What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-22 compared with 2021-03-05 · 375 added, 519 removed, 1362 unchanged (40% of the section changed)

7 unchanged sentences

Available-for-sale debt securities, at fair value

Marketable equity security

Loans held for sale

Loans receivable

10 unchanged sentences

Short-term borrowings

Long-term borrowings

Subordinated debt

Long-term borrowings - FHLB advances

Senior notes, net

Subordinated debt, net

Accrued interest and other liabilities

24 unchanged sentences

Interest and fees on loans:

Interest on mortgages held for sale

Interest on balances with depository institutions

Income from available-for-sale debt securities:

Dividends on marketable equity security

Other interest and dividend income

Total interest and dividend income

2 unchanged sentences

Interest on short-term borrowings

Interest on long-term borrowings

Interest on subordinated debt

Interest on long-term borrowings - FHLB advances

Interest on senior notes, net

Interest on subordinated debt, net

Total interest expense

3 unchanged sentences

NONINTEREST INCOME

Trust and financial management revenue

Brokerage revenue

Insurance commissions, fees and premiums

Trust revenue

Brokerage and insurance revenue

Service charges on deposit accounts

Service charges and fees

Interchange revenue from debit card transactions

6 unchanged sentences

NONINTEREST EXPENSE

Salaries and wages

Pensions and other employee benefits

Occupancy expense, net

Furniture and equipment expense

Data processing expenses

Salaries and employee benefits

Net occupancy and equipment expense

Data processing and telecommunications expense

Automated teller machine and interchange expense

1 unchanged sentence

Professional fees

Telecommunications

Directors' fees

Loss on prepayment of borrowings

10 unchanged sentences

(In Thousands)

Unrealized gains on available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

Available-for-sale debt securities:

Unrealized holding (losses) gains on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive income on available-for-sale debt securities

Other comprehensive (loss) income on available-for-sale debt securities

Unfunded pension and postretirement obligations:

1 unchanged sentence

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

Other comprehensive (loss) income on unfunded retirement obligations

Other comprehensive income before income tax

Income tax related to other comprehensive income

Net other comprehensive income

Other comprehensive income (loss) on pension and postretirement obligations

Other comprehensive (loss) income before income tax

Income tax related to other comprehensive loss (income)

Net other comprehensive (loss) income

Comprehensive income

3 unchanged sentences

Comprehensive

(Loss) Income

Balance, January 1, 2020

7 unchanged sentences

Purchase of restricted stock for tax withholding

Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs

Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs

Balance, December 31, 2020

Other comprehensive income, net

Other comprehensive loss, net

Cash dividends declared on common stock, $ 1.11 per share

5 unchanged sentences

Purchase of restricted stock for tax withholding

Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs

Treasury stock purchases

Balance, December 31, 2021

18 unchanged sentences

Proceeds from sales of loans held for sale

(Increase) decrease in accrued interest receivable and other assets

Increase (decrease) in accrued interest payable and other liabilities

Decrease (increase) in accrued interest receivable and other assets

Increase in accrued interest payable and other liabilities

Net Cash Provided by Operating Activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Net cash and cash equivalents provided by (used in) business combination

Proceeds from maturities of certificates of deposit

Net cash and cash equivalents provided by business combination

Purchase of certificates of deposit

Proceeds from maturities of certificates of deposit

Proceeds from sales of available-for-sale debt securities

3 unchanged sentences

Purchase of Federal Home Loan Bank of Pittsburgh stock

Net decrease (increase) in loans

Net decrease in loans

Proceeds from bank owned life insurance

Proceeds from sales of premises and equipment

Purchase of premises and equipment

Proceeds from sale of foreclosed assets

Net Cash Provided by Investing Activities

Net Cash (Used in) Provided by Investing Activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in deposits

Net increase in deposits

Net decrease in short-term borrowings

Proceeds from long-term borrowings

Repayments of long-term borrowings and subordinated debt

Proceeds from long-term borrowings - FHLB advances

Repayments of long-term borrowings - FHLB advances

Proceeds from issuance of senior notes, net of issuance costs

Proceeds from issuance of subordinated debt, net of issuance costs

Redemption of subordinated debt

Sale of treasury stock

Purchase of vested restricted stock for tax withholding

Purchases of treasury stock

Common dividends paid

Net Cash Used in Financing Activities

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Net Cash Provided by (Used in) Financing Activities

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

CASH AND CASH EQUIVALENTS, END OF YEAR

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Years Ended December 31,

(In Thousands)

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Right-of-use assets recognized at adoption of ASU 2016-02

Leased assets obtained in exchange for new operating lease liabilities

Accrued purchase of available-for-sale securities

(Decrease) increase in accrued purchase of available-for-sale debt securities

Accrued income from life insurance claim

Assets acquired through foreclosure of real estate loans

Leased assets obtained in exchange for new operating lease liabilities

Interest paid

Income taxes paid

NONCASH INVESTING ASSETS ACQUIRED IN BUSINESS COMBINATION:

Available-for-sale debt securities

Loans receivable

Bank-owned life insurance

Foreclosed assets held for sale

NONCASH FINANCING ACTIVITY RELATED TO BUSINESS COMBINATION:

Common stock issued

Liabilities assumed:

Short-term borrowings

Long-term borrowings

Subordinated debt

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

4 unchanged sentences

All material intercompany balances and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS – The Corporation provides banking and related services to individual and corporate customers.

Lending products include commercial, mortgage and consumer loans, as well as specialized instruments such as commercial letters-of-credit.

Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit.

NATURE OF OPERATIONS – The Corporation’s principal office is located in Wellsboro, Pennsylvania.

The majority of the Corporation’s operations are conducted in the Northern tier/Northcentral region of Pennsylvania and Southern tier of New York.

As discussed further in Note 3, in 2020 the Corporation expanded its presence in Southeastern Pennsylvania by acquiring Covenant Financial, Inc.

(“Covenant”).

The Covenant acquisitions follows the acquisition of Monument Bancorp, Inc.

(“Monument”) in 2019, as well as the opening of a lending office in York, Pennsylvania which is located in southcentral Pennsylvania.

The Covenant acquisition follows the acquisition of Monument Bancorp, Inc.

(“Monument”) in 2019, as well as the opening of offices in York and Lancaster, which are located in Southcentral Pennsylvania.

The Corporation provides banking and related services to individual and corporate customers.

Lending products include commercial, mortgage and consumer loans, as well as specialized instruments such as commercial letters-of-credit.

The Corporation provides wealth management services through its trust department, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services.

9 unchanged sentences

Material estimates that are particularly susceptible to change include:

(1) the allowance for loan losses, (2) fair values of debt securities based on estimates from independent valuation services or from brokers and (3) assessment of goodwill for possible impairment.

(1) the allowance for loan losses and (2) fair values of available-for-sale debt securities based on estimates from independent valuation services or from brokers.

INVESTMENT SECURITIES – Investment securities are accounted for as follows:

6 unchanged sentences

Other-than-temporary impairment – Credit-related declines in the fair value of available-for-sale debt securities that are deemed to be other-than-temporary are reflected in earnings as realized losses.

In estimating other-than-temporary impairment (OTTI) losses,

management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.

In estimating other-than-temporary impairment (OTTI) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.

The credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate.

3 unchanged sentences

Holdings of restricted equity securities are included in Other Assets in the consolidated balance sheets, and dividends received on restricted securities are included in Other Income in the consolidated statements of income.

DERIVATIVES – In connection with the acquisition of Covenant, the Corporation became a party to derivative financial instruments.

DERIVATIVES – The Corporation is a party to derivative financial instruments.

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

Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies.

Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans from Covenant (acquired by the Corporation) into fixed interest rate exposures.

Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps that Covenant had in place with a third party (assumed by the Corporation), such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures.

Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures.

Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures.

These derivatives are not designated as hedges and are not speculative.

4 unchanged sentences

The fair value of interest rate derivatives is included in the balance of other assets and other liabilities in the consolidated balance sheets.

LOANS HELD FOR SALE – Mortgage loans held for sale are reported at the lower of cost or market, determined in the aggregate.

LOANS HELD FOR SALE – Mortgage loans held for sale are reported at the lower of cost or fair value, determined in the aggregate.

LOANS RECEIVABLE – Loans originated by the Corporation which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees.

13 unchanged sentences

Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status.

PURCHASED LOANS – The Corporation purchased loans in connection with its acquisition of Covenant in 2020 and Monument in 2019, some of which had, at the acquisition dates, shown evidence of credit deterioration since origination.

PURCHASED LOANS – The Corporation purchased loans in 2019 and 2020, some of which had, at the acquisition dates, shown evidence of credit deterioration since origination.

The Corporation considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality.

2 unchanged sentences

The PCI loans acquired are secured by real estate and the fair value of each loan at the acquisition date was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs.

The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2020) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.

The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2021 and 2020) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan.

28 unchanged sentences

Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance.

All loans classified as troubled debt restructurings and all commercial loan relationships less than $ 200,000 or other loan relationships less than $ 400,000 in the aggregate, but with an estimated loss of $ 100,000 or more, are individually evaluated for impairment.

All loans classified as troubled debt restructurings (TDR) and all commercial loan relationships less than $ 200,000 or other loan relationships less than $ 400,000 in the aggregate, but with an estimated loss of $ 100,000 or more, are individually evaluated for impairment.

The general component covers pools of loans by loan class including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans.

30 unchanged sentences

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs.

Provisions of the CARES Act Section 4013 largely mirrored the provisions of the interagency statement, providing that modified loans were not to be considered TDRs if they were performing at December 31, 2019 and other consideration set forth in the interagency statements were met.

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 or at December 31, 2019.

Consistent with this guidance, the Corporation has not reported loans that were modified in response to COVID-19 as past due, nonaccrual or as TDRs.

BANK PREMISES AND EQUIPMENT – Bank premises and equipment are stated at cost less accumulated depreciation.

18 unchanged sentences

The servicing rights asset is included in Other Assets in the consolidated balance sheets.

INCOME TAXES – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws.

Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon

available evidence.

Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence.

Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method.

6 unchanged sentences

The fair value of restricted stock is based on the current market price on the date of grant.

TREASURY STOCK – Common stock held in treasury is accounted for using the cost method, which treats stock held in treasury as a reduction to total stockholders’ equity.

The shares may be purchased in the open market or in privately negotiated transactions from time to time depending upon market conditions and other factors .

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS – In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit.

10 unchanged sentences

The fair value of trust assets under management was approximately $ 1,232,919,000 at December 31, 2021 and $ 1,103,228,000 at December 31, 2020.

Trust and financial management revenue is included within noninterest income in the consolidated statements of income.

Trust revenue is included within noninterest income in the consolidated statements of income.

Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis.

11 unchanged sentences

and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts.

All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the

services are provided to the customers.

All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers.

Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.

7 unchanged sentences

This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the foreseeable future.

Recent Accounting Pronouncements - Adopted

Effective January 1, 2020, the Corporation adopted ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements on fair value measurements.

This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements.

ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date.

ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.

The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented.

Note 22 provides disclosure regarding fair value measurements of the Corporation’s financial instruments.

Adoption of this ASU did not have a material impact on the Corporation’s consolidated financial position or results of operations.

Recently Issued But Not Yet Effective Accounting Pronouncements

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The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.

The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require

contract remeasurement at the modification date or reassessment of a previous accounting determination.

The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.

Some specific optional expedients are as follows:

3 unchanged sentences

The Corporation expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.

BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

On July 1, 2020, the Corporation completed its acquisition of Covenant Financial, Inc.

(“Covenant”).

Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania.

Management believes the acquisition provides an opportunity to expand the Corporation’s presence in a higher growth market and further leverage the Corporation’s capital to enhance long-term shareholder value.

The consolidated financial statements include the formerly separate Covenant operations from July 1, 2020 through December 31, 2020.

Since the activities of the former Covenant operations have been combined with those of the Corporation, separate disclosure of Covenant-related financial information included in the consolidated financial statements is not practicable.

Total purchase consideration was $ 63,266,000 , including cash paid to former Covenant shareholders totaling $ 21,654,000 and 2,047,819 shares of Corporation common stock issued with a value of $ 41,612,000 .

In the table below, the cash portion of merger consideration includes $ 183,000 of costs directly related to issuance of stock, and the equity portion of merger consideration has been reduced by these costs.

The merger was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values.

The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

As adjusted in the fourth quarter 2020, the fair value of assets acquired, excluding goodwill, totaled $ 608,485,000 , while the fair value of liabilities assumed totaled $ 569,336,000 .

Goodwill represents consideration transferred in excess of the fair value of the net assets acquired.

At December 31, 2020, goodwill associated with the acquisition was $ 24,117,000 .

The goodwill resulting from the acquisition represents the value expected from the further expansion of the Corporation’s market penetration into Southeastern Pennsylvania, adding to the base established in the acquisition of Monument Bancorp, Inc.

Goodwill acquired in the Covenant merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

In the fourth quarter 2020, the Corporation recorded adjustments to the initial fair value measurements of certain assets and liabilities that resulted in a net decrease in goodwill of $ 21,000 , summarized as follows:

(In Thousands)

Preliminary goodwill balance, September 30, 2020

Adjustments in fourth quarter 2020:

Write-down purchased credit impaired loan

Increase deferred tax asset, net

Decrease other liabilities

Goodwill balance, December 31, 2020

The following table summarizes the consideration paid for Covenant and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:

(In Thousands)

Fair value of consideration transferred:

Common stock issued

Total consideration transferred

Estimated fair value of assets acquired and (liabilities) assumed:

Cash and cash equivalents

Available-for-sale debt securities

Loans receivable

Bank-owned life insurance

Accrued interest receivable

Bank premises and equipment

Foreclosed assets held for sale

Deferred tax asset, net

Core deposit intangible

Short-term borrowings

Long-term borrowings

Subordinated debt

Accrued interest and other liabilities

Estimated excess fair value of assets acquired over liabilities assumed

In the consolidated statements of cash flows, investing and financing activities exclude the following noncash items:

the issuance of common stock as part of the merger consideration as well as the following categories of assets acquired and liabilities assumed from Covenant as reflected in the table above:

available-for-sale debt securities, loans receivable, bank-owned life insurance, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill, other assets (including Federal Home Loan Bank of Pittsburgh stock of $ 2,939,000 ), deposits, short-term borrowings, long-term borrowings, subordinated debt and accrued interest and other liabilities.

Acquisition date fair values for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 22.

The determination of estimated fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature.

Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were evaluated, and twenty-four loans displayed evidence of credit quality deterioration.

These loans are accounted for under ASC 310-30 (purchased credit impaired, or “PCI”).

The majority of the purchased loans did not display evidence of impairment, and thus are accounted for under ASC 310-20.

Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default.

These assumptions were developed using both Covenant’s historical experience and the portfolio characteristics as of the acquisition date as well as available market research.

The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Corporation considers Level 3 fair value measurements.

Loans acquired from Covenant were measured at fair value at the acquisition date with no carryover of an allowance for loan losses.

The following table presents performing and PCI loans acquired, by loan segment and class, as adjusted, at July 1, 2020:

(In Thousands)

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Commercial loans secured by real estate

Commercial and industrial

Commercial construction and land

Loans secured by farmland

Multi-family (5 or more) residential

Other commercial loans

Total commercial

The following table presents the updated fair value adjustments made to the amortized cost basis of loans acquired on July 1, 2020:

(In Thousands)

Gross amortized cost at acquisition

Fair value adjustments:

Credit adjustment on non-impaired loans

Credit adjustment on impaired loans

Fair value at acquisition

The market rate adjustment represents the movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans.

The credit adjustment made on non-PCI loans represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date.

The credit adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that have been deemed uncollectible for each loan.

The PCI loans are secured by real estate or other collateral, and the fair value of each loan was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs.

The Corporation recognized a core deposit intangible of $ 3,144,000 .

The core deposit intangible represents the estimated value of lower-cost funding provided by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market.

The valuation assumptions to determine the core deposit intangible were comprised of level 2 and level 3 inputs.

The core deposit intangible will be amortized over a weighted-average life of 5.4 years.

Deposit liabilities assumed were segregated into two categories:

(1) nonmaturity deposits (checking, savings and money market), and (2) time deposits (deposit accounts with a stated maturity).

The fair values of both categories of deposits were determined using level 2 fair value measurements.

For nonmaturity deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value.

In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration.

Short-term and long-term borrowings assumed consisted of advances from the Federal Home Loan Bank of Pittsburgh.

The fair value of borrowings was determined using Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available July 1, 2020 for advances to the same maturities as those of the deposits assumed.

Subordinated debt assumed included two issues:

(1) agreements with par values totaling $ 8,000,000 , maturing in June 2026, redeemable at par beginning in June 2021 and bearing interest at 6.25 %;

and (2) an agreement with a par value of $ 2,000,000 , maturing in July 2027, redeemable at par beginning in July 2022 and bearing interest at 6.50 %.

The fair value of subordinated debt was determined using Level 2 measurements by comparing the interest rates on the debt to the rates on similar recent issues of comparable size by other similar-sized banking companies.

The Corporation incurred merger-related expenses associated with the Covenant transaction of $ 7,708,000 in 2020 and $ 287,000 in 2019.

Merger-related expenses include severance and similar expenses, costs associated with termination of data processing contracts and conversion of Covenant’s customer accounting data into the Corporation’s core system, legal and other professional fees and various other costs.

The following table presents pro forma information as if the merger between the Corporation and Covenant had been completed on January 1, 2019.

The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning of 2019.

The supplemental pro forma information excludes merger-related expenses totaling $ 9,061,000 in 2020 (including $ 1,353,000 incurred by Covenant), or $ 7,245,000 net of tax (including $ 1,111,000 incurred by Covenant).

The pro forma also excludes a tax benefit of $ 600,000 that Covenant realized from stock-based compensation vested upon completion of the merger.

The pro forma information does not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

(In Thousands Except Per Share Data)

Interest income

Interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Noninterest income

Net gains on securities

Loss on prepayment of borrowings

Other noninterest expenses

Income before income tax provision

Income tax provision

Earnings per common share - basic

Earnings per common share - diluted

Business Combination – Acquisition of Monument Bancorp, Inc.

On April 1, 2019, the Corporation completed its acquisition of 100 % of the common stock of Monument Bancorp, Inc.

(“Monument”).

Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania.

Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank.

Total purchase consideration was $ 42.7 million, including cash paid to former Monument shareholders totaling $ 9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $ 33.1 million, net of costs directly related to stock issuance of $ 181,000 .

BUSINESS COMBINATION

On July 1, 2020, the Corporation completed its acquisition of Covenant, which operated banking offices in Bucks and Chester Counties of Pennsylvania.

In connection with the transaction, the Corporation recorded goodwill of $ 24.1 million and a core deposit intangible asset of $ 3.1 million.

Total loans acquired on April 1, 2019 were valued at $ 259.3 million, while total deposits assumed were valued at $ 223.3 million, borrowings were valued at $ 111.6 million and subordinated debt was valued at $ 12.4 million.

The subordinated debt included an instrument with a fair value of $ 5.4 million that was redeemed on April 1, 2019 with no realized gain or loss.

The Corporation acquired available-for-sale debt securities valued at $ 94.6 million and sold the securities in early April for approximately no realized gain or loss.

Total loans acquired on July 1, 2020 were valued at $ 464.2 million, while total deposits assumed were valued at $ 481.8 million, borrowings were valued at $ 64.0 million and subordinated debt was valued at $ 10.1 million.

The Corporation acquired available-for-sale debt securities valued at $ 10.8 million and bank-owned life insurance valued at $ 11.2 million.

The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date.

There were no adjustments to the fair value measurements of assets or liabilities in 2020.

Merger-related expenses associated with the Monument acquisition, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $ 3,812,000 in 2019.

There were no adjustments to the fair value measurements of assets acquired or liabilities assumed in the year ended December 31, 2021.

Merger-related expenses related to the acquisition of Covenant totaled $ 7,708,000 in 2020.

There were no merger-related expenses in 2021.

PER SHARE DATA

15 unchanged sentences

Diluted earnings per common share (a)

Weighted-average nonvested restricted shares outstanding

(a) Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities).

The weighted-average number of nonvested restricted shares outstanding was 89,718 shares in 2020 and 68,358 shares in 2019.

Anti-dilutive stock options are excluded from net income per share calculations.

Weighted-average common shares available from anti-dilutive instruments totaled 32,538 shares in 2020.

There were no anti-dilutive instruments in 2021.

Weighted-average common shares available from anti-dilutive instruments totaled 32,538 shares in 2020.

COMPREHENSIVE INCOME

2 unchanged sentences

(In Thousands)

Unrealized gains on available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive income on available-for-sale debt securities

Other comprehensive loss from available-for-sale debt securities

Unfunded pension and postretirement obligations:

Changes from plan amendments and actuarial gains and losses included in other comprehensive income

Changes from plan amendments and actuarial gains and losses

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

Other comprehensive loss on unfunded retirement obligations

Total other comprehensive income

Other comprehensive income on unfunded retirement obligations

Total other comprehensive loss

(In Thousands)

Unrealized gains on available-for-sale debt securities:

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive income on available-for-sale debt securities

Other comprehensive income from available-for-sale debt securities

Unfunded pension and postretirement obligations:

Changes from plan amendments and actuarial gains and losses included in other comprehensive income

Changes from plan amendments and actuarial gains and losses

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

Other comprehensive income on unfunded retirement obligations

Other comprehensive loss on unfunded retirement obligations

Total other comprehensive income

Items reclassified out of each component of accumulated other comprehensive income (loss) are as follows:

Items reclassified out of each component of accumulated other comprehensive income are as follows:

Affected Line Item in the

Consolidated Statements of Income

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)

Other noninterest expense

Reclassification adjustment for (gains) realized in income (before-tax)

Realized gains on available-for-sale debt securities, net

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)

Other noninterest expense

Income tax effect

Income tax provision

Changes in the components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

Changes in the components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

(In Thousands)

1 unchanged sentence

on Securities

Income (Loss)

Balance, beginning of period

Other comprehensive income (loss) during year ended December 31, 2020

Other comprehensive loss during year ended December 31, 2021

Balance, end of period

12 unchanged sentences

The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

The Corporation has not experienced any losses in such accounts.

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia.

1 unchanged sentence

In March 2020, the Federal Reserve Board reduced reserve requirements for U.S.

Accordingly, C&N Bank had no required reserves at December 31, 2020 and $ 20,148,000 at December 31, 2019.

Accordingly, C&N Bank had no required reserves at December 31, 2021 or December 31, 2020.

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

4 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

7 unchanged sentences

December 31, 2020

Obligations of the U.S.

Obligations of U.S.

15 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

1 unchanged sentence

Government agencies or sponsored agencies:

Residential pass-through securities

Residential collateralized mortgage obligations

Commercial mortgage-backed securities

Total temporarily impaired available-for-sale debt securities

3 unchanged sentences

(In Thousands)

Obligations of the U.S.

Obligations of U.S.

Government agencies

Obligations of states and political subdivisions:

1 unchanged sentence

Government agencies or sponsored agencies,

Residential pass-through securities

Residential collateralized mortgage obligations

Commercial mortgage-backed securities

Total temporarily impaired available-for-sale debt securities

21 unchanged sentences

In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

Investment securities carried at $ 247,373,000 at December 31, 2020 and $ 215,270,000 at December 31, 2019 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law.

Investment securities carried at $ 241,428,000 at December 31, 2021 and $ 247,373,000 at December 31, 2020 were pledged as collateral for public deposits, trusts and certain other deposits, as provided by law, totaling $ 189,383,000 at December 31, 2021 and $ 201,176,000 at December 31, 2020.

See Note 12 for information concerning securities pledged to secure borrowing arrangements and Note 21 for information related to securities pledged against interest rate swap obligations.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation.

Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.

14 unchanged sentences

The Corporation’s marketable equity security, with a carrying value of $ 971,000 at December 31, 2021 and $ 1,000,000 at December 31, 2020, consisted exclusively of one mutual fund.

There was no unrealized gain/loss on the mutual fund at December 31, 2020 and an unrealized loss of $ 21,000 at December 31, 2019.

The decrease in the unrealized loss of $ 21,000 in 2020 and the decrease in the unrealized loss of $ 29,000 in 2019 are included in other noninterest income in the consolidated statements of income.

There was an unrealized loss of $ 29,000 on the mutual fund at December 31, 2021 and no unrealized gain/loss at December 31, 2020.

The increase in the unrealized loss of $ 29,000 in 2021 and the decrease in the unrealized loss of $ 21,000 in 2020 are included in other noninterest income in the consolidated statements of income.

There were no sales of equity securities in 2021 and 2020.

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans.

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans.

Loans outstanding at December 31, 2021 and December 31, 2020 are summarized by segment, and by classes within each segment, as follows:

1 unchanged sentence

(In Thousands)

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Commercial loans secured by real estate

Commercial and industrial

Small Business Administration - Paycheck Protection Program

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

5 unchanged sentences

Total commercial

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

allowance for loan losses

1 unchanged sentence

The Corporation grants loans to individuals as well as commercial and tax-exempt entities.

Commercial, residential and personal loans are made to customers geographically concentrated in the northern tier and northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania.

Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania.

Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region .

There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10 %of total loans at either December 31, 2020 or December 31, 2019.

On March 27, 2020, the CARES Act was signed into law.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law.

The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S.

1 unchanged sentence

A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department.

Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage

interest, and utilities.

Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to

small businesses to pay their employees, rent, mortgage interest, and utilities.

PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-year terms, and the Corporation will be repaid sooner to the extent the loans are forgiven.

The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan.

Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020.

Covenant also engaged in PPP lending starting in early April 2020.

As of December 31, 2020, the recorded investment in PPP loans was $ 132,269,000 , including contractual principal balances of $ 134,802,000 , increased by a market rate adjustment on PPP loans acquired from Covenant of $ 504,000 and reduced by net deferred origination fees of $ 3,037,000 .

Net deferred origination fees and the market rate adjustment on PPP loans are recognized in interest income as yield adjustments (net accretion over the term of the loans).

Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $ 1,945,000 for the year ended December 31, 2020.

Section 4013 of 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 coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S.

GAAP for loan modifications related to the pandemic that would otherwise be categorized as 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.

Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.

Section 4013 of the CARES Act provides that, from the period beginning March 1, 2020 until 60 days after the date on which the national emergency concerning the coronavirus (COVID-19) pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S.

GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes.

The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019.

The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA Act”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief.

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

The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act.

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.

7 unchanged sentences

The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

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

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.

The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act.

Information related to PPP loans advanced pursuant to the CAA are labeled “2nd Draw” within the tables.

The maximum term of PPP loans is five years.

Most of the Corporation’s 1st Draw PPP loans have two-year terms, while 2nd Draw PPP loans have five-year terms and the Corporation will be repaid sooner to the extent the loans are forgiven.

The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan.

Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020.

Covenant also engaged in PPP lending starting in early April 2020.

As of December 31, 2021, the recorded investment in 1st Draw PPP loans was $ 1,356,000 , including contractual principal balances of $ 1,410,000 , reduced by net deferred origination fees of $ 54,000 .

The recorded investment in 2nd Draw PPP loans was $ 25,508,000 , including contractual principal balances of $ 26,356,000 reduced by net deferred origination fees of $ 848,000 .

Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $ 5,515,000 in 2021 and $ 1,901,000 in 2020.

Interest and fees on PPP loans which are included in taxable interest and fees on loans in the consolidated statements of income totaled $ 6,530,000 in 2021 and $ 2,924,000 in 2020.

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

Prior to the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program.

These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk.

For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the

deferred amounts will be moved to the end of the loan term.

Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2020.

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

Accordingly, many of the loans for which deferrals were granted returned to full payment status prior to December 31, 2020.

The quantity and balances of modifications outstanding under the program at December 31, 2020 are as follows:

Deferrals Remaining

As of December 31, 2020

(Dollars in Thousands)

COVID-19-related loan modifications:

Residential mortgage

The ultimate effect of COVID-19 on the local or broader economy is not known.

In 2020, the Corporation increased the allowance for loan losses $ 785,000 based on an increase in qualitative factors related to potential deterioration in economic conditions.

Further, in June, September and December 2020, the Corporation’s credit administration and commercial lending staffs performed reviews of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance.

Updated risk ratings and specific allowances based on the December 2020 review have been included in the December 31, 2020 information presented below.

Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

As described in Note 3, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant, and effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument.

The acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans.

In the last three quarters of 2019 and year ended December 31, 2020, the Corporation recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans.

These efforts were 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 was required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts have been 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 December 31, 2021 and 2020.

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

At December 31, 2021, there were no loans in deferral status under the program.

At December 31, 2020, there were 45 loans with a total recorded investment of $ 37,397,000 , in deferral status under the program.

As described in Note 3, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant.

In 2019, the Corporation acquired loans pursuant to the acquisition of Monument Bancorp, Inc.

(“Monument”).

Acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans.

Subsequent to the acquisitions, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans.

For the years ended December 31, 2021 and 2020, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

3 unchanged sentences

Market rate adjustment recorded in acquisition

(Amortization) accretion recognized in interest income

Amortization recognized in interest income

Adjustments to gross amortized cost of loans at end of period

4 unchanged sentences

Adjustments to gross amortized cost of loans at end of period

The following table presents the components of the purchase accounting adjustments related to the PCI loans acquired from Covenant as of July 1, 2020:

(In Thousands)

Contractually required principal at acquisition

Non-accretable discount

Expected cash flows

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

6 unchanged sentences

Allowance for Loan Losses:

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Commercial loans secured by real estate

6 unchanged sentences

Total commercial

Total Allowance for Loan Losses

Year Ended December 31, 2019

(In Thousands)

Allowance for Loan Losses:

Residential mortgage:

4 unchanged sentences

Total residential mortgage

Total Allowance for Loan Losses

Year Ended December 31, 2020

(In Thousands)

Allowance for Loan Losses:

Commercial loans secured by real estate

6 unchanged sentences

Total commercial

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Total Allowance for Loan Losses

For the year ended December 31, 2020, the provision for loan losses was $ 3,913,000 , an increase in expense of $ 3,064,000 as compared to 2019.

The provision included the impact of a $ 2,219,000 charge-off on a commercial loan of $ 3,500,000 .

In total, the provision for 2020 included a net charge of $ 2,238,000 related to specific loans (net decrease in specific allowances on loans of $ 126,000 and net charge-offs of $ 2,364,000 ) and a $ 1,675,000 increase in the collectively determined portion of the allowance for loan losses.

The increase in the collectively determined portion of the allowance includes the impact of an increase in the net charge-off experience factor for commercial loans and an increase in qualitative factors.

For the year ended December 31, 2021, the provision for loan losses was $ 3,661,000 , a decrease in expense of $ 252,000 as compared to 2020.

In 2021, the provision included the impact of partial charge-offs totaling $ 1,463,000 on a commercial loan.

At December 31, 2021, the recorded investment in this loan was $ 1,391,000 .

In total, the provision for 2021 included a net charge of $ 1,324,000 related to specific loans (net charge-offs of $ 1,509,000 offset by a net decrease in specific allowances on loans of $ 185,000 ), an increase of $ 2,251,000 in the collectively determined potion of the allowance and an $ 86,000 increase in the unallocated allowance.

The increase in the collectively determined portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans.

In 2020, the provision included a $ 2,219,000 charge-off on one commercial loan for which there was no recorded investment at December 31, 2021 and 2020.

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system.

4 unchanged sentences

Risk ratings are updated any time that conditions or the situation warrants.

Loans not classified are included in the “Pass” column in the table below.

Loans not classified are included in the “Pass” column in the table that follows.

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

1 unchanged sentence

(In Thousands)

Residential Mortgage:

Residential Mortgage loans - first liens

Residential Mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Commercial loans secured by real estate

Commercial and Industrial

Small Business Administration - Paycheck Protection Program

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

5 unchanged sentences

Total commercial

December 31, 2019

(In Thousands)

Residential Mortgage:

4 unchanged sentences

Total residential mortgage

December 31, 2020

(In Thousands)

Commercial loans secured by real estate

Commercial and Industrial

Paycheck Protection Program - 1st Draw

Political subdivisions

5 unchanged sentences

Total commercial

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2020 and 2019:

December 31, 2020

Allowance for Loan Losses:

(In Thousands)

Residential Mortgage:

4 unchanged sentences

Total residential mortgage

December 31, 2021

Allowance for Loan Losses:

(In Thousands)

Commercial loans secured by real estate

Commercial and industrial

Small Business Administration - Paycheck Protection Program

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

5 unchanged sentences

Total commercial

December 31, 2019

Allowance for Loan Losses:

(In Thousands)

Residential mortgage:

4 unchanged sentences

Total residential mortgage

December 31, 2020

Allowance for Loan Losses:

(In Thousands)

Commercial loans secured by real estate

Commercial and industrial

Paycheck Protection Program - 1st Draw

Political subdivisions

5 unchanged sentences

Total commercial

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Summary information related to impaired loans as of December 31, 2021 and 2020 is as follows:

3 unchanged sentences

With no related allowance recorded:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Commercial loans secured by real estate

Commercial and industrial

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Loans secured by farmland

Multi-family (5 or more) residential

Agricultural loans

Total with no related allowance recorded

With a related allowance recorded:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Commercial loans secured by real estate

Commercial and industrial

Construction and other land loans

Loans secured by farmland

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Total with a related allowance recorded

In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes.

Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property.

The total allowance related to these two borrowers was $ 153,000 at December 31, 2020 and $ 176,000 at December 31, 2019.

The average balance of impaired loans and interest income recognized on impaired loans is as follows:

7 unchanged sentences

Year Ended December 31,

Residential mortgage:

Residential mortgage loans - first lien

Residential mortgage loans - junior lien

Home equity lines of credit

Total residential mortgage

Commercial loans secured by real estate

6 unchanged sentences

Total commercial

Residential mortgage:

Residential mortgage loans - first lien

Residential mortgage loans - junior lien

Home equity lines of credit

Total residential mortgage

The breakdown by portfolio segment and class of nonaccrual loans and loans past due ninety days or more and still accruing is as follows:

2 unchanged sentences

December 31, 2020

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

Total residential mortgage

Commercial loans secured by real estate

3 unchanged sentences

Multi-family (5 or more) residential

Agricultural loans

Other commercial

Total commercial

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

Total residential mortgage

Loans past due 90 days or more for which interest continues to be accrued have been evaluated and determind to be well secured and in the process of collection.

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.

5 unchanged sentences

As of December 31, 2020

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Commercial loans secured by real estate

Commercial and industrial

Small Business Administration - Paycheck Protection Program

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

5 unchanged sentences

Total commercial

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Home equity lines of credit

1-4 Family residential construction

Total residential mortgage

Nonaccrual loans are included in the contractual aging immediately above.

4 unchanged sentences

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.

Loans classified as TDRs are designated as impaired and reviewed each quarter to determine if a specific allowance for loan losses is required.

Loans deferred under COVID-19 CARES Act Section 4013 are not classified as TDRs as they meet COVID-19 relief guidance.

Loans classified as TDRs are designated as impaired.

The outstanding balance of loans subject to TDRs, as well as the contractual aging information at December 31, 2021 and 2020 is as follows:

6 unchanged sentences

(Balances in Thousands)

Residential mortgage - junior liens:

Residential mortgage - first liens:

Reduced monthly payments and extended maturity date

Reduced monthly payments for a fifteen-month period

Residential mortgage - junior liens,

New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted

Home equity lines of credit:

Reduced monthly payments and extended maturity date

Reduced monthly payments for an eighteen-month period

Commercial loans secured by real estate:

1 unchanged sentence

Principal and interest payment deferral non-COVID related

Extended interest only payments and reduced monthly payments with a balloon payment at maturity

Commercial and industrial,

Reduced monthly payments and extended maturity date

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

Agricultural loans,

Reduced monthly payments and extended maturity date

In the year ended December 31, 2020, the Corporation recorded a specific allowance for loan losses of $ 416,000 related to a loan secured by commercial real estate for which a TDR concession was also made in 2020 and included in the table above.

The other loans for which TDRs were granted in 2020 had no specific impact on the provision or allowance for loan losses.

In the year ended December 31, 2019, the Corporation recorded a specific allowance for loan losses of $ 678,000 related to the commercial loan secured by real estate in the table above.

This loan was subsequently paid off in the first quarter of 2020 for less than the full principal balance, resulting in a charge-off of $ 107,000 .

In 2021, the allowance on this loan with a recorded investment of $ 3,405,000 at December 31, 2021 was increased to $ 427,000 .

The other loans for which TDRs were granted in 2021 and 2020 had no specific impact on the provision or allowance for loan losses.

In 2021 and 2020, payment defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:

(Balances in Thousands)

Residential mortgage - first liens

Residential mortgage - junior liens

Commercial and industrial

Agricultural loans

In 2020, one commercial real estate loan experienced a payment default.

This loan was individually evaluated for impairment at December 31, 2020 and no specific allowance was recorded as the estimated value of collateral exceeded the outstanding balance.

All of the TDRs for which payment defaults occurred in 2019 were related to one commercial relationship.

These loans were individually evaluated for impairment at December 31, 2020 and 2019, and no specific allowance for loan losses was recognized because the estimated values of collateral and U.S.

Government (Small Business Administration) guarantees exceeded the outstanding balances of the loans.

Commercial loans secured by real estate

The default that occurred in 2021 was on the loan referred to above with a specific allowance of $ 427,000 at December 31, 2021.

The loan for which a default occurred in 2020 was repaid in full in 2021.

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in Foreclosed assets held for sale in the consolidated balance sheets) is as follows:

12 unchanged sentences

(In Thousands)

Occupancy expense

Furniture and equipment expense

Data processing expenses

Telecommunications expenses

Net occupancy and equipment expense

Data processing and telecommunications expense

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

5 unchanged sentences

Amortization expense

In 2020, amortization expense included $ 292,000 related to the Covenant acquisition and $ 248,000 related to the Monument acquisition as described in Note 3.

In 2019, amortization expense included $ 214,000 related to the Monument acquisition and $ 9,000 related to a previous acquisition.

The amount of amortization expense to be recognized in each of the ensuing five years is as follows:

17 unchanged sentences

Over 1 year through 3 years

BORROWED FUNDS AND SUBORDINATED DEBT

BORROWED FUNDS

SHORT-TERM BORROWINGS

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

3 unchanged sentences

Total short-term borrowings

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

(In Thousands)

Overnight borrowing

Other short-term advances

Total short-term FHLB-Pittsburgh borrowings

The overnight borrowing from FHLB-Pittsburgh had an interest rate of 1.81 % at December 31, 2019 .

At December 31, 2020, other short-term advances included five advances totaling $ 18,000,000 which are presented in the table inclusive of the unaccreted purchase accounting adjustment, with a weighted-average effective rate of 0.43 %.

At December 31, 2019, other short-term advances included seven advances totaling $ 20,297,000 which are presented in the table net of the unamortized purchase accounting adjustment, with a weighted-average effective rate of 2.28 %.

The weighted average interest rate on total short-term borrowings outstanding was 0.10 % at December 31, 2021 and 0.40 % at December 31, 2020.

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As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $ 14,034,000 at December 31, 2021 and $ 15,126,000 at December 31, 2020.

The Corporation engages in repurchase agreements with certain commercial customers.

These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day.

The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10 %at December 31, 2021 and 2020.

The carrying value of the underlying securities was $ 1,820,000 at December 31, 2021 and $ 1,980,000 at December 31, 2020.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $ 1,046,242,000 at December 31, 2021 and $ 1,049,690,000 at December 31, 2020.

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At December 31, 2020, the Corporation’s total credit facility with FHLB-Pittsburgh was $ 771,199,000 , including an unused (available) amount of $ 698,977,000 .

The Corporation engages in repurchase agreements with certain commercial customers.

These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day.

The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10 %at December 31, 2020 and December 31, 2019.

The carrying value of the underlying securities was $ 1,980,000 at December 31, 2020 and $ 1,951,000 at December 31, 2019.

LONG-TERM BORROWINGS

At December 31, 2021, there were no overnight borrowings or short-term advances from FHLB-Pittsburgh.

At December 31, 2020, other short-term advances from FHLB-Pittsburgh included five advances totaling $ 18,000,000 which are presented in the table net of the unamortized purchase accounting adjustment, with a weighted-average effective rate of 0.43 %.

LONG-TERM BORROWINGS – FHLB ADVANCES

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

(In Thousands)

Loans matured in 2020 with a weighted-average rate of 2.71 %

Loans maturing in 2021 with a weighted-average rate of 1.36 %

Loans maturing in 2022 with a weighted-average rate of 0.60 %

Loans matured in 2021

Loans maturing in 2022 with a weighted-average rate of 0.60 %

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Loan maturing in 2024 with a rate of 0.75 %

Loan maturing in 2025 with a rate of 4.91 %

Total long-term FHLB-Pittsburgh borrowings

Weighted-average rates are presented as of December 31, 2021.

On May 19, 2021, the Corporation issued and sold $ 15.0 million in aggregate principal amount of 2.75 % Fixed Rate Senior Unsecured Notes due 2026 (the "Senior Notes").

The Senior Notes mature on June 1, 2026 and bear interest at a fixed annual rate of 2.75 %.

The Corporation is not entitled to redeem the Senior Notes, in whole or in part, at any time prior to maturity and the Senior Notes are not subject to redemption by the holders.

The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Senior Notes were recorded, net of debt issuance costs of $ 337,000 , at an initial carrying amount of $ 14,663,000 .

Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate.

Amortization of debt issuance costs associated with the Senior Notes totaling $ 38,000 in 2021 was included in interest expense in the consolidated statements of income.

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

(In Thousands)

Senior Notes with an aggregate par value of $ 15,000,000 ;

bearing interest at 2.75 % with an effective interest rate of 3.23 %;

maturing in June 2026

Total carrying value

SUBORDINATED DEBT

On May 19, 2021 , the Corporation issued and sold $ 25.0 million in aggregate principal amount of 3.25 % Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Subordinated Notes").

The Subordinated Notes mature on June 1, 2031 and bear interest at a fixed annual rate of 3.25 %, to June 1, 2026 .

From June 1, 2026 to maturity or early redemption, the interest rate will reset quarterly to an interest rate per annum equal to the three-month Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York

plus 259 basis points.

The Corporation is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after June 1, 2026, and to redeem the Subordinated Notes at any time in whole upon certain other events.

Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.

The Subordinated Notes are not subject to redemption at the option of the holders.

The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above).

The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

The Subordinated Notes were recorded, net of debt issuance costs of $ 563,000 , at an initial carrying amount of $ 24,437,000 .

Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate.

Amortization of debt issuance costs associated with the Subordinated Notes totaling $ 63,000 in 2021 was included in interest expense in the unaudited consolidated statements of income.

At December 31, 2021 and 2020, outstanding subordinated debt agreements are as follows:

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Agreements with an aggregate par value of $ 8,000,000 ;

bearing interest at 6.25 %;

maturing in June 2026 and redeemable at par in June 2021

bearing interest at 6.25 % with an effective interest rate of 5.49 %;

redeemed at par in June 2021

Agreements with an aggregate par value of $ 6,500,000 ;

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Agreement with a par value of $ 2,000,000 ;

bearing interest at 6.50 %;

bearing interest at 6.50 % with an effective interest rate of 5.60 %;

maturing in July 2027 and redeemable at par in July 2022

Agreements with a par value of $ 25,000,000 ;

bearing interest at 3.25 % with an effective interest rate of 3.74 % ;

maturing in June 2031 and redeemable at par in June 2026

Total carrying value

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The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage.

Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2020 and December 31, 2019 and are not expected to significantly affect the Corporation’s future expenses.

Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2021 and 2020 and are not expected to significantly affect the Corporation’s future expenses.

The Corporation uses a December 31 measurement date for the postretirement plan.

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Funded status at end of year

At December 31, 2020 and 2019, the following pension plan and postretirement plan liability amounts were recognized in the consolidated balance sheets:

At December 31, 2021 and 2020, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance sheets:

Postretirement

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Postretirement

Citizens Trust Company Retirement Plan and postretirement plan:

Discount rate

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Effective July 1, 2020, the Corporation recorded a liability of $ 499,000 representing the present value of the obligation prior to the executive fully vesting in the benefit.

In 2020, the Corporation recorded expense totaling $ 366,000 related to this obligation, including:

(1) $ 360,000 , which is included in merger-related expenses in the consolidated statements of income, representing the impact of the executive fully vesting upon the change in control, and (2) $ 6,000 , which is included in pensions and other employee benefits in the consolidated statements of income, representing the effective interest cost on the obligation from July 1, 2020 through December 31, 2020.

The discount rate used to measure the liability at July 1, 2020 and December 31, 2020 was 1.5 %.

The balance of the liability at December 31, 2020, which is included in accrued interest and other liabilities in the consolidated balance sheets, is $ 865,000 .

In 2020, the Corporation recorded expense of $ 360,000 , which is included in merger-related expenses in the consolidated statements of income, representing the impact of the executive fully vesting upon the change in control.

In addition, the Corporation recorded expense of $ 13,000 in 2021 and $ 6,000 in 2020, which is included in pensions and other employee benefits in the consolidated statements of income, representing the effective interest cost on the obligation.

The discount rate used to measure the liability is 1.5 %.

The balance of the liability, which is included in accrued interest and other liabilities in the consolidated balance sheets, is $ 878,000 at December 31, 2021 and $ 865,000 at December 31, 2020.

The Corporation also has a nonqualified deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives.

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The recipients’ rights to exercise stock options under this plan expire 10 years from the date of grant.

The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant.

prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant.

There are 96,309 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2021.

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Currently payable

Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets

Tax expense resulting from allocations of certain tax benefits

to equity or as a reduction in other assets

Total provision

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Operating Lease Commitments

Operating leases in which the Corporation is the lessee are recorded as operating lease Right of Use ("ROU") assets and operating lease liabilities, included in other assets and other liabilities, respectively, on the Consolidated Balance Sheets.

The Corporation does not currently have any finance leases.

Operating lease ROU assets represent the right to use an underlying asset during the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease.

ROU assets and operating lease liabilities were recognized as of the date of adoption of ASU 2017-02 based on the present value of the remaining lease payments using a discount rate that represented the then Corporation’s incremental borrowing rate at the date of initial application.

Operating lease expense, which is comprised of amortization of the ROU assets and the implicit interest accreted on the operating lease liability, is recognized on a straight line basis over the remaining lease term of the operating lease, and is recorded in office occupancy expense in the Consolidated Statements of Income.

The leases relate to Bank branches with remaining lease terms of generally 1 to 10 years .

The Corporation leases certain branch locations, office space and equipment.

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At December 31, 2021, discount rates ranged from 0.84 % to 3.50 % with a weighted-average discount rate of 1.90 %.

As shown in the table below, at December 31, 2020, right-of-use assets of $ 3,446,000 were included in other assets , and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets.

At December 31, 2019, right of use assets totaled $ 1,637,000 .

In 2020, the Corporation recorded right-of-use asset and lease liabilities from the Covenant acquisition of $ 1,956,000 and additional right-of-use assets obtained in exchange for lease liabilities of $ 167,000 .

At December 31, 2021, the weighted-average remaining lease term was 4.8 years.

As shown in the table below, at December 31, 2021, right-of-use assets of $ 3,751,000 were included in other assets , and the related lease liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets.

At December 31, 2020, right of use assets and the related liabilities totaled $ 3,446,000 .

(In Thousands)

Other liabilities

In 2020 and 2019, operating lease expenses are included in the line items of the consolidated statements of income:

In 2021 and 2020, operating lease expenses are included in the following line item of the consolidated statements of income:

(In Thousands)

Occupancy expense, net

Furniture and equipment expense

Net occupancy and equipment expense

A maturity analysis of the Corporation’s lease liabilities at December 31, 2021 is as follows:

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Trust Department Tax Reporting Contingency

Estimated losses related to trust department tax compliance matters totaled $ 571,000 in 2020, up from $ 12,000 in 2019.

These losses are included in other noninterest expense in the consolidated statements of income.

The operational losses in 2020 arose mainly from compliance oversight and failure of the trust department to provide timely responses to tax notices which occurred between 2007 and 2019 but were identified in 2020.

The Corporation has incurred operational losses from compliance oversight related to trust department tax preparation and administration activities that occurred prior to 2020.

In 2020, the Corporation made changes in internal controls and personnel responsible for trust department tax administration activities.

Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities.

At December 31, 2020, the balance of accrued interest and other liabilities in the consolidated balance sheets includes $ 322,000 related to specific tax compliance matters that have been identified;

Losses related to trust department tax compliance matters totaled $ 164,000 in 2021 and $ 571,000 in 2020.

These losses are included in other noninterest

expense in the consolidated statements of income.

The balance of accrued interest and other liabilities in the consolidated balance sheets includes $ 465,000 at December 31, 2021 and $ 322,000 at December 31, 2020 related to specific tax compliance matters that have been identified;

however, no estimate can be made of the amount of additional expenses that may be incurred related to these matters.

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(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.

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.

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Federal regulatory authorities impose a capital rule providing that, 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.

The buffer is

measured relative to risk-weighted assets.

At December 31, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

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LIABILITIES AND STOCKHOLDERS' EQUITY

Subordinated debt

Senior notes, net

Subordinated debt, net

Other liabilities

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Dividends from Citizens & Northern Bank

Income before distributions in excess of income from subsidiaries

Distributions in excess of income from subsidiaries

Income before equity in undistributed income (excess distributions) of subsidiaries

Equity in undistributed income (excess distributions) of subsidiaries

CONDENSED STATEMENT OF CASH FLOWS

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Accretion of purchase accounting adjustment

Loss on repayment of subordinated debt

Distributions in excess of income from subsidiaries

Decrease (increase) in other assets

Increase (decrease) in other liabilities

Amortization of debt issuance costs

Equity in (undistributed income) excess distributions of subsidiaries

(Increase) decrease in other assets

(Decrease) increase in other liabilities

Net Cash Provided by Operating Activities

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CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of senior notes and subordinated debt

Repayment of subordinated debt

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Dividends paid

Net Cash Used in Financing Activities

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

Net Cash Provided by (Used in) Financing Activities

INCREASE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

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SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

The following table presents summarized quarterly financial data for 2020 and 2019:

The following tables present summarized quarterly financial data for 2021 and 2020:

2021 Quarter Ended

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Net interest income

Provision (credit) for loan losses

Net interest income after provision (credit) for loan losses

Net gains on available-for-sale debt securities

Loss on prepayment of borrowings

Merger-related expenses

Other expenses

Provision for loan losses

Net interest income after provision for loan losses

Noninterest income

Net gains (losses) on available-for-sale debt securities

Other noninterest expenses

Income before income tax provision

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2020 Quarter Ended

(In Thousands Except Per Share Data) (Unaudited)

Interest income

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Net interest income

(Credit) provision for loan losses

Net interest income after (credit) provision for loan losses

Provision (credit) for loan losses

Net interest income after provision (credit) for loan losses

Noninterest income

Net gains on available-for-sale debt securities

Loss on prepayment of borrowings

Merger-related expenses

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DERIVATIVE FINANCIAL INSTRUMENTS

In connection with the acquisition of Covenant, the Corporation became a party to derivative financial instruments.

The Corporation is a party to derivative financial instruments.

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

At July 1, 2020, the aggregate notional amount of commercial loans subject to interest rate swaps was $ 137,176,000 , and the Corporation recorded the fair value of the derivative asset of $ 7,932,000 and the fair value of the derivative liability of $ 7,932,000 .

Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies.

Interest rate swaps with commercial loan banking customers were executed to facilitate their respective risk management strategies.

Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures.

Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures.

These derivatives are not designated as hedges and are not speculative.

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As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

At December 31, 2020, the aggregate notional amount of interest rate swaps was $ 135,740,000 .

Subsequent to the merger there were no interest rate swaps originated in 2020.

The aggregate notional amount of interest rate swaps was $ 123,094,000 at December 31, 2021 and $ 135,740,000 at December 31, 2020.

The Corporation originated no interest rate swaps in 2021 or 2020.

There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at December 31, 2021.

For the year ended December 31, 2020, the net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $ 698,000 .

The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $ 1,347,000 in 2021 and $ 698,000 in 2020.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at December 31, 2021:

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At December 31, 2021

At December 31, 2020

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

Interest rate swap agreements

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Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data.

Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

Level 2 inputs include quoted market prices

in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs.

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Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

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Nonrecurring fair value measurements, assets:

Impaired loans with a valuation allowance

Valuation allowance

Impaired loans, net

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AVAILABLE-FOR-SALE DEBT SECURITIES:

Obligations of the U.S.

Obligations of U.S.

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Servicing rights

Total recurring fair value measurements

Interest rate swap agreements, assets

Total recurring fair value measurements, assets

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

Nonrecurring fair value measurements, assets:

Impaired loans with a valuation allowance

Valuation allowance

Impaired loans, net

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Originations of servicing rights

Unrealized losses included in earnings

Unrealized loss included in earnings

Servicing rights balance, end of period

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

assets held for sale consist of real estate acquired by foreclosure.

Foreclosed assets held for sale consist of real estate acquired by foreclosure.

For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals.

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Impaired loans:

Residential mortgage loans - first and junior liens

Sales comparison

Discount to appraised value

Commercial loans secured by real estate

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Foreclosed assets held for sale - real estate:

Residential (1-4 family)

Commercial real estate

Sales comparison

Discount to appraised value

Commercial real estate

Residential (1-4 family)

Sales comparison

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Impaired loans:

Residential mortgage loans - first and junior liens

Sales comparison

Discount to appraised value

Commercial and industrial

Commercial loans secured by real estate

Sales comparison

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Commercial and industrial

Liquidation of accounts receivable

Discount to borrower's financial statement value

Commercial construction and land

Sales comparison

Liquidation of assets

Discount to appraised value

Loans secured by farmland

Residential mortgage loans - first and junior liens

Sales comparison

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Foreclosed assets held for sale - real estate:

Residential (1-4 family)

Sales comparison

Discount to appraised value

Commercial real estate

Sales comparison

Discount to appraised value

Commercial real estate

Residential (1-4 family)

Sales comparison

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Accrued interest receivable

Interest rate swap agreements

Financial liabilities:

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Accrued interest payable

Interest rate swap agreements

Report of Independent Registered Public Accounting Firm

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Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively, the Corporation) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows, for the years then ended, and the related notes (collectively referred to as the consolidated financial statements).

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively the "Corporation") as of December 31, 2021 and 2020, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "consolidated financial statements").

We also have audited the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework:

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Our responsibility is to express an opinion on the Corporation's consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Corporation in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We believe that our audits provide a reasonable basis for our opinions.

As described in Management's Report on Internal Control over Financial Reporting, management has excluded from its assessment the internal control over financial reporting of Covenant Financial, Inc., which was acquired on July 1, 2020, and whose financial statements constitute assets of approximately 22.7 percent of the Corporation's consolidated total assets, and interest income and noninterest income of approximately 10.7 percent of the Corporation's consolidated total interest income and noninterest income, as of and for the year ended December 31, 2020.

Accordingly, our audit did not include the internal control over financial reporting of Covenant Financial, Inc.

Definition and Limitations of Internal Control Over Financial Reporting

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses, General Reserve - Qualitative Factors - Refer to Notes 1 and 8 to the Consolidated Financial Statements

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factors

Critical Audit Matter Description

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As described in Note 1 and Note 8, the allowance for loan losses consists of two major components:

(1) a specific component consisting of the valuation allowance for loans individually evaluated for impairment (specific component), representing $925,000 and (2) a general component consisting of the valuation allowance for pool of loans with similar risk characteristics collectively evaluated for impairment (general reserves), representing $10,460,000.

(1) a specific component consisting of the valuation allowance for loans individually evaluated for impairment (“specific component”), representing $740,000 and (2) a general component consisting of the valuation allowance for pools of loans with similar risk characteristics collectively evaluated for impairment (“general reserves”), representing $12,797,000.

The general reserves are further broken down as reserves assigned to each pool of loans based on both historical net charge-off experience ($1,332,000) and reserves related to qualitative factors ($11,465,000).

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Management has designed qualitative factors that include such factors as 1) economic conditions within its market area, 2) the Corporation’s lending policies, 3) changes or trends in the portfolio, 4) risk profile, 5) competition, and 6) regulatory requirements.

To formulate the additional allocations to the allowance for loan losses for general reserve qualitative factors, management multiplies the outstanding principal balance of the various commercial loan classes by the applicable qualitative factor.

Management’s identification and analysis of these issues requires significant judgment.

We identified the estimate of the general reserves qualitative factors of the allowance for loan losses with respect to the commercial loan segments as a critical audit matter as it involved especially subjective auditor judgment.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls relating to the evaluation of the management's assumptions and inputs used to develop the qualitative factor adjustments, including controls addressing:

o Management's review of the accuracy of inputs related to qualitative factor adjustments included within the allowance for loan losses calculation.

o Management's review of the qualitative and quantitative conclusions reached related to the qualitative factor adjustments and the resulting allocation to the allowance for loan losses.

o Management's process for determining classification and valuation of loans that have been separately evaluated from the general reserves of the allowance for loan losses due to their status as impaired or acquired loans.

o Management's review of risk rating changes of commercial loans which could have an impact on determination of qualitative factor adjustments.

● Substantively testing the appropriateness of the judgments and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:

o Analyzing loans separately evaluated from the general reserve qualitative factors calculation for propriety of classification as acquired or impaired loans.

o Evaluating the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation's lending practices, historical loan portfolio performance and third-party macroeconomic data, as well as giving appropriate consideration to current economic factors.

o Evaluating the completeness and accuracy of risk ratings for a selection of commercial loans and timeliness of commercial loan risk rating changes.

o Analytically evaluating the qualitative factors allocation year over year and testing allocations for reasonableness.

Business Combination, Fair Value of Acquired Loans Receivable - Refer to Note 3 to the Consolidated Financial Statements

Critical Audit Matter Description

As disclosed in Note 3 to the Corporation's consolidated financial statements, the Corporation completed the acquisition of Covenant Financial, Inc.

on July 1, 2020.

The Corporation accounted for the acquisition under the acquisition method of accounting for business combinations.

Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including loans receivable of $464.2 million.

Management estimated the fair value of loans receivable using a discounted cash flow method, which required management to make significant estimates and assumptions related to the prepayment speeds and recoveries, loss severities, as well as, determine discount rates to present value the cash flows.

Changes in assumptions could impact the amount allocated to loans and ultimately the amount recorded as goodwill.

We identified the assessment of the fair value measurement of loans acquired in the Covenant acquisition as a critical audit matter.

The assessment encompassed the evaluation of the fair value methodology for acquired loans, including the valuation assumptions and the inputs used to determine those assumptions.

The valuation assumptions related to prepayment speeds, default rates, loss severities and discount rates, involved significant measurement uncertainty and required specialized skills and knowledge to evaluate.

Additionally, there was a high degree of auditor judgment involved in designing and performing audit procedures in order to evaluate and test these key assumptions and inputs, including the involvement of fair value specialists.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

● Testing the design and operating effectiveness of internal controls relating to the evaluation of management's judgments and assumptions in estimating the fair value of acquired loans, including controls addressing:

o Development of the fair value methodology for the acquired loans.

o Determining completeness and accuracy of the data inputs used for key valuation assumptions.

o Evaluating the reasonableness of the judgments used for key assumptions.

● Substantively testing management's process, including evaluating their judgments and assumptions, for estimating the fair value of acquired loans receivable which included:

o Evaluating management's fair value measurement methodology for compliance with U.S.

generally accepted accounting principles.

o Involving valuation professionals with specialized skills and knowledge to assess the appropriateness of the judgments, assumptions and data used and overall reasonableness of the fair values.

o Testing the completeness and accuracy of the acquired loan data used and evaluating the relevance of the loan data on the date of acquisition.

o Developing an independent estimate of the fair value of the loans using the Corporation's assumptions and independently developing key assumptions including prepayment speeds, default rates, loss severities and discount rates used by other market participants, and comparing the result to the Corporation's fair value estimate.

We identified the estimate of the general reserve's qualitative factors of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors requires significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included, among others:

● Obtaining an understanding of the management review control over the determination, review and approval of the qualitative factors, including controls over the underlying internal and external data inputs, and testing such control for design and operating effectiveness.

● Evaluating the reasonableness of management’s judgments related to qualitative factor adjustments to determine if they are calculated in accordance with management’s policies and consistently applied.

● Evaluating the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation’s lending practices, historical loan portfolio performance, and third-party macroeconomic data, as well as considering current economic factors.

● Analytically evaluate changes that occurred in the allowance for loan losses.

/s/ Baker Tilly US, LLP

We have served as the Corporation’s auditor since 1979.

Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

Williamsport, Pennsylvania

March 5, 2021

Pittsburgh, Pennsylvania

February 22, 202 2

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data