) earnings were $7,943,000.

Other significant variances were as follows:

● 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.

● Third quarter 2021 net interest income of $19,459,000 was $177,000 higher than the third quarter 2020 total.

Average outstanding loans decreased $113.7 million, including a reduction in average PPP loans of $74.5 million, and average total deposits increased $52.2 million.

The net interest margin for the third quarter 2021 was 3.59% as compared to 3.57% for the third quarter 2020.

The average yield on earning assets of 3.89% for the third quarter 2021 was down 0.13% from the third quarter 2020, while the average rate on interest-bearing liabilities of 0.43% in the third quarter 2021 was 0.19% lower than the comparable third quarter 2020 average rate.

Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020 amount.

Accretion and amortization of purchase accounting adjustments had

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

● The provision for loan losses was $1,530,000 in the third quarter 2021 as compared to $1,941,000 in the third quarter 2020.

The provision for loan losses in the third quarter 2021 included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance.

In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off.

The partial charge-off amount exceeded the specific allowance of $583,000 that had been established at June 30, 2021.

The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000.

● Noninterest income for the third quarter 2021 was down $611,000 from the third quarter 2020 total.

Significant variances included the following:

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

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

o Loan servicing fees, net, were $153,000 in the third quarter 2021, an increase of $240,000 over the third quarter 2020 reduction in revenue of $87,000.

The net increase reflects growth in volume of residential mortgage loans sold with servicing retained.

Further, the fair value of servicing rights decreased $45,000 in the third quarter 2021 as compared to a reduction in fair value of $221,000 in the third quarter 2020, as market assumptions regarding prepayment speeds have decreased.

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

o 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.

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

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

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

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

Significant variances included the following:

o Salaries and employee benefits 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.

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

Net income for the nine-month period ended September 30, 2021 was $23,246,000, or $1.46 per diluted share, while net income for the first nine months of 2020 was $12,452,000, or $0.86 per share.

Excluding the impact of merger-related expenses, adjusted (non-U.S.

GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share.

GAAP) earnings for the first nine months of 2020 would be $18,442,000 or $1.27 per share.

Other significant variances were as follows:

● Net interest income was up $10,236,000 (35.9%) for the first six months of 2021 over the same period in 2020, reflecting the growth mainly attributable to the Covenant acquisition.

● Net interest income was up $10,413,000 (21.8%) for the first nine months of 2021 over the same period in 2020, reflecting growth mainly attributable to the Covenant acquisition.

Average outstanding loans increased $241.3 million, and average total deposits increased $396.7 million.

The net interest margin was 3.75% 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.

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.

The net interest margin was 3.70% for the nine months ended September 30, 2021, up from 3.67% for the first nine months of 2020.

Interest and fees on PPP loans totaled $4,886,000 for the first nine months of 2021, an increase of $3,457,000 compared to the first nine months of 2020.

Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,228,000 in the first nine months of 2021 as compared to a net positive impact of $1,999,000 in the first nine months of 2020.

● For the first nine months of 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded in the first nine months of 2020.

The provision for the first nine months of 2021 includes the impact of a charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000, as previously discussed.

In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000.

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

Significant variances included the following:

o Loan servicing fees, net, were $547,000 in the first nine months of 2021, an increase of $806,000 over the 2020 total of negative $259,000 (a decrease in revenue).

The net increase reflects growth in volume of residential mortgage loans sold with servicing retained.

Further, the fair value of servicing rights decreased $9,000 in the first nine months of 2021 as compared to a reduction in fair value of $617,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans.

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

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

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

o Other noninterest income totaled $2,837,000, an increase of $254,000 over 2020.

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.

Within this category, significant variances included the following:

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

o Merchant services income increased $43,000.

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

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

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

o Net gains from sales of loans totaled $2,786,000 in the first nine months of 2021, a decrease of $1,145,000 from the total for the first nine months of 2020.

The decrease reflects a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions.

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

Significant variances included the following:

o Total salaries and employee benefits expense increased $4,033,000.

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

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

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

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

o Other noninterest expense increased $256,000.

Within this category, significant variances included the following:

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

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

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

o 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.

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

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

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.

● The income tax provision was $5,456,000 for the nine months ended September 30, 2021, up from $2,509,000 for the first nine months of 2020.

Pre-tax income was $13,741,000 higher in the first nine months of 2021 as compared to 2020.

The effective tax rate was 19.0% for the first nine months of 2021, higher than the 16.8% effective tax rate for the first nine months of 2020.

The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in the first nine months of 2021 as compared to a 5.0% benefit in 2020.

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

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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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the nine months ended September 30, 2021.

TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,

For the Three Months Ended :

(Dollars In Thousands, Except Per Share Data)

Except Per Share Data)

September 30,

Interest income

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Actual results could differ from these estimates.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses.

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Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

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.

Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 2021 and 2020.

In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis.

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The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended June 30, 2021 and 2020

Three-Month Periods Ended September 30, 2021 and 2020

For the three-month periods, fully taxable equivalent net interest income was $19,751,000 in 2021, which was $216,000 (1.1%) higher than in 2020.

Interest income in the 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.

Interest income in the third quarter was $21,365,000 which was $639,000 lower in 2021 as compared to 2020, while interest expense was lower by $855,000 in comparing the same periods.

As presented in Table III, the Net Interest Margin was 3.59% in 2021 as compared to 3.57% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.46% in 2021 from 3.40% in 2020.

The average yield on earning assets of 3.89% was 0.13% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.43% in 2021 was 0.19% lower.

Income from purchase accounting-related adjustments in the 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%.

Income from purchase accounting-related adjustments in the third quarter 2021 had a positive effect on net interest income of $563,000, including an increase in income on loans of $298,000 and net reductions in interest expense on time deposits and borrowed funds totaling $265,000.

The positive impact to the third quarter 2021 net interest margin from purchase accounting adjustments was 0.10%.

In comparison, the positive impact of purchase accounting adjustments to the third quarter 2020 net interest margin was $1,298,000, or 0.24%.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $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.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest and fees from loans receivable decreased $627,000 in 2021 as compared to 2020.

Average outstanding loans receivable decreased $113,735,000 (6.7%) to $1,591,857,000 in 2021 from $1,705,592,000 in 2020, including a reduction in average PPP loans of $74,501,000.

The average balance of other loans also decreased, as falling interest rates contributed to accelerated prepayments and demand for new commercial loans was muted over much of 2020 and 2021.

In addition, the Corporation has sold an increased proportion of its residential mortgage loans into the secondary market over the past few years, which has helped to enhance noninterest income in 2020 and 2021 but has contributed to a net reduction in average outstanding loans.

The average yield on loans in the third quarter 2021 was 4.76%, up from 4.60% in the third quarter 2020.

Although the average yield on taxable loans other than PPP loans fell to 4.70% in 2021 from 4.91% in 2020, and the average yield on tax-exempt loans fell to 2.90% in 2021 from 3.57% in 2020, the average yield on the total portfolio was affected by the comparatively high yield on PPP loans.

Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

Interest income from available-for-sale debt securities decreased $35,000 in 2021 from 2020.

Total average available-for-sale debt securities (at amortized cost) increased to $391,148,000 in 2021 from $321,541,000 in 2020.

The average balance of 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 balance of taxable securities increased by $36,199,000, while the average balance of tax-exempt securities increased $33,408,000.

The average yield on available-for-sale debt securities was 2.18% for 2021, down from 2.70% in 2020.

The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates.

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.

Income from interest-bearing due from banks totaled $106,000 in 2021, an increase of $37,000 from 2020.

The average yield on interest-bearing due from banks was 0.22% in 2021 and 0.19% in 2020.

Within this category, the largest asset balance in 2021 and 2020 has been interest-bearing deposits held with the Federal Reserve.

The average balance of $195,359,000, or 9.0% of total average earning assets in the third quarter 2021, was up $47,816,000 from $147,543,000, or 6.8% of total average earning assets in the third quarter 2020.

The levels of cash held at the Federal Reserve in both periods were significantly higher as compared to customary levels prior to the onset of the COVID-19 pandemic.

Throughout most of 2020 and 2021, funds received from PPP and other loan repayments and increases in deposits have outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

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The decrease in average rates on deposits includes decreases of 0.32% on time deposits, 0.14% on money market accounts, 0.06% on interest checking accounts and 0.01% on saving accounts.

The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 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 change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 16.2% of average total deposits in the third quarter 2021 from 23.9% in the third quarter 2020.

Average total deposits increased $52,215,000 (2.8%) to $1,936,758,000 in the third quarter from $1,884,543,000 in 2020.

The increase in average balance on deposits reflects PPP-related activity and funding from other government stimulus programs.

Interest expense on short-term borrowings in the third quarter 2021 was less than $1,000 as compared to $73,000 in 2020.

The average balance of short-term borrowings decreased to $2,185,000 in 2021 from $44,660,000 in 2020.

The average rate on short-term borrowings decreased to 0.43% in 2021 from 1.30% in 2020, reflecting the impact of lower short term rates.

The average rate on short-term borrowings was 0.65% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $275,000 to $87,000 in 2021 from $362,000 in 2020.

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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%.

The senior notes were issued to provide funding at a relatively attractive cost for the holding company, Citizens & Northern Corporation.

Interest expense on the senior notes totaled $118,000 in the third quarter 2021.

The average balance of the senior notes was $14,674,000 in the third quarter of 2021 at an average rate of 3.19%.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest expense on subordinated debt increased $99,000 to $346,000 in 2021 from $247,000 in 2020.

The average balance of subordinated debt increased to $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 average balance of subordinated debt increased to $32,978,000 in 2021 from $16,540,000 in 2020, reflecting a new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021.

The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026.

If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity.

The subordinated notes are a source of Tier 2 capital for the holding company.

The average rate incurred on subordinated debt was 4.16% in 2021, down from 5.94% in 2020.

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

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

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.

Nine-Month Periods Ended September 30, 2021 and 2020

For the nine-month periods, fully taxable equivalent net interest income was $59,056,000 in 2021, $10,532,000 (21.7%) higher than in 2020.

Interest income was $8,073,000 higher in 2021 as compared to 2020, while interest expense was lower by $2,459,000 in comparing the same periods.

As presented in Table III, the Net Interest Margin was 3.70% in 2021 as compared to 3.67% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.55% in 2021, up from 3.44% in 2020.

The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program.

Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the nine months ended September 30, 2021 of $2,228,000, including an increase in income on loans of $1,052,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,176,000.

In comparision, the net positive impact on net interest income of purchase accounting adjustments was $1,999,000 in the nine-month period ended September 30, 2020.

The net positive impact to the net interest margin from purchase accounting adjustments was 0.14% in the first nine months of 2021 as compared to 0.15% in the first nine months of 2020.

INTEREST INCOME AND EARNING ASSETS

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Table IV shows the increase in interest on loans includes an increase of $8,431,000 attributable to changes in volume and a decrease of $135,000 related to changes in average rates.

For the first 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.

For the first nine months of 2021, average outstanding loans totaled $1,611,032,000, an increase of $241,296,000 (17.6%) over the comparative amount for the first nine months of 2020.

The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as an increase in the average balance of PPP loans.

The fully taxable equivalent yield on loans in 2021 was 4.79% compared to 4.82% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates.

Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before 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%.

Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition.

Similar to the third quarter comparision, the overall yield on loans in the nine-month period ended September 30, 2021 included the impact of the acceleration of fees recognized on PPP loans as repayments have been received from the SBA.

Interest income on available-for-sale debt securities totaled $6,071,000 in 2021, a decrease of $254,000 from the total for 2020.

As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $364,452,000 in 2021, an increase of $36,935,000 from 2020.

The average yield on available-for-sale debt securities decreased to 2.26% 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 yield on available-for-sale debt securities decreased to 2.23% in 2021 from 2.58% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates.

For the nine-month periods, interest income from interest-bearing due from banks totaled $230,000 in 2021, an increase of $39,000 from $191,000 in 2020.

The average balance increased $88,694,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings.

The average balance of interest-bearing due from

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

banks totaled 7.4% of average total earning assets for the nine months ended September 30, 2021 as compared to 3.9% in 2020.

The average yield on interest-bearing due from banks was 0.20% in 2021 as compared to 0.37% in 2020, due to decreases in market rates.

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Table IV shows the reduction in interest expense related to changes in rate accounted for $2,912,000 of the decrease in expense, partially offset by an increase in expense of $453,000 attributable to volume.

For the 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.

For the nine-month period ended September 30, 2021, average total deposits increased $396,652,000 (26.5%) to $1,896,023,000 in 2021 from $1,499,371,000 in 2020.

The increase in average deposits includes the impact of the Covenant acquisition.

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The decrease in average rate on deposits includes decreases of 0.64% on time deposits, 0.15% on money market accounts, 0.09% on interest checking accounts and 0.03% on saving accounts.

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.

The average balance of time deposits fell to 17.9% of average total deposits in 2021 from 26.1% in 2020, further contributing to the reduction in average rate on deposits.

Interest expense on short-term borrowings decreased $313,000 to $22,000 in 2021 from $335,000 in 2020.

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The average rate on long-term borrowings was 0.94% in 2021 compared to 1.62% in 2020.

The reduction in both average balance and rate reflects the prepayment of higher cost borrowings done in December 2020.

Interest expense on the senior notes totaled $57,000 in 2021.

The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020.

Interest expense on the senior notes issued in May 2021 totaled $175,000 in 2021.

The average balance of the senior notes was $7,255,000 in 2021 with an average rate of 3.23%.

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Three Months Ended 9/30/21 vs.

Six Months Ended 6/30/21 vs.

Nine Months Ended 9/30/21 vs.

EARNING ASSETS

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Three Months Ended

September 30,

Trust revenue

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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.

Total noninterest income, excluding realized gains on securities, net in the third quarter 2021 decreased $611,000 (8.8%) from the third quarter 2020 total.

Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Trust revenue

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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.

Total noninterest income, excluding realized gains on securities, net for the first nine months of 2021 increased $1,662,000 (9.3%) from the total for the first nine months of 2020.

Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

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Three Months Ended

September 30,

Salaries and employee benefits

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Total noninterest expense

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.

Total noninterest expense in the third quarter 2021 decreased $5,704,000 (27.1%) from the third quarter 2020 total.

Excluding merger-related expenses from the third quarter 2020, total noninterest expense in the third quarter 2021 increased $698,000 (4.8%) from the third quarter 2020.

Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)

Six Months Ended

Nine Months Ended

September 30,

Salaries and employee benefits

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Total noninterest expense

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.

Total noninterest expense for the first nine months of 2021 decreased $906,000 (1.9%) from the total for the first nine months of 2020.

Total noninterest expense for the first nine months of 2021 increased $6,620,000 (16.6%) from the total excluding merger-related expenses, for the first nine months of 2020.

Changes of significance, including the impact of the Covenant acquisition that closed July 1, 2020, are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

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.

The income tax provision for the first nine months of 2021 was $5,456,000, which was $2,947,000 higher than the provision for the first nine months of 2020.

The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the first nine months of 2021 compared to 16.8% in the first nine months of 2020.

The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences.

The higher effective tax rate in the first nine months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income.

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:

The net deferred tax asset at September 30, 2021 and December 31, 2020 represents the following temporary difference components:

September 30,

(In Thousands)

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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;

Management believes the recorded net deferred tax asset at September 30, 2021 is fully realizable;

however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings .

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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.

There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at September 30, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021.

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.

At September 30, 2021, gross loans outstanding totaled $1,575,708,000, a decrease of $68,501,000 from December 31, 2020, including a reduction in PPP loans of $69,541,000 due to repayments and a net reduction in residential mortgage loans of $41,309,000.

The net reduction in loans outstanding over the past 9 months reflects the impact of high levels of loan prepayments consistent with low interest rates and a high proportion of new mortgage loans being sold into the secondary market.

Excluding PPP loans, total commercial loans at September 30, 2021 were up $41,099,000 from December 31, 2020.

At September 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans.

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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.

Total participation loans outstanding amounted to $57,918,000 at September 30, 2021, down from $65,741,000 at December 31, 2020.

At September 30, 2021, the balance of participation loans outstanding includes a total of $33,530,000 to businesses located outside of the Corporation’s market areas.

Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories.

Leveraged participation loans totaled $7,642,000 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.

Leveraged participation loans totaled $7,565,000 at September 30, 2021 and $8,437,000 at December 31, 2020.

The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago.

Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity.

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.

The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago.

Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh.

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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.

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

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor.

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

At September 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $328,659,000, including loans sold through the MPF Xtra program of $167,914,000 and loans sold through the Original program of $160,745,000.

At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000.

Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of June 30, 2021 and December 31, 2020.

Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2021 and December 31, 2020.

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts.

The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold.

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

At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000.

Income related to providing the credit enhancement (included

Income related to providing the credit enhancement

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.

(included in other noninterest income in the consolidated statements of income) totaled $265,000 for the nine months ended September 30, 2021 and $107,000 for the nine months ended September 30, 2020.

A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the nine months ended September 30, 2021 with a provision for losses of $29,000 in the nine months ended September 30, 2020.

The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

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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.

The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $11,458,000 at September 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $485,000 at September 30, 2021 and $730,000 at December 31, 2020.

In the nine months ended September 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $208,000 representing amounts realized on SBA claims in excess of prior estimates.

TABLE VII - SUMMARY OF LOANS BY TYPE

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(In Thousands)

September 30,

Commercial loans secured by real estate

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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 allowance for loan losses was $12,700,000 at September 30, 2021, up from $11,385,000 at December 31, 2020.

Table IX shows total specific allowances on impaired loans decreased $42,000 to $883,000 at September 30, 2021 from $925,000 at December 31, 2020.

Table IX also shows the increase in the allowance in 2021 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $6,689,000 at September 30, 2021 from $5,545,000 at December 31, 2020.

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.

Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,482,000 at September 30, 2021 and $5,362,000 at December 31, 2020.

This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $302,000 at June 30, 2021.

Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $300,000 at September 30, 2021.

The remainder of the portfolio was deemed to be the performing component of the portfolio.

Performing loans acquired from Monument are presented net of a discount for credit losses of $431,000 at June 30, 2021 and $617,000 at December 31, 2020.

Performing loans acquired from Monument are presented net of a discount for credit losses of $354,000 at September 30, 2021 and $617,000 at December 31, 2020.

This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Table X shows the allowance for loan losses totaled 0.77% 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:

Table X shows the allowance for loan losses totaled 0.81% of gross loans outstanding at September 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018.

Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at September 30, 2021, in line with ratios from the previous years.

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

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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

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

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

Increase in collectively determined portion of the allowance attributable to:

Changes in loan volume

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In Thousands)

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

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

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

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(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.

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

In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off.

There was a specific allowance for loan losses of $583,000 on this commercial loan at June 30, 2021, with no specific allowance at December 31, 2020.

At September 30, 2021, there was no specific allowance on the loan, and the Corporation’s recorded investment in the loan of $2,302,000 is reported as non-accrual and impaired.

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

The Corporation had no recorded investment in this loan at September 30, 2021 and December 31, 2020.

In the three months ended September 30, 2021, net charge-offs were $1,205,000, including recoveries of $15,000 and charge-offs of $1,220,000.

For the nine months ended September 30, 2021, net charge-offs were $1,218,000 including recoveries of $60,000 and charge-offs of $1,278,000.

Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.08% in the nine months ended September 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs.

Total nonperforming loans as a percentage of outstanding loans was 1.56% 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.

Total nonperforming loans as a percentage of outstanding loans was 1.48% at September 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.05% at September 30, 2021, down from 1.10% at December 31, 2020.

Table X presents data at the end of each of the years ended December 31, 2016 through 2020.

Table X shows that total nonperforming loans as a percentage of loans of 1.56% 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.

Table X shows that total nonperforming loans as a percentage of loans of 1.48% at September 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018.

Similarly, the September 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.05% was lower than the corresponding ratio from 2016 through 2018.

Total impaired loans of $18,014,000 at September 30, 2021 are up $196,000 from the corresponding amount at December 31, 2020 of $17,818,000.

Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020.

Table X shows that the total balance of impaired loans at September 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020.

Similarly, total nonperforming assets of $24,639,000 at September 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition.

As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,139,000 at September 30, 2021, down from $5,918,000 at December 31, 2020.

This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,775,000 at September 30, 2021, down from $5,084,000 at December 31, 2020.

Management monitors the status

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Over the period 2016-2020 and the first nine months of 2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts.

As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status;

however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2021.

however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 2021.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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(Dollars In Thousands)

Six Months Ended

Nine Months Ended

September 30,

Years Ended December 31,

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(In Thousands)

September 30,

As of December 31,

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(Dollars In Thousands)

September 30,

As of December 31,

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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.

At September 30, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $163,565,000.

The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.

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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:

As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $14,936,000 at September 30, 2021.

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

(In Thousands)

September 30,

Federal Home Loan Bank of Pittsburgh

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Total credit facilities

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 September 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $38,251,000 and letters of credit totaling $5,584,000.

At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit.

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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.

At September 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $214,072,000.

Management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.

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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.

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.

Details concerning capital ratios at September 30, 2021 and December 31, 2020 are presented below.

Management believes, as of September 30, 2021, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers.

Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)

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Policy Thresholds

June 30, 2021:

September 30, 2021:

Total capital to risk-weighted assets:

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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.

In the third quarter 2021, 230,404 shares were repurchased for a total cost of $5,707,000, at an average price of $24.77 per share.

Cumulatively through September 30, 2021, 292,100 shares have been repurchased for a total cost of $7,238,000, at an average price of $24.78 per share.

Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements.

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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:

At September 30, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

Minimum common equity tier 1 capital ratio

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≤1.25% and >0.625%

At June 30, 2021, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.40%.

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

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities.

The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity.

The balance in Accumulated Other Comprehensive Income related to unrealized gains (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.

The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $6,300,000 at September 30, 2021 and $11,676,000 at December 31, 2020.

Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity.

If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced.

Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at June 30, 2021.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis