What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-05-06 compared with 2021-11-08 · 180 added, 465 removed, 875 unchanged (42% of the section changed)

2 unchanged sentences

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

September 30,

Cash and due from banks:

28 unchanged sentences

authorized 20,000,000 shares;

issued 16,030,172 and outstanding 15,750,250 at September 30, 2021;

issued 16,030,172 and outstanding 15,718,723 at March 31, 2022;

issued 16,030,172 and outstanding 15,759,090 at December 31, 2021

2 unchanged sentences

Treasury stock, at cost;

279,922 shares at September 30, 2021 and 70,831

311,449 shares at March 31, 2022 and 271,082

shares at December 31, 2021

Accumulated other comprehensive income

Accumulated other comprehensive (loss) income

TOTAL STOCKHOLDERS' EQUITY

5 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

INTEREST INCOME

31 unchanged sentences

Professional fees

Merger-related expenses

Other noninterest expense

6 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

Consolidated Statements of Comprehensive (Loss) Income

(In Thousands) (Unaudited)

Three Months Ended

Nine Months Ended

September 30,

Available-for-sale debt securities:

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

Unrealized holding losses on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

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

Other comprehensive loss 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 (loss) income before income tax

Income tax related to other comprehensive loss (income)

Net other comprehensive (loss) income

Comprehensive income

Other comprehensive income (loss) on pension and postretirement obligations

Other comprehensive loss before income tax

Income tax related to other comprehensive loss

Net other comprehensive loss

Comprehensive (loss) income

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

2 unchanged sentences

(In Thousands) (Unaudited)

Nine Months Ended

September 30,

Three Months Ended

CASH FLOWS FROM OPERATING ACTIVITIES:

8 unchanged sentences

Deferred income taxes

Decrease in fair value of servicing rights

Increase in fair value of servicing rights

Gains on sales of loans, net

1 unchanged sentence

Proceeds from sales of loans held for sale

Decrease (increase) in accrued interest receivable and other assets

Decrease in accrued interest payable and other liabilities

Increase in accrued interest receivable and other assets

(Decrease) 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 business combination

Purchase of certificates of deposit

Proceeds from maturities of certificates of deposit

Proceeds from sales of available-for-sale debt securities

Proceeds from calls and maturities of available-for-sale debt securities

2 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

5 unchanged sentences

Net increase in deposits

Net decrease in short-term borrowings

Proceeds from long-term borrowings - FHLB advances

Net increase (decrease) in short-term borrowings

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

5 unchanged sentences

CASH AND CASH EQUIVALENTS, END OF PERIOD

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

Nine Months Ended

September 30,

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Accrued purchase of certificates of deposit

Increase in accrued purchase of available-for-sale debt securities

Accrued sale of available-for-sale 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 these unaudited consolidated financial statements.

3 unchanged sentences

Comprehensive

Three Months Ended September 30, 2021

Balance, June 30, 2021

Other comprehensive loss, net

Cash dividends declared on common stock, $ .28 per share

Shares issued for dividend reinvestment plan

Shares issued from treasury and redeemed related to exercise of stock options

Stock-based compensation expense

Purchase of restricted stock for tax withholding

Treasury stock purchases

Balance, September 30, 2021

Three Months Ended September 30, 2020

Balance, June 30, 2020

Other comprehensive loss, net

Cash dividends declared on common stock, $ .27 per share

Shares issued for dividend reinvestment plan

Restricted stock granted

Forfeiture of restricted stock

Stock-based compensation expense

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

Balance, September 30, 2020

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands Except Share and Per Share Data) (Unaudited)

Comprehensive

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2022

Income (Loss)

Balance, December 31, 2021

8 unchanged sentences

Treasury stock purchases

Balance, September 30, 2021

Nine Months Ended September 30, 2020

Balance, March 31, 2022

Three Months Ended March 31, 2021

Balance, December 31, 2020

Other comprehensive income, net

Other comprehensive loss, net

Cash dividends declared on common stock, $ .27 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

Balance, September 30, 2020

Balance, March 31, 2021

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

3 unchanged sentences

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”).

The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services Corporation and Northern Tier Holding LLC.

C&N Bank is the sole member of Northern Tier Holding LLC.

The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services, LLC and Northern Tier Holding LLC.

C&N Bank is the sole member of C&N Financial Services, LLC and Northern Tier Holding LLC.

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

3 unchanged sentences

GAAP”) for a complete set of financial statements.

Certain 2020 information has been reclassified for consistency with the 2021 presentation.

Operating results reported for the nine-month period ended September 30, 2021 might not be indicative of the results for the year ending December 31, 2021.

Operating results reported for the three-month period ended March 31, 2022 might not be indicative of the results for the year ending December 31, 2022.

The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

20 unchanged sentences

The Corporation has formed a cross functional management team to evaluate and implement changes to contracts with rates indexed to LIBOR and 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.

The Covenant acquisition has contributed significantly to growth in the size of the Corporation’s balance sheet and in net interest income and noninterest expenses.

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 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 acquired or liabilities assumed in the nine months ended September 30, 2021.

Merger-related expenses related to the acquisition of Covenant totaled $ 6,402,000 in the third quarter 2020 and $ 7,526,000 in the nine months ended September 30, 2020.

There were no merger-related expenses in the nine months ended September 30, 2021.

PER SHARE DATA

5 unchanged sentences

Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands, Except Share and Per Share Data)

Three Months Ended

Nine Months Ended

September 30,

Dividends and undistributed earnings allocated to participating securities

10 unchanged sentences

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

There were no anti-dilutive instruments in the three-month and nine month periods ended September 30, 2021.

Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended September 30, 2020 and 19,506 shares in the nine-month period ended September 30, 2020.

COMPREHENSIVE INCOME

Comprehensive income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive income (loss).

The components of other comprehensive income (loss), and the related tax effects, are as follows:

(In Thousands)

Three Months Ended September 30, 2021

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive loss from available-for-sale debt securities

Unfunded pension and postretirement obligations,

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

Total other comprehensive loss

There were no anti-dilutive instruments in the three-month periods ended March 31, 2022 and 2021.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

COMPREHENSIVE (LOSS) INCOME

Comprehensive (loss) income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as other comprehensive (loss) income.

The components of other comprehensive (loss) income, and the related tax effects, are as follows:

(In Thousands)

Three Months Ended September 30, 2020

Three Months Ended March 31, 2022

Available-for-sale debt securities:

3 unchanged sentences

Unfunded pension and postretirement obligations:

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

Total other comprehensive loss

(In Thousands)

Nine Months Ended September 30, 2021

Three Months Ended March 31, 2021

Available-for-sale debt securities,

Unrealized holding losses on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive loss from available-for-sale debt securities

Unfunded pension and postretirement obligations:

3 unchanged sentences

Total other comprehensive loss

(In Thousands)

Nine Months Ended September 30, 2020

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

Reclassification adjustment for (gains) realized in income

Other comprehensive income from available-for-sale debt securities

Unfunded pension and postretirement obligations:

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

Total other comprehensive income

The amounts shown in the table immediately above are included in the following line items in the consolidated statements of income:

8 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Changes in the components of accumulated other comprehensive income are as follows and are presented net of tax:

(In Thousands)

Comprehensive

on Securities

Three Months Ended September 30, 2021

Balance, beginning of period

Other comprehensive loss during three months ended September 30, 2021

Balance, end of period

Three Months Ended September 30, 2020

Balance, beginning of period

Other comprehensive loss during three months ended September 30, 2020

Balance, end of period

Changes in the components of accumulated other comprehensive (loss) income are as follows and are presented net of tax:

(In Thousands)

1 unchanged sentence

on Securities

Nine Months Ended September 30, 2021

(Loss) Income

Three Months Ended March 31, 2022

Balance, beginning of period

Other comprehensive loss during nine months ended September 30, 2021

Other comprehensive (loss) income during three months ended March 31, 2022

Balance, end of period

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

Balance, beginning of period

Other comprehensive income during nine months ended September 30, 2020

Other comprehensive loss during three months ended March 31, 2021

Balance, end of period

CASH AND DUE FROM BANKS

Cash and due from banks at September 30, 2021 and December 31, 2020 include the following:

Cash and due from banks at March 31, 2022 and December 31, 2021 include the following:

(In Thousands)

September 30,

Cash and cash equivalents

8 unchanged sentences

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

Accordingly, C&N Bank had no required reserves at September 30, 2021 and December 31, 2020.

Accordingly, C&N Bank had no required reserves at March 31, 2022 or December 31, 2021.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Amortized cost and fair value of available-for-sale debt securities at September 30, 2021 and December 31, 2020 are summarized as follows:

Amortized cost and fair value of available-for-sale debt securities at March 31, 2022 and December 31, 2021 are summarized as follows:

(In Thousands)

September 30, 2021

March 31, 2022

Obligations of the U.S.

1 unchanged sentence

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

10 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

6 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, 2021 and December 31, 2020:

September 30, 2021

March 31, 2022

Less Than 12 Months

4 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

12 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

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Gross realized gains from sales

2 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 2021.

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of March 31, 2022.

Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands)

September 30, 2021

March 31, 2022

Due in one year or less

10 unchanged sentences

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

Investment securities carried at $ 254,062,000 at September 30, 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.

Investment securities carried at $ 237,165,000 at March 31, 2022 and $ 241,428,000 at December 31, 2021 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law.

See Note 8 for information concerning securities pledged to secure borrowing arrangements and Note 11 for information related to securities pledged against interest rate swap obligations.

1 unchanged sentence

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.

A summary of information management considered in evaluating debt and equity securities for OTTI at September 30, 2021 is provided below.

A summary of information management considered in evaluating debt and equity securities for OTTI at March 31, 2022 is provided below.

Debt Securities

At September 30, 2021 and December 31, 2020, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources.

At March 31, 2022 and December 31, 2021, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources.

The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security.

Based on the results of the assessment, management believes impairment of debt securities at September 30, 2021 and December 31, 2020 to be temporary.

As reflected in the table above, the fair value of available-for-sale debt securities as of March 31, 2022 was lower than the amortized cost basis by $ 25,940,000 , or 4.6 %.

In comparison, the aggregate unrealized gain position was $ 6,087,000 ( 1.2 %) at December 31, 2021.

The unrealized decrease in fair value of the portfolio in the first quarter 2022 was consistent with the significant increase in market interest rates that occurred during the period.

Based on the results of the assessment, management believes there were no credit-related declines in fair value and that impairment of debt securities at March 31, 2022 and December 31, 2021 is temporary.

Equity Securities

1 unchanged sentence

As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh.

There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated.

C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $ 9,400,000 at September 30, 2021 and $ 9,720,000 at December 31, 2020.

The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, 2021 and December 31, 2020.

In making this determination, management concluded that

There is no active market for

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

recovery of total outstanding par value, which equals the carrying value, is expected.

FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated.

C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was $ 9,258,000 at March 31, 2022 and $ 9,313,000 at December 31, 2021.

The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at March 31, 2022 and December 31, 2021.

In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected.

The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $ 981,000 at September 30, 2021 and $ 1,000,000 at December 31, 2020, consisting exclusively of one mutual fund.

There was an unrealized loss on the mutual fund of $ 19,000 at September 30, 2021 and no unrealized gain or loss on the mutual fund at December 31, 2020.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $ 926,000 at March 31, 2022 and $ 971,000 at December 31, 2021, consisting exclusively of one mutual fund.

There was an unrealized loss on the mutual fund of $ 45,000 at March 31, 2022 and $ 29,000 at December 31, 2021.

Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

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

Loans outstanding at September 30, 2021 and December 31, 2020 are summarized by segment, and by classes within each segment, as follows:

Loans outstanding at March 31, 2022 and December 31, 2021 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)

September 30,

Commercial loans secured by real estate

16 unchanged sentences

allowance for loan losses

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $ 5,719,000 at September 30, 2021 and $ 6,286,000 at December 31, 2020.

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $ 3,735,000 at March 31, 2022 and $ 4,427,000 at December 31, 2021.

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

1 unchanged sentence

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.

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.

businesses and consumers struggling as a result of the pandemic.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.

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.

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

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, provided SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities.

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

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.

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic.

Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR.

Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S.

This includes short-term (e.g.

six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

Appropriate allowances for loan and lease losses are expected to be maintained.

With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral.

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

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

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

Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of relief from troubled debt restructurings reporting established under Section 4013 of the CARES Act to 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.

3 unchanged sentences

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 September 30, 2021, the recorded investment in 1st Draw PPP loans was $ 5,747,000 , including contractual principal balances of $ 5,982,000 , increased by a market rate adjustment on PPP loans acquired from Covenant of $ 2,000 and reduced by net deferred origination fees of $ 237,000 .

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

As of March 31, 2022, the recorded investment in 1st Draw PPP loans was $ 887,000 , including contractual principal balances of $ 905,000 , reduced by net deferred origination fees of $ 18,000 .

The recorded investment in 2nd Draw PPP loans was $ 11,490,000 , including contractual principal balances of $ 11,847,000 reduced by net deferred origination fees of $ 357,000 .

Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $ 1,409,000 in the three-month period ended September 30, 2021 and $ 467,000 in the three-month period ended September 30, 2020.

Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $ 3,975,000 in the nine-month period ended September 30, 2021 and $ 804,000 in the nine-month period ended September 30, 2020.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Prior to 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 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 September 30, 2021.

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 September 30, 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 2, 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 Bancorp, Inc.

(“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.

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 three-month and nine-month periods ended September 30, 2021 and 2020, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

Interest and fees on PPP loans which are included in taxable interest and fees on loans in the unaudited consolidated statements of income totaled $ 575,000 in the three-month period ended March 31, 2022 and $ 1,998,000 in the three-month period ended March 31, 2021.

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

Subsequently, 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 three-month periods ended March 31, 2022 and 2021, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

Market Rate Adjustment

Adjustments to gross amortized cost of loans at beginning of period

Market rate adjustment recorded in acquisition

Amortization recognized in interest income

2 unchanged sentences

Adjustments to gross amortized cost of loans at beginning of period

Credit adjustment recorded in acquisition

Accretion recognized in interest income

Adjustments to gross amortized cost of loans at end of period

A summary of PCI loans held at September 30, 2021 and December 31, 2020 is as follows:

A summary of PCI loans held at March 31, 2022 and December 31, 2021 is as follows:

(In Thousands)

September 30,

Outstanding balance

Carrying amount

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the three-month period ended March 31, 2022, the Corporation received repayments on PCI loans in excess of previous carrying amounts, resulting in income of $ 1,398,000 .

This amount is included in interest and fees on taxable loans in the unaudited consolidated statements of income.

There was no corresponding income from repayments on PCI loans in the three-month period ended March 31, 2021.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans.

4 unchanged sentences

In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments.

As of September 30, 2021 and December 31, 2020, management determined that no allowance for credit losses related to unfunded loan commitments was required.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, 2021 and 2020 were as follows:

Three Months Ended September 30, 2021

June 30, 2021

September 30, 2021

(In Thousands)

Provision (Credit)

Allowance for Loan Losses:

Commercial loans secured by real estate

Commercial and industrial

Commercial construction and land

Loans secured by farmland

Multi-family (5 or more) residential

Agricultural loans

Other commercial loans

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

Three Months Ended September 30, 2020

June 30, 2020

September 30, 2020

As of March 31, 2022 and December 31, 2021, management determined that no allowance for credit losses related to unfunded loan commitments was required.

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month periods ended March 31, 2022 and 2021 were as follows:

Three Months Ended March 31, 2022

December 31, 2021

March 31, 2022

(In Thousands)

16 unchanged sentences

Total Allowance for Loan Losses

For the three months ended September 30, 2021, the provision for loan losses was $ 1,530,000 , a decrease in expense of $ 411,000 as compared to $ 1,941,000 for the three months ended September 30, 2020.

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

September 30,

Nine Months Ended September 30, 2021

(In Thousands)

Allowance for Loan Losses:

Commercial loans secured by real estate

Commercial and industrial

Commercial construction and land

Loans secured by farmland

Multi-family (5 or more) residential

Agricultural loans

Other commercial loans

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

September 30,

Nine Months Ended September 30, 2020

Three Months Ended March 31, 2021

December 31, 2020

March 31, 2021

(In Thousands)

Provision (Credit)

Allowance for Loan Losses:

14 unchanged sentences

Total Allowance for Loan Losses

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For the nine months ended September 30, 2021, the provision for loan losses was $ 2,533,000 , a decrease in expense of $ 760,000 as compared to $ 3,293,000 recorded for the nine months ended September 30, 2020.

The provision for the nine months ended September 30, 2021, includes the impact of a charge-off of $ 1,194,000 on a commercial loan with an ouststanding balance of $ 3,496,000 , as previously discussed.

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

For the three months ended March 31, 2022, the provision for loan losses was $ 891,000 , an increase in expense of $ 632,000 as compared to $ 259,000 for the three months ended March 31, 2021.

The first quarter 2022 provision included a net charge of $ 147,000 related to specific loans (net charge-offs of $ 157,000 offset by a net decrease in specific allowances on loans of $ 10,000 ), an increase of $ 748,000 in the collectively determined portion of the allowance and a decrease of $ 4,000 in the unallocated portion of the 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.

The first quarter 2021 provision included a net charge of $ 182,000 related to specific loans (increase in specific allowances on loans of $ 199,000 , partially offset by net recoveries of $ 17,000 ), an increase of $ 92,000 in the unallocated portion of the allowance and a reduction of $ 15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses.

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

5 unchanged sentences

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 September 30, 2021 and December 31, 2020:

September 30, 2021

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of March 31, 2022 and December 31, 2021:

March 31, 2022

(In Thousands)

16 unchanged sentences

Total residential mortgage

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2021

3 unchanged sentences

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

11 unchanged sentences

Total residential mortgage

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 September 30, 2021 and December 31, 2020.

September 30, 2021

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 March 31, 2022 and December 31, 2021.

March 31, 2022

Allowance for Loan Losses:

24 unchanged sentences

Paycheck Protection Program - 1st Draw

Paycheck Protection Program - 2nd Draw

Political subdivisions

11 unchanged sentences

Total residential mortgage

Summary information related to impaired loans at September 30, 2021 and December 31, 2020 is provided in the table immediately below.

Summary information related to impaired loans at March 31, 2022 and December 31, 2021 is provided in the table immediately below.

(In Thousands)

September 30, 2021

March 31, 2022

December 31, 2021

5 unchanged sentences

Loans secured by farmland

Agricultural loans

Construction and other land loans

Multi-family (5 or more) residential

3 unchanged sentences

Commercial and industrial

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Total with a related allowance recorded

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 $ 139,000 at September 30, 2021 and $ 153,000 at December 31, 2020.

The average balance of impaired loans, excluding purchased credit impaired loans, and interest income recognized on these impaired loans is as follows:

4 unchanged sentences

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

Commercial loans secured by real estate

4 unchanged sentences

Agricultural loans

Other commercial loans

Total commercial

4 unchanged sentences

Total residential mortgage

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

September 30, 2021

March 31, 2022

December 31, 2021

5 unchanged sentences

Agricultural loans

Other commercial

Total commercial

5 unchanged sentences

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.

PCI loans with a total recorded investment of $ 6,624,000 at September 30, 2021 and $ 6,841,000 at December 31, 2020 are classified as nonaccrual.

PCI loans with a total recorded investment of $ 3,983,000 at March 31, 2022 and $ 6,558,000 at December 31, 2021 are classified as nonaccrual.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of September 30, 2021 and December 31, 2020.

Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows.

The table below presents a summary of the contractual aging of loans as of March 31, 2022 and December 31, 2021.

Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19 are included in the current and past due less than 30 days category in the table that follows.

(In Thousands)

As of September 30, 2021

As of March 31, 2022

As of December 31, 2021

18 unchanged sentences

Nonaccrual loans are included in the contractual aging in the immediately preceding table.

A summary of the contractual aging of nonaccrual loans at September 30, 2021 and December 31, 2020 is as follows:

A summary of the contractual aging of nonaccrual loans at March 31, 2022 and December 31, 2021 is as follows:

(In Thousands)

September 30, 2021 Nonaccrual Totals

March 31, 2022 Nonaccrual Totals

December 31, 2021 Nonaccrual Totals

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 whose terms are modified are classified as troubled debt restructurings (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.

The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, 2021 and December 31, 2020 is as follows:

The outstanding balance of loans subject to TDRs, as well as contractual aging information at March 31, 2022 and December 31, 2021 is as follows:

(In Thousands)

September 30, 2021 Totals

March 31, 2022 Totals

December 31, 2021 Totals

At September 30, 2021 and December 31, 2020, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

TDRs that occurred during the three-month and nine-month periods ended September 30, 2021 and 2020 are as follows:

At March 31, 2022 and December 31, 2021, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

TDRs that occurred during the three-month periods ended March 31, 2022 and 2021 are as follows:

(Balances in Thousands)

1 unchanged sentence

Three Months Ended

September 30, 2021

September 30, 2020

Home equity lines of credit,

Reduced monthly payments for an eighteen-month period

Commercial loans secured by real estate,

Principal and interest payment deferral non-COVID related

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(Balances in Thousands)

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

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:

Interest only payments for a nine-month period

Principal and interest payment deferral non-COVID related

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

In the three-month and nine-month periods ended September 30, 2020, the Corporation recorded a specific allowance for loan losses of $ 134,000 related to a loan secured by commercial real estate for which a TDR concession was also made in the third quarter 2020 and included in the table above.

At December 31, 2020, the Corporation increased the specific allowance for loan losses related to this credit to $ 416,000 , where it remains at September 30, 2021.

The other loans for which TDRs were granted in the three-month and nine-month periods ended September 30, 2021 and 2020 had no specific impact on the provision or allowance for loan losses.

In the three-month and nine-month periods ended September 30, 2021 and 2020, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:

In the three-month periods ended March 31, 2022 and 2021, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:

(Balances in Thousands)

1 unchanged sentence

Three Months Ended

September 30, 2021

September 30, 2020

Commercial loans secured by real estate

(Balances in Thousands)

Nine Months Ended

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Commercial loans secured by real estate

2 unchanged sentences

(In Thousands)

September 30,

Foreclosed residential real estate

1 unchanged sentence

(In Thousands)

September 30,

Residential real estate in process of foreclosure

2 unchanged sentences

(In Thousands)

September 30,

Accumulated amortization

2 unchanged sentences

Three Months Ended

Nine Months Ended

September 30,

Amortization expense

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired.

At September 30, 2021 and December 31, 2020, the net carrying value of goodwill was $ 52,505,000 .

Changes in the carrying amount of goodwill are summarized in the following table:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30,

Balance, beginning of period

Goodwill arising in business combination

Balance, end of period

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At March 31, 2022 and December 31, 2021, the net carrying value of goodwill was $ 52,505,000 .

BORROWED FUNDS

2 unchanged sentences

(In Thousands)

September 30,

FHLB-Pittsburgh borrowings

1 unchanged sentence

Total short-term borrowings

The Corporation had available credit with other correspondent banks totaling $ 45,000,000 at September 30, 2021 and December 31, 2020.

The Corporation had available credit with other correspondent banks totaling $ 45,000,000 at March 31, 2022 and December 31, 2021.

These lines of credit are primarily unsecured.

No amounts were outstanding at September 30, 2021 or December 31, 2020.

No amounts were outstanding at March 31, 2022 or December 31, 2021.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window.

At September 30, 2021, the Corporation had available credit in the amount of $ 14,482,000 on this line with no outstanding advances.

At December 31, 2020, the Corporation had available credit in the amount of $ 14,654,000 on this line with no outstanding advances.

As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $ 14,936,000 at September 30, 2021 and $ 15,126,000 at December 31, 2020.

At March 31, 2022, the Corporation had available credit in the amount of $ 12,429,000 on this line with no outstanding advances.

At December 31, 2021, the

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Corporation had available credit in the amount of $ 13,642,000 on this line with no outstanding advances.

As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $ 12,817,000 at March 31, 2022 and $ 14,034,000 at December 31, 2021.

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 September 30, 2021 and December 31, 2020.

The carrying value of the underlying securities was $ 1,900,000 at September 30, 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 $ 1,044,507,000 at September 30, 2021 and $ 1,049,690,000 at December 31, 2020.

The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10 %at March 31, 2022 and December 31, 2021.

The carrying value of the underlying securities was $ 2,380,000 at March 31, 2022 and $ 1,820,000 at December 31, 2021.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $ 1,077,215,000 at March 31, 2022 and $ 1,046,242,000 at December 31, 2021.

Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock.

The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were $ 9,400,000 at September 30, 2021 and $ 9,720,000 at December 31, 2020.

In addition to the short-term and long-term borrowings shown in these tables, there are letters of credit from FHLB-Pittsburgh outstanding in the amount of $ 5,584,000 at September 30, 2021 and $ 400,000 at December 31, 2020.

The Corporation’s total credit facility with FHLB-Pittsburgh was $ 752,847,000 at September 30, 2021, including an unused (available) amount of $ 709,012,000 .

The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were $ 9,258,000 at March 31, 2022 and $ 9,313,000 at December 31, 2021.

The Corporation’s total credit facility with FHLB-Pittsburgh was $ 757,811,000 at March 31, 2022, including an unused (available) amount of $ 731,429,000 .

At December 31, 2021, the Corporation’s total credit facility with FHLB-Pittsburgh was $ 756,868,000 , including an unused (available) amount of $ 723,557,000 .

At September 30, 2021, there were no outstanding short-term borrowings from FHLB-Pittsburgh.

At December 31, 2020, short-term borrowings from FHLB-Pittsburgh included five advances totaling $ 18,000,000 par value, with a weighted average effective interest rate of 0.43 %.

At March 31, 2022 and December 31, 2021, there were no overnight borrowings or short-term advances from FHLB-Pittsburgh.

LONG-TERM BORROWINGS – FHLB ADVANCES

1 unchanged sentence

(In Thousands)

September 30,

Loans maturing in 2022 with a weighted-average rate of 0.58 %

Loans maturing in 2023 with a weighted-average rate of 0.73 %

Loans maturing in 2024 with a weighted-average rate of 0.75 %

Loan maturing in 2025 with an average rate of 4.91 %

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 September 30, 2021.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Weighted-average rates are presented as of March 31, 2022.

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 and the Senior Notes are not subject to redemption by the holders.

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.

1 unchanged sentence

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 $ 15,000 in the third quarter 2021 and $ 22,000 in the nine-month period ended September 30, 2021 was included in interest expense in the unaudited consolidated statements of income.

At September 30, 2021 and December 31, 2020, outstanding Senior Notes are as follows:

Amortization of debt issuance costs associated with the Senior Notes totaling $ 16,000 in the first quarter 2022 was included in interest expense in the unaudited consolidated statements of income.

At March 31, 2022 and December 31, 2021, outstanding Senior Notes are as follows:

(In Thousands)

September 30,

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

2 unchanged sentences

Total carrying value

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SUBORDINATED DEBT

10 unchanged sentences

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 $ 25,000 in the third quarter 2021 and $ 38,000 in the nine-month period ended September 30, 2021 was included in interest expense in the unaudited consolidated statements of income.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, the carrying amounts of subordinated debt agreements are as follows:

Amortization of debt issuance costs associated with the Subordinated Notes totaling $ 26,000 in the first quarter 2022 was included in interest expense in the unaudited consolidated statements of income.

At March 31, 2022 and December 31, 2021, the carrying amounts of subordinated debt agreements are as follows:

(In Thousands)

September 30,

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

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 ;

bearing interest at 6.50 %;

maturing in April 2027 and redeemable at par in April 2022

maturing in April 2027 and redeemed at par in April 2022

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

8 unchanged sentences

The 2022 restricted stock awards under the Stock Incentive Plan vest ratably over three years , and the 2022 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year .

Following is a summary of restricted stock awards granted in the nine-month period ended September 30, 2021:

Following is a summary of restricted stock awards granted in the three-month period ended March 31, 2022:

(Dollars in Thousands)

3 unchanged sentences

Performance-based awards to employees

2nd quarter 2021 awards,

Time-based awards to employees

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.

Total annual stock-based compensation for the year ending December 31, 2021 is estimated to total $ 1,314,000 .

Total stock-based compensation expense attributable to restricted stock awards amounted to $ 345,000 in the third quarter 2021 and $ 248,000 in the third quarter 2020.

Total stock-based compensation expense attributable to restricted stock awards amounted to $ 970,000 in the nine-month period ended September 30, 2021 and $ 672,000 in the nine-month period ended September 30, 2020.

Total annual stock-based compensation for the year ending December 31, 2022 is estimated

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

to total $ 1,622,000 .

Total stock-based compensation expense attributable to restricted stock awards amounted to $ 368,000 in the first quarter 2022 and $ 341,000 in the first quarter 2021.

CONTINGENCIES

Litigation Matters

In the normal course of business, the Corporation is subject to pending and threatened lawsuits in which claims for monetary damages have been asserted.

In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of such pending legal proceedings.

Trust Department Tax Reporting Contingency

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.

There were no losses related to trust department tax compliance matters in the third quarter 2021.

Losses related to a state tax reporting matter totaled $ 200,000 in the third quarter 2020.

Losses related to trust department tax compliance matters totaled $ 107,000 in the nine months ended September 30, 2021, and $ 500,000 in the nine-month period ended September 30, 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 $ 429,000 at September 30, 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.

In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted.

In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.

DERIVATIVE FINANCIAL INSTRUMENTS

1 unchanged sentence

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.

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.

3 unchanged sentences

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.

The aggregate notional amount of interest rate swaps was $ 123,990,000 at September 30, 2021 and $ 135,740,000 at December 31, 2020.

There were no interest rate swaps originated in the nine-month periods ended September 30, 2021 and 2020.

There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at September 30, 2021.

The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $ 335,000 in the third quarter 2021 and $ 1,013,000 in the nine months ended September 30, 2021 as compared to a reduction in interest income on loans of $ 351,000 in the third quarter 2020 and the nine months ended September 30, 2020.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 September 30, 2021 and December 31, 2020:

The aggregate notional amount of interest rate swaps was $ 122,138,000 at March 31, 2022 and $ 123,904,000 at December 31, 2021.

There were no interest rate swaps originated in the first quarter 2022 or first quarter 2021.

There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at March 31, 2022.

The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $ 317,000 in the first quarter 2022 as compared to a reduction in interest income on loans of $ 338,000 in the first quarter 2021.

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 March 31, 2022 and December 31, 2021:

(In Thousands)

At September 30, 2021

At March 31, 2022

At December 31, 2021

8 unchanged sentences

Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements.

Available-for-sale securities with a carrying value of $ 7,069,000 were pledged as collateral against the Corporation’s liability related to the interest rate swaps at September 30, 2021.

Available-for-sale securities with a carrying value of $ 3,965,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at March 31, 2022.

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

1 unchanged sentence

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

FASB topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value.

FASB topic 820, “Fair

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value.

The hierarchy prioritizes the inputs used in determining valuations into three levels.

9 unchanged sentences

Examples of such changes may include the market for a particular asset or liability becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, assets and liabilities measured at fair value and the valuation methods used are as follows:

September 30, 2021

At March 31, 2022 and December 31, 2021, assets and liabilities measured at fair value and the valuation methods used are as follows:

March 31, 2022

(In Thousands)

4 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

12 unchanged sentences

Nonrecurring fair value measurements, assets:

Impaired loans with a valuation allowance

Valuation allowance

Impaired loans, net

9 unchanged sentences

Government agencies

Bank holding company debt securities

Obligations of states and political subdivisions:

12 unchanged sentences

Nonrecurring fair value measurements, assets:

Impaired loans with a valuation allowance

Valuation allowance

Impaired loans, net

4 unchanged sentences

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021 and December 31, 2020, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

At March 31, 2022 and December 31, 2021, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

Fair Value at

42 unchanged sentences

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

September 30, 2021

September 30, 2020

March 31, 2022

March 31, 2021

Servicing rights balance, beginning of period

Originations of servicing rights

Unrealized loss included in earnings

Unrealized gain included in earnings

Servicing rights balance, end of period

5 unchanged sentences

The discounts also include estimated costs to sell the property.

For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices.

Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

At September 30, 2021 and December 31, 2020, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:

At March 31, 2022 and December 31, 2021, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:

(Dollars In Thousands)

7 unchanged sentences

Discount to appraised value

Residential mortgage loans - first and junior liens

Sales comparison

Discount to appraised value

Total impaired loans

16 unchanged sentences

Discount to appraised value

Residential mortgage loans - first and junior liens

Sales comparison

Discount to appraised value

Total impaired loans

16 unchanged sentences

(In Thousands)

September 30, 2021

March 31, 2022

December 31, 2021

16 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements