CITIZENS & NORTHERN CORP 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following: ● the effect of the novel coronavirus (COVID-19) and related events ● changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates ● disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions ● changes in general economic conditions ● legislative or regulatory changes ● downturn in demand for loan, deposit and other financial services in the Corporation’s market area ● increased competition from other banks and non-bank providers of financial services ● technological changes and increased technology-related costs ● changes in accounting principles, or the application of generally accepted accounting principles ● failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions ​ These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. CORONAVIRUS (COVID-19) RESPONSE AND PAYCHECK PROTECTION PROGRAM Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic. On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need 42 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual. To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc. (“Covenant”) had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts are moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at September 30, 2021. Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. At September 30, 2021, there were no loans remaining in deferral status under the program. In comparison, at June 30, 2021, the Corporation had 12 loans with an aggregate recorded investment of $6.7 million in deferral status and at September 30, 2020, there were 44 loans with an aggregate recorded investment of $44.6 million in deferral status. The recorded investment in Paycheck Protection Program (“PPP”) loans at September 30, 2021 was $62.7 million, with contractual principal balances totaling $65.2 million, reduced $2.5 million by the impact of net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant. The recorded investment of $5.7 million in first draw PPP loans at September 30, 2021 decreased $126.6 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”). In the third quarter 2021, the pace of repayments of second draw PPP loans increased as the recorded investment of second draw PPP loans fell to $57.0 million at September 30, 2021 from $72.4 million at June 30, 2021.The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven. Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven. Capital Strength While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens & Northern Bank (“C&N Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized. C&N Bank’s leverage ratio (Tier 1 capital to average assets) at September 30, 2021 of 10.35% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $121.7 million. Similarly, the total capital to risk-weighted assets ratio at September 30, 2021 is 16.35%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $96.5 million. Additional details regarding the Corporation’s and C&N Bank’s regulatory capital position are provided in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). EARNINGS OVERVIEW Net income was $0.47 per diluted share in the third quarter 2021, up from $0.44 in the second quarter 2021 and up $0.29 from $0.18 in the third quarter 2020. For the nine months ended September 30, 2021, net income per diluted share was $1.46, up from $0.86 per share for the first nine months of 2020. As described below, earnings of $0.47 per share for the third quarter 2021 were 6.0% lower than third 43 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q quarter 2020 non-U.S. generally accepted accounting principles (U.S. GAAP) earnings per share of $0.50 as adjusted to exclude the impact of merger-related expenses. For the nine months ended September 30, 2021, earnings of $1.46 per share were 15.0% higher than the first nine months of 2020 non-U.S. GAAP earnings per share of $1.27 as adjusted to exclude the impact of merger-related expenses. The following table provides a reconciliation of the Corporation’s unaudited earnings results under U.S. GAAP to comparative non-U.S. GAAP results excluding merger-related expenses. Management believes disclosure of unaudited earnings results for the periods presented, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes. RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE (Dollars In Thousands, Except Per Share Data) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 3rd Quarter 2021 ​ 3rd Quarter 2020 ​ ​ Income ​ ​ ​ ​ ​ Diluted ​ Income ​ ​ ​ ​ ​ ​ ​ Diluted ​ ​ Before ​ ​ ​ ​ ​ Earnings ​ Before ​ ​ ​ ​ ​ ​ Earnings ​ ​ Income ​ Income ​ ​ ​ per ​ Income ​ Income ​ ​ ​ ​ per ​ ​ Tax ​ Tax ​ Net ​ Common ​ Tax ​ Tax ​ Net ​ Common ​ ​ Provision ​ Provision ​ Income ​ Share ​ Provision ​ Provision ​ Income ​ Share Earnings Under U.S. GAAP ​ $ 8,965 ​ $ 1,566 ​ $ 7,399 ​ $ 0.47 ​ $ 3,286 ​ $ 438 ​ $ 2,848 ​ $ 0.18 Add: Merger-Related Expenses (1) ​ 0 ​ 0 ​ 0 ​ ​ ​ 6,402 ​ 1,307 ​ 5,095 ​ Adjusted Earnings (Non-U.S. GAAP) ​ $ 8,965 ​ $ 1,566 ​ $ 7,399 ​ $ 0.47 ​ $ 9,688 ​ $ 1,745 ​ $ 7,943 ​ $ 0.50 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2021 Nine Months Ended September 30, 2020 ​ ​ Income ​ ​ ​ ​ ​ Diluted ​ Income ​ ​ ​ ​ ​ ​ ​ Diluted ​ ​ Before ​ ​ ​ ​ ​ Earnings ​ Before ​ ​ ​ ​ ​ ​ Earnings ​ ​ Income ​ Income ​ ​ ​ per ​ Income ​ Income ​ ​ ​ ​ per ​ ​ Tax ​ Tax ​ Net ​ Common ​ Tax ​ Tax ​ Net ​ Common ​ ​ Provision ​ Provision ​ Income ​ Share ​ Provision ​ Provision ​ Income ​ Share Earnings Under U.S. GAAP ​ $ 28,702 ​ $ 5,456 ​ $ 23,246 ​ $ 1.46 ​ $ 14,961 ​ $ 2,509 ​ $ 12,452 ​ $ 0.86 Add: Merger-Related Expenses (1) ​ 0 ​ 0 ​ 0 ​ ​ ​ 7,526 ​ 1,536 ​ 5,990 ​ Adjusted Earnings (Non-U.S. GAAP) ​ $ 28,702 ​ $ 5,456 ​ $ 23,246 ​ $ 1.46 ​ $ 22,487 ​ $ 4,045 ​ $ 18,442 ​ $ 1.27 (1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses. Additional highlights related to the Corporation’s third quarter and September 30, 2021 year-to-date unaudited earnings results as compared to the corresponding periods of 2020 are presented below. Third Quarter 2021 as Compared to Third Quarter 2020 Third quarter 2021 net income was $7,399,000. In comparison, third quarter 2020 net income was $2,848,000, and excluding merger-related expenses, adjusted (non-U.S. GAAP) earnings were $7,943,000. Other significant variances were as follows: ● Third quarter 2021 net interest income of $19,459,000 was $177,000 higher than the third quarter 2020 total. Average outstanding loans decreased $113.7 million, including a reduction in average PPP loans of $74.5 million, and average total deposits increased $52.2 million. The net interest margin for the third quarter 2021 was 3.59% as compared to 3.57% for the third quarter 2020. The average yield on earning assets of 3.89% for the third quarter 2021 was down 0.13% from the third quarter 2020, while the average rate on interest-bearing liabilities of 0.43% in the third quarter 2021 was 0.19% lower than the comparable third quarter 2020 average rate. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020 amount. Accretion and amortization of purchase accounting adjustments had 44 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q a net positive impact on net interest income of $563,000 in the third quarter 2021, a decrease of $735,000 from the net positive impact of $1,298,000 in the third quarter 2020 ● The provision for loan losses was $1,530,000 in the third quarter 2021 as compared to $1,941,000 in the third quarter 2020. The provision for loan losses in the third quarter 2021 included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. The partial charge-off amount exceeded the specific allowance of $583,000 that had been established at June 30, 2021. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000. ● Noninterest income for the third quarter 2021 was down $611,000 from the third quarter 2020 total. Significant variances included the following: o Net gains from sales of loans of $797,000 for the third quarter 2021 were down $1,255,000 from the total for the third quarter 2020, as the volume of residential mortgage loans sold in the third quarter 2021 was down from the third quarter 2020 level. o Other noninterest income totaled $665,000, a decrease of $331,000 from the third quarter 2020 as the Corporation recognized income of $279,000 in the third quarter 2020 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee and dividend income from Federal Home Loan Bank stock decreased $55,000. o Loan servicing fees, net, were $153,000 in the third quarter 2021, an increase of $240,000 over the third quarter 2020 reduction in revenue of $87,000. The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $45,000 in the third quarter 2021 as compared to a reduction in fair value of $221,000 in the third quarter 2020, as market assumptions regarding prepayment speeds have decreased. o Trust revenue of $1,821,000 increased $226,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation. o Service charges on deposit accounts of $1,249,000 in the third quarter 2021 were up $204,000 from the third quarter 2020 amount, as the volume of consumer and business overdraft and other activity increased. o Brokerage and insurance revenue of $560,000 increased $178,000 from the third quarter 2020 total, due to commissions on higher transaction volume. o Interchange revenue from debit card transactions totaled $975,000 in the third quarter 2021, an increase of $147,000 over the third quarter 2020 total, reflecting increases in transaction volumes and number of accounts due to the Covenant acquisition. ● Noninterest expense, excluding merger-related expenses, increased $698,000 in the third quarter 2021 over the third quarter 2020 amount. Significant variances included the following: o Salaries and employee benefits of $9,427,000 increased $724,000, including the impact of increases in administrative, information technology, cash management services and lending personnel. o Professional fees of $538,000 increased $116,000, including increases in recruiting services. 45 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q o Other noninterest expense of $1,850,000 decreased $240,000, including other operational losses decreasing $195,000 as an estimated accrual of $200,000 related to a Trust Department tax compliance and preparation matter was recorded in the third quarter 2020 with no comparable charge in the third quarter 2021. ● The income tax provision of $1,566,000 for the third quarter 2021 was up $1,128,000 from $438,000 for the third quarter 2020, reflecting higher pre-tax income. ​ Nine Months Ended September 30, 2021 as Compared to Nine Months Ended September 30, 2020 ​ Net income for the nine-month period ended September 30, 2021 was $23,246,000, or $1.46 per diluted share, while net income for the first nine months of 2020 was $12,452,000, or $0.86 per share. Excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings for the first nine months of 2020 would be $18,442,000 or $1.27 per share. Other significant variances were as follows: ● Net interest income was up $10,413,000 (21.8%) for the first nine months of 2021 over the same period in 2020, reflecting growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $241.3 million, and average total deposits increased $396.7 million. The net interest margin was 3.70% for the nine months ended September 30, 2021, up from 3.67% for the first nine months of 2020. Interest and fees on PPP loans totaled $4,886,000 for the first nine months of 2021, an increase of $3,457,000 compared to the first nine months of 2020. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,228,000 in the first nine months of 2021 as compared to a net positive impact of $1,999,000 in the first nine months of 2020. ● For the first nine months of 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded in the first nine months of 2020. The provision for the first nine months of 2021 includes the impact of a charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000, as previously discussed. In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000. ● Noninterest income for the first nine months of 2021 was up $1,662,000 from the total for the first nine months of 2020. Significant variances included the following: o Loan servicing fees, net, were $547,000 in the first nine months of 2021, an increase of $806,000 over the 2020 total of negative $259,000 (a decrease in revenue). The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $9,000 in the first nine months of 2021 as compared to a reduction in fair value of $617,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans. o Trust revenue of $5,254,000 increased $615,000 reflecting the impact of growth in average trust assets under management including the impact of market value appreciation. o Interchange revenue from debit card transactions totaled $2,854,000 for the first nine months of 2021, an increase of $577,000, reflecting an increase in transaction volumes. o Brokerage and insurance revenue of $1,392,000 increased $271,000, due to commissions on higher transaction volume. o Other noninterest income totaled $2,837,000, an increase of $254,000 over 2020. Within this category, significant variances included the following: o Income from realization of tax credits was $268,000 higher in the first nine months of 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations. o Fee income for providing credit enhancement on sale of mortgage loans increased $158,000. 46 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q o Credit card interchange income increased $69,000 due to higher transaction volume. o Income from investment in a title agency increased $54,000. o Merchant services income increased $43,000. o Other noninterest income decreased $279,000 due to the impact of the life insurance transaction in 2020 in which benefits were split between the Corporation and heirs of a former employee. o Dividend income from Federal Home Loan Bank stock decreased $76,000. o Service charges on deposit accounts of $3,337,000 in the first nine months of 2021 increased $211,000 from the total for the first nine months of 2020, as consumer and business activity increased. o Net gains from sales of loans totaled $2,786,000 in the first nine months of 2021, a decrease of $1,145,000 from the total for the first nine months of 2020. The decrease reflects a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions. ● Noninterest expense, excluding merger-related expenses, increased $6,620,000 for the nine months ended September 30, 2021 over the total for the first nine months of 2020. Significant variances included the following: o Total salaries and wages and benefits expenses increased $4,757,000, reflecting inclusion of the former Covenant operations for nine months in 2021 as compared to three months in 2020, as well as increases in lending, human resources, information technology and other personnel needed to accommodate growth. o Net occupancy and equipment expense increased $473,000, primarily reflecting an increase due to the Covenant acquisition. o Data processing and telecommunications expenses increased $383,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs. o Professional fees expense increased $418,000, mainly due to increases in recruiting services and PPP loan processing professional fees. o Other noninterest expense increased $256,000. Within this category, significant variances included the following: o FDIC insurance expense totaled $431,000, an increase of $244,000. o Donations expense increased $230,000, mainly due to an increase in donations associated with the PA Educational Improvement Tax Credit program. o Business development expenses totaled $345,000, an increase of $201,000, due primarily to an increase in public relations expense. o Other operational losses totaled $159,000, a decrease of $394,000, including a reduction in charges related to Trust Department tax compliance and preparation matters. o The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $208,000. 47 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q ● The income tax provision was $5,456,000 for the nine months ended September 30, 2021, up from $2,509,000 for the first nine months of 2020. Pre-tax income was $13,741,000 higher in the first nine months of 2021 as compared to 2020. The effective tax rate was 19.0% for the first nine months of 2021, higher than the 16.8% effective tax rate for the first nine months of 2020. The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in the first nine months of 2021 as compared to a 5.0% benefit in 2020. ​ More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of Management’s Discussion and Analysis. ACQUISITION OF COVENANT FINANCIAL, INC. The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant follows the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million. In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the nine months ended September 30, 2021. TABLE I – QUARTERLY FINANCIAL DATA ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands, ​ For the Three Months Ended : Except Per Share Data) ​ September 30, ​ June 30, ​ March 31, ​ December 31, ​ September 30, ​ June 30, ​ March 31, (Unaudited) 2021 ​ 2021 ​ 2021 2020 ​ 2020 2020 2020 Interest income ​ $ 21,073 ​ $ 20,428 ​ $ 21,754 ​ $ 21,859 ​ $ 21,751 ​ $ 16,513 ​ $ 17,037 Interest expense ​ 1,614 ​ 1,747 ​ 1,671 ​ 2,104 ​ 2,469 ​ 2,267 ​ 2,755 Net interest income ​ 19,459 ​ 18,681 ​ 20,083 ​ 19,755 ​ 19,282 ​ 14,246 ​ 14,282 Provision (credit) for loan losses ​ 1,530 ​ 744 ​ 259 ​ 620 ​ 1,941 ​ (176) ​ 1,528 Net interest income after provision (credit) for loan losses ​ 17,929 ​ 17,937 ​ 19,824 ​ 19,135 ​ 17,341 ​ 14,422 ​ 12,754 Noninterest income ​ 6,359 ​ 6,300 ​ 6,782 ​ 6,565 ​ 6,970 ​ 5,528 ​ 5,281 Net gains on securities ​ 23 ​ 2 ​ 0 ​ 144 ​ 25 ​ 0 ​ 0 Loss on prepayment of borrowings ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 1,636 ​ ​ 0 ​ ​ 0 ​ ​ 0 Merger-related expenses ​ 0 ​ 0 ​ 0 ​ 182 ​ 6,402 ​ 983 ​ 141 Other noninterest expenses ​ 15,346 ​ 15,399 ​ 15,709 ​ 15,775 ​ 14,648 ​ 12,274 ​ 12,912 Income before income tax provision ​ 8,965 ​ 8,840 ​ 10,897 ​ 8,251 ​ 3,286 ​ 6,693 ​ 4,982 Income tax provision ​ 1,566 ​ 1,780 ​ 2,110 ​ 1,481 ​ 438 ​ 1,255 ​ 816 Net income ​ $ 7,399 ​ $ 7,060 ​ $ 8,787 ​ $ 6,770 ​ $ 2,848 ​ $ 5,438 ​ $ 4,166 Net income attributable to common shares ​ $ 7,336 ​ $ 6,999 ​ $ 8,722 ​ $ 6,727 ​ $ 2,830 ​ $ 5,405 ​ $ 4,146 Basic earnings per common share ​ $ 0.47 ​ $ 0.44 ​ $ 0.55 ​ $ 0.43 ​ $ 0.18 ​ $ 0.39 ​ $ 0.30 Diluted earnings per common share ​ $ 0.47 ​ $ 0.44 ​ $ 0.55 ​ $ 0.43 ​ $ 0.18 ​ $ 0.39 ​ $ 0.30 ​ CRITICAL ACCOUNTING POLICIES The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates. 48 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. Business Combinations – We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable. Fair Value of Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. NET INTEREST INCOME The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables. Three-Month Periods Ended September 30, 2021 and 2020 For the three-month periods, fully taxable equivalent net interest income was $19,751,000 in 2021, which was $216,000 (1.1%) higher than in 2020. Interest income in the third quarter was $21,365,000 which was $639,000 lower in 2021 as compared to 2020, while interest expense was lower by $855,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.59% in 2021 as compared to 3.57% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.46% in 2021 from 3.40% in 2020. The average yield on earning assets of 3.89% was 0.13% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.43% in 2021 was 0.19% lower. Income from purchase accounting-related adjustments in the third quarter 2021 had a positive effect on net interest income of $563,000, including an increase in income on loans of $298,000 and net reductions in interest expense on time deposits and borrowed funds totaling $265,000. The positive impact to the third quarter 2021 net interest margin from purchase accounting adjustments was 0.10%. In comparison, the positive impact of purchase accounting adjustments to the third quarter 2020 net interest margin was $1,298,000, or 0.24%. INTEREST INCOME AND EARNING ASSETS Interest income totaled $21,365,000 in 2021, a decrease of $639,000 from 2020. 49 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Interest and fees from loans receivable decreased $627,000 in 2021 as compared to 2020. Average outstanding loans receivable decreased $113,735,000 (6.7%) to $1,591,857,000 in 2021 from $1,705,592,000 in 2020, including a reduction in average PPP loans of $74,501,000. The average balance of other loans also decreased, as falling interest rates contributed to accelerated prepayments and demand for new commercial loans was muted over much of 2020 and 2021. In addition, the Corporation has sold an increased proportion of its residential mortgage loans into the secondary market over the past few years, which has helped to enhance noninterest income in 2020 and 2021 but has contributed to a net reduction in average outstanding loans. The average yield on loans in the third quarter 2021 was 4.76%, up from 4.60% in the third quarter 2020. Although the average yield on taxable loans other than PPP loans fell to 4.70% in 2021 from 4.91% in 2020, and the average yield on tax-exempt loans fell to 2.90% in 2021 from 3.57% in 2020, the average yield on the total portfolio was affected by the comparatively high yield on PPP loans. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. Interest income from available-for-sale debt securities decreased $35,000 in 2021 from 2020. Total average available-for-sale debt securities (at amortized cost) increased to $391,148,000 in 2021 from $321,541,000 in 2020. The average balance of taxable securities increased by $36,199,000, while the average balance of tax-exempt securities increased $33,408,000. The average yield on available-for-sale debt securities was 2.18% for 2021, down from 2.70% in 2020. The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates. Income from interest-bearing due from banks totaled $106,000 in 2021, an increase of $37,000 from 2020. The average yield on interest-bearing due from banks was 0.22% in 2021 and 0.19% in 2020. Within this category, the largest asset balance in 2021 and 2020 has been interest-bearing deposits held with the Federal Reserve. The average balance of $195,359,000, or 9.0% of total average earning assets in the third quarter 2021, was up $47,816,000 from $147,543,000, or 6.8% of total average earning assets in the third quarter 2020. The levels of cash held at the Federal Reserve in both periods were significantly higher as compared to customary levels prior to the onset of the COVID-19 pandemic. Throughout most of 2020 and 2021, funds received from PPP and other loan repayments and increases in deposits have outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES For the three-month periods, interest expense decreased $855,000 to $1,614,000 in 2021 from $2,469,000 in 2020. Interest expense on deposits decreased $724,000, as the average rate on interest-bearing deposits decreased to 0.30% in 2021 from 0.50% in 2020. The decrease in average rates on deposits includes decreases of 0.32% on time deposits, 0.14% on money market accounts, 0.06% on interest checking accounts and 0.01% on saving accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 16.2% of average total deposits in the third quarter 2021 from 23.9% in the third quarter 2020. Average total deposits increased $52,215,000 (2.8%) to $1,936,758,000 in the third quarter from $1,884,543,000 in 2020. The increase in average balance on deposits reflects PPP-related activity and funding from other government stimulus programs. Interest expense on short-term borrowings in the third quarter 2021 was less than $1,000 as compared to $73,000 in 2020. The average balance of short-term borrowings decreased to $2,185,000 in 2021 from $44,660,000 in 2020. The average rate on short-term borrowings was 0.65% in 2020. Interest expense on long-term borrowings (FHLB advances) decreased $275,000 to $87,000 in 2021 from $362,000 in 2020. The average balance of long-term borrowings was $41,083,000 in 2021, down from an average balance of $102,857,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.84% in 2021 compared to 1.40% in 2020. In May 2021, the Corporation issued unsecured senior notes with a total carrying value at issuance of $14,663,000, net of issuance costs. The senior notes were issued to provide funding at a relatively attractive cost for the holding company, Citizens & Northern Corporation. Interest expense on the senior notes totaled $118,000 in the third quarter 2021. The average balance of the senior notes was $14,674,000 in the third quarter of 2021 at an average rate of 3.19%. 50 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Interest expense on subordinated debt increased $99,000 to $346,000 in 2021 from $247,000 in 2020. The average balance of subordinated debt increased to $32,978,000 in 2021 from $16,540,000 in 2020, reflecting a new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021. The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026. If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity. The subordinated notes are a source of Tier 2 capital for the holding company. The average rate incurred on subordinated debt was 4.16% in 2021, down from 5.94% in 2020. More information regarding the terms of borrowed funds is provided in Note 9 to the unaudited consolidated financial statements. Nine-Month Periods Ended September 30, 2021 and 2020 For the nine-month periods, fully taxable equivalent net interest income was $59,056,000 in 2021, $10,532,000 (21.7%) higher than in 2020. Interest income was $8,073,000 higher in 2021 as compared to 2020, while interest expense was lower by $2,459,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.70% in 2021 as compared to 3.67% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.55% in 2021, up from 3.44% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program. Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the nine months ended September 30, 2021 of $2,228,000, including an increase in income on loans of $1,052,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,176,000. In comparision, the net positive impact on net interest income of purchase accounting adjustments was $1,999,000 in the nine-month period ended September 30, 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.14% in the first nine months of 2021 as compared to 0.15% in the first nine months of 2020. INTEREST INCOME AND EARNING ASSETS Interest income totaled $64,088,000 in 2021, an increase of $8,073,000 from 2020. Interest and fees on loans receivable increased $8,296,000, or 16.8%, to $57,734,000 in 2021 from $49,438,000 in 2020. Table IV shows the increase in interest on loans includes an increase of $8,431,000 attributable to changes in volume and a decrease of $135,000 related to changes in average rates. For the first nine months of 2021, average outstanding loans totaled $1,611,032,000, an increase of $241,296,000 (17.6%) over the comparative amount for the first nine months of 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as an increase in the average balance of PPP loans. The fully taxable equivalent yield on loans in 2021 was 4.79% compared to 4.82% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. Similar to the third quarter comparision, the overall yield on loans in the nine-month period ended September 30, 2021 included the impact of the acceleration of fees recognized on PPP loans as repayments have been received from the SBA. Interest income on available-for-sale debt securities totaled $6,071,000 in 2021, a decrease of $254,000 from the total for 2020. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $364,452,000 in 2021, an increase of $36,935,000 from 2020. The average yield on available-for-sale debt securities decreased to 2.23% in 2021 from 2.58% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates. For the nine-month periods, interest income from interest-bearing due from banks totaled $230,000 in 2021, an increase of $39,000 from $191,000 in 2020. The average balance increased $88,694,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from 51 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q banks totaled 7.4% of average total earning assets for the nine months ended September 30, 2021 as compared to 3.9% in 2020. The average yield on interest-bearing due from banks was 0.20% in 2021 as compared to 0.37% in 2020, due to decreases in market rates. INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES Interest expense decreased $2,459,000 to $5,032,000 in 2021 from $7,491,000 in 2020. Table III shows that the overall cost of funds on interest-bearing liabilities decreased to 0.46% in 2021 from 0.79% in 2020. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. Table IV shows the reduction in interest expense related to changes in rate accounted for $2,912,000 of the decrease in expense, partially offset by an increase in expense of $453,000 attributable to volume. For the nine-month period ended September 30, 2021, average total deposits increased $396,652,000 (26.5%) to $1,896,023,000 in 2021 from $1,499,371,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. The decrease in average rate on deposits includes decreases of 0.64% on time deposits, 0.15% on money market accounts, 0.09% on interest checking accounts and 0.03% on saving accounts. The average balance of time deposits fell to 17.9% of average total deposits in 2021 from 26.1% in 2020, further contributing to the reduction in average rate on deposits. Interest expense on short-term borrowings decreased $313,000 to $22,000 in 2021 from $335,000 in 2020. The average balance of short-term borrowings decreased to $7,648,000 in 2021 from $36,492,000 in 2020. The average rate on short-term borrowings decreased to 0.38% in 2021 from 1.23% in 2020. Interest expense on long-term borrowings (FHLB advances) decreased $640,000 to $330,000 in 2021 from $970,000 in 2020. The average balance of long-term borrowings was $46,863,000 in 2021, down from an average balance of $80,030,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.94% in 2021 compared to 1.62% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020. Interest expense on the senior notes issued in May 2021 totaled $175,000 in 2021. The average balance of the senior notes was $7,255,000 in 2021 with an average rate of 3.23%. Interest expense on subordinated debt increased $487,000 to $947,000 in 2021 from $460,000 in 2020. The average balance of subordinated debt increased to $25,539,000 in 2021 from $9,871,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.96% in 2021 from 6.22% in 2020. ​ 52 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ ​ ​ Nine Months Ended ​ ​ ​ ​ ​ September 30, ​ Increase/ . ​ September 30, ​ Increase/ (In Thousands) 2021 2020 (Decrease) ​ 2021 2020 (Decrease) INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 106 ​ $ 69 ​ $ 37 ​ ​ $ 230 ​ $ 191 ​ $ 39 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 1,304 ​ 1,483 ​ (179) ​ ​ 3,604 ​ 4,451 ​ (847) Tax-exempt ​ 842 ​ 698 ​ 144 ​ ​ 2,467 ​ 1,874 ​ 593 Total available-for-sale debt securities ​ 2,146 ​ 2,181 ​ (35) ​ ​ 6,071 ​ 6,325 ​ (254) Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 16,890 ​ 18,269 ​ (1,379) ​ ​ 51,209 ​ 46,316 ​ 4,893 Paycheck Protection Program - 1st Draw ​ ​ 618 ​ ​ 889 ​ ​ (271) ​ ​ ​ 3,289 ​ ​ 1,429 ​ ​ 1,860 Paycheck Protection Program - 2nd Draw ​ ​ 1,021 ​ ​ 0 ​ ​ 1,021 ​ ​ ​ 1,597 ​ ​ 0 ​ ​ 1,597 Tax-exempt ​ 568 ​ 566 ​ 2 ​ ​ 1,639 ​ 1,693 ​ (54) Total loans receivable ​ 19,097 ​ 19,724 ​ (627) ​ ​ 57,734 ​ 49,438 ​ 8,296 Other earning assets ​ 16 ​ 30 ​ (14) ​ ​ 53 ​ 61 ​ (8) Total Interest Income ​ 21,365 ​ 22,004 ​ (639) ​ ​ 64,088 ​ 56,015 ​ 8,073 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ INTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 230 ​ 271 ​ (41) ​ ​ 686 ​ 716 ​ (30) Money market ​ 269 ​ 368 ​ (99) ​ ​ 895 ​ 863 ​ 32 Savings ​ 58 ​ 57 ​ 1 ​ ​ 170 ​ 175 ​ (5) Time deposits ​ 506 ​ 1,091 ​ (585) ​ ​ 1,807 ​ 3,972 ​ (2,165) Total interest-bearing deposits ​ 1,063 ​ 1,787 ​ (724) ​ ​ 3,558 ​ 5,726 ​ (2,168) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ 0 ​ 73 ​ (73) ​ ​ 22 ​ 335 ​ (313) Long-term - FHLB advances ​ 87 ​ 362 ​ (275) ​ ​ 330 ​ 970 ​ (640) Senior notes, net ​ ​ 118 ​ ​ 0 ​ ​ 118 ​ ​ ​ 175 ​ ​ 0 ​ ​ 175 Subordinated debt, net ​ 346 ​ 247 ​ 99 ​ ​ 947 ​ 460 ​ 487 Total borrowed funds ​ 551 ​ 682 ​ (131) ​ ​ 1,474 ​ 1,765 ​ (291) Total Interest Expense ​ 1,614 ​ 2,469 ​ (855) ​ ​ 5,032 ​ 7,491 ​ (2,459) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ 19,751 ​ $ 19,535 ​ $ 216 ​ ​ $ 59,056 ​ $ 48,524 ​ $ 10,532 ​ Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% 53 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Table III - Analysis of Average Daily Balances and Rates ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months ​ ​ ​ Three Months ​ ​ ​ Nine Months ​ ​ ​ Nine Months ​ ​ ​ ​ Ended ​ Rate of ​ Ended ​ Rate of ​ Ended ​ Rate of ​ Ended ​ Rate of ​ ​ 9/30/2021 ​ Return/ ​ 9/30/2020 ​ Return/ ​ 9/30/2021 ​ Return/ ​ 9/30/2020 ​ Return/ ​ ​ Average ​ Cost of ​ Average ​ Cost of ​ Average ​ Cost of ​ Average ​ Cost of ​ Balance Funds % Balance Funds % Balance Funds % Balance Funds % EARNING ASSETS ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 195,359 0.22 % $ 147,543 0.19 % $ 157,231 0.20 % $ 68,537 0.37 % Available-for-sale debt securities, ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ at amortized cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 263,682 1.96 % ​ 227,483 2.59 % ​ ​ 241,716 1.99 % ​ 245,487 2.42 % Tax-exempt ​ 127,466 2.62 % 94,058 2.95 % ​ 122,736 2.69 % 82,030 3.05 % Total available-for-sale debt securities ​ 391,148 2.18 % 321,541 2.70 % ​ 364,452 2.23 % 327,517 2.58 % Loans receivable: ​ ​ ​ ​ ​ ​ Taxable ​ 1,426,503 4.70 % 1,480,247 4.91 % ​ 1,424,457 4.81 % 1,228,521 5.04 % Paycheck Protection Program - 1st Draw ​ ​ 19,625 ​ 12.49 % ​ 162,234 ​ 2.18 % ​ ​ 58,900 ​ 7.47 % ​ 80,322 ​ 2.38 % Paycheck Protection Program - 2nd Draw ​ ​ 68,108 ​ 5.95 % ​ 0 ​ 0.00 % ​ ​ 58,173 ​ 3.67 % ​ 0 ​ 0.00 % Tax-exempt ​ 77,621 2.90 % 63,111 3.57 % ​ 69,502 3.15 % 60,893 3.71 % Total loans receivable ​ 1,591,857 4.76 % 1,705,592 4.60 % ​ 1,611,032 4.79 % 1,369,736 4.82 % Other earning assets ​ 2,355 2.70 % 3,361 3.55 % ​ 2,556 2.77 % 2,346 3.47 % Total Earning Assets ​ 2,180,719 3.89 % 2,178,037 4.02 % ​ 2,135,271 4.01 % 1,768,136 4.23 % Cash ​ 24,436 ​ 33,291 ​ ​ 24,564 ​ 23,467 ​ Unrealized gain on securities ​ 12,411 ​ 15,277 ​ ​ 11,831 ​ 12,021 ​ Allowance for loan losses ​ (12,688) ​ (11,473) ​ ​ (12,143) ​ (10,988) ​ Bank-owned life insurance ​ ​ 30,445 ​ ​ ​ ​ 30,078 ​ ​ ​ ​ ​ 30,301 ​ ​ ​ ​ 22,539 ​ ​ ​ Bank premises and equipment ​ 20,620 ​ 21,763 ​ ​ 20,860 ​ 19,251 ​ Intangible assets ​ 56,021 ​ 57,008 ​ ​ 56,153 ​ 38,786 ​ Other assets ​ 43,947 ​ 48,451 ​ ​ 43,694 ​ 36,632 ​ Total Assets ​ $ 2,355,911 ​ $ 2,372,432 ​ ​ $ 2,310,531 ​ $ 1,909,844 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ Interest checking ​ $ 423,371 0.22 % $ 382,997 0.28 % ​ $ 389,349 0.24 % $ 290,420 0.33 % Money market ​ 446,385 0.24 % 386,848 0.38 % ​ 428,985 0.28 % 268,095 0.43 % Savings ​ 231,093 0.10 % 201,401 0.11 % ​ 224,050 0.10 % 184,829 0.13 % Time deposits ​ 312,979 0.64 % 449,964 0.96 % ​ 339,558 0.71 % 391,827 1.35 % Total interest-bearing deposits ​ 1,413,828 0.30 % 1,421,210 0.50 % ​ 1,381,942 0.34 % 1,135,171 0.67 % Borrowed funds: ​ ​ ​ ​ ​ ​ Short-term ​ 2,185 0.00 % 44,660 0.65 % ​ 7,648 0.38 % 36,492 1.23 % Long-term - FHLB advances ​ 41,083 0.84 % 102,857 1.40 % ​ 46,863 0.94 % 80,030 1.62 % Senior notes, net ​ ​ 14,674 ​ 3.19 % ​ 0 ​ 0.00 % ​ ​ 7,255 ​ 3.23 % ​ 0 ​ 0.00 % Subordinated debt, net ​ 32,978 4.16 % 16,540 5.94 % ​ 25,539 4.96 % 9,871 6.22 % Total borrowed funds ​ 90,920 2.40 % 164,057 1.65 % ​ 87,305 2.26 % 126,393 1.87 % Total Interest-bearing Liabilities ​ 1,504,748 0.43 % 1,585,267 0.62 % ​ 1,469,247 0.46 % 1,261,564 0.79 % Demand deposits ​ 522,930 ​ 463,333 ​ ​ 514,081 ​ 364,200 ​ Other liabilities ​ 25,386 ​ 26,367 ​ ​ 25,729 ​ 18,804 ​ Total Liabilities ​ 2,053,064 ​ 2,074,967 ​ ​ 2,009,057 ​ 1,644,568 ​ Stockholders' equity, excluding ​ ​ ​ ​ ​ ​ other comprehensive income ​ 292,936 ​ 285,158 ​ ​ 292,017 ​ 255,545 ​ Accumulated other comprehensive income ​ 9,911 ​ 12,307 ​ ​ 9,457 ​ 9,731 ​ Total Stockholders' Equity ​ 302,847 ​ 297,465 ​ ​ 301,474 ​ 265,276 ​ Total Liabilities and Stockholders' Equity ​ $ 2,355,911 ​ $ 2,372,432 ​ ​ $ 2,310,531 ​ $ 1,909,844 ​ Interest Rate Spread ​ 3.46 % 3.40 % ​ 3.55 % 3.44 % Net Interest Income/Earning Assets ​ 3.59 % 3.57 % ​ 3.70 % 3.67 % ​ ​ ​ ​ ​ ​ ​ Total Deposits (Interest-bearing ​ ​ ​ ​ ​ ​ and Demand) ​ $ 1,936,758 ​ $ 1,884,543 ​ ​ $ 1,896,023 ​ $ 1,499,371 ​ (1) Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings. (3) Rates of return on earning assets and costs of funds are presented on an annualized basis. 54 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ Three Months Ended 9/30/21 vs. 9/30/20 . ​ Nine Months Ended 9/30/21 vs. 9/30/20 ​ ​ Change in ​ Change in ​ Total ​ Change in ​ Change in ​ Total ​ Volume Rate Change ​ Volume Rate Change EARNING ASSETS ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing due from banks ​ $ 1 ​ $ 36 ​ $ 37 ​ ​ $ 162 ​ $ (123) ​ $ 39 Available-for-sale debt securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ 200 ​ (379) ​ (179) ​ ​ (67) ​ (780) ​ (847) Tax-exempt ​ 226 ​ (82) ​ 144 ​ ​ 838 ​ (245) ​ 593 Total available-for-sale debt securities ​ 426 ​ (461) ​ (35) ​ ​ 771 ​ (1,025) ​ (254) Loans receivable: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ (677) ​ (702) ​ (1,379) ​ ​ 7,085 ​ (2,192) ​ 4,893 Paycheck Protection Program - 1st Draw ​ ​ (1,356) ​ ​ 1,085 ​ ​ (271) ​ ​ ​ (472) ​ ​ 2,332 ​ ​ 1,860 Paycheck Protection Program - 2nd Draw ​ ​ 1,021 ​ ​ 0 ​ ​ 1,021 ​ ​ ​ 1,597 ​ ​ 0 ​ ​ 1,597 Tax-exempt ​ 123 ​ (121) ​ 2 ​ ​ 221 ​ (275) ​ (54) Total loans receivable ​ (889) ​ 262 ​ (627) ​ ​ 8,431 ​ (135) ​ 8,296 Other earning assets ​ (7) ​ (7) ​ (14) ​ ​ 5 ​ (13) ​ (8) Total Interest Income ​ (469) ​ (170) ​ (639) ​ ​ 9,369 ​ (1,296) ​ 8,073 ​ ​ ​ ​ ​ ​ ​ ​ INTEREST-BEARING LIABILITIES ​ ​ ​ ​ ​ ​ ​ Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ Interest checking ​ 20 ​ (61) ​ (41) ​ ​ 206 ​ (236) ​ (30) Money market ​ 37 ​ (136) ​ (99) ​ ​ 402 ​ (370) ​ 32 Savings ​ 8 ​ (7) ​ 1 ​ ​ 33 ​ (38) ​ (5) Time deposits ​ (402) ​ (183) ​ (585) ​ ​ (475) ​ (1,690) ​ (2,165) Total interest-bearing deposits ​ (337) ​ (387) ​ (724) ​ ​ 166 ​ (2,334) ​ (2,168) Borrowed funds: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Short-term ​ (53) ​ (20) ​ (73) ​ ​ (168) ​ (145) ​ (313) Long-term - FHLB advances ​ (180) ​ (95) ​ (275) ​ ​ (318) ​ (322) ​ (640) Senior notes, net ​ ​ 118 ​ ​ 0 ​ ​ 118 ​ ​ ​ 175 ​ ​ 0 ​ ​ 175 Subordinated debt, net ​ 172 ​ (73) ​ 99 ​ ​ 598 ​ (111) ​ 487 Total borrowed funds ​ 57 ​ (188) ​ (131) ​ ​ 287 ​ (578) ​ (291) Total Interest Expense ​ (280) ​ (575) ​ (855) ​ ​ 453 ​ (2,912) ​ (2,459) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net Interest Income ​ $ (189) ​ $ 405 ​ $ 216 ​ ​ $ 8,916 ​ $ 1,616 ​ $ 10,532 (1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. (2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each. 55 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q NONINTEREST INCOME TABLE V – COMPARISON OF NONINTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ $ ​ % ​ 2021 ​ 2020 ​ Change ​ Change Trust revenue ​ $ 1,821 ​ $ 1,595 ​ $ 226 ​ 14.2 % Brokerage and insurance revenue ​ 560 ​ ​ 382 ​ ​ 178 ​ 46.6 % Service charges on deposit accounts ​ 1,249 ​ ​ 1,045 ​ ​ 204 ​ 19.5 % Interchange revenue from debit card transactions ​ 975 ​ ​ 828 ​ ​ 147 ​ 17.8 % Net gains from sales of loans ​ 797 ​ ​ 2,052 ​ ​ (1,255) ​ (61.2) % Loan servicing fees, net ​ 153 ​ ​ (87) ​ ​ 240 ​ N/M ​ Increase in cash surrender value of life insurance ​ 139 ​ ​ 159 ​ ​ (20) ​ (12.6) % Other noninterest income ​ 665 ​ ​ 996 ​ ​ (331) ​ (33.2) % Total noninterest income, excluding realized gains on securities, net ​ ​ 6,359 ​ ​ 6,970 ​ ​ (611) ​ (8.8) % Realized gains on available-for-sale debt securities, net ​ ​ 23 ​ ​ 25 ​ ​ (2) ​ (8.0) % Total noninterest income ​ $ 6,382 ​ $ 6,995 ​ $ (613) ​ (8.8) % ​ N/M = Not Meaningful Total noninterest income, excluding realized gains on securities, net in the third quarter 2021 decreased $611,000 (8.8%) from the third quarter 2020 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ ​ $ ​ % ​ 2021 2020 ​ Change ​ Change Trust revenue ​ $ 5,254 ​ $ 4,639 ​ $ 615 ​ 13.3 % Brokerage and insurance revenue ​ 1,392 ​ 1,121 ​ ​ 271 ​ 24.2 % Service charges on deposit accounts ​ 3,337 ​ 3,126 ​ ​ 211 ​ 6.7 % Interchange revenue from debit card transactions ​ 2,854 ​ 2,277 ​ ​ 577 ​ 25.3 % Net gains from sales of loans ​ 2,786 ​ 3,931 ​ ​ (1,145) ​ (29.1) % Loan servicing fees, net ​ 547 ​ (259) ​ ​ 806 ​ N/M ​ Increase in cash surrender value of life insurance ​ 434 ​ 361 ​ ​ 73 ​ 20.2 % Other noninterest income ​ 2,837 ​ 2,583 ​ ​ 254 ​ 9.8 % Total noninterest income, excluding realized gains on securities, net ​ 19,441 ​ 17,779 ​ ​ 1,662 ​ 9.3 % Realized gains on available-for-sale debt securities, net ​ 25 ​ 25 ​ ​ 0 ​ 0.0 % Total noninterest income ​ $ 19,466 ​ $ 17,804 ​ $ 1,662 ​ 9.3 % ​ N/M = Not Meaningful Total noninterest income, excluding realized gains on securities, net for the first nine months of 2021 increased $1,662,000 (9.3%) from the total for the first nine months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ 56 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q NONINTEREST EXPENSE TABLE VI - COMPARISON OF NONINTEREST EXPENSE ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Three Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ $ ​ % ​ 2021 2020 Change Change ​ Salaries and employee benefits $ 9,427 $ 8,703 $ 724 8.3 % Net occupancy and equipment expense ​ 1,217 ​ 1,189 ​ 28 2.4 % Data processing and telecommunications expense ​ 1,475 ​ 1,482 ​ (7) (0.5) % Automated teller machine and interchange expense ​ 357 ​ 340 ​ 17 5.0 % Pennsylvania shares tax ​ 482 ​ 422 ​ 60 14.2 % Professional fees ​ 538 ​ 422 ​ 116 27.5 % Other noninterest expense ​ ​ 1,850 ​ ​ 2,090 ​ ​ (240) ​ (11.5) % Total noninterest expense, excluding merger-related expenses ​ ​ 15,346 ​ ​ 14,648 ​ ​ 698 ​ 4.8 % Merger-related expenses ​ ​ 0 ​ ​ 6,402 ​ ​ (6,402) ​ (100.0) % Total noninterest expense ​ $ 15,346 ​ $ 21,050 ​ $ (5,704) (27.1) % ​ Total noninterest expense in the third quarter 2021 decreased $5,704,000 (27.1%) from the third quarter 2020 total. Excluding merger-related expenses from the third quarter 2020, total noninterest expense in the third quarter 2021 increased $698,000 (4.8%) from the third quarter 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ September 30, ​ $ ​ % ​ ​ 2021 ​ 2020 ​ Change ​ Change Salaries and employee benefits $ 27,821 $ 23,064 $ 4,757 20.6 % Net occupancy and equipment expense ​ 3,740 ​ 3,267 ​ 473 14.5 % Data processing and telecommunications expense ​ 4,342 ​ 3,959 ​ 383 9.7 % Automated teller machine and interchange expense ​ 1,049 ​ 912 ​ 137 15.0 % Pennsylvania shares tax ​ 1,463 ​ 1,267 ​ 196 15.5 % Professional fees ​ 1,683 ​ 1,265 ​ 418 33.0 % Other noninterest expense ​ 6,356 ​ 6,100 ​ 256 4.2 % Total noninterest expense, excluding merger-related expenses ​ 46,454 ​ 39,834 ​ 6,620 16.6 % Merger-related expenses ​ 0 ​ 7,526 ​ (7,526) (100.0) % Total noninterest expense ​ $ 46,454 ​ $ 47,360 ​ $ (906) (1.9) % ​ Total noninterest expense for the first nine months of 2021 decreased $906,000 (1.9%) from the total for the first nine months of 2020. Total noninterest expense for the first nine months of 2021 increased $6,620,000 (16.6%) from the total excluding merger-related expenses, for the first nine months of 2020. Changes of significance, including the impact of the Covenant acquisition that closed July 1, 2020, are discussed in the Earnings Overview section of Management’s Discussion and Analysis. INCOME TAXES The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first nine months of 2021 was $5,456,000, which was $2,947,000 higher than the provision for the first nine months of 2020. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the first nine months of 2021 compared to 16.8% in the first nine months of 2020. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The higher effective tax rate in the first nine months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income. 57 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2021 and December 31, 2020 represents the following temporary difference components: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, (In Thousands) ​ 2021 ​ 2020 Deferred tax assets: ​ ​ Allowance for loan losses ​ $ 2,678 ​ $ 2,154 Purchase accounting adjustments on loans ​ 1,713 ​ 1,930 Net operating loss carryforward ​ ​ 807 ​ ​ 896 Operating leases liability ​ 846 ​ 724 Other deferred tax assets ​ 3,102 ​ 3,089 Total deferred tax assets ​ 9,146 ​ 8,793 ​ ​ ​ Deferred tax liabilities: ​ ​ Unrealized holding gains on securities ​ 1,674 ​ 3,104 Defined benefit plans - ASC 835 ​ 28 ​ 32 Bank premises and equipment ​ 492 ​ 1,216 Core deposit intangibles ​ 754 ​ 840 Right-of-use assets from operating leases ​ 846 ​ 724 Other deferred tax liabilities ​ 224 ​ 172 Total deferred tax liabilities ​ 4,018 ​ 6,088 Deferred tax asset, net ​ $ 5,128 ​ $ 2,705 ​ In connection with the Covenant merger, the Corporation received a net operating loss (“NOL”) available to be carried forward against federal taxable income of $4.6 million. Availability of the NOL does not expire; however, the amount that may be offset against taxable income is limited to approximately $563,000 per year and further limited annually to no more than 80% of taxable income without regard to the NOL. At December 31, 2020, the unused amount of the NOL was $4.3 million. The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income. Management believes the recorded net deferred tax asset at September 30, 2021 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings . FINANCIAL CONDITION This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at September 30, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021. 58 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q At September 30, 2021, gross loans outstanding totaled $1,575,708,000, a decrease of $68,501,000 from December 31, 2020, including a reduction in PPP loans of $69,541,000 due to repayments and a net reduction in residential mortgage loans of $41,309,000. The net reduction in loans outstanding over the past 9 months reflects the impact of high levels of loan prepayments consistent with low interest rates and a high proportion of new mortgage loans being sold into the secondary market. Excluding PPP loans, total commercial loans at September 30, 2021 were up $41,099,000 from December 31, 2020. At September 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio. While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $57,918,000 at September 30, 2021, down from $65,741,000 at December 31, 2020. At September 30, 2021, the balance of participation loans outstanding includes a total of $33,530,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,565,000 at September 30, 2021 and $8,437,000 at December 31, 2020. The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through September 30, 2021, the Corporation’s activity under the MPF Direct Program has been minimal. For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At September 30, 2021, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,584,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000. At September 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $328,659,000, including loans sold through the MPF Xtra program of $167,914,000 and loans sold through the Original program of $160,745,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2021 and December 31, 2020. For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At September 30, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,273,000, and the Corporation has recorded a related allowance for credit losses in the amount of $550,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement 59 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q (included in other noninterest income in the consolidated statements of income) totaled $265,000 for the nine months ended September 30, 2021 and $107,000 for the nine months ended September 30, 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the nine months ended September 30, 2021 with a provision for losses of $29,000 in the nine months ended September 30, 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program. The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $11,458,000 at September 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $485,000 at September 30, 2021 and $730,000 at December 31, 2020. In the nine months ended September 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $208,000 representing amounts realized on SBA claims in excess of prior estimates. TABLE VII - SUMMARY OF LOANS BY TYPE Summary of Loans by Type ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ September 30, ​ December 31, ​ 2021 2020 2019 2018 2017 2016 Commercial: ​ ​ ​ ​ ​ ​ ​ Commercial loans secured by real estate ​ $ 553,389 ​ $ 531,810 ​ $ 301,227 ​ $ 162,611 ​ $ 159,266 ​ $ 150,468 Commercial and industrial ​ 152,244 ​ 159,577 ​ 126,374 ​ 91,856 ​ 88,276 ​ 83,854 Paycheck Protection Program - 1st Draw ​ ​ 5,747 ​ ​ 132,269 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 Paycheck Protection Program - 2nd Draw ​ ​ 56,981 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ ​ 0 Political subdivisions ​ 73,503 ​ 53,221 ​ 53,570 ​ 53,263 ​ 59,287 ​ 38,068 Commercial construction and land ​ 53,267 ​ 42,874 ​ 33,555 ​ 11,962 ​ 14,527 ​ 14,287 Loans secured by farmland ​ 10,812 ​ 11,736 ​ 12,251 ​ 7,146 ​ 7,255 ​ 7,294 Multi-family (5 or more) residential ​ 52,962 ​ 55,811 ​ 31,070 ​ 7,180 ​ 7,713 ​ 7,896 Agricultural loans ​ 3,092 ​ 3,164 ​ 4,319 ​ 5,659 ​ 6,178 ​ 3,998 Other commercial loans ​ 17,312 ​ 17,289 ​ 16,535 ​ 13,950 ​ 10,986 ​ 11,475 Total commercial ​ 979,309 ​ 1,007,751 ​ 578,901 ​ 353,627 ​ 353,488 ​ 317,340 Residential mortgage: ​ ​ ​ ​ ​ ​ Residential mortgage loans - first liens ​ ​ 494,376 ​ ​ 532,947 ​ ​ 510,641 ​ ​ 372,339 ​ $ 359,987 ​ ​ 334,102 Residential mortgage loans - junior liens ​ 24,303 ​ 27,311 ​ 27,503 ​ 25,450 ​ 25,325 ​ 23,706 Home equity lines of credit ​ 38,465 ​ 39,301 ​ 33,638 ​ 34,319 ​ 35,758 ​ 38,057 1-4 Family residential construction ​ 21,719 ​ 20,613 ​ 14,798 ​ 24,698 ​ 26,216 ​ 24,908 Total residential mortgage ​ 578,863 ​ 620,172 ​ 586,580 ​ 456,806 ​ 447,286 ​ 420,773 Consumer ​ 17,536 ​ 16,286 ​ 16,741 ​ 17,130 ​ 14,939 ​ 13,722 Total ​ 1,575,708 ​ 1,644,209 ​ 1,182,222 ​ 827,563 ​ 815,713 ​ 751,835 Less: allowance for loan losses ​ (12,700) ​ (11,385) ​ (9,836) ​ (9,309) ​ (8,856) ​ (8,473) Loans, net ​ $ 1,563,008 ​ $ 1,632,824 ​ $ 1,172,386 ​ $ 818,254 ​ $ 806,857 ​ $ 743,362 ​ 60 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q PROVISION AND ALLOWANCE FOR LOAN LOSSES The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. The allowance for loan losses was $12,700,000 at September 30, 2021, up from $11,385,000 at December 31, 2020. Table IX shows total specific allowances on impaired loans decreased $42,000 to $883,000 at September 30, 2021 from $925,000 at December 31, 2020. Table IX also shows the increase in the allowance in 2021 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $6,689,000 at September 30, 2021 from $5,545,000 at December 31, 2020. Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,324,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,482,000 at September 30, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $300,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $354,000 at September 30, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs. Table X shows the allowance for loan losses totaled 0.81% of gross loans outstanding at September 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at September 30, 2021, in line with ratios from the previous years. The provision (credit) for loan losses by segment in the three-month and nine-month periods ended September 30, 2021 and 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended Nine Months Ended ​ ​ ​ September 30, ​ September 30, ​ September 30, ​ September 30, ​ (In Thousands) 2021 ​ 2020 2021 2020 Commercial ​ $ 1,503 ​ $ 1,990 ​ $ 2,297 ​ $ 3,184 ​ Residential mortgage ​ ​ 3 ​ ​ (66) ​ ​ 112 ​ ​ 67 ​ Consumer ​ 24 ​ 17 ​ 38 ​ 42 ​ Unallocated ​ 0 ​ 0 ​ 86 ​ 0 ​ Total ​ $ 1,530 ​ $ 1,941 ​ $ 2,533 ​ $ 3,293 ​ ​ 61 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q The provision (credit) for loan losses is further detailed as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial segment ​ Three Months Ended Nine Months Ended ​ ​ September 30, ​ September 30, ​ September 30, ​ September 30, (In Thousands) 2021 ​ 2020 2021 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 596 ​ $ 908 ​ $ 1,154 ​ $ 1,949 Increase in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 568 ​ ​ 194 ​ 1,061 ​ 84 Changes in historical loss experience factors ​ ​ 339 ​ ​ 848 ​ 82 ​ 841 Changes in qualitative factors ​ ​ 0 ​ ​ 40 ​ 0 ​ 310 Total provision for loan losses - Commercial segment ​ $ 1,503 ​ $ 1,990 ​ $ 2,297 ​ $ 3,184 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage segment ​ Three Months Ended Nine Months Ended ​ ​ September 30, ​ September 30, ​ September 30, ​ September 30, (In Thousands) 2021 ​ 2020 2021 2020 Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ (2) ​ $ (21) ​ $ (17) ​ $ (38) Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 11 ​ ​ (87) ​ 222 ​ (227) Changes in historical loss experience factors ​ ​ (6) ​ ​ 0 ​ (48) ​ (82) Changes in qualitative factors ​ ​ 0 ​ ​ 42 ​ (45) ​ 414 Total provision (credit) for loan losses - Residential mortgage segment ​ $ 3 ​ $ (66) ​ $ 112 ​ $ 67 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consumer segment ​ Three Months Ended Nine Months Ended ​ ​ September 30, ​ September 30, ​ September 30, ​ September 30, (In Thousands) 2021 ​ 2020 2021 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 17 ​ $ 22 ​ $ 39 ​ $ 65 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 9 ​ ​ 12 ​ 13 ​ (10) Changes in historical loss experience factors ​ ​ (7) ​ ​ (14) ​ (15) ​ (14) Changes in qualitative factors ​ ​ 5 ​ ​ (3) ​ 1 ​ 1 Total provision for loan losses - Consumer segment ​ $ 24 ​ $ 17 ​ $ 38 ​ $ 42 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total - All segments ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, September 30, ​ September 30, (In Thousands) 2021 ​ 2020 ​ 2021 ​ 2020 Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs ​ $ 611 ​ $ 909 $ 1,176 ​ $ 1,976 Increase (decrease) in collectively determined portion of the allowance attributable to: ​ ​ ​ ​ ​ ​ ​ ​ Changes in loan volume ​ ​ 588 ​ ​ 119 ​ 1,296 ​ (153) Changes in historical loss experience factors ​ ​ 326 ​ ​ 834 ​ 19 ​ 745 Changes in qualitative factors ​ ​ 5 ​ ​ 79 ​ (44) ​ 725 Sub-total ​ ​ 1,530 ​ ​ 1,941 ​ 2,447 ​ 3,293 Unallocated ​ ​ 0 ​ ​ 0 ​ 86 ​ 0 Total provision for loan losses - All segments ​ $ 1,530 ​ $ 1,941 ​ $ 2,533 ​ $ 3,293 ​ 62 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off. In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding purchased loans and loans specifically evaluated for impairment) for the period. The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment). The provision for loan losses in the third quarter 2021 and 2020, and in the nine-month periods ended September 30, 2021 and 2020, included the impact of a large charge-off in the third quarter of each year. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. There was a specific allowance for loan losses of $583,000 on this commercial loan at June 30, 2021, with no specific allowance at December 31, 2020. At September 30, 2021, there was no specific allowance on the loan, and the Corporation’s recorded investment in the loan of $2,302,000 is reported as non-accrual and impaired. In the third quarter 2020, the Corporation recorded a charge-off of $2,219,000 on a commercial loan for which an allowance of $1,193,000 had been recorded at June 30, 2020 but for which there was no specific allowance at December 31, 2019. The Corporation had no recorded investment in this loan at September 30, 2021 and December 31, 2020. In the three months ended September 30, 2021, net charge-offs were $1,205,000, including recoveries of $15,000 and charge-offs of $1,220,000. For the nine months ended September 30, 2021, net charge-offs were $1,218,000 including recoveries of $60,000 and charge-offs of $1,278,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.08% in the nine months ended September 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018. Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.48% at September 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.05% at September 30, 2021, down from 1.10% at December 31, 2020. Table X presents data at the end of each of the years ended December 31, 2016 through 2020. Table X shows that total nonperforming loans as a percentage of loans of 1.48% at September 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the September 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.05% was lower than the corresponding ratio from 2016 through 2018. Total impaired loans of $18,014,000 at September 30, 2021 are up $196,000 from the corresponding amount at December 31, 2020 of $17,818,000. Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020. Table X shows that the total balance of impaired loans at September 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020. Similarly, total nonperforming assets of $24,639,000 at September 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition. As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,139,000 at September 30, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,775,000 at September 30, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status 63 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable through the first nine months of 2021, in evaluating the allowance for loan losses at September 30, 2021. Over the period 2016-2020 and the first nine months of 2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period. Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate. Tables VIII through X present historical data related to loans and the allowance for loan losses. TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ Nine Months Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ September 30, ​ ​ Years Ended December 31, ​ ​ 2021 2020 2020 2019 2018 2017 2016 Balance, beginning of year ​ $ 11,385 ​ $ 9,836 ​ ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ $ 7,889 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ (1,194) ​ (2,343) ​ ​ (2,343) ​ (6) ​ (165) ​ (132) ​ (597) ​ Residential mortgage ​ (11) ​ 0 ​ ​ 0 ​ (190) ​ (158) ​ (197) ​ (73) ​ Consumer ​ (73) ​ (100) ​ ​ (122) ​ (183) ​ (174) ​ (150) ​ (87) ​ Total charge-offs ​ (1,278) ​ (2,443) ​ ​ (2,465) ​ (379) ​ (497) ​ (479) ​ (757) ​ Recoveries: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ 22 ​ 0 ​ ​ 16 ​ 6 ​ 317 ​ 4 ​ 35 ​ Residential mortgage ​ 5 ​ 32 ​ ​ 44 ​ 12 ​ 8 ​ 19 ​ 3 ​ Consumer ​ 33 ​ 35 ​ ​ 41 ​ 39 ​ 41 ​ 38 ​ 82 ​ Total recoveries ​ 60 ​ 67 ​ ​ 101 ​ 57 ​ 366 ​ 61 ​ 120 ​ Net charge-offs ​ (1,218) ​ (2,376) ​ ​ (2,364) ​ (322) ​ (131) ​ (418) ​ (637) ​ Provision for loan losses ​ 2,533 ​ 3,293 ​ ​ 3,913 ​ 849 ​ 584 ​ 801 ​ 1,221 ​ Balance, end of period ​ $ 12,700 ​ $ 10,753 ​ ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Net charge-offs as a % of average loans ​ 0.08 % 0.17 % ​ 0.16 % 0.03 % 0.02 % 0.05 % 0.09 % ​ TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In Thousands) ​ September 30, ​ As of December 31, ​ 2021 2020 2019 2018 2017 2016 ASC 310 - Impaired loans ​ $ 883 ​ $ 925 ​ $ 1,051 ​ $ 1,605 ​ $ 1,279 ​ $ 674 ASC 450 - Collective segments: ​ ​ ​ ​ ​ ​ Commercial ​ 6,689 ​ 5,545 ​ 3,913 ​ 3,102 ​ 3,078 ​ 3,373 Residential mortgage ​ 4,220 ​ 4,091 ​ 4,006 ​ 3,870 ​ 3,841 ​ 3,890 Consumer ​ 237 ​ 239 ​ 281 ​ 233 ​ 159 ​ 138 Unallocated ​ 671 ​ 585 ​ 585 ​ 499 ​ 499 ​ 398 Total Allowance ​ $ 12,700 ​ $ 11,385 ​ $ 9,836 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ ​ 64 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars In Thousands) ​ September 30, ​ As of December 31, ​ 2021 2020 2019 2018 2017 2016 Impaired loans with a valuation allowance ​ $ 7,225 ​ $ 8,082 ​ $ 3,375 ​ $ 4,851 ​ $ 4,100 ​ $ 3,372 ​ Impaired loans without a valuation allowance ​ 4,165 ​ 2,895 ​ 1,670 ​ 4,923 ​ 5,411 ​ 7,488 ​ Purchased credit impaired loans ​ ​ 6,624 ​ ​ 6,841 ​ ​ 441 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ Total impaired loans ​ $ 18,014 ​ $ 17,818 ​ $ 5,486 ​ $ 9,774 ​ $ 9,511 ​ $ 10,860 ​ Total loans past due 30-89 days and still accruing ​ $ 2,139 ​ $ 5,918 ​ $ 8,889 ​ $ 7,142 ​ $ 9,449 ​ $ 7,735 ​ Nonperforming assets: ​ ​ ​ ​ ​ ​ ​ ​ Purchased credit impaired loans ​ $ 6,624 ​ $ 6,841 ​ $ 441 ​ $ 0 ​ $ 0 ​ $ 0 ​ Other nonaccrual loans ​ ​ 14,717 ​ ​ 14,575 ​ ​ 8,777 ​ ​ 13,113 ​ ​ 13,404 ​ ​ 8,736 ​ Total nonaccrual loans ​ ​ 21,341 ​ ​ 21,416 ​ ​ 9,218 ​ ​ 13,113 ​ ​ 13,404 ​ ​ 8,736 ​ Total loans past due 90 days or more and still accruing ​ 1,924 ​ 1,975 ​ 1,207 ​ 2,906 ​ 3,724 ​ 6,838 ​ Total nonperforming loans ​ 23,265 ​ 23,391 ​ 10,425 ​ 16,019 ​ 17,128 ​ 15,574 ​ Foreclosed assets held for sale (real estate) ​ 1,374 ​ 1,338 ​ 2,886 ​ 1,703 ​ 1,598 ​ 2,180 ​ Total nonperforming assets ​ $ 24,639 ​ $ 24,729 ​ $ 13,311 ​ $ 17,722 ​ $ 18,726 ​ $ 17,754 ​ Loans subject to troubled debt restructurings (TDRs): ​ ​ ​ ​ ​ ​ ​ ​ Performing ​ $ 232 ​ $ 166 ​ $ 889 ​ $ 655 ​ $ 636 ​ $ 5,803 ​ Nonperforming ​ 5,591 ​ 7,285 ​ 1,737 ​ 2,884 ​ 3,027 ​ 2,874 ​ Total TDRs ​ $ 5,823 ​ $ 7,451 ​ $ 2,626 ​ $ 3,539 ​ $ 3,663 ​ $ 8,677 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total nonperforming loans as a % of loans ​ 1.48 % 1.42 % 0.88 % 1.94 % 2.10 % 2.07 % Total nonperforming assets as a % of assets ​ 1.05 % 1.10 % 0.80 % 1.37 % 1.47 % 1.43 % Allowance for loan losses as a % of total loans ​ 0.81 % 0.69 % 0.83 % 1.12 % 1.09 % 1.13 % Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a) ​ ​ 1.05 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ 1.13 % Allowance for loan losses as a % of nonperforming loans ​ 54.59 % 48.67 % 94.35 % 58.11 % 51.70 % 54.40 % (a) Credit adjustment on purchased non-impaired loans at end of period ​ $ 3,836 ​ $ 5,979 ​ $ 1,216 ​ $ 0 ​ $ 0 ​ $ 0 ​ Allowance for loan losses ​ ​ 12,700 ​ ​ 11,385 ​ ​ 9,836 ​ ​ 9,309 ​ ​ 8,856 ​ ​ 8,473 ​ Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1) ​ $ 16,536 ​ $ 17,364 ​ $ 11,052 ​ $ 9,309 ​ $ 8,856 ​ $ 8,473 ​ Total loans receivable ​ $ 1,575,708 ​ $ 1,644,209 ​ $ 1,182,222 ​ $ 827,563 ​ $ 815,713 ​ $ 751,835 ​ Credit adjustment on purchased non-impaired loans at end of period ​ ​ 3,836 ​ ​ 5,979 ​ ​ 1,216 ​ ​ 0 ​ ​ 0 ​ ​ 0 ​ Total (2) ​ $ 1,579,544 ​ $ 1,650,188 ​ $ 1,183,438 ​ $ 827,563 ​ $ 815,713 ​ $ 751,835 ​ Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2) ​ ​ 1.05 % ​ 1.05 % ​ 0.93 % ​ 1.12 % ​ 1.09 % ​ 1.13 % 65 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q LIQUIDITY Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At September 30, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $163,565,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash. The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans. The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $14,936,000 at September 30, 2021. The Corporation’s outstanding, available, and total credit facilities at September 30, 2021 and December 31, 2020 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding ​ Available ​ Total Credit (In Thousands) September 30, December 31, September 30, December 31, September 30, December 31, ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 ​ 2021 ​ 2020 Federal Home Loan Bank of Pittsburgh ​ $ 43,835 ​ $ 72,222 ​ $ 709,012 ​ $ 698,977 ​ $ 752,847 ​ $ 771,199 Federal Reserve Bank Discount Window ​ 0 ​ 0 ​ 14,482 ​ 14,654 ​ 14,482 ​ 14,654 Other correspondent banks ​ 0 ​ 0 ​ 45,000 ​ 45,000 ​ 45,000 ​ 45,000 Total credit facilities ​ $ 43,835 ​ $ 72,222 ​ $ 768,494 ​ $ 758,631 ​ $ 812,329 ​ $ 830,853 ​ At September 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $38,251,000 and letters of credit totaling $5,584,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements. Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At September 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $214,072,000. Management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations. STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2021; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. 66 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q Details concerning capital ratios at September 30, 2021 and December 31, 2020 are presented below. Management believes, as of September 30, 2021, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in Thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum To Be ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum To Maintain ​ Well ​ ​ ​ ​ ​ ​ ​ ​ ​ Minimum ​ Capital Conservation ​ Capitalized Under ​ Minimum To Meet ​ ​ ​ ​ ​ ​ ​ Capital ​ Buffer at Reporting ​ Prompt Corrective ​ the Corporation's ​ ​ Actual ​ Requirement ​ Date ​ Action Provisions ​ Policy Thresholds ​ Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio September 30, 2021: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ $ 283,197 ​ 18.57 % N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ N/A ​ $ 160,164 ​ ≥10.5 % C&N Bank ​ 248,651 16.35 % 121,688 ≥8 % 159,716 ≥10.5 % 152,110 ≥10 % ​ 159,716 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 236,959 15.53 % N/A N/A N/A N/A N/A N/A ​ 129,657 ≥8.5 % C&N Bank ​ 235,401 15.48 % 91,266 ≥6 % 129,294 ≥8.5 % 121,688 ≥8 % ​ 129,294 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 236,959 15.53 % N/A N/A N/A N/A N/A N/A ​ 106,776 ≥7 % C&N Bank ​ 235,401 15.48 % 68,450 ≥4.5 % 106,477 ≥7.0 % 98,872 ≥6.5 % ​ 106,477 ≥7 % Tier 1 capital to average assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated ​ 236,959 10.34 % N/A N/A N/A N/A N/A N/A ​ 183,266 ≥8 % C&N Bank ​ 235,401 10.35 % 90,961 ≥4 % N/A N/A 113,702 ≥5 % ​ 181,923 ≥8 % ​ ​ ​ ​ December 31, 2020: ​ ​ ​ Total capital to risk-weighted assets: ​ ​ ​ Consolidated ​ $ 260,015 17.49 % N/A N/A ​ N/A N/A N/A N/A ​ $ 156,113 ≥10.5 % C&N Bank ​ 236,943 15.98 % 118,602 ≥8 % 155,665 ≥10.5 % 148,252 ≥10 % 155,665 ≥10.5 % Tier 1 capital to risk-weighted assets: ​ ​ ​ Consolidated ​ 231,577 15.58 % N/A N/A N/A N/A N/A N/A ​ 126,377 ≥8.5 % C&N Bank ​ 225,058 15.18 % 88,951 ≥6 % 126,015 ≥8.5 % 118,602 ≥8 % 126,015 ≥8.5 % Common equity tier 1 capital to risk-weighted assets: ​ ​ ​ Consolidated ​ 231,577 15.58 % N/A N/A N/A N/A N/A N/A ​ 104,075 ≥7 % C&N Bank ​ 225,058 15.18 % 66,714 ≥4.5 % 103,777 ≥7.0 % 96,364 ≥6.5 % 103,777 ≥7 % Tier 1 capital to average assets: ​ ​ ​ Consolidated ​ 231,577 10.34 % N/A N/A N/A N/A N/A N/A ​ 179,206 ≥8 % C&N Bank ​ 225,058 10.12 % 88,959 ≥4 % N/A N/A 111,199 ≥5 % 177,919 ≥8 % ​ In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. In the third quarter 2021, 230,404 shares were repurchased for a total cost of $5,707,000, at an average price of $24.77 per share. Cumulatively through September 30, 2021, 292,100 shares have been repurchased for a total cost of $7,238,000, at an average price of $24.78 per share. Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile. 67 Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows: ​ ​ ​ ​ ​ Minimum common equity tier 1 capital ratio 4.5 % Minimum common equity tier 1 capital ratio plus capital conservation buffer 7.0 % Minimum tier 1 capital ratio 6.0 % Minimum tier 1 capital ratio plus capital conservation buffer 8.5 % Minimum total capital ratio 8.0 % Minimum total capital ratio plus capital conservation buffer 10.5 % ​ A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows: ​ ​ ​ ​ ​ Capital Conservation Buffer Maximum Payout (as a % of risk-weighted assets) ​ (as a % of eligible retained income) Greater than 2.5% ​ No payout limitation applies ​ ≤2.5% and >1.875% ​ 60 % ≤1.875% and >1.25% ​ 40 % ≤1.25% and >0.625% ​ 20 % ≤0.625% ​ 0 % ​ At September 30, 2021, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.35%. The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $6,300,000 at September 30, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at September 30, 2021. ​