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CITIZENS & NORTHERN CORP - Quarter Report: 2021 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA

    

23-2451943

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

    

Trading Symbol

    

Name of Each Exchange on Which Registered

Common Stock Par Value $1.00

CZNC

NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock ($1.00 par value)

15,751,005 Shares Outstanding on November 3, 2021

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets (Unaudited) – September 30, 2021 and December 31, 2020

Page 3

 

 

Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2021 and 2020

Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Nine-month Periods Ended September 30, 2021 and 2020

Page 5

 

 

Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, 2021 and 2020

Pages 6 – 7

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods September 30, 2021 and 2020

Pages 8 – 9

 

 

Notes to Unaudited Consolidated Financial Statements

Pages 10 – 41

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Pages 42 – 68

 

 

Item 4. Controls and Procedures

Page 68

 

 

Part II. Other Information

Pages 69 – 72

 

 

Signatures

Page 73

2

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

    

September 30, 

    

December 31, 

2021

2020

ASSETS

 

  

 

  

Cash and due from banks:

 

  

 

  

Noninterest-bearing

$

26,589

$

24,780

Interest-bearing

 

172,406

 

77,077

Total cash and due from banks

 

198,995

 

101,857

Available-for-sale debt securities, at fair value

 

437,857

 

349,332

Loans receivable

 

1,575,708

 

1,644,209

Allowance for loan losses

 

(12,700)

 

(11,385)

Loans, net

 

1,563,008

 

1,632,824

Bank-owned life insurance

 

30,530

 

30,096

Accrued interest receivable

 

7,307

 

8,293

Bank premises and equipment, net

 

20,526

 

21,526

Foreclosed assets held for sale

 

1,374

 

1,338

Deferred tax asset, net

 

5,128

 

2,705

Goodwill

 

52,505

 

52,505

Core deposit intangibles, net

 

3,450

 

3,851

Other assets

 

34,216

 

34,773

TOTAL ASSETS

$

2,354,896

$

2,239,100

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

521,561

$

465,332

Interest-bearing

 

1,418,580

 

1,355,137

Total deposits

 

1,940,141

 

1,820,469

Short-term borrowings

 

1,875

 

20,022

Long-term borrowings - FHLB advances

 

38,680

 

54,608

Senior notes, net

14,685

0

Subordinated debt, net

 

32,988

 

16,553

Accrued interest and other liabilities

 

27,125

 

27,692

TOTAL LIABILITIES

 

2,055,494

 

1,939,344

STOCKHOLDERS' EQUITY

 

 

Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation

 

 

preference per share; no shares issued

 

0

 

0

Common stock, par value $1.00 per share; authorized 20,000,000 shares;

 

 

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

 

 

issued 15,982,815 and outstanding 15,911,984 at December 31, 2020

 

16,030

 

15,983

Paid-in capital

 

144,172

 

143,644

Retained earnings

 

139,715

 

129,703

Treasury stock, at cost; 279,922 shares at September 30, 2021 and 70,831

 

 

shares at December 31, 2020

 

(6,920)

 

(1,369)

Accumulated other comprehensive income

 

6,405

 

11,795

TOTAL STOCKHOLDERS' EQUITY

 

299,402

 

299,756

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$

2,354,896

$

2,239,100

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

3

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2021

2020

2021

2020

INTEREST INCOME

 

  

 

  

  

 

  

Interest and fees on loans:

 

  

 

  

  

 

  

Taxable

$

18,529

$

19,158

$

56,095

$

47,745

Tax-exempt

 

450

 

450

 

1,300

 

1,348

Income from available-for-sale debt securities:

 

 

 

 

Taxable

 

1,304

 

1,483

 

3,604

 

4,451

Tax-exempt

 

668

 

561

 

1,973

 

1,505

Other interest and dividend income

 

122

 

99

 

283

 

252

Total interest and dividend income

 

21,073

 

21,751

 

63,255

 

55,301

INTEREST EXPENSE

 

  

 

 

  

 

Interest on deposits

 

1,063

 

1,787

 

3,558

 

5,726

Interest on short-term borrowings

 

0

 

73

 

22

 

335

Interest on long-term borrowings - FHLB advances

 

87

 

362

 

330

 

970

Interest on senior notes, net

 

118

0

175

0

Interest on subordinated debt, net

 

346

 

247

 

947

 

460

Total interest expense

 

1,614

 

2,469

 

5,032

 

7,491

Net interest income

 

19,459

 

19,282

 

58,223

 

47,810

Provision for loan losses

 

1,530

 

1,941

 

2,533

 

3,293

Net interest income after provision for loan losses

 

17,929

 

17,341

 

55,690

 

44,517

NONINTEREST INCOME

 

  

 

  

 

  

 

  

Trust revenue

 

1,821

 

1,595

 

5,254

 

4,639

Brokerage and insurance revenue

 

560

 

382

 

1,392

 

1,121

Service charges on deposit accounts

 

1,249

 

1,045

 

3,337

 

3,126

Interchange revenue from debit card transactions

 

975

 

828

 

2,854

 

2,277

Net gains from sale of loans

 

797

 

2,052

 

2,786

 

3,931

Loan servicing fees, net

 

153

 

(87)

 

547

 

(259)

Increase in cash surrender value of life insurance

 

139

 

159

 

434

 

361

Other noninterest income

 

665

 

996

 

2,837

 

2,583

Sub-total

6,359

6,970

19,441

17,779

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

23

25

25

25

Total noninterest income

 

6,382

 

6,995

 

19,466

 

17,804

NONINTEREST EXPENSE

 

 

 

  

 

  

Salaries and employee benefits

9,427

8,703

27,821

23,064

Net occupancy and equipment expense

1,217

1,189

3,740

3,267

Data processing and telecommunications expense

1,475

1,482

4,342

3,959

Automated teller machine and interchange expense

 

357

 

340

 

1,049

 

912

Pennsylvania shares tax

 

482

 

422

 

1,463

 

1,267

Professional fees

 

538

 

422

 

1,683

 

1,265

Merger-related expenses

 

0

 

6,402

 

0

 

7,526

Other noninterest expense

 

1,850

 

2,090

 

6,356

 

6,100

Total noninterest expense

 

15,346

 

21,050

 

46,454

 

47,360

Income before income tax provision

 

8,965

 

3,286

 

28,702

 

14,961

Income tax provision

 

1,566

 

438

 

5,456

 

2,509

NET INCOME

$

7,399

$

2,848

$

23,246

$

12,452

EARNINGS PER COMMON SHARE - BASIC

$

0.47

$

0.18

$

1.46

$

0.86

EARNINGS PER COMMON SHARE - DILUTED

$

0.47

$

0.18

$

1.46

$

0.86

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

4

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

 

2021

    

2020

2021

    

2020

Net income

$

7,399

$

2,848

$

23,246

$

12,452

Available-for-sale debt securities:

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

(3,608)

(95)

(6,781)

9,980

Reclassification adjustment for (gains) realized in income

(23)

(25)

(25)

(25)

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

(3,631)

(120)

(6,806)

9,955

Unfunded pension and postretirement obligations:

 

 

 

 

Changes from plan amendments and actuarial gains and losses

 

0

 

0

 

(5)

 

88

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

 

(5)

 

(8)

 

(13)

 

(22)

Other comprehensive (loss) income on unfunded retirement obligations

 

(5)

 

(8)

 

(18)

 

66

Other comprehensive (loss) income before income tax

 

(3,636)

 

(128)

 

(6,824)

 

10,021

Income tax related to other comprehensive loss (income)

 

765

 

26

 

1,434

 

(2,103)

Net other comprehensive (loss) income

 

(2,871)

 

(102)

 

(5,390)

 

7,918

Comprehensive income

$

4,528

$

2,746

$

17,856

$

20,370

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

5

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

Nine Months Ended

September 30, 

September 30, 

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

23,246

$

12,452

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Provision for loan losses

 

2,533

 

3,293

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

 

(25)

 

(25)

Net amortization of securities

1,554

1,020

Increase in cash surrender value of life insurance

 

(434)

 

(361)

Depreciation and amortization of bank premises and equipment

 

1,602

 

1,429

Net accretion of purchase accounting adjustments

 

(1,827)

 

(1,547)

Stock-based compensation

 

970

 

672

Deferred income taxes

 

(989)

 

649

Decrease in fair value of servicing rights

 

9

 

617

Gains on sales of loans, net

 

(2,786)

 

(3,931)

Origination of loans held for sale

 

(86,428)

 

(123,547)

Proceeds from sales of loans held for sale

 

87,483

 

126,268

Decrease (increase) in accrued interest receivable and other assets

 

295

 

(1,194)

Decrease in accrued interest payable and other liabilities

 

(50)

 

(856)

Other

 

(18)

 

(339)

Net Cash Provided by Operating Activities

 

25,135

 

14,600

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Net cash and cash equivalents provided by business combination

0

75,955

Purchase of certificates of deposit

(3,000)

(2,500)

Proceeds from maturities of certificates of deposit

 

0

 

250

Proceeds from sales of available-for-sale debt securities

 

2,027

 

20,535

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

 

48,262

 

71,009

Purchase of available-for-sale debt securities

 

(145,445)

 

(65,853)

Redemption of Federal Home Loan Bank of Pittsburgh stock

 

1,934

 

5,712

Purchase of Federal Home Loan Bank of Pittsburgh stock

 

(1,614)

 

(4,571)

Net decrease (increase) in loans

 

68,018

 

(45,564)

Proceeds from bank owned life insurance

 

287

 

0

Proceeds from sales of premises and equipment

 

575

 

0

Purchase of premises and equipment

 

(1,173)

 

(2,550)

Proceeds from sale of foreclosed assets

 

303

 

1,347

Other

 

176

 

178

Net Cash (Used in) Provided by Investing Activities

 

(29,650)

 

53,948

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

Net increase in deposits

 

120,386

 

137,543

Net decrease in short-term borrowings

 

(18,082)

 

(79,213)

Proceeds from long-term borrowings - FHLB advances

 

0

 

25,891

Repayments of long-term borrowings - FHLB advances

 

(15,571)

 

(5,136)

Proceeds from issuance of senior notes, net of issuance costs

14,663

0

Proceeds from issuance of subordinated debt, net of issuance costs

24,437

0

Redemption of subordinated debt

(8,000)

0

Sale of treasury stock

 

212

 

124

Purchases of treasury stock

 

(7,412)

 

(163)

Common dividends paid

 

(11,980)

 

(10,568)

Net Cash Provided by Financing Activities

 

98,653

 

68,478

INCREASE IN CASH AND CASH EQUIVALENTS

 

94,138

 

137,026

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

96,017

 

31,122

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

190,155

$

168,148

6

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

(Continued)

    

Nine Months Ended

September 30, 

September 30, 

2021

    

2020

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

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

$

1,704

$

287

Accrued sale of available-for-sale securities

$

0

$

488

Accrued income from life insurance claim

$

0

$

279

Assets acquired through foreclosure of real estate loans

$

317

$

0

Leased assets obtained in exchange for new operating lease liabilities

$

739

$

167

Interest paid

$

6,063

$

7,635

Income taxes paid

$

8,076

$

2,975

NONCASH INVESTING ASSETS ACQUIRED IN BUSINESS COMBINATION:

Available-for-sale debt securities

$

0

$

10,754

Loans receivable

$

0

$

464,236

Bank-owned life insurance

$

0

$

11,170

Foreclosed assets held for sale

$

0

$

860

NONCASH FINANCING ACTIVITY RELATED TO BUSINESS COMBINATION:

Common stock issued

$

0

$

41,429

Liabilities assumed:

Deposits

$

0

$

481,796

Short-term borrowings

$

0

$

33,950

Long-term borrowings

$

0

$

30,025

Subordinated debt

$

0

$

10,091

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

7

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

 

Accumulated

 

Other

 

Common

 

Treasury

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

Three Months Ended September 30, 2021

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income

 

Stock

 

Total

Balance, June 30, 2021

 

16,030,172

 

72,660

$

16,030

$

143,817

$

136,756

$

9,276

$

(1,746)

$

304,133

Net income

 

 

 

 

 

7,399

 

 

 

7,399

Other comprehensive loss, net

 

 

 

 

 

 

(2,871)

 

 

(2,871)

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

 

 

 

 

 

(4,440)

 

 

 

(4,440)

Shares issued for dividend reinvestment plan

 

 

(16,833)

 

 

10

 

 

 

415

 

425

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

(7,000)

135

135

Stock-based compensation expense

 

 

 

 

345

 

 

 

 

345

Purchase of restricted stock for tax withholding

691

(17)

(17)

Treasury stock purchases

230,404

(5,707)

(5,707)

Balance, September 30, 2021

 

16,030,172

 

279,922

$

16,030

$

144,172

$

139,715

$

6,405

$

(6,920)

$

299,402

Three Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, June 30, 2020

 

13,934,996

 

127,839

$

13,935

$

103,954

$

128,661

$

11,711

$

(2,470)

$

255,791

Net income

 

 

 

 

 

2,848

 

 

 

2,848

Other comprehensive loss, net

 

 

 

 

 

 

(102)

 

 

(102)

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

 

 

 

 

 

(4,285)

 

 

 

(4,285)

Shares issued for dividend reinvestment plan

 

 

(21,949)

 

 

(36)

 

 

 

423

 

387

Restricted stock granted

 

 

(15,076)

 

 

(291)

 

 

 

291

 

0

Forfeiture of restricted stock

 

 

1,648

 

 

30

 

 

 

(30)

 

0

Stock-based compensation expense

 

 

 

 

248

 

 

 

 

248

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

2,047,819

2,048

39,381

41,429

Balance, September 30, 2020

 

15,982,815

 

92,462

$

15,983

$

143,286

$

127,224

$

11,609

$

(1,786)

$

296,316

8

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

(Continued)

    

    

    

    

    

    

Accumulated

    

    

Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Nine Months Ended September 30, 2021

Shares

Shares

Stock

Capital

Earnings

Income

Stock

Total

Balance, December 31, 2020

 

15,982,815

 

70,831

$

15,983

$

143,644

$

129,703

$

11,795

$

(1,369)

$

299,756

Net income

 

 

 

  

 

  

 

23,246

 

  

 

  

 

23,246

Other comprehensive loss, net

 

 

 

  

 

  

 

  

 

(5,390)

 

  

 

(5,390)

Cash dividends declared on common stock, $.83 per share

 

 

 

  

 

  

 

(13,234)

 

  

 

  

 

(13,234)

Shares issued for dividend reinvestment plan

 

36,368

 

(16,833)

 

36

 

803

 

 

 

415

 

1,254

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

 

 

(12,414)

 

 

(28)

 

  

 

  

 

240

 

212

Restricted stock granted

 

10,989

 

(67,402)

 

11

 

(1,319)

 

  

 

  

 

1,308

 

0

Forfeiture of restricted stock

 

 

5,290

 

 

102

 

  

 

  

 

(102)

 

0

Stock-based compensation expense

 

 

 

  

 

970

 

  

 

  

 

  

 

970

Purchase of restricted stock for tax withholding

 

 

8,350

 

 

  

 

  

 

  

 

(174)

 

(174)

Treasury stock purchases

292,100

(7,238)

(7,238)

Balance, September 30, 2021

 

16,030,172

 

279,922

$

16,030

$

144,172

$

139,715

$

6,405

$

(6,920)

$

299,402

Nine Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2019

 

13,934,996

 

218,551

$

13,935

$

104,519

$

126,480

$

3,691

$

(4,173)

$

244,452

Net income

 

 

 

  

 

  

 

12,452

 

  

 

  

 

12,452

Other comprehensive income, net

 

 

 

  

 

  

 

  

 

7,918

 

  

 

7,918

Cash dividends declared on common stock, $.81 per share

 

 

 

  

 

  

 

(11,708)

 

  

 

  

 

(11,708)

Shares issued for dividend reinvestment plan

 

 

(56,649)

 

 

46

 

  

 

  

 

1,094

 

1,140

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

 

 

(9,652)

 

 

(62)

 

  

 

  

 

186

 

124

Restricted stock granted

 

 

(70,940)

 

 

(1,370)

 

  

 

  

 

1,370

 

0

Forfeiture of restricted stock

 

 

5,290

 

 

100

 

  

 

  

 

(100)

 

0

Stock-based compensation expense

 

 

 

  

 

672

 

  

 

  

 

  

 

672

Purchase of restricted stock for tax withholding

 

 

5,862

 

 

  

 

  

 

  

 

(163)

 

(163)

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

 

2,047,819

2,048

39,381

  

 

41,429

Balance, September 30, 2020

 

15,982,815

 

92,462

$

15,983

$

143,286

$

127,224

$

11,609

$

(1,786)

$

296,316

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

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Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

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

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2020, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. 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. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). 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 near future.

Recently Issued But Not Yet Effective Accounting Pronouncements

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. The Corporation has formed a cross functional management team and is working with an outside vendor assessing alternative loss estimation methodologies and the Corporation’s data and system needs to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in ASU 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. Some specific optional expedients are as follows:

Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.

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Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.

The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. 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.

2. 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.

3. PER SHARE DATA

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. 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.

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(In Thousands, Except Share and Per Share Data)

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Basic

  

 

  

 

  

 

  

Net income

$

7,399

$

2,848

$

23,246

$

12,452

Less: Dividends and undistributed earnings allocated to participating securities

 

(63)

 

(18)

 

(189)

 

(74)

Net income attributable to common shares

$

7,336

$

2,830

$

23,057

$

12,378

Basic weighted-average common shares outstanding

 

15,703,932

 

15,778,391

 

15,806,897

 

14,388,797

Basic earnings per common share (a)

$

0.47

$

0.18

$

1.46

$

0.86

Diluted

 

  

 

  

 

  

 

  

Net income attributable to common shares

$

7,336

$

2,830

$

23,057

$

12,378

Basic weighted-average common shares outstanding

 

15,703,932

 

15,778,391

 

15,806,897

 

14,388,797

Dilutive effect of potential common stock arising from stock options

 

6,413

 

1,330

 

6,232

 

4,632

Diluted weighted-average common shares outstanding

 

15,710,345

 

15,779,721

 

15,813,129

 

14,393,429

Diluted earnings per common share (a)

$

0.47

$

0.18

$

1.46

$

0.86

Weighted-average nonvested restricted shares outstanding

 

133,053

 

102,629

 

129,456

 

85,611

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

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.

4. 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)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2021

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(3,608)

$

759

$

(2,849)

Reclassification adjustment for (gains) realized in income

(23)

5

(18)

Other comprehensive loss from available-for-sale debt securities

(3,631)

764

(2,867)

Unfunded pension and postretirement obligations,

 

  

 

  

 

  

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

 

(5)

 

1

 

(4)

Total other comprehensive loss

$

(3,636)

$

765

$

(2,871)

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(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2020

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(95)

$

19

$

(76)

Reclassification adjustment for (gains) realized in income

 

(25)

 

5

 

(20)

Other comprehensive loss from available-for-sale debt securities

 

(120)

 

24

 

(96)

Unfunded pension and postretirement obligations,

 

  

 

  

 

  

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

 

(8)

 

2

 

(6)

Total other comprehensive loss

$

(128)

$

26

$

(102)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2021

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(6,781)

$

1,425

$

(5,356)

Reclassification adjustment for (gains) realized in income

(25)

5

(20)

Other comprehensive loss from available-for-sale debt securities

(6,806)

1,430

(5,376)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

(5)

1

(4)

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

 

(13)

 

3

 

(10)

Other comprehensive loss on unfunded retirement obligations

(18)

4

(14)

Total other comprehensive loss

$

(6,824)

$

1,434

$

(5,390)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2020

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

$

9,980

$

(2,095)

$

7,885

Reclassification adjustment for (gains) realized in income

(25)

5

(20)

Other comprehensive income from available-for-sale debt securities

9,955

(2,090)

7,865

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

 

88

 

(18)

 

70

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

 

(22)

 

5

 

(17)

Other comprehensive income on unfunded retirement obligations

 

66

 

(13)

 

53

Total other comprehensive income

$

10,021

$

(2,103)

$

7,918

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

Affected Line Item in the

Description

 

Consolidated Statements of Income

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

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

(In Thousands)

    

    

    

    

Accumulated

Unrealized

Unfunded

Other

Losses

Retirement

Comprehensive

on Securities

Obligations

Income

Three Months Ended September 30, 2021

 

  

 

  

 

  

Balance, beginning of period

$

9,167

$

109

$

9,276

Other comprehensive loss during three months ended September 30, 2021

 

(2,867)

 

(4)

 

(2,871)

Balance, end of period

$

6,300

$

105

$

6,405

Three Months Ended September 30, 2020

 

  

 

  

 

  

Balance, beginning of period

$

11,472

$

239

$

11,711

Other comprehensive loss during three months ended September 30, 2020

 

(96)

 

(6)

 

(102)

Balance, end of period

$

11,376

$

233

$

11,609

(In Thousands)

    

Unrealized

    

    

Accumulated

Gains

Unfunded

Other

 

(Losses)

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

Income

Nine Months Ended September 30, 2021

 

  

 

  

 

  

Balance, beginning of period

$

11,676

$

119

$

11,795

Other comprehensive loss during nine months ended September 30, 2021

 

(5,376)

 

(14)

 

(5,390)

Balance, end of period

$

6,300

$

105

$

6,405

Nine Months Ended September 30, 2020

 

  

 

  

 

  

Balance, beginning of period

$

3,511

$

180

$

3,691

Other comprehensive income during nine months ended September 30, 2020

 

7,865

 

53

 

7,918

Balance, end of period

$

11,376

$

233

$

11,609

5. CASH AND DUE FROM BANKS

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

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Cash and cash equivalents

$

190,155

$

96,017

Certificates of deposit

 

8,840

 

5,840

Total cash and due from banks

$

198,995

$

101,857

Certificates of deposit are issues by U.S. banks with original maturities greater than three months. Each certificate of deposit is fully FDIC-insured. The Corporation maintains cash and cash equivalents with certain financial institutions in excess of the FDIC insurance limit.

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. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at September 30, 2021 and December 31, 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. SECURITIES

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

(In Thousands)

    

September 30, 2021

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

25,088

$

60

$

(80)

$

25,068

Obligations of U.S. Government agencies

23,935

666

(289)

24,312

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

135,362

 

4,390

 

(508)

 

139,244

Taxable

 

69,426

 

1,516

 

(449)

 

70,493

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

59,920

 

978

 

(269)

 

60,629

Residential collateralized mortgage obligations

 

43,811

 

820

 

(38)

 

44,593

Commercial mortgage-backed securities

 

72,341

 

1,963

 

(786)

 

73,518

Total available-for-sale debt securities

$

429,883

$

10,393

$

(2,419)

$

437,857

(In Thousands)

    

December 31, 2020

Gross

Gross

 

 

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

12,184

$

0

$

(2)

$

12,182

Obligations of U.S. Government agencies

25,349

1,003

(8)

26,344

Obligations of states and political subdivisions:

 

  

 

 

 

  

Tax-exempt

 

116,427

 

6,000

 

(26)

 

122,401

Taxable

 

45,230

 

2,246

 

(24)

 

47,452

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

36,853

 

1,323

 

0

 

38,176

Residential collateralized mortgage obligations

 

56,048

 

1,428

 

(9)

 

57,467

Commercial mortgage-backed securities

 

42,461

 

2,849

 

0

 

45,310

Total available-for-sale debt securities

$

334,552

$

14,849

$

(69)

$

349,332

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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

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

11,001

$

(80)

$

0

$

0

$

11,001

$

(80)

Obligations of U.S. Government agencies

12,210

(289)

0

0

12,210

(289)

Obligations of states and political subdivisions:

Tax-exempt

41,145

(508)

0

0

41,145

(508)

Taxable

 

25,561

 

(365)

 

2,200

 

(84)

 

27,761

 

(449)

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

 

  

 

  

 

  

Residential pass-through securities

36,651

(269)

0

0

36,651

(269)

Residential collateralized mortgage obligations

 

4,745

 

(38)

 

0

 

0

 

4,745

 

(38)

Commercial mortgage-backed securities

 

34,931

 

(786)

 

0

 

0

 

34,931

 

(786)

Total temporarily impaired available-for-sale debt securities

$

166,244

$

(2,335)

$

2,200

$

(84)

$

168,444

$

(2,419)

December 31, 2020

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

9,159

$

(2)

$

0

$

0

$

9,159

$

(2)

Obligations of U.S. Government agencies

4,992

(8)

0

0

4,992

(8)

Obligations of states and political subdivisions:

 

 

  

 

  

 

  

 

  

 

  

Tax-exempt

3,811

(26)

0

0

3,811

(26)

Taxable

 

5,235

 

(24)

 

0

 

0

 

5,235

 

(24)

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,

 

  

 

 

 

 

 

Residential collateralized mortgage obligations

 

2,861

 

(9)

 

0

 

0

 

2,861

 

(9)

Total temporarily impaired available-for-sale debt securities

$

26,058

$

(69)

$

0

$

0

$

26,058

$

(69)

Gross realized gains and losses from available-for-sale debt securities were as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Gross realized gains from sales

$

23

$

26

$

27

$

78

Gross realized losses from sales

 

0

 

(1)

 

(2)

 

(53)

Net realized gains

$

23

$

25

$

25

$

25

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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. 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

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

15,531

$

15,641

Due from one year through five years

 

51,151

 

52,150

Due from five years through ten years

 

65,651

 

67,498

Due after ten years

 

121,478

 

123,828

Sub-total

 

253,811

 

259,117

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

Residential pass-through securities

 

59,920

 

60,629

Residential collateralized mortgage obligations

 

43,811

 

44,593

Commercial mortgage-backed securities

 

72,341

 

73,518

Total

$

429,883

$

437,857

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. 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. See Note 9 for information concerning securities pledged to secure borrowing arrangements and Note 12 for information related to securities pledged against interest rate swap obligations.

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.

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

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. 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

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

7. LOANS

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:

Summary of Loans by Type

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Commercial:

 

  

 

  

Commercial loans secured by real estate

$

553,389

$

531,810

Commercial and industrial

 

152,244

 

159,577

Paycheck Protection Program - 1st Draw

5,747

132,269

Paycheck Protection Program - 2nd Draw

56,981

0

Political subdivisions

 

73,503

 

53,221

Commercial construction and land

 

53,267

 

42,874

Loans secured by farmland

 

10,812

 

11,736

Multi-family (5 or more) residential

 

52,962

 

55,811

Agricultural loans

 

3,092

 

3,164

Other commercial loans

 

17,312

 

17,289

Total commercial

 

979,309

 

1,007,751

Residential mortgage:

 

  

 

  

Residential mortgage loans - first liens

494,376

532,947

Residential mortgage loans - junior liens

 

24,303

 

27,311

Home equity lines of credit

 

38,465

 

39,301

1-4 Family residential construction

 

21,719

 

20,613

Total residential mortgage

 

578,863

 

620,172

Consumer

 

17,536

 

16,286

Total

 

1,575,708

 

1,644,209

Less: allowance for loan losses

 

(12,700)

 

(11,385)

Loans, net

$

1,563,008

$

1,632,824

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.

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 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.

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. A

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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.  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. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

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. 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 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.  The recorded investment in 2nd Draw PPP loans was $56,981,000, including contractual principal balances of $59,190,000 reduced by net deferred origination fees of $2,208,000. 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.

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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:

(In Thousands)

    

    

    

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2021

2020

2021

2020

Market Rate Adjustment

 

  

 

  

 

  

 

  

Adjustments to gross amortized cost of loans at beginning of period

$

(5)

$

(1,103)

$

718

$

(1,415)

Market rate adjustment recorded in acquisition

0

2,909

0

2,909

Amortization recognized in interest income

(368)

(452)

(1,091)

(140)

Adjustments to gross amortized cost of loans at end of period

$

(373)

$

1,354

$

(373)

$

1,354

Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$

(4,502)

$

(878)

$

(5,979)

$

(1,216)

Credit adjustment recorded in acquisition

0

(7,219)

0

(7,219)

Accretion recognized in interest income

 

666

 

970

 

2,143

 

1,308

Adjustments to gross amortized cost of loans at end of period

$

(3,836)

$

(7,127)

$

(3,836)

$

(7,127)

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

(In Thousands)

September 30, 

December 31, 

    

2021

    

2020

Outstanding balance

$

10,064

$

10,316

Carrying amount

 

6,624

 

6,841

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. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. 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.

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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)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

3,452

$

0

$

0

$

368

$

3,820

Commercial and industrial

 

2,781

 

(1,194)

 

6

 

947

 

2,540

Commercial construction and land

 

452

 

0

 

0

 

107

 

559

Loans secured by farmland

 

113

 

0

 

0

 

(1)

 

112

Multi-family (5 or more) residential

 

150

 

0

 

0

 

46

 

196

Agricultural loans

 

25

 

0

 

0

 

8

 

33

Other commercial loans

 

145

 

0

 

0

 

28

 

173

Total commercial

 

7,118

 

(1,194)

 

6

 

1,503

 

7,433

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,536

0

1

29

3,566

Residential mortgage loans - junior liens

 

327

 

0

 

0

 

(6)

 

321

Home equity lines of credit

 

294

 

0

 

0

 

(11)

 

283

1-4 Family residential construction

 

198

 

0

 

0

 

(9)

 

189

Total residential mortgage

 

4,355

 

0

 

1

 

3

4,359

Consumer

 

231

 

(26)

 

8

 

24

 

237

Unallocated

 

671

 

0

 

0

 

0

 

671

Total Allowance for Loan Losses

$

12,375

$

(1,220)

$

15

$

1,530

$

12,700

Three Months Ended September 30, 2020

June 30, 2020

    

    

    

    

    

    

    

September 30, 2020

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

2,426

$

0

$

0

$

(40)

$

2,386

Commercial and industrial

 

2,496

 

(2,219)

 

0

 

1,974

 

2,251

Commercial construction and land

 

420

 

0

 

0

 

20

 

440

Loans secured by farmland

 

146

 

0

 

0

 

(25)

 

121

Multi-family (5 or more) residential

 

163

 

0

 

0

 

64

 

227

Agricultural loans

 

40

 

0

 

0

 

(3)

 

37

Other commercial loans

 

167

 

0

 

0

 

0

 

167

Total commercial

 

5,858

 

(2,219)

 

0

 

1,990

 

5,629

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,531

0

26

(92)

3,465

Residential mortgage loans - junior liens

 

365

 

0

 

0

 

(7)

 

358

Home equity lines of credit

 

287

 

0

 

1

 

1

 

289

1-4 Family residential construction

 

137

 

0

 

0

 

32

 

169

Total residential mortgage

 

4,320

 

0

 

27

 

(66)

 

4,281

Consumer

 

263

 

(30)

 

8

 

17

 

258

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

11,026

$

(2,249)

$

35

$

1,941

$

10,753

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. The

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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.

    

December 31, 

    

    

    

    

September 30, 

Nine Months Ended September 30, 2021

2020

Provision

2021

(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance

Allowance for Loan Losses:

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

3,051

$

0

$

2

$

767

$

3,820

Commercial and industrial

 

2,245

 

(1,194)

 

20

 

1,469

 

2,540

Commercial construction and land

 

454

 

0

 

0

 

105

 

559

Loans secured by farmland

 

120

 

0

 

0

 

(8)

 

112

Multi-family (5 or more) residential

 

236

 

0

 

0

 

(40)

 

196

Agricultural loans

 

34

 

0

 

0

 

(1)

 

33

Other commercial loans

 

168

 

0

 

0

 

5

 

173

Total commercial

 

6,308

 

(1,194)

 

22

 

2,297

 

7,433

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

3,524

(11)

3

50

3,566

Residential mortgage loans - junior liens

 

349

 

0

 

0

 

(28)

 

321

Home equity lines of credit

 

281

 

0

 

2

 

0

 

283

1-4 Family residential construction

 

99

 

0

 

0

 

90

 

189

Total residential mortgage

 

4,253

 

(11)

 

5

 

112

 

4,359

Consumer

 

239

 

(73)

 

33

 

38

 

237

Unallocated

 

585

 

0

 

0

 

86

 

671

Total Allowance for Loan Losses

$

11,385

$

(1,278)

$

60

$

2,533

$

12,700

    

December 31, 

    

    

    

    

September 30, 

Nine Months Ended September 30, 2020

2019

Provision

2020

(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance

Allowance for Loan Losses:

  

  

  

  

  

Commercial:

 

 

 

 

 

  

Commercial loans secured by real estate

$

1,921

$

0

$

0

$

465

$

2,386

Commercial and industrial

 

1,391

 

(2,236)

 

0

 

3,096

 

2,251

Commercial construction and land

 

966

 

(107)

 

0

 

(419)

 

440

Loans secured by farmland

 

158

 

0

 

0

 

(37)

 

121

Multi-family (5 or more) residential

 

156

 

0

 

0

 

71

 

227

Agricultural loans

 

41

 

0

 

0

 

(4)

 

37

Other commercial loans

 

155

 

0

 

0

 

12

 

167

Total commercial

 

4,788

 

(2,343)

 

0

 

3,184

 

5,629

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

3,405

0

28

32

3,465

Residential mortgage loans - junior liens

 

384

 

0

 

1

 

(27)

 

358

Home equity lines of credit

 

276

 

0

 

3

 

10

 

289

1-4 Family residential construction

 

117

 

0

 

0

 

52

 

169

Total residential mortgage

 

4,182

 

0

 

32

 

67

 

4,281

Consumer

 

281

 

(100)

 

35

 

42

 

258

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

9,836

$

(2,443)

$

67

$

3,293

$

10,753

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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.

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention.  Risk ratings are updated any time that conditions or the situation warrants. 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

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

519,673

$

15,055

$

14,473

$

0

$

4,188

$

553,389

Commercial and Industrial

 

136,858

 

8,578

 

6,028

 

0

 

780

 

152,244

Paycheck Protection Program - 1st Draw

5,747

0

0

0

0

5,747

Paycheck Protection Program - 2nd Draw

56,981

0

0

0

0

56,981

Political subdivisions

 

73,503

 

0

 

0

 

0

 

0

 

73,503

Commercial construction and land

 

52,504

 

715

 

48

 

0

 

0

 

53,267

Loans secured by farmland

 

9,639

 

194

 

979

 

0

 

0

 

10,812

Multi-family (5 or more) residential

 

48,154

 

2,352

 

878

 

0

 

1,578

 

52,962

Agricultural loans

 

2,533

 

0

 

559

 

0

 

0

 

3,092

Other commercial loans

 

17,307

 

5

 

0

 

0

 

0

 

17,312

Total commercial

 

922,899

 

26,899

 

22,965

 

0

 

6,546

 

979,309

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

482,710

5,066

6,528

0

72

494,376

Residential mortgage loans - junior liens

 

23,676

 

107

 

514

 

0

 

6

 

24,303

Home equity lines of credit

 

37,889

 

59

 

517

 

0

 

0

 

38,465

1-4 Family residential construction

 

21,719

 

0

 

0

 

0

 

0

 

21,719

Total residential mortgage

 

565,994

 

5,232

 

7,559

 

0

 

78

 

578,863

Consumer

 

17,505

 

0

 

31

 

0

 

0

 

17,536

Totals

$

1,506,398

$

32,131

$

30,555

$

0

$

6,624

$

1,575,708

23

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

494,876

$

17,374

$

15,262

$

0

$

4,298

$

531,810

Commercial and Industrial

 

143,500

 

8,025

 

7,268

 

0

 

784

 

159,577

Paycheck Protection Program - 1st Draw

132,269

0

0

0

0

132,269

Political subdivisions

 

53,221

 

0

 

0

 

0

 

0

 

53,221

Commercial construction and land

 

42,110

 

715

 

49

 

0

 

0

 

42,874

Loans secured by farmland

 

10,473

 

405

 

858

 

0

 

0

 

11,736

Multi-family (5 or more) residential

 

50,563

 

2,405

 

1,229

 

0

 

1,614

 

55,811

Agricultural loans

 

2,569

 

0

 

595

 

0

 

0

 

3,164

Other commercial loans

 

17,289

 

0

 

0

 

0

 

0

 

17,289

Total commercial

 

946,870

 

28,924

 

25,261

 

0

 

6,696

 

1,007,751

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential Mortgage loans - first liens

516,685

6,192

9,994

0

76

532,947

Residential Mortgage loans - junior liens

 

26,480

 

141

 

621

 

0

 

69

 

27,311

Home equity lines of credit

 

38,529

 

59

 

713

 

0

 

0

 

39,301

1-4 Family residential construction

 

20,613

 

0

 

0

 

0

 

0

 

20,613

Total residential mortgage

 

602,307

 

6,392

 

11,328

 

0

 

145

 

620,172

Consumer

 

16,172

 

0

 

114

 

0

 

0

 

16,286

Totals

$

1,565,349

$

35,316

$

36,703

$

0

$

6,841

$

1,644,209

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

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

11,303

$

542,086

$

553,389

$

672

$

3,148

$

3,820

Commercial and industrial

 

3,598

 

148,646

 

152,244

 

72

 

2,468

 

2,540

Paycheck Protection Program - 1st Draw

 

0

 

5,747

 

5,747

 

0

 

0

 

0

Paycheck Protection Program - 2nd Draw

0

56,981

56,981

0

0

0

Political subdivisions

 

0

 

73,503

 

73,503

 

0

 

0

 

0

Commercial construction and land

 

0

 

53,267

 

53,267

 

0

 

559

 

559

Loans secured by farmland

 

84

 

10,728

 

10,812

 

0

 

112

 

112

Multi-family (5 or more) residential

 

1,578

 

51,384

 

52,962

 

0

 

196

 

196

Agricultural loans

 

0

 

3,092

 

3,092

 

0

 

33

 

33

Other commercial loans

 

0

 

17,312

 

17,312

 

0

 

173

 

173

Total commercial

 

16,563

 

962,746

 

979,309

 

744

 

6,689

 

7,433

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

1,134

493,242

494,376

0

3,566

3,566

Residential mortgage loans - junior liens

 

317

 

23,986

 

24,303

 

139

 

182

 

321

Home equity lines of credit

 

0

 

38,465

 

38,465

 

0

 

283

 

283

1-4 Family residential construction

 

0

 

21,719

 

21,719

 

0

 

189

 

189

Total residential mortgage

 

1,451

 

577,412

 

578,863

 

139

 

4,220

 

4,359

Consumer

 

0

 

17,536

 

17,536

 

0

 

237

 

237

Unallocated

 

 

 

 

 

 

671

Total

$

18,014

$

1,557,694

$

1,575,708

$

883

$

11,146

$

12,700

24

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

11,962

$

519,848

$

531,810

$

692

$

2,359

$

3,051

Commercial and industrial

 

1,359

 

158,218

 

159,577

 

71

 

2,174

 

2,245

Paycheck Protection Program - 1st Draw

 

0

 

132,269

 

132,269

 

0

 

0

 

0

Political subdivisions

 

0

 

53,221

 

53,221

 

0

 

0

 

0

Commercial construction and land

 

0

 

42,874

 

42,874

 

0

 

454

 

454

Loans secured by farmland

 

84

 

11,652

 

11,736

 

0

 

120

 

120

Multi-family (5 or more) residential

 

1,614

 

54,197

 

55,811

 

0

 

236

 

236

Agricultural loans

 

0

 

3,164

 

3,164

 

0

 

34

 

34

Other commercial loans

 

0

 

17,289

 

17,289

 

0

 

168

 

168

Total commercial

 

15,019

 

992,732

 

1,007,751

 

763

 

5,545

 

6,308

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

2,385

530,562

532,947

9

3,515

3,524

Residential mortgage loans - junior liens

 

414

 

26,897

 

27,311

 

153

 

196

 

349

Home equity lines of credit

 

0

 

39,301

 

39,301

 

0

 

281

 

281

1-4 Family residential construction

 

0

 

20,613

 

20,613

 

0

 

99

 

99

Total residential mortgage

 

2,799

 

617,373

 

620,172

 

162

 

4,091

 

4,253

Consumer

 

0

 

16,286

 

16,286

 

0

 

239

 

239

Unallocated

 

 

 

 

 

 

585

Total

$

17,818

$

1,626,391

$

1,644,209

$

925

$

9,875

$

11,385

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

(In Thousands)

September 30, 2021

December 31, 2020

Unpaid

Unpaid

Principal

Recorded

Related

Principal

Recorded

Related

    

Balance

    

Investment

    

Allowance

    

Balance

    

Investment

    

Allowance

With no related allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

7,068

$

4,823

$

0

$

7,168

$

5,398

$

0

Commercial and industrial

 

5,930

 

3,526

 

0

 

1,781

 

1,287

 

0

Residential mortgage loans - first liens

786

760

0

1,248

1,248

0

Residential mortgage loans - junior liens

 

65

 

18

 

0

 

160

 

105

 

0

Loans secured by farmland

 

84

 

84

 

0

 

84

 

84

 

0

Multi-family (5 or more) residential

2,734

1,578

0

2,770

1,614

0

Total with no related allowance recorded

 

16,667

 

10,789

 

0

 

13,211

 

9,736

 

0

With a related allowance recorded:

 

 

 

 

 

 

Commercial loans secured by real estate

6,480

6,480

672

6,501

6,501

691

Commercial and industrial

 

72

 

72

 

72

 

72

 

72

 

72

Residential mortgage loans - first liens

 

374

 

374

 

0

 

1,200

 

1,200

 

9

Residential mortgage loans - junior liens

 

299

 

299

 

139

 

309

 

309

 

153

Total with a related allowance recorded

 

7,225

 

7,225

 

883

 

8,082

 

8,082

 

925

Total

$

23,892

$

18,014

$

883

$

21,293

$

17,818

$

925

25

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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:

(In Thousands)

Interest Income Recognized on

Average Investment in Impaired Loans

Impaired Loans on a Cash Basis

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

2020

2021

    

2020

2021

2020

2021

    

2020

Commercial:

 

 

 

 

Commercial loans secured by real estate

$

11,252

$

7,298

$

11,811

$

3,779

$

172

$

65

$

401

$

81

Commercial and industrial

3,844

2,235

 

2,566

 

3,178

4

1

 

25

 

21

Commercial construction and land

48

49

 

48

 

678

2

1

 

2

 

14

Loans secured by farmland

84

253

 

84

 

397

0

2

 

1

 

26

Multi-family (5 or more) residential

1,578

0

1,584

0

31

0

122

0

Agricultural loans

66

76

 

67

 

76

0

2

 

3

 

4

Other commercial loans

0

0

 

0

 

25

0

0

 

0

 

1

Total commercial

16,872

9,911

 

16,160

 

8,133

209

71

 

554

 

147

Residential mortgage:

 

  

 

  

  

 

  

Residential mortgage loans - first lien

1,322

2,159

1,830

1,579

11

27

68

70

Residential mortgage loans - junior lien

386

384

 

417

 

386

1

5

 

10

 

18

Home equity lines of credit

0

65

 

0

 

65

0

0

 

0

 

2

Total residential mortgage

1,708

2,608

 

2,247

 

2,030

12

32

 

78

 

90

Total

$

18,580

$

12,519

$

18,407

$

10,163

$

221

$

103

$

632

$

237

26

Table of Contents

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

December 31, 2020

Past Due

Past Due

90+ Days and

90+ Days and

    

Accruing

    

Nonaccrual

    

Accruing

    

Nonaccrual

Commercial:

 

 

 

  

 

  

Commercial loans secured by real estate

$

752

$

11,205

$

395

$

11,550

Commercial and industrial

 

99

 

3,232

 

142

 

970

Commercial construction and land

 

0

 

48

 

0

 

49

Loans secured by farmland

 

30

 

84

 

188

 

84

Multi-family (5 or more) residential

0

1,578

0

1,614

Agricultural loans

66

0

0

0

Other commercial

 

0

 

0

 

71

 

0

Total commercial

 

947

 

16,147

 

796

 

14,267

Residential mortgage:

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

832

4,569

838

6,387

Residential mortgage loans - junior liens

 

71

 

305

 

52

 

378

Home equity lines of credit

 

64

 

289

 

233

 

299

Total residential mortgage

 

967

 

5,163

 

1,123

 

7,064

Consumer

 

10

 

31

 

56

 

85

Totals

$

1,924

$

21,341

$

1,975

$

21,416

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.

27

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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.

(In Thousands)

As of September 30, 2021

As of December 31, 2020

    

Current &

    

    

    

    

Current &

    

    

    

Past Due

Past Due

Past Due

Past Due

Past Due

Past Due

Less than

30-89

90+

Less than

30-89

90+

30 Days

Days

Days

Total

30 Days

Days

Days

Total

Commercial:

 

 

 

 

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

547,885

$

142

$

5,362

$

553,389

$

529,998

$

66

$

1,746

$

531,810

Commercial and industrial

 

151,119

 

218

 

907

 

152,244

 

158,523

 

55

 

999

 

159,577

Paycheck Protection Program - 1st Draw

5,747

0

0

5,747

132,269

0

0

132,269

Paycheck Protection Program - 2nd Draw

56,981

0

0

56,981

0

0

0

0

Political subdivisions

 

73,503

 

0

 

0

 

73,503

 

53,221

 

0

 

0

 

53,221

Commercial construction and land

 

53,125

 

142

 

0

 

53,267

 

42,590

 

284

 

0

 

42,874

Loans secured by farmland

 

10,667

 

31

 

114

 

10,812

 

11,419

 

95

 

222

 

11,736

Multi-family (5 or more) residential

 

52,962

 

0

 

0

 

52,962

 

53,860

 

1,951

 

0

 

55,811

Agricultural loans

 

3,026

 

0

 

66

 

3,092

 

3,091

 

2

 

71

 

3,164

Other commercial loans

 

17,312

 

0

 

0

 

17,312

 

17,289

 

0

 

0

 

17,289

Total commercial

 

972,327

 

533

 

6,449

 

979,309

 

1,002,260

 

2,453

 

3,038

 

1,007,751

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

489,339

2,212

2,825

494,376

523,191

5,703

4,053

532,947

Residential mortgage loans - junior liens

 

24,200

 

32

 

71

 

24,303

 

27,009

 

111

 

191

 

27,311

Home equity lines of credit

 

38,059

 

342

 

64

 

38,465

 

38,919

 

101

 

281

 

39,301

1-4 Family residential construction

 

21,719

 

0

 

0

 

21,719

 

20,457

 

156

 

0

 

20,613

Total residential mortgage

 

573,317

 

2,586

 

2,960

 

578,863

 

609,576

 

6,071

 

4,525

 

620,172

Consumer

 

17,447

 

48

 

41

 

17,536

 

16,063

 

83

 

140

 

16,286

Totals

$

1,563,091

$

3,167

$

9,450

$

1,575,708

$

1,627,899

$

8,607

$

7,703

$

1,644,209

28

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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:

(In Thousands)

Current &

 

Past Due

Past Due

Past Due

 

Less than

30-89

90+

 

    

30 Days

    

Days

    

Days

    

Total

September 30, 2021 Nonaccrual Totals

$

12,787

$

1,028

$

7,526

$

21,341

December 31, 2020 Nonaccrual Totals

$

12,999

$

2,689

$

5,728

$

21,416

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. 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:

(In Thousands)

Current &

 

 

Past Due

Past Due

Past Due

 

 

Less than

30-89

90+

 

 

    

30 Days

    

Days

    

Days

    

Nonaccrual

    

Total

September 30, 2021 Totals

$

144

$

88

$

134

$

5,457

$

5,823

December 31, 2020 Totals

$

166

$

0

$

418

$

6,867

$

7,451

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:

(Balances in Thousands)

Three Months Ended

Three Months Ended

September 30, 2021

September 30, 2020

Post-

Post-

Number

Modification

Number

Modification

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Home equity lines of credit,

Reduced monthly payments for an eighteen-month period

    

1

    

$

70

    

0

    

$

0

Commercial loans secured by real estate,

Principal and interest payment deferral non-COVID related

0

0

2

4,831

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

0

0

3

2,170

Total

    

1

    

$

70

    

5

    

$

7,001

29

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(Balances in Thousands)

Nine Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

    

    

Post-

    

    

Post-

Number

Modification

Number

Modification

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Residential mortgage - first liens:

 

  

 

  

 

  

 

  

Reduced monthly payments and extended maturity date

 

1

$

12

 

0

$

0

Reduced monthly payments for a fifteen-month period

1

116

0

0

Residential mortgage - junior liens,

 

  

  

 

  

  

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

 

0

 

0

 

1

 

30

Home equity lines of credit:

Reduced monthly payments and extended maturity date

1

24

0

0

Reduced monthly payments for an eighteen-month period

1

70

0

0

Commercial loans secured by real estate:

Interest only payments for a nine-month period

0

0

1

240

Principal and interest payment deferral non-COVID related

0

0

2

4,831

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

0

0

3

2,170

Total

 

4

$

222

 

7

$

7,271

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:

(Balances in Thousands)

Three Months Ended

Three Months Ended

September 30, 2021

September 30, 2020

Number

Number

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Commercial loans secured by real estate

0

$

0

1

$

240

Total

 

0

$

0

 

1

$

240

(Balances in Thousands)

Nine Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

Number

Number

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Commercial loans secured by real estate

1

$

3,392

1

$

240

Total

 

1

$

3,392

 

1

$

240

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 unaudited consolidated balance sheets) is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Foreclosed residential real estate

$

179

$

80

The recorded investment of consumer mortgage loans secured by residential real properties for which formal foreclosure proceedings were in process is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Residential real estate in process of foreclosure

$

1,392

$

1,246

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Gross amount

$

6,639

$

6,639

Accumulated amortization

 

(3,189)

 

(2,788)

Net

$

3,450

$

3,851

Amortization expense related to core deposit intangibles is included in other noninterest expense in the consolidated statements of income, as follows:

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Amortization expense

$

133

    

$

208

    

$

401

    

$

332

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,

September 30,

September 30,

September 30,

2021

2020

2021

2020

Balance, beginning of period

$

52,505

$

28,388

$

52,505

$

28,388

Goodwill arising in business combination

0

24,138

0

24,138

Balance, end of period

$

52,505

$

52,526

$

52,505

$

52,526

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

9. BORROWED FUNDS

SHORT-TERM BORROWINGS

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

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

FHLB-Pittsburgh borrowings

$

0

$

18,066

Customer repurchase agreements

 

1,875

 

1,956

Total short-term borrowings

$

1,875

$

20,022

The Corporation had available credit with other correspondent banks totaling $45,000,000 at September 30, 2021 and December 31, 2020. These lines of credit are primarily unsecured. No amounts were outstanding at September 30, 2021 or December 31, 2020.

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.

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. 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. 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.

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%.

LONG-TERM BORROWINGS – FHLB ADVANCES

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

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Loans maturing in 2021 with a weighted-average rate of 0.94%

$

10,520

$

26,098

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

15,510

15,682

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

7,145

7,224

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

5,109

5,137

Loan maturing in 2025 with an average rate of 4.91%

396

467

Total long-term FHLB-Pittsburgh borrowings

$

38,680

$

54,608

Note: Weighted-average rates are presented as of September 30, 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SENIOR NOTES

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 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 $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:

(In Thousands)

    

September 30,

    

December 31, 

2021

2020

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

$

14,685

$

0

Total carrying value

$

14,685

$

0

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 $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.

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

(In Thousands)

    

September 30,

    

December 31, 

2021

2020

Agreements with an aggregate par value of $8,000,000; bearing interest at 6.25% with an effective interest rate of 5.49%; redeemed at par in June 2021

$

0

$

8,027

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

6,500

6,500

Agreement with a par value of $2,000,000; bearing interest at 6.50% with an effective interest rate of 5.60%; maturing in July 2027 and redeemable at par in July 2022

2,013

2,026

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

24,475

0

Total carrying value

$

32,988

$

16,553

10. STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The 2021 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the 2021 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:

(Dollars in Thousands)

    

    

Aggregate

Grant

Date

Number of

Fair

Shares

Value

1st quarter 2021 awards:

Time-based awards to independent directors

10,989

$

220

Time-based awards to employees

46,178

924

Performance-based awards to employees

17,224

345

2nd quarter 2021 awards,

Time-based awards to employees

4,000

100

Total

78,391

$

1,589

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

11. 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.

12. 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.

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 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. Rather, these derivatives result from a service provided to certain customers. 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.

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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:

(In Thousands)

At September 30, 2021

At December 31, 2020

Asset Derivatives

Liability Derivatives

Asset Derivatives

Liability Derivatives

Notional

Fair

Notional

Fair

Notional

Fair

Notional

Fair

Amount

Value (1)

Amount

Value (2)

Amount

Value (1)

Amount

Value (2)

Interest rate swap agreements

$

61,995

$

3,902

$

61,995

$

3,902

$

67,870

$

6,566

$

67,870

$

6,566

(1)Included in other assets in the consolidated balance sheets.
(2)Included in accrued interest and other liabilities in the consolidated balance sheets.

The Corporation’s agreement with its derivative counterparty provides that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. 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.

13. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets and liabilities at fair value. 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. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets or liabilities. These generally provide the most reliable evidence and are used to measure fair value whenever available.

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 or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.

Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. 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.

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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

    

Quoted

    

    

    

Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

0

$

25,068

$

0

$

25,068

Obligations of U.S. Government agencies

0

24,312

0

24,312

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

139,244

 

0

 

139,244

Taxable

 

0

 

70,493

 

0

 

70,493

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

60,629

 

0

 

60,629

Residential collateralized mortgage obligations

 

0

 

44,593

 

0

 

44,593

Commercial mortgage-backed securities

 

0

 

73,518

 

0

 

73,518

Total available-for-sale debt securities

 

0

 

437,857

 

0

 

437,857

Marketable equity security

 

981

 

0

 

0

 

981

Servicing rights

 

0

 

0

 

2,247

 

2,247

Interest rate swap agreements, assets

0

3,902

0

3,902

Total recurring fair value measurements, assets

$

981

$

441,759

$

2,247

$

444,987

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

3,902

$

0

$

3,902

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans with a valuation allowance

$

0

$

0

$

7,225

$

7,225

Valuation allowance

 

0

 

0

 

(883)

 

(883)

Impaired loans, net

 

0

 

0

 

6,342

 

6,342

Foreclosed assets held for sale

 

0

 

0

 

1,374

 

1,374

Total nonrecurring fair value measurements, assets

$

0

$

0

$

7,716

$

7,716

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020

    

Quoted

    

    

    

Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair

(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value

Recurring fair value measurements, assets:

 

  

 

  

 

  

 

  

AVAILABLE-FOR-SALE DEBT SECURITIES:

 

  

 

  

 

  

 

  

Obligations of the U.S. Treasury

$

0

$

12,182

$

0

$

12,182

Obligations of U.S. Government agencies

0

26,344

0

26,344

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

122,401

 

0

 

122,401

Taxable

 

0

 

47,452

 

0

 

47,452

Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

38,176

 

0

 

38,176

Residential collateralized mortgage obligations

 

0

 

57,467

 

0

 

57,467

Commercial mortgage-backed securities

 

0

 

45,310

 

0

 

45,310

Total available-for-sale debt securities

 

0

 

349,332

 

0

 

349,332

Marketable equity security

 

1,000

 

0

 

0

 

1,000

Servicing rights

 

0

 

0

 

1,689

 

1,689

Interest rate swap agreements, assets

0

6,566

0

6,566

Total recurring fair value measurements, assets

$

1,000

$

355,898

$

1,689

$

358,587

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

6,566

$

0

$

6,566

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans with a valuation allowance

$

0

$

0

$

8,082

$

8,082

Valuation allowance

 

0

 

0

 

(925)

 

(925)

Impaired loans, net

 

0

 

0

 

7,157

 

7,157

Foreclosed assets held for sale

 

0

 

0

 

1,338

 

1,338

Total nonrecurring fair value measurements, assets

$

0

$

0

$

8,495

$

8,495

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management.

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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:

    

Fair Value at

    

  

    

  

    

  

    

  

9/30/2021

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

9/30/2021

Servicing rights

$

2,247

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

221.00

%  

Weighted-average PSA

 

 

Servicing fees

0.25

%  

of loan balances

 

4.00

%  

of payments are late

 

5.00

%  

late fees assessed

$

1.94

Miscellaneous fees per account per month

 

 

Servicing costs

$

6.00

Monthly servicing cost per account

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

 

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

    

Fair Value at

    

  

    

  

    

  

    

  

12/31/2020

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

12/31/2020

Servicing rights

$

1,689

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

277.00

%  

Weighted-average PSA

 

 

Servicing fees

0.25

%  

of loan balances

 

4.00

%  

of payments are late

5.00

%  

late fees assessed

$

1.94

 

Miscellaneous fees per account per month

 

Servicing costs

$

6.00

Monthly servicing cost per account

$

24.00

Additional monthly servicing cost per loan on loans more than 30 days delinquent

1.50

%  

of loans more than 30 days delinquent

 

 

3.00

%  

annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

Following is a reconciliation of activity for Level 3 assets measured at fair value on a recurring basis:

(In Thousands)

Three Months Ended

Nine Months Ended

    

September 30, 2021

    

September 30, 2020

    

September 30, 2021

    

September 30, 2020

Servicing rights balance, beginning of period

$

2,116

$

1,284

$

1,689

$

1,277

Originations of servicing rights

 

176

 

374

 

567

 

777

Unrealized loss included in earnings

 

(45)

 

(221)

 

(9)

 

(617)

Servicing rights balance, end of period

$

2,247

$

1,437

$

2,247

$

1,437

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. Foreclosed

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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. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. 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:

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted

 

Valuation

  

  

  

Average

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

9/30/2021

9/30/2021

9/30/2021

Technique

Inputs

9/30/2021

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

$

6,480

$

672

$

5,808

 

Sales comparison

 

Discount to appraised value

 

27

%

Commercial and industrial

72

72

0

Liquidation of assets

 

Discount to appraised value

 

100

%

Residential mortgage loans - first and junior liens

673

139

534

 

Sales comparison

 

Discount to appraised value

 

33

%

Total impaired loans

$

7,225

$

883

$

6,342

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

1,195

$

0

$

1,195

 

Sales comparison

 

Discount to appraised value

 

47

%

Residential (1-4 family)

179

0

179

 

Sales comparison

 

Discount to appraised value

 

52

%

Total foreclosed assets held for sale

$

1,374

$

0

$

1,374

 

  

 

  

 

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted  

 

Valuation

  

  

  

Average  

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

12/31/2020

12/31/2020

12/31/2020

Technique

Inputs

12/31/2020

 

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

$

6,501

$

691

$

5,810

 

Sales comparison

 

Discount to appraised value

 

28

%

Commercial and industrial

 

72

 

72

 

0

 

Liquidation of assets

 

Discount to appraised value

 

100

%

Residential mortgage loans - first and junior liens

1,509

162

1,347

 

Sales comparison

 

Discount to appraised value

 

31

%

Total impaired loans

$

8,082

$

925

$

7,157

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

1,258

$

0

$

1,258

 

Sales comparison

 

Discount to appraised value

 

44

%

Residential (1-4 family)

80

0

80

 

Sales comparison

 

Discount to appraised value

 

36

%

Total foreclosed assets held for sale

$

1,338

$

0

$

1,338

 

  

 

  

 

  

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation.

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The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments that are not recorded at fair value are as follows:

(In Thousands)

Fair Value

September 30, 2021

December 31, 2020

Hierarchy

Carrying

Fair

Carrying

Fair

    

Level

    

Amount

    

Value

    

Amount

    

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

190,155

$

190,155

$

96,017

$

96,017

Certificates of deposit

 

Level 2

 

8,840

 

8,949

 

5,840

 

6,054

Restricted equity securities (included in Other Assets)

 

Level 2

 

9,650

 

9,650

 

9,970

 

9,970

Loans, net

 

Level 3

 

1,563,008

 

1,586,592

 

1,632,824

 

1,646,207

Accrued interest receivable

 

Level 2

 

7,307

 

7,307

 

8,293

 

8,293

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits with no stated maturity

 

Level 2

 

1,637,463

 

1,637,463

 

1,430,062

 

1,430,062

Time deposits

 

Level 2

 

302,678

 

304,330

 

390,407

 

393,566

Short-term borrowings

 

Level 2

 

1,875

 

1,685

 

20,022

 

19,974

Long-term borrowings

 

Level 2

 

38,680

 

39,229

 

54,608

 

55,723

Senior debt

Level 2

14,685

15,000

0

0

Subordinated debt

Level 2

32,988

33,150

16,553

16,680

Accrued interest payable

 

Level 2

 

633

 

633

 

390

 

390

The Corporation has commitments to extend credit and has issued standby letters of credit. Standby letters of credit are conditional guarantees of performance by a customer to a third party. Estimates of the fair value of these off-balance sheet items were not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking statements. Citizens & Northern Corporation and its wholly-owned subsidiaries (collectively, the Corporation) intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. Forward-looking statements, which are not historical facts, are based on certain assumptions and describe future plans, business objectives and expectations, and are generally identifiable by the use of words such as, "should", “likely”, "expect", “plan”, "anticipate", “target”, “forecast”, and “goal”. These forward-looking statements are subject to risks and uncertainties that are difficult to predict, may be beyond management’s control and could cause results to differ materially from those expressed or implied by such forward-looking statements. Factors which could have a material, adverse impact on the operations and future prospects of the Corporation include, but are not limited to, the following:

the effect of the novel coronavirus (COVID-19) and related events
changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates
disruptions, security breaches, or other adverse events, failures or interruptions in, or attacks on, our information technology systems or on the third-party vendors who perform several of our critical processing functions
changes in general economic conditions
legislative or regulatory changes
downturn in demand for loan, deposit and other financial services in the Corporation’s market area
increased competition from other banks and non-bank providers of financial services
technological changes and increased technology-related costs
changes in accounting principles, or the application of generally accepted accounting principles
failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

CORONAVIRUS (COVID-19) RESPONSE AND PAYCHECK PROTECTION PROGRAM

Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) provides that, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States under the National Emergencies Act terminates (the “applicable period”), the Corporation may elect to suspend U.S. GAAP for loan modifications related to the pandemic that would otherwise be categorized as troubled debt restructurings (TDRs) and suspend any determination of a loan modified as a result of the effects of the pandemic as being a TDR, including impairment for accounting purposes. The suspension is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. The suspension is not applicable to any adverse impact on the credit of a borrower that is not related to the pandemic.

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief.  Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates.  

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need

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to be accounted for as a TDR. Specifically, the agencies confirmed with the Financial Accounting Standards Board (“FASB”) staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc. (“Covenant”) had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts are moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual  or as TDRs at September 30, 2021. Most of the modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days.

At September 30, 2021, there were no loans remaining in deferral status under the program. In comparison, at June 30, 2021, the Corporation had 12 loans with an aggregate recorded investment of $6.7 million in deferral status and at September 30, 2020, there were 44 loans with an aggregate recorded investment of $44.6 million in deferral status.

The recorded investment in Paycheck Protection Program (“PPP”) loans at September 30, 2021 was $62.7 million, with contractual principal balances totaling $65.2 million, reduced $2.5 million by the impact of net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant. The recorded investment of $5.7 million in first draw PPP loans at September 30, 2021 decreased $126.6 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”). In the third quarter 2021, the pace of repayments of second draw PPP loans increased as the recorded investment of second draw PPP loans fell to $57.0 million at September 30, 2021 from $72.4 million at June 30, 2021.The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven. Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven.

Capital Strength

While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, Citizens & Northern Bank (“C&N Bank”), entered the crisis from a position of strength. This is especially apparent in the capital ratios, which are at levels that demonstrate the capacity to absorb significant losses if they arise while continuing to meet the requirements to be considered well capitalized.

C&N Bank’s leverage ratio (Tier 1 capital to average assets) at September 30, 2021 of 10.35% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $121.7 million. Similarly, the total capital to risk-weighted assets ratio at September 30, 2021 is 16.35%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $96.5 million.

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

EARNINGS OVERVIEW

Net income was $0.47 per diluted share in the third quarter 2021, up from $0.44 in the second quarter 2021 and up $0.29 from $0.18 in the third quarter 2020. For the nine months ended September 30, 2021, net income per diluted share was $1.46, up from $0.86 per share for the first nine months of 2020. As described below, earnings of $0.47 per share for the third quarter 2021 were 6.0% lower than third

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quarter 2020 non-U.S. generally accepted accounting principles (U.S. GAAP) earnings per share of $0.50 as adjusted to exclude the impact of merger-related expenses. For the nine months ended September 30, 2021, earnings of $1.46 per share were 15.0% higher than the first nine months of 2020 non-U.S. GAAP earnings per share of $1.27 as adjusted to exclude the impact of merger-related expenses.

The following table provides a reconciliation of the Corporation’s unaudited earnings results under U.S. GAAP to comparative non-U.S. GAAP results excluding merger-related expenses. Management believes disclosure of unaudited earnings results for the periods presented, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes.

RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE

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

3rd Quarter 2021

3rd Quarter 2020

Income

Diluted

Income

Diluted

Before

Earnings

Before

Earnings

Income

Income

per

Income

Income

per

Tax

Tax

Net

Common

Tax

Tax

Net

Common

Provision

Provision

Income

Share

Provision

Provision

Income

Share

Earnings Under U.S. GAAP

$

8,965

$

1,566

$

7,399

$

0.47

$

3,286

$

438

$

2,848

$

0.18

Add: Merger-Related Expenses (1)

 

0

 

0

 

0

 

 

6,402

 

1,307

 

5,095

 

  

Adjusted Earnings (Non-U.S. GAAP)

$

8,965

$

1,566

$

7,399

$

0.47

$

9,688

$

1,745

$

7,943

$

0.50

    

Nine Months Ended September 30, 2021

    

Nine Months Ended September 30, 2020

Income

Diluted

Income

Diluted

Before

Earnings

Before

Earnings

Income

Income

per

Income

Income

per

Tax

Tax

Net

Common

Tax

Tax

Net

Common

Provision

Provision

Income

Share

Provision

Provision

Income

Share

Earnings Under U.S. GAAP

$

28,702

$

5,456

$

23,246

$

1.46

$

14,961

$

2,509

$

12,452

$

0.86

Add: Merger-Related Expenses (1)

 

0

 

0

 

0

 

 

7,526

 

1,536

 

5,990

 

  

Adjusted Earnings (Non-U.S. GAAP)

$

28,702

$

5,456

$

23,246

$

1.46

$

22,487

$

4,045

$

18,442

$

1.27

(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision is adjusted for the estimated nondeductible portion of the expenses.

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

Third Quarter 2021 as Compared to Third Quarter 2020

Third quarter 2021 net income was $7,399,000. In comparison, third quarter 2020 net income was $2,848,000, and excluding merger-related expenses, adjusted (non-U.S. GAAP) earnings were $7,943,000. Other significant variances were as follows:

Third quarter 2021 net interest income of $19,459,000 was $177,000 higher than the third quarter 2020 total. Average outstanding loans decreased $113.7 million, including a reduction in average PPP loans of $74.5 million, and average total deposits increased $52.2 million. The net interest margin for the third quarter 2021 was 3.59% as compared to 3.57% for the third quarter 2020. The average yield on earning assets of 3.89% for the third quarter 2021 was down 0.13% from the third quarter 2020, while the average rate on interest-bearing liabilities of 0.43% in the third quarter 2021 was 0.19% lower than the comparable third quarter 2020 average rate. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020 amount. Accretion and amortization of purchase accounting adjustments had

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a net positive impact on net interest income of $563,000 in the third quarter 2021, a decrease of $735,000 from the net positive impact of $1,298,000 in the third quarter 2020
The provision for loan losses was $1,530,000 in the third quarter 2021 as compared to $1,941,000 in the third quarter 2020. The provision for loan losses in the third quarter 2021 included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. The partial charge-off amount exceeded the specific allowance of $583,000 that had been established at June 30, 2021. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000.
Noninterest income for the third quarter 2021 was down $611,000 from the third quarter 2020 total. Significant variances included the following:
oNet gains from sales of loans of $797,000 for the third quarter 2021 were down $1,255,000 from the total for the third quarter 2020, as the volume of residential mortgage loans sold in the third quarter 2021 was down from the third quarter 2020 level.
oOther noninterest income totaled $665,000, a decrease of $331,000 from the third quarter 2020 as the Corporation recognized income of $279,000 in the third quarter 2020 from a life insurance arrangement in which benefits were split between the Corporation and heirs of a former employee and dividend income from Federal Home Loan Bank stock decreased $55,000.
oLoan servicing fees, net, were $153,000 in the third quarter 2021, an increase of $240,000 over the third quarter 2020 reduction in revenue of $87,000. The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $45,000 in the third quarter 2021 as compared to a reduction in fair value of $221,000 in the third quarter 2020, as market assumptions regarding prepayment speeds have decreased.
oTrust revenue of $1,821,000 increased $226,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation.
oService charges on deposit accounts of $1,249,000 in the third quarter 2021 were up $204,000 from the third quarter 2020 amount, as the volume of consumer and business overdraft and other activity increased.
oBrokerage and insurance revenue of $560,000 increased $178,000 from the third quarter 2020 total, due to commissions on higher transaction volume.
oInterchange revenue from debit card transactions totaled $975,000 in the third quarter 2021, an increase of $147,000 over the third quarter 2020 total, reflecting increases in transaction volumes and number of accounts due to the Covenant acquisition.
Noninterest expense, excluding merger-related expenses, increased $698,000 in the third quarter 2021 over the third quarter 2020 amount. Significant variances included the following:
oSalaries and employee benefits of $9,427,000 increased $724,000, including the impact of increases in administrative, information technology, cash management services and lending personnel.
oProfessional fees of $538,000 increased $116,000, including increases in recruiting services.

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oOther noninterest expense of $1,850,000 decreased $240,000, including other operational losses decreasing $195,000 as an estimated accrual of $200,000 related to a Trust Department tax compliance and preparation matter was recorded in the third quarter 2020 with no comparable charge in the third quarter 2021.
The income tax provision of $1,566,000 for the third quarter 2021 was up $1,128,000 from $438,000 for the third quarter 2020, reflecting higher pre-tax income.

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

Net income for the nine-month period ended September 30, 2021 was $23,246,000, or $1.46 per diluted share, while net income for the first nine months of 2020 was $12,452,000, or $0.86 per share. Excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings for the first nine months of 2020 would be $18,442,000 or $1.27 per share. Other significant variances were as follows:

Net interest income was up $10,413,000 (21.8%) for the first nine months of 2021 over the same period in 2020, reflecting growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $241.3 million, and average total deposits increased $396.7 million. The net interest margin was 3.70% for the nine months ended September 30, 2021, up from 3.67% for the first nine months of 2020. Interest and fees on PPP loans totaled $4,886,000 for the first nine months of 2021, an increase of $3,457,000 compared to the first nine months of 2020. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $2,228,000 in the first nine months of 2021 as compared to a net positive impact of $1,999,000 in the first nine months of 2020.
For the first nine months of 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded in the first nine months of 2020. The provision for the first nine months of 2021 includes the impact of a charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000, as previously discussed. In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000.
Noninterest income for the first nine months of 2021 was up $1,662,000 from the total for the first nine months of 2020. Significant variances included the following:
oLoan servicing fees, net, were $547,000 in the first nine months of 2021, an increase of $806,000 over the 2020 total of negative $259,000 (a decrease in revenue). The net increase reflects growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights decreased $9,000 in the first nine months of 2021 as compared to a reduction in fair value of $617,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans.
oTrust revenue of $5,254,000 increased $615,000 reflecting the impact of growth in average trust assets under management including the impact of market value appreciation.
oInterchange revenue from debit card transactions totaled $2,854,000 for the first nine months of 2021, an increase of $577,000, reflecting an increase in transaction volumes.
oBrokerage and insurance revenue of $1,392,000 increased $271,000, due to commissions on higher transaction volume.
oOther noninterest income totaled $2,837,000, an increase of $254,000 over 2020. Within this category, significant variances included the following:
oIncome from realization of tax credits was $268,000 higher in the first nine months of 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations.
oFee income for providing credit enhancement on sale of mortgage loans increased $158,000.

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oCredit card interchange income increased $69,000 due to higher transaction volume.
oIncome from investment in a title agency increased $54,000.
oMerchant services income increased $43,000.
oOther noninterest income decreased $279,000 due to the impact of the life insurance transaction in 2020 in which benefits were split between the Corporation and heirs of a former employee.
oDividend income from Federal Home Loan Bank stock decreased $76,000.
oService charges on deposit accounts of $3,337,000 in the first nine months of 2021 increased $211,000 from the total for the first nine months of 2020, as consumer and business activity increased.
oNet gains from sales of loans totaled $2,786,000 in the first nine months of 2021, a decrease of $1,145,000 from the total for the first nine months of 2020. The decrease reflects a decrease in volume of mortgage loans sold, resulting mainly from lower refinancing activity and overall market conditions.
Noninterest expense, excluding merger-related expenses, increased $6,620,000 for the nine months ended September 30, 2021 over the total for the first nine months of 2020. Significant variances included the following:
oTotal salaries and wages and benefits expenses increased $4,757,000, reflecting inclusion of the former Covenant operations for nine months in 2021 as compared to three months in 2020, as well as increases in lending, human resources, information technology and other personnel needed to accommodate growth.
oNet occupancy and equipment expense increased $473,000, primarily reflecting an increase due to the Covenant acquisition.
oData processing and telecommunications expenses increased $383,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs.
oProfessional fees expense increased $418,000, mainly due to increases in recruiting services and PPP loan processing professional fees.
oOther noninterest expense increased $256,000. Within this category, significant variances included the following:
oFDIC insurance expense totaled $431,000, an increase of $244,000.
oDonations expense increased $230,000, mainly due to an increase in donations associated with the PA Educational Improvement Tax Credit program.
oBusiness development expenses totaled $345,000, an increase of $201,000, due primarily to an increase in public relations expense.
oOther operational losses totaled $159,000, a decrease of $394,000, including a reduction in charges related to Trust Department tax compliance and preparation matters.
oThe allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $208,000.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The income tax provision was $5,456,000 for the nine months ended September 30, 2021, up from $2,509,000 for the first nine months of 2020. Pre-tax income was $13,741,000 higher in the first nine months of 2021 as compared to 2020. The effective tax rate was 19.0% for the first nine months of 2021, higher than the 16.8% effective tax rate for the first nine months of 2020. The tax benefit of tax-exempt interest income was 2.4% of pre-tax income in the first nine months of 2021 as compared to a 5.0% benefit in 2020.

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

ACQUISITION OF COVENANT FINANCIAL, INC.

The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. The acquisition of Covenant follows the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with banking and lending offices in Bucks County, Pennsylvania. The total transaction value of the Monument acquisition was $42.7 million.

In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the nine months ended September 30, 2021.

TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,

For the Three Months Ended :

Except Per Share Data)

September 30, 

June 30, 

March 31,

December 31,

September 30,

June 30, 

March 31, 

(Unaudited)

    

2021

2021

2021

    

2020

2020

    

2020

    

2020

Interest income

$

21,073

$

20,428

$

21,754

$

21,859

$

21,751

$

16,513

$

17,037

Interest expense

 

1,614

 

1,747

 

1,671

 

2,104

 

2,469

 

2,267

 

2,755

Net interest income

 

19,459

 

18,681

 

20,083

 

19,755

 

19,282

 

14,246

 

14,282

Provision (credit) for loan losses

 

1,530

 

744

 

259

 

620

 

1,941

 

(176)

 

1,528

Net interest income after provision (credit) for loan losses

 

17,929

 

17,937

 

19,824

 

19,135

 

17,341

 

14,422

 

12,754

Noninterest income

 

6,359

 

6,300

 

6,782

 

6,565

 

6,970

 

5,528

 

5,281

Net gains on securities

 

23

 

2

 

0

 

144

 

25

 

0

 

0

Loss on prepayment of borrowings

0

0

0

1,636

0

0

0

Merger-related expenses

 

0

 

0

 

0

 

182

 

6,402

 

983

 

141

Other noninterest expenses

 

15,346

 

15,399

 

15,709

 

15,775

 

14,648

 

12,274

 

12,912

Income before income tax provision

 

8,965

 

8,840

 

10,897

 

8,251

 

3,286

 

6,693

 

4,982

Income tax provision

 

1,566

 

1,780

 

2,110

 

1,481

 

438

 

1,255

 

816

Net income

$

7,399

$

7,060

$

8,787

$

6,770

$

2,848

$

5,438

$

4,166

Net income attributable to common shares

$

7,336

$

6,999

$

8,722

$

6,727

$

2,830

$

5,405

$

4,146

Basic earnings per common share

$

0.47

$

0.44

$

0.55

$

0.43

$

0.18

$

0.39

$

0.30

Diluted earnings per common share

$

0.47

$

0.44

$

0.55

$

0.43

$

0.18

$

0.39

$

0.30

CRITICAL ACCOUNTING POLICIES

The presentation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect many of the reported amounts and disclosures. Actual results could differ from these estimates.

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Allowance for Loan Losses – A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Business Combinations – We account for business combinations under the purchase method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets that are amortized, accreted or depreciated from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable.

Fair Value of Debt Securities – Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services.

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 2021 and 2020. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended September 30, 2021 and 2020

For the three-month periods, fully taxable equivalent net interest income was $19,751,000 in 2021, which was $216,000 (1.1%) higher than in 2020. Interest income in the third quarter was $21,365,000 which was $639,000 lower in 2021 as compared to 2020, while interest expense was lower by $855,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.59% in 2021 as compared to 3.57% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) increased to 3.46% in 2021 from 3.40% in 2020. The average yield on earning assets of 3.89% was 0.13% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.43% in 2021 was 0.19% lower.

Income from purchase accounting-related adjustments in the third quarter 2021 had a positive effect on net interest income of $563,000, including an increase in income on loans of $298,000 and net reductions in interest expense on time deposits and borrowed funds totaling $265,000. The positive impact to the third quarter 2021 net interest margin from purchase accounting adjustments was 0.10%. In comparison, the positive impact of purchase accounting adjustments to the third quarter 2020 net interest margin was $1,298,000, or 0.24%.

INTEREST INCOME AND EARNING ASSETS

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

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Interest and fees from loans receivable decreased $627,000 in 2021 as compared to 2020. Average outstanding loans receivable decreased $113,735,000 (6.7%) to $1,591,857,000 in 2021 from $1,705,592,000 in 2020, including a reduction in average PPP loans of $74,501,000. The average balance of other loans also decreased, as falling interest rates contributed to accelerated prepayments and demand for new commercial loans was muted over much of 2020 and 2021. In addition, the Corporation has sold an increased proportion of its residential mortgage loans into the secondary market over the past few years, which has helped to enhance noninterest income in 2020 and 2021 but has contributed to a net reduction in average outstanding loans.

The average yield on loans in the third quarter 2021 was 4.76%, up from 4.60% in the third quarter 2020. Although the average yield on taxable loans other than PPP loans fell to 4.70% in 2021 from 4.91% in 2020, and the average yield on tax-exempt loans fell to 2.90% in 2021 from 3.57% in 2020, the average yield on the total portfolio was affected by the comparatively high yield on PPP loans. Interest and fees on PPP loans totaled $1,639,000 in the third quarter 2021, an increase of $750,000 over the third quarter 2020, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

Interest income from available-for-sale debt securities decreased $35,000 in 2021 from 2020. Total average available-for-sale debt securities (at amortized cost) increased to $391,148,000 in 2021 from $321,541,000 in 2020. The average balance of taxable securities increased by $36,199,000, while the average balance of tax-exempt securities increased $33,408,000. The average yield on available-for-sale debt securities was 2.18% for 2021, down from 2.70% in 2020. The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates.

Income from interest-bearing due from banks totaled $106,000 in 2021, an increase of $37,000 from 2020. The average yield on interest-bearing due from banks was 0.22% in 2021 and 0.19% in 2020. Within this category, the largest asset balance in 2021 and 2020 has been interest-bearing deposits held with the Federal Reserve. The average balance of $195,359,000, or 9.0% of total average earning assets in the third quarter 2021, was up $47,816,000 from $147,543,000, or 6.8% of total average earning assets in the third quarter 2020. The levels of cash held at the Federal Reserve in both periods were significantly higher as compared to customary levels prior to the onset of the COVID-19 pandemic. Throughout most of 2020 and 2021, funds received from PPP and other loan repayments and increases in deposits have outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense decreased $855,000 to $1,614,000 in 2021 from $2,469,000 in 2020. Interest expense on deposits decreased $724,000, as the average rate on interest-bearing deposits decreased to 0.30% in 2021 from 0.50% in 2020. The decrease in average rates on deposits includes decreases of 0.32% on time deposits, 0.14% on money market accounts, 0.06% on interest checking accounts and 0.01% on saving accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 16.2% of average total deposits in the third quarter 2021 from 23.9% in the third quarter 2020.

Average total deposits increased $52,215,000 (2.8%) to $1,936,758,000 in the third quarter from $1,884,543,000 in 2020. The increase in average balance on deposits reflects PPP-related activity and funding from other government stimulus programs.

Interest expense on short-term borrowings in the third quarter 2021 was less than $1,000 as compared to $73,000 in 2020. The average balance of short-term borrowings decreased to $2,185,000 in 2021 from $44,660,000 in 2020. The average rate on short-term borrowings was 0.65% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $275,000 to $87,000 in 2021 from $362,000 in 2020. The average balance of long-term borrowings was $41,083,000 in 2021, down from an average balance of $102,857,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.84% in 2021 compared to 1.40% in 2020.

In May 2021, the Corporation issued unsecured senior notes with a total carrying value at issuance of $14,663,000, net of issuance costs. The senior notes were issued to provide funding at a relatively attractive cost for the holding company, Citizens & Northern Corporation. Interest expense on the senior notes totaled $118,000 in the third quarter 2021. The average balance of the senior notes was $14,674,000 in the third quarter of 2021 at an average rate of 3.19%.

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Interest expense on subordinated debt increased $99,000 to $346,000 in 2021 from $247,000 in 2020. The average balance of subordinated debt increased to $32,978,000 in 2021 from $16,540,000 in 2020, reflecting a new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021. The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026. If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity. The subordinated notes are a source of Tier 2 capital for the holding company. The average rate incurred on subordinated debt was 4.16% in 2021, down from 5.94% in 2020.

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

Nine-Month Periods Ended September 30, 2021 and 2020

For the nine-month periods, fully taxable equivalent net interest income was $59,056,000 in 2021, $10,532,000 (21.7%) higher than in 2020. Interest income was $8,073,000 higher in 2021 as compared to 2020, while interest expense was lower by $2,459,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.70% in 2021 as compared to 3.67% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.55% in 2021, up from 3.44% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and income from the PPP loan program.

Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the nine months ended September 30, 2021 of $2,228,000, including an increase in income on loans of $1,052,000 and net reductions in interest expense on time deposits and borrowed funds totaling $1,176,000. In comparision, the net positive impact on net interest income of purchase accounting adjustments was $1,999,000 in the nine-month period ended September 30, 2020. The net positive impact to the net interest margin from purchase accounting adjustments was 0.14% in the first nine months of 2021 as compared to 0.15% in the first nine months of 2020.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $64,088,000 in 2021, an increase of $8,073,000 from 2020. Interest and fees on loans receivable increased $8,296,000, or 16.8%, to $57,734,000 in 2021 from $49,438,000 in 2020. Table IV shows the increase in interest on loans includes an increase of $8,431,000 attributable to changes in volume and a decrease of $135,000 related to changes in average rates.

For the first nine months of 2021, average outstanding loans totaled $1,611,032,000, an increase of $241,296,000 (17.6%) over the comparative amount for the first nine months of 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as an increase in the average balance of PPP loans.

The fully taxable equivalent yield on loans in 2021 was 4.79% compared to 4.82% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before the acquisition. Similar to the third quarter comparision, the overall yield on loans in the nine-month period ended September 30, 2021 included the impact of the acceleration of fees recognized on PPP loans as repayments have been received from the SBA.  

Interest income on available-for-sale debt securities totaled $6,071,000 in 2021, a decrease of $254,000 from the total for 2020. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $364,452,000 in 2021, an increase of $36,935,000 from 2020. The average yield on available-for-sale debt securities decreased to 2.23% in 2021 from 2.58% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent, lower market rates.

For the nine-month periods, interest income from interest-bearing due from banks totaled $230,000 in 2021, an increase of $39,000 from $191,000 in 2020. The average balance increased $88,694,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average balance of interest-bearing due from

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

banks totaled 7.4% of average total earning assets for the nine months ended September 30, 2021 as compared to 3.9% in 2020. The average yield on interest-bearing due from banks was 0.20% in 2021 as compared to 0.37% in 2020, due to decreases in market rates.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense decreased $2,459,000 to $5,032,000 in 2021 from $7,491,000 in 2020. Table III shows that the overall cost of funds on interest-bearing liabilities decreased to 0.46% in 2021 from 0.79% in 2020. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. Table IV shows the reduction in interest expense related to changes in rate accounted for $2,912,000 of the decrease in expense, partially offset by an increase in expense of $453,000 attributable to volume.

For the nine-month period ended September 30, 2021, average total deposits increased $396,652,000 (26.5%) to $1,896,023,000 in 2021 from $1,499,371,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.34% in 2021 from 0.67% in 2020. The decrease in average rate on deposits includes decreases of 0.64% on time deposits, 0.15% on money market accounts, 0.09% on interest checking accounts and 0.03% on saving accounts. The average balance of time deposits fell to 17.9% of average total deposits in 2021 from 26.1% in 2020, further contributing to the reduction in average rate on deposits.

Interest expense on short-term borrowings decreased $313,000 to $22,000 in 2021 from $335,000 in 2020. The average balance of short-term borrowings decreased to $7,648,000 in 2021 from $36,492,000 in 2020. The average rate on short-term borrowings decreased to 0.38% in 2021 from 1.23% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $640,000 to $330,000 in 2021 from $970,000 in 2020. The average balance of long-term borrowings was $46,863,000 in 2021, down from an average balance of $80,030,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.94% in 2021 compared to 1.62% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings of $48,036,000 in December 2020.

Interest expense on the senior notes issued in May 2021 totaled $175,000 in 2021. The average balance of the senior notes was $7,255,000 in 2021 with an average rate of 3.23%.

Interest expense on subordinated debt increased $487,000 to $947,000 in 2021 from $460,000 in 2020. The average balance of subordinated debt increased to $25,539,000 in 2021 from $9,871,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.96% in 2021 from 6.22% in 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

Three Months Ended

Nine Months Ended

September 30, 

Increase/

.

September 30, 

Increase/

(In Thousands)

    

2021

    

2020

    

(Decrease)

    

2021

    

2020

    

(Decrease)

INTEREST INCOME

Interest-bearing due from banks

$

106

$

69

$

37

$

230

$

191

$

39

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

1,304

 

1,483

 

(179)

 

3,604

 

4,451

 

(847)

Tax-exempt

 

842

 

698

 

144

 

2,467

 

1,874

 

593

Total available-for-sale debt securities

 

2,146

 

2,181

 

(35)

 

6,071

 

6,325

 

(254)

Loans receivable:

 

 

 

 

 

 

Taxable

 

16,890

 

18,269

 

(1,379)

 

51,209

 

46,316

 

4,893

Paycheck Protection Program - 1st Draw

618

889

(271)

3,289

1,429

1,860

Paycheck Protection Program - 2nd Draw

1,021

0

1,021

1,597

0

1,597

Tax-exempt

 

568

 

566

 

2

 

1,639

 

1,693

 

(54)

Total loans receivable

 

19,097

 

19,724

 

(627)

 

57,734

 

49,438

 

8,296

Other earning assets

 

16

 

30

 

(14)

 

53

 

61

 

(8)

Total Interest Income

 

21,365

 

22,004

 

(639)

 

64,088

 

56,015

 

8,073

INTEREST EXPENSE

 

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

Interest checking

 

230

 

271

 

(41)

 

686

 

716

 

(30)

Money market

 

269

 

368

 

(99)

 

895

 

863

 

32

Savings

 

58

 

57

 

1

 

170

 

175

 

(5)

Time deposits

 

506

 

1,091

 

(585)

 

1,807

 

3,972

 

(2,165)

Total interest-bearing deposits

 

1,063

 

1,787

 

(724)

 

3,558

 

5,726

 

(2,168)

Borrowed funds:

 

 

 

 

 

 

Short-term

 

0

 

73

 

(73)

 

22

 

335

 

(313)

Long-term - FHLB advances

 

87

 

362

 

(275)

 

330

 

970

 

(640)

Senior notes, net

118

0

118

175

0

175

Subordinated debt, net

 

346

 

247

 

99

 

947

 

460

 

487

Total borrowed funds

 

551

 

682

 

(131)

 

1,474

 

1,765

 

(291)

Total Interest Expense

 

1,614

 

2,469

 

(855)

 

5,032

 

7,491

 

(2,459)

Net Interest Income

$

19,751

$

19,535

$

216

$

59,056

$

48,524

$

10,532

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%

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Table III - Analysis of Average Daily Balances and Rates

(Dollars in Thousands)

Three Months

Three Months

 

Nine Months

Nine Months

 

Ended

Rate of

Ended

Rate of

 

Ended

Rate of

Ended

Rate of

 

9/30/2021

Return/

9/30/2020

Return/

 

9/30/2021

Return/

9/30/2020

Return/

 

Average

Cost of

Average

Cost of

 

Average

Cost of

Average

Cost of

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

EARNING ASSETS

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing due from banks

$

195,359

 

0.22

%  

$

147,543

 

0.19

%

 

$

157,231

 

0.20

%  

$

68,537

 

0.37

%

Available-for-sale debt securities,

 

 

 

 

 

 

 

 

  

at amortized cost:

 

 

 

 

 

 

 

 

  

Taxable

263,682

 

1.96

%  

227,483

 

2.59

%

241,716

 

1.99

%  

245,487

 

2.42

%

Tax-exempt

 

127,466

 

2.62

%  

 

94,058

 

2.95

%

 

122,736

 

2.69

%  

 

82,030

 

3.05

%

Total available-for-sale debt securities

 

391,148

 

2.18

%  

 

321,541

 

2.70

%

 

364,452

 

2.23

%  

 

327,517

 

2.58

%

Loans receivable:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Taxable

 

1,426,503

 

4.70

%  

 

1,480,247

 

4.91

%

 

1,424,457

 

4.81

%  

 

1,228,521

 

5.04

%

Paycheck Protection Program - 1st Draw

19,625

12.49

%  

162,234

2.18

%

58,900

7.47

%  

80,322

2.38

%  

Paycheck Protection Program - 2nd Draw

68,108

5.95

%  

0

0.00

%

58,173

3.67

%  

0

0.00

%  

Tax-exempt

 

77,621

 

2.90

%  

 

63,111

 

3.57

%

 

69,502

 

3.15

%  

 

60,893

 

3.71

%

Total loans receivable

 

1,591,857

 

4.76

%  

 

1,705,592

 

4.60

%

 

1,611,032

 

4.79

%  

 

1,369,736

 

4.82

%

Other earning assets

 

2,355

 

2.70

%  

 

3,361

 

3.55

%

 

2,556

 

2.77

%  

 

2,346

 

3.47

%

Total Earning Assets

 

2,180,719

 

3.89

%  

 

2,178,037

 

4.02

%

 

2,135,271

 

4.01

%  

 

1,768,136

 

4.23

%

Cash

 

24,436

 

  

 

33,291

 

  

 

24,564

 

  

 

23,467

 

  

Unrealized gain on securities

 

12,411

 

  

 

15,277

 

  

 

11,831

 

  

 

12,021

 

  

Allowance for loan losses

 

(12,688)

 

  

 

(11,473)

 

  

 

(12,143)

 

  

 

(10,988)

 

  

Bank-owned life insurance

30,445

30,078

30,301

22,539

Bank premises and equipment

 

20,620

 

  

 

21,763

 

  

 

20,860

 

  

 

19,251

 

  

Intangible assets

 

56,021

 

  

 

57,008

 

  

 

56,153

 

  

 

38,786

 

  

Other assets

 

43,947

 

  

 

48,451

 

  

 

43,694

 

  

 

36,632

 

  

Total Assets

$

2,355,911

 

  

$

2,372,432

 

  

$

2,310,531

 

  

$

1,909,844

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

$

423,371

 

0.22

%  

$

382,997

 

0.28

%

$

389,349

 

0.24

%  

$

290,420

 

0.33

%

Money market

 

446,385

 

0.24

%  

 

386,848

 

0.38

%

 

428,985

 

0.28

%  

 

268,095

 

0.43

%

Savings

 

231,093

 

0.10

%  

 

201,401

 

0.11

%

 

224,050

 

0.10

%  

 

184,829

 

0.13

%

Time deposits

 

312,979

 

0.64

%  

 

449,964

 

0.96

%

 

339,558

 

0.71

%  

 

391,827

 

1.35

%

Total interest-bearing deposits

 

1,413,828

 

0.30

%  

 

1,421,210

 

0.50

%

 

1,381,942

 

0.34

%  

 

1,135,171

 

0.67

%

Borrowed funds:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Short-term

 

2,185

 

0.00

%  

 

44,660

 

0.65

%

 

7,648

 

0.38

%  

 

36,492

 

1.23

%

Long-term - FHLB advances

 

41,083

 

0.84

%  

 

102,857

 

1.40

%

 

46,863

 

0.94

%  

 

80,030

 

1.62

%

Senior notes, net

14,674

3.19

%

0

0.00

%

7,255

3.23

%

0

0.00

%

Subordinated debt, net

 

32,978

 

4.16

%  

 

16,540

 

5.94

%

 

25,539

 

4.96

%  

 

9,871

 

6.22

%

Total borrowed funds

 

90,920

 

2.40

%  

 

164,057

 

1.65

%

 

87,305

 

2.26

%  

 

126,393

 

1.87

%

Total Interest-bearing Liabilities

 

1,504,748

 

0.43

%  

 

1,585,267

 

0.62

%

 

1,469,247

 

0.46

%  

 

1,261,564

 

0.79

%

Demand deposits

 

522,930

 

  

 

463,333

 

  

 

514,081

 

  

 

364,200

 

  

Other liabilities

 

25,386

 

  

 

26,367

 

  

 

25,729

 

  

 

18,804

 

  

Total Liabilities

 

2,053,064

 

  

 

2,074,967

 

  

 

2,009,057

 

  

 

1,644,568

 

  

Stockholders' equity, excluding

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

other comprehensive income

 

292,936

 

  

 

285,158

 

  

 

292,017

 

  

 

255,545

 

  

Accumulated other comprehensive income

 

9,911

 

  

 

12,307

 

  

 

9,457

 

  

 

9,731

 

  

Total Stockholders' Equity

 

302,847

 

  

 

297,465

 

  

 

301,474

 

  

 

265,276

 

  

Total Liabilities and Stockholders' Equity

$

2,355,911

 

  

$

2,372,432

 

  

$

2,310,531

 

  

$

1,909,844

 

  

Interest Rate Spread

 

  

 

3.46

%  

 

  

 

3.40

%

 

  

 

3.55

%  

 

  

 

3.44

%

Net Interest Income/Earning Assets

 

  

 

3.59

%  

 

  

 

3.57

%

 

  

 

3.70

%  

 

  

 

3.67

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total Deposits (Interest-bearing

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

and Demand)

$

1,936,758

 

  

$

1,884,543

 

  

$

1,896,023

 

  

$

1,499,371

 

  

(1)Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2)Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
(3)Rates of return on earning assets and costs of funds are presented on an annualized basis.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)

Three Months Ended  9/30/21 vs. 9/30/20

.

Nine Months Ended  9/30/21 vs. 9/30/20

Change in

Change in

Total

 

Change in

Change in

Total

    

Volume

    

Rate

    

Change

 

Volume

    

Rate

    

Change

EARNING ASSETS

 

  

 

  

 

  

  

 

  

 

  

Interest-bearing due from banks

$

1

$

36

$

37

$

162

$

(123)

$

39

Available-for-sale debt securities:

 

 

 

 

 

 

Taxable

 

200

 

(379)

 

(179)

 

(67)

 

(780)

 

(847)

Tax-exempt

 

226

 

(82)

 

144

 

838

 

(245)

 

593

Total available-for-sale debt securities

 

426

 

(461)

 

(35)

 

771

 

(1,025)

 

(254)

Loans receivable:

 

  

 

  

 

 

 

 

Taxable

 

(677)

 

(702)

 

(1,379)

 

7,085

 

(2,192)

 

4,893

Paycheck Protection Program - 1st Draw

(1,356)

1,085

(271)

(472)

2,332

1,860

Paycheck Protection Program - 2nd Draw

1,021

0

1,021

1,597

0

1,597

Tax-exempt

 

123

 

(121)

 

2

 

221

 

(275)

 

(54)

Total loans receivable

 

(889)

 

262

 

(627)

 

8,431

 

(135)

 

8,296

Other earning assets

 

(7)

 

(7)

 

(14)

 

5

 

(13)

 

(8)

Total Interest Income

 

(469)

 

(170)

 

(639)

 

9,369

 

(1,296)

 

8,073

 

  

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

 

  

 

  

Interest checking

 

20

 

(61)

 

(41)

 

206

 

(236)

 

(30)

Money market

 

37

 

(136)

 

(99)

 

402

 

(370)

 

32

Savings

 

8

 

(7)

 

1

 

33

 

(38)

 

(5)

Time deposits

 

(402)

 

(183)

 

(585)

 

(475)

 

(1,690)

 

(2,165)

Total interest-bearing deposits

 

(337)

 

(387)

 

(724)

 

166

 

(2,334)

 

(2,168)

Borrowed funds:

 

 

 

 

 

 

Short-term

 

(53)

 

(20)

 

(73)

 

(168)

 

(145)

 

(313)

Long-term - FHLB advances

 

(180)

 

(95)

 

(275)

 

(318)

 

(322)

 

(640)

Senior notes, net

118

0

118

175

0

175

Subordinated debt, net

 

172

 

(73)

 

99

 

598

 

(111)

 

487

Total borrowed funds

 

57

 

(188)

 

(131)

 

287

 

(578)

 

(291)

Total Interest Expense

 

(280)

 

(575)

 

(855)

 

453

 

(2,912)

 

(2,459)

 

 

 

 

 

 

Net Interest Income

$

(189)

$

405

$

216

$

8,916

$

1,616

$

10,532

(1)Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
(2)The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE V – COMPARISON OF NONINTEREST INCOME

(Dollars in Thousands)

Three Months Ended

 

September 30, 

$

%

 

    

2021

2020

    

Change

Change

 

Trust revenue

$

1,821

$

1,595

$

226

14.2

%

Brokerage and insurance revenue

 

560

382

178

46.6

%

Service charges on deposit accounts

 

1,249

1,045

204

19.5

%

Interchange revenue from debit card transactions

 

975

828

147

17.8

%

Net gains from sales of loans

 

797

2,052

(1,255)

(61.2)

%

Loan servicing fees, net

 

153

(87)

240

N/M

Increase in cash surrender value of life insurance

 

139

159

(20)

(12.6)

%

Other noninterest income

 

665

996

(331)

(33.2)

%

Total noninterest income, excluding realized gains on securities, net

6,359

6,970

(611)

(8.8)

%

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

23

25

(2)

(8.0)

%

Total noninterest income

$

6,382

$

6,995

$

(613)

(8.8)

%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net in the third quarter 2021 decreased $611,000 (8.8%) from the third quarter 2020 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

$

%

 

    

2021

    

2020

    

Change

Change

 

Trust revenue

$

5,254

$

4,639

$

615

13.3

%

Brokerage and insurance revenue

 

1,392

 

1,121

271

24.2

%

Service charges on deposit accounts

 

3,337

 

3,126

211

6.7

%

Interchange revenue from debit card transactions

 

2,854

 

2,277

577

25.3

%

Net gains from sales of loans

 

2,786

 

3,931

(1,145)

(29.1)

%

Loan servicing fees, net

 

547

 

(259)

806

N/M

Increase in cash surrender value of life insurance

 

434

 

361

73

20.2

%

Other noninterest income

 

2,837

 

2,583

254

9.8

%

Total noninterest income, excluding realized gains on securities, net

 

19,441

 

17,779

1,662

9.3

%

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

 

25

 

25

0

0.0

%

Total noninterest income

$

19,466

$

17,804

$

1,662

9.3

%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net for the first nine months of 2021 increased $1,662,000 (9.3%) from the total for the first nine months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE

TABLE VI - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 Three Months Ended 

 

September 30, 

 $ 

 % 

 

 

2021

 

2020

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

9,427

    

$

8,703

    

$

724

    

8.3

%

Net occupancy and equipment expense

 

1,217

 

1,189

 

28

 

2.4

%

Data processing and telecommunications expense

 

1,475

 

1,482

 

(7)

 

(0.5)

%

Automated teller machine and interchange expense

 

357

 

340

 

17

 

5.0

%

Pennsylvania shares tax

 

482

 

422

 

60

 

14.2

%

Professional fees

 

538

 

422

 

116

 

27.5

%

Other noninterest expense

1,850

2,090

(240)

(11.5)

%

Total noninterest expense, excluding merger-related expenses

15,346

14,648

698

4.8

%

Merger-related expenses

0

6,402

(6,402)

(100.0)

%

Total noninterest expense

$

15,346

$

21,050

$

(5,704)

 

(27.1)

%

Total noninterest expense in the third quarter 2021 decreased $5,704,000 (27.1%) from the third quarter 2020 total. Excluding merger-related expenses from the third quarter 2020, total noninterest expense in the third quarter 2021 increased $698,000 (4.8%) from the third quarter 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

(Dollars in Thousands)

Nine Months Ended

 

September 30, 

 $ 

 % 

 

2021

2020

 Change 

 Change 

 

Salaries and employee benefits

    

$

27,821

    

$

23,064

    

$

4,757

    

20.6

%

Net occupancy and equipment expense

 

3,740

 

3,267

 

473

 

14.5

%

Data processing and telecommunications expense

 

4,342

 

3,959

 

383

 

9.7

%

Automated teller machine and interchange expense

 

1,049

 

912

 

137

 

15.0

%

Pennsylvania shares tax

 

1,463

 

1,267

 

196

 

15.5

%

Professional fees

 

1,683

 

1,265

 

418

 

33.0

%

Other noninterest expense

 

6,356

 

6,100

 

256

 

4.2

%

Total noninterest expense, excluding merger-related expenses

 

46,454

 

39,834

 

6,620

 

16.6

%

Merger-related expenses

 

0

 

7,526

 

(7,526)

 

(100.0)

%

Total noninterest expense

$

46,454

$

47,360

$

(906)

 

(1.9)

%

Total noninterest expense for the first nine months of 2021 decreased $906,000 (1.9%) from the total for the first nine months of 2020. Total noninterest expense for the first nine months of 2021 increased $6,620,000 (16.6%) from the total excluding merger-related expenses, for the first nine months of  2020. Changes of significance, including the impact of the Covenant acquisition that closed July 1, 2020, are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first nine months of 2021 was $5,456,000, which was $2,947,000 higher than the provision for the first nine months of 2020. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.0% in the first nine months of 2021 compared to 16.8% in the first nine months of 2020. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The higher effective tax rate in the first nine months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2021 and December 31, 2020 represents the following temporary difference components:

    

September 30, 

    

December 31, 

(In Thousands)

2021

2020

Deferred tax assets:

 

  

 

  

Allowance for loan losses

$

2,678

$

2,154

Purchase accounting adjustments on loans

 

1,713

 

1,930

Net operating loss carryforward

807

896

Operating leases liability

 

846

 

724

Other deferred tax assets

 

3,102

 

3,089

Total deferred tax assets

 

9,146

 

8,793

 

  

 

  

Deferred tax liabilities:

 

  

 

  

Unrealized holding gains on securities

 

1,674

 

3,104

Defined benefit plans - ASC 835

 

28

 

32

Bank premises and equipment

 

492

 

1,216

Core deposit intangibles

 

754

 

840

Right-of-use assets from operating leases

 

846

 

724

Other deferred tax liabilities

 

224

 

172

Total deferred tax liabilities

 

4,018

 

6,088

Deferred tax asset, net

$

5,128

$

2,705

In connection with the Covenant merger, the Corporation received a net operating loss (“NOL”) available to be carried forward against federal taxable income of $4.6 million. Availability of the NOL does not expire; however, the amount that may be offset against taxable income is limited to approximately $563,000 per year and further limited annually to no more than 80% of taxable income without regard to the NOL. At December 31, 2020, the unused amount of the NOL was $4.3 million.

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income.

Management believes the recorded net deferred tax asset at September 30, 2021 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at September 30, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021.

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Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2021, gross loans outstanding totaled $1,575,708,000, a decrease of $68,501,000 from December 31, 2020, including a reduction in PPP loans of $69,541,000 due to repayments and a net reduction in residential mortgage loans of $41,309,000. The net reduction in loans outstanding over the past 9 months reflects the impact of high levels of loan prepayments consistent with low interest rates and a high proportion of new mortgage loans being sold into the secondary market. Excluding PPP loans, total commercial loans at September 30, 2021 were up $41,099,000 from December 31, 2020. At September 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio.  

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $57,918,000 at September 30, 2021, down from $65,741,000 at December 31, 2020. At September 30, 2021, the balance of participation loans outstanding includes a total of $33,530,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,565,000 at September 30, 2021 and $8,437,000 at December 31, 2020.

The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through September 30, 2021, the Corporation’s activity under the MPF Direct Program has been minimal.

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At September 30, 2021, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,584,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000.

At September 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $328,659,000, including loans sold through the MPF Xtra program of $167,914,000 and loans sold through the Original program of $160,745,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, 2021 and December 31, 2020.

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At September 30, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,273,000, and the Corporation has recorded a related allowance for credit losses in the amount of $550,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(included in other noninterest income in the consolidated statements of income) totaled $265,000 for the nine months ended September 30, 2021 and $107,000 for the nine months ended September 30, 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the nine months ended September 30, 2021 with a provision for losses of $29,000 in the nine months ended September 30, 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $11,458,000 at September 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $485,000 at September 30, 2021 and $730,000 at December 31, 2020. In the nine months ended September 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $208,000 representing amounts realized on SBA claims in excess of prior estimates.

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

September 30, 

December 31, 

    

2021

    

2020

    

2019

    

2018

    

2017

    

2016

Commercial:

 

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

553,389

$

531,810

$

301,227

$

162,611

$

159,266

$

150,468

Commercial and industrial

 

152,244

 

159,577

 

126,374

 

91,856

 

88,276

 

83,854

Paycheck Protection Program - 1st Draw

5,747

132,269

0

0

0

0

Paycheck Protection Program - 2nd Draw

56,981

0

0

0

0

0

Political subdivisions

 

73,503

 

53,221

 

53,570

 

53,263

 

59,287

 

38,068

Commercial construction and land

 

53,267

 

42,874

 

33,555

 

11,962

 

14,527

 

14,287

Loans secured by farmland

 

10,812

 

11,736

 

12,251

 

7,146

 

7,255

 

7,294

Multi-family (5 or more) residential

 

52,962

 

55,811

 

31,070

 

7,180

 

7,713

 

7,896

Agricultural loans

 

3,092

 

3,164

 

4,319

 

5,659

 

6,178

 

3,998

Other commercial loans

 

17,312

 

17,289

 

16,535

 

13,950

 

10,986

 

11,475

Total commercial

 

979,309

 

1,007,751

 

578,901

 

353,627

 

353,488

 

317,340

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

494,376

532,947

510,641

372,339

$

359,987

334,102

Residential mortgage loans - junior liens

 

24,303

 

27,311

 

27,503

 

25,450

 

25,325

 

23,706

Home equity lines of credit

 

38,465

 

39,301

 

33,638

 

34,319

 

35,758

 

38,057

1-4 Family residential construction

 

21,719

 

20,613

 

14,798

 

24,698

 

26,216

 

24,908

Total residential mortgage

 

578,863

 

620,172

 

586,580

 

456,806

 

447,286

 

420,773

Consumer

 

17,536

 

16,286

 

16,741

 

17,130

 

14,939

 

13,722

Total

 

1,575,708

 

1,644,209

 

1,182,222

 

827,563

 

815,713

 

751,835

Less: allowance for loan losses

 

(12,700)

 

(11,385)

 

(9,836)

 

(9,309)

 

(8,856)

 

(8,473)

Loans, net

$

1,563,008

$

1,632,824

$

1,172,386

$

818,254

$

806,857

$

743,362

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

The allowance for loan losses was $12,700,000 at September 30, 2021, up from $11,385,000 at December 31, 2020. Table IX shows total specific allowances on impaired loans decreased $42,000 to $883,000 at September 30, 2021 from $925,000 at December 31, 2020. Table IX also shows the increase in the allowance in 2021 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $6,689,000 at September 30, 2021 from $5,545,000 at December 31, 2020.

Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,324,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $3,482,000 at September 30, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.  

Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $300,000 at September 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $354,000 at September 30, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Table X shows the allowance for loan losses totaled 0.81% of gross loans outstanding at September 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at September 30, 2021, in line with ratios from the previous years.

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

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands)

    

2021

2020

 

2021

    

2020

    

Commercial

$

1,503

$

1,990

$

2,297

$

3,184

Residential mortgage

3

(66)

112

67

Consumer

 

24

 

17

 

38

 

42

Unallocated

 

0

 

0

 

86

 

0

Total

$

1,530

$

1,941

$

2,533

$

3,293

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The provision (credit) for loan losses is further detailed as follows:

Commercial segment

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands)

    

2021

2020

 

2021

    

2020

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

$

596

$

908

$

1,154

$

1,949

Increase in collectively determined portion of the allowance attributable to:

 

  

 

  

Changes in loan volume

568

194

 

1,061

 

84

Changes in historical loss experience factors

339

848

 

82

 

841

Changes in qualitative factors

0

40

 

0

 

310

Total provision for loan losses - Commercial segment

$

1,503

$

1,990

$

2,297

$

3,184

Residential mortgage segment

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands)

    

2021

2020

 

2021

    

2020

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

$

(2)

$

(21)

$

(17)

$

(38)

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

 

  

 

  

Changes in loan volume

11

(87)

 

222

 

(227)

Changes in historical loss experience factors

(6)

0

 

(48)

 

(82)

Changes in qualitative factors

0

42

 

(45)

 

414

Total provision (credit) for loan losses - Residential mortgage segment

$

3

$

(66)

$

112

$

67

Consumer segment

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

(In Thousands)

    

2021

2020

 

2021

    

2020

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

$

17

$

22

$

39

$

65

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

 

  

 

  

Changes in loan volume

9

12

 

13

 

(10)

Changes in historical loss experience factors

(7)

(14)

 

(15)

 

(14)

Changes in qualitative factors

5

(3)

 

1

 

1

Total provision for loan losses - Consumer segment

$

24

$

17

$

38

$

42

Total - All segments

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

September 30, 

September 30, 

(In Thousands)

    

2021

2020

2021

2020

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

$

611

$

909

 

$

1,176

$

1,976

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

 

  

 

  

Changes in loan volume

588

119

 

1,296

 

(153)

Changes in historical loss experience factors

326

834

 

19

 

745

Changes in qualitative factors

5

79

 

(44)

 

725

Sub-total

1,530

1,941

 

2,447

 

3,293

Unallocated

0

0

 

86

 

0

Total provision for loan losses - All segments

$

1,530

$

1,941

$

2,533

$

3,293

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For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.

In the tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase or reduction in loans outstanding (excluding purchased loans and loans specifically evaluated for impairment) for the period.

The effect on the provision of changes in historical loss experience and qualitative factors, as shown in the tables above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the period as compared to the preceding period, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding period (excluding loans specifically evaluated for impairment).

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

In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. There was a specific allowance for loan losses of $583,000 on this commercial loan at June 30, 2021, with no specific allowance at December 31, 2020. At September 30, 2021, there was no specific allowance on the loan, and the Corporation’s recorded investment in the loan of $2,302,000 is reported as non-accrual and impaired.

In the third quarter 2020, the Corporation recorded a charge-off of $2,219,000 on a commercial loan for which an allowance of $1,193,000 had been recorded at June 30, 2020 but for which there was no specific allowance at December 31, 2019. The Corporation had no recorded investment in this loan at September 30, 2021 and December 31, 2020.

In the three months ended September 30, 2021, net charge-offs were $1,205,000, including recoveries of $15,000 and charge-offs of $1,220,000. For the nine months ended September 30, 2021, net charge-offs were $1,218,000 including recoveries of $60,000 and charge-offs of $1,278,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.08% in the nine months ended September 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.48% at September 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.05% at September 30, 2021, down from 1.10% at December 31, 2020. Table X presents data at the end of each of the years ended December 31, 2016 through 2020. Table X shows that total nonperforming loans as a percentage of loans of 1.48% at September 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the September 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.05% was lower than the corresponding ratio from 2016 through 2018.

Total impaired loans of $18,014,000 at September 30, 2021 are up $196,000 from the corresponding amount at December 31, 2020 of $17,818,000. Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020. Table X shows that the total balance of impaired loans at September 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020. Similarly, total nonperforming assets of $24,639,000 at September 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition.

As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,139,000 at September 30, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,775,000 at September 30, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status

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

Over the period 2016-2020 and the first nine months of 2021, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars In Thousands)

Nine Months Ended

 

September 30, 

September 30, 

Years Ended December 31, 

    

2021

    

2020

  

  

2020

    

2019

    

2018

    

2017

    

2016

 

Balance, beginning of year

$

11,385

$

9,836

$

9,836

$

9,309

$

8,856

$

8,473

$

7,889

Charge-offs:

 

 

 

  

 

  

 

  

 

  

 

  

Commercial

 

(1,194)

 

(2,343)

 

(2,343)

 

(6)

 

(165)

 

(132)

 

(597)

Residential mortgage

 

(11)

 

0

 

0

 

(190)

 

(158)

 

(197)

 

(73)

Consumer

 

(73)

 

(100)

 

(122)

 

(183)

 

(174)

 

(150)

 

(87)

Total charge-offs

 

(1,278)

 

(2,443)

 

(2,465)

 

(379)

 

(497)

 

(479)

 

(757)

Recoveries:

 

 

 

  

 

  

 

  

 

  

 

  

Commercial

 

22

 

0

 

16

 

6

 

317

 

4

 

35

Residential mortgage

 

5

 

32

 

44

 

12

 

8

 

19

 

3

Consumer

 

33

 

35

 

41

 

39

 

41

 

38

 

82

Total recoveries

 

60

 

67

 

101

 

57

 

366

 

61

 

120

Net charge-offs

 

(1,218)

 

(2,376)

 

(2,364)

 

(322)

 

(131)

 

(418)

 

(637)

Provision for loan losses

 

2,533

 

3,293

 

3,913

 

849

 

584

 

801

 

1,221

Balance, end of period

$

12,700

$

10,753

$

11,385

$

9,836

$

9,309

$

8,856

$

8,473

Net charge-offs as a % of average loans

 

0.08

%  

 

0.17

%  

 

0.16

%  

 

0.03

%  

 

0.02

%  

 

0.05

%  

 

0.09

%

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

September 30, 

As of December 31, 

    

2021

    

2020

    

2019

    

2018

    

2017

    

2016

ASC 310 - Impaired loans

$

883

$

925

$

1,051

$

1,605

$

1,279

$

674

ASC 450 - Collective segments:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

6,689

 

5,545

 

3,913

 

3,102

 

3,078

 

3,373

Residential mortgage

 

4,220

 

4,091

 

4,006

 

3,870

 

3,841

 

3,890

Consumer

 

237

 

239

 

281

 

233

 

159

 

138

Unallocated

 

671

 

585

 

585

 

499

 

499

 

398

Total Allowance

$

12,700

$

11,385

$

9,836

$

9,309

$

8,856

$

8,473

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(Dollars In Thousands)

September 30, 

As of December 31, 

 

    

2021

    

2020

    

2019

    

2018

    

2017

    

2016

 

Impaired loans with a valuation allowance

$

7,225

$

8,082

$

3,375

$

4,851

$

4,100

$

3,372

Impaired loans without a valuation allowance

 

4,165

 

2,895

 

1,670

 

4,923

 

5,411

 

7,488

Purchased credit impaired loans

6,624

6,841

441

0

0

0

Total impaired loans

$

18,014

$

17,818

$

5,486

$

9,774

$

9,511

$

10,860

Total loans past due 30-89 days and still accruing

$

2,139

$

5,918

$

8,889

$

7,142

$

9,449

$

7,735

Nonperforming assets:

 

 

  

 

  

 

  

 

  

 

  

Purchased credit impaired loans

$

6,624

$

6,841

$

441

$

0

$

0

$

0

Other nonaccrual loans

14,717

14,575

8,777

13,113

13,404

8,736

Total nonaccrual loans

21,341

21,416

9,218

13,113

13,404

8,736

Total loans past due 90 days or more and still accruing

 

1,924

 

1,975

 

1,207

 

2,906

 

3,724

 

6,838

Total nonperforming loans

 

23,265

 

23,391

 

10,425

 

16,019

 

17,128

 

15,574

Foreclosed assets held for sale (real estate)

 

1,374

 

1,338

 

2,886

 

1,703

 

1,598

 

2,180

Total nonperforming assets

$

24,639

$

24,729

$

13,311

$

17,722

$

18,726

$

17,754

Loans subject to troubled debt restructurings (TDRs):

 

 

  

 

  

 

  

 

  

 

  

Performing

$

232

$

166

$

889

$

655

$

636

$

5,803

Nonperforming

 

5,591

 

7,285

 

1,737

 

2,884

 

3,027

 

2,874

Total TDRs

$

5,823

$

7,451

$

2,626

$

3,539

$

3,663

$

8,677

Total nonperforming loans as a % of loans

 

1.48

%  

 

1.42

%  

 

0.88

%  

 

1.94

%  

 

2.10

%  

 

2.07

%

Total nonperforming assets as a % of assets

 

1.05

%  

 

1.10

%  

 

0.80

%  

 

1.37

%  

 

1.47

%  

 

1.43

%

Allowance for loan losses as a % of total loans

 

0.81

%  

 

0.69

%  

 

0.83

%  

 

1.12

%  

 

1.09

%  

 

1.13

%

Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)

1.05

%  

1.05

%  

0.93

%  

1.12

%  

1.09

%  

1.13

%

Allowance for loan losses as a % of nonperforming loans

 

54.59

%  

 

48.67

%  

 

94.35

%  

 

58.11

%  

 

51.70

%  

 

54.40

%

(a) Credit adjustment on purchased non-impaired loans at end of period

$

3,836

$

5,979

$

1,216

$

0

$

0

$

0

Allowance for loan losses

12,700

11,385

9,836

9,309

8,856

8,473

Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)

$

16,536

$

17,364

$

11,052

$

9,309

$

8,856

$

8,473

Total loans receivable

$

1,575,708

$

1,644,209

$

1,182,222

$

827,563

$

815,713

$

751,835

Credit adjustment on purchased non-impaired loans at end of period

3,836

5,979

1,216

0

0

0

Total (2)

$

1,579,544

$

1,650,188

$

1,183,438

$

827,563

$

815,713

$

751,835

Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)

1.05

%  

1.05

%  

0.93

%  

1.12

%  

1.09

%  

1.13

%  

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At September 30, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $163,565,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.

The Corporation maintains overnight borrowing facilities with several correspondent banks that provide a source of day-to-day liquidity. Also, the Corporation maintains borrowing facilities with the Federal Home Loan Bank of Pittsburgh, secured by various mortgage loans.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $14,936,000 at September 30, 2021.

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

Outstanding

Available

Total Credit

(In Thousands)

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

    

September 30, 

    

December 31, 

2021

2020

2021

2020

2021

2020

Federal Home Loan Bank of Pittsburgh

$

43,835

$

72,222

$

709,012

$

698,977

$

752,847

$

771,199

Federal Reserve Bank Discount Window

 

0

 

0

 

14,482

 

14,654

 

14,482

 

14,654

Other correspondent banks

 

0

 

0

 

45,000

 

45,000

 

45,000

 

45,000

Total credit facilities

$

43,835

$

72,222

$

768,494

$

758,631

$

812,329

$

830,853

At September 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $38,251,000 and letters of credit totaling $5,584,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At September 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $214,072,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2021; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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Details concerning capital ratios at September 30, 2021 and December 31, 2020 are presented below. Management believes, as of September 30, 2021, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, 2021 and December 31, 2020 exceed the Corporation’s Board policy threshold levels.

(Dollars in Thousands)

Minimum To Be

 

Minimum To Maintain

Well

 

Minimum

Capital Conservation

Capitalized Under

Minimum To Meet

 

Capital

Buffer at Reporting

Prompt Corrective

the Corporation's

 

Actual

Requirement

Date

Action Provisions

Policy Thresholds

 

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

September 30, 2021:

  

  

  

  

  

  

  

  

  

  

 

Total capital to risk-weighted assets:

  

  

  

  

  

  

  

  

  

  

 

Consolidated

$

283,197

18.57

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

160,164

≥10.5

%

C&N Bank

 

248,651

 

16.35

%  

121,688

 

≥8

%

159,716

 

≥10.5

%

152,110

 

≥10

%

159,716

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

 

 

 

 

 

  

 

 

  

 

 

  

Consolidated

 

236,959

 

15.53

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

129,657

 

≥8.5

%

C&N Bank

 

235,401

 

15.48

%  

91,266

 

≥6

%

129,294

 

≥8.5

%

121,688

 

≥8

%

129,294

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

  

Consolidated

 

236,959

 

15.53

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

106,776

 

≥7

%

C&N Bank

 

235,401

 

15.48

%  

68,450

 

≥4.5

%

106,477

 

≥7.0

%

98,872

 

≥6.5

%

106,477

 

≥7

%

Tier 1 capital to average assets:

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

236,959

 

10.34

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

183,266

 

≥8

%

C&N Bank

 

235,401

 

10.35

%  

90,961

 

≥4

%

N/A

 

N/A

 

113,702

 

≥5

%

181,923

 

≥8

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2020:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

260,015

 

17.49

%  

N/A

 

N/A

N/A

 

N/A

 

N/A

 

N/A

$

156,113

 

≥10.5

%

C&N Bank

 

236,943

 

15.98

%  

118,602

 

≥8

%

155,665

 

≥10.5

%

148,252

 

≥10

%

 

155,665

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

231,577

 

15.58

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

126,377

 

≥8.5

%

C&N Bank

 

225,058

 

15.18

%  

88,951

 

≥6

%

126,015

 

≥8.5

%

118,602

 

≥8

%

 

126,015

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

231,577

 

15.58

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

104,075

 

≥7

%

C&N Bank

 

225,058

 

15.18

%  

66,714

 

≥4.5

%

103,777

 

≥7.0

%

96,364

 

≥6.5

%

 

103,777

 

≥7

%

Tier 1 capital to average assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

231,577

 

10.34

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

179,206

 

≥8

%

C&N Bank

 

225,058

 

10.12

%  

88,959

 

≥4

%

N/A

 

N/A

 

111,199

 

≥5

%

 

177,919

 

≥8

%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. In the third quarter 2021, 230,404 shares were repurchased for a total cost of $5,707,000, at an average price of $24.77 per share. Cumulatively through September 30, 2021, 292,100 shares have been repurchased for a total cost of $7,238,000, at an average price of $24.78 per share.

Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities.  Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.

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To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, 2021, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:

Minimum common equity tier 1 capital ratio

    

4.5

%

Minimum common equity tier 1 capital ratio plus capital conservation buffer

 

7.0

%

Minimum tier 1 capital ratio

 

6.0

%

Minimum tier 1 capital ratio plus capital conservation buffer

 

8.5

%

Minimum total capital ratio

 

8.0

%

Minimum total capital ratio plus capital conservation buffer

 

10.5

%

A banking organization with a buffer greater than 2.5% over the minimum risk-based capital ratios would not be subject to additional limits on dividend payments or discretionary bonus payments; however, a banking organization with a buffer less than 2.5% would be subject to increasingly stringent limitations as the buffer approaches zero. Also, a banking organization is prohibited from making dividend payments or discretionary bonus payments if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% as of the beginning of that quarter. Eligible net income is defined as net income for the four calendar quarters preceding the current calendar quarter, net of any distributions and associated tax effects not already reflected in net income. A summary of payout restrictions based on the capital conservation buffer is as follows:

Capital Conservation Buffer

    

Maximum Payout

 

(as a % of risk-weighted assets)

(as a % of eligible retained income)

 

Greater than 2.5%

No payout limitation applies

≤2.5% and >1.875%

60

%

≤1.875% and >1.25%

40

%

≤1.25% and >0.625%

20

%

≤0.625%

0

%

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

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale debt securities, net of deferred income tax, amounted to $6,300,000 at September 30, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity.  If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at September 30, 2021.

ITEM 4. CONTROLS AND PROCEDURES

The Corporation’s management, under the supervision of and with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has carried out an evaluation of the design and effectiveness of the Corporation’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective to ensure that all material information required to be disclosed in reports the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PART II – OTHER INFORMATION

Item 1.       Legal Proceedings

The Corporation and C&N Bank are involved in various legal proceedings incidental to their business. Management believes the aggregate liability, if any, resulting from such pending and threatened legal proceedings will not have a material, adverse effect on the Corporation’s financial condition or results of operations.

Item 1A.    Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed March 5, 2021.

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. As of September 30, 2021, 292,100 shares have been repurchased under the repurchase program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that:  (1) the treasury stock repurchase program, as amended to increase the repurchase authorization to 1,000,000 shares, shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Company's Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.

The following table sets forth a summary of the purchases by the Corporation of its common stock during the third quarter 2021.

    

    

    

Total Number of

    

Maximum

Shares

Number of

Purchased

Shares that May

as Part of

Yet

Publicly

be Purchased

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

July 1 - 31, 2021

 

103,555

$

24.82

 

165,251

 

834,749

August 1 - 31, 2021

 

62,993

$

24.89

 

228,244

 

771,756

September 1 - 30, 2021

 

63,856

$

24.56

 

292,100

 

707,900

Item 3.       Defaults Upon Senior Securities

None

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Item 4.       Mine Safety Disclosures

Not applicable

Item 5.       Other Information

None

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6.       Exhibits

2.

Plan of acquisition, reorganization, arrangement, liquidation or succession:

    

 

 

 

2.1

Agreement and Plan of Merger dated September 27, 2018,  between the Corporation and Monument Bancorp, Inc.

 

Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018

 

 

2.2

Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.

 

Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019

 

3.

(i) Articles of Incorporation

 

Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009

 

 

3.

(ii) By-laws

 

Incorporated by reference to Exhibit 3.1(ii) of The Corporation’s Form S-4/A filed April 20, 2020

 

 

4.

Instruments defining the rights of Security holders, including Indentures

 

 

 

4.1

Indenture, dated May 19, 2021 between Citizens & Northern Corporation and UMB Bank, National Association, as trustee

Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.2

Form of Subordinated Note

Incorporated by reference to Exhibit A-2 to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

4.3

Form of Senior Note

Incorporated by reference to Exhibit 4.3 of the Corporation’s Form 8-K filed May 19, 2021

10.

Material contracts

 

10.1

Indemnification Agreement dated July 12, 2021 between the Corporation and Kate Shattuck

 

Filed herewith

10.2

Form of Subordinated Note Purchase Agreement

Incorporated by reference to Exhibit 10.1 of the Corporation’s Form 8-K filed May 19, 2021

10.3

Form of Registration Rights Agreement

Incorporated by reference to Exhibit 10.2 of the Corporation’s Form 8-K filed May 19, 2021

10.4

Form of Senior Note Purchase Agreement

Incorporated by reference to Exhibit 10.3 of the Corporation’s Form 8-K filed May 19, 2021

15.

Letter re: unaudited interim information

 

Not applicable

 

 

18.

Letter re: change in accounting principles

 

Not applicable

 

 

22.

Published report regarding matters submitted to vote of security holders

 

Not applicable

 

 

23.

Consents of experts and counsel

 

Not applicable

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24.

Power of attorney

 

Not applicable

 

 

31.

Rule 13a-14(a)/15d-14(a) certifications:

 

 

31.1

Certification of Chief Executive Officer

 

Filed herewith

31.2

Certification of Chief Financial Officer

 

Filed herewith

 

 

 

32.

Section 1350 certifications

 

Filed herewith

 

 

 

99.

Additional exhibits

 

Not applicable

 

 

 

100.

XBRL-related documents

 

Not applicable

 

 

 

101.

Interactive data file

 

Filed herewith

 

 

 

104.

Cover page interactive data file

 

Filed herewith

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

CITIZENS & NORTHERN CORPORATION

 

 

 

 

 

November 8, 2021

 

By: /s/ J. Bradley Scovill

Date

 

President and Chief Executive Officer

 

 

 

 

 

 

 

November 8, 2021

 

By: /s/ Mark A. Hughes

Date

 

Treasurer and Chief Financial Officer

 

 

73