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CITIZENS & NORTHERN CORP - Quarter Report: 2022 March (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 March 31, 2022

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)

15,605,135 Shares Outstanding on May 4, 2022

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) – March 31, 2022 and December 31, 2021

Page 3

 

 

Consolidated Statements of Income (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021

Page 4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021

Page 5

 

 

Consolidated Statements of Cash Flows (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021

Page 6

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month Periods March 31, 2022 and 2021

Page 7

 

 

Notes to Unaudited Consolidated Financial Statements

Pages 8 – 33

 

 

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

Pages 34 – 55

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Pages 55 – 57

Item 4. Controls and Procedures

Page 57

 

 

Part II. Other Information

Pages 57 – 59

 

 

Signatures

Page 60

2

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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

    

March 31, 

    

December 31, 

2022

2021

ASSETS

 

  

 

  

Cash and due from banks:

 

  

 

  

Noninterest-bearing

$

19,471

$

16,729

Interest-bearing

 

94,875

 

88,219

Total cash and due from banks

 

114,346

 

104,948

Available-for-sale debt securities, at fair value

 

532,913

 

517,679

Loans receivable

 

1,538,190

 

1,564,849

Allowance for loan losses

 

(14,271)

 

(13,537)

Loans, net

 

1,523,919

 

1,551,312

Bank-owned life insurance

 

30,804

 

30,669

Accrued interest receivable

 

7,507

 

7,235

Bank premises and equipment, net

 

21,169

 

20,683

Foreclosed assets held for sale

 

531

 

684

Deferred tax asset, net

 

11,818

 

5,887

Goodwill

 

52,505

 

52,505

Core deposit intangibles, net

 

3,206

 

3,316

Other assets

 

31,653

 

32,730

TOTAL ASSETS

$

2,330,371

$

2,327,648

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

552,255

$

521,206

Interest-bearing

 

1,408,697

 

1,403,854

Total deposits

 

1,960,952

 

1,925,060

Short-term borrowings

 

2,357

 

1,803

Long-term borrowings - FHLB advances

 

20,581

 

28,042

Senior notes, net

14,717

14,701

Subordinated debt, net

 

33,031

 

33,009

Accrued interest and other liabilities

 

22,525

 

23,628

TOTAL LIABILITIES

 

2,054,163

 

2,026,243

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 15,718,723 at March 31, 2022;

 

 

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

 

16,030

 

16,030

Paid-in capital

 

142,991

 

144,453

Retained earnings

 

145,073

 

142,612

Treasury stock, at cost; 311,449 shares at March 31, 2022 and 271,082

 

 

shares at December 31, 2021

 

(7,708)

 

(6,716)

Accumulated other comprehensive (loss) income

 

(20,178)

 

5,026

TOTAL STOCKHOLDERS' EQUITY

 

276,208

 

301,405

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$

2,330,371

$

2,327,648

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

March 31, 

March 31, 

2022

2021

INTEREST INCOME

 

  

 

  

Interest and fees on loans:

 

  

 

  

Taxable

$

18,549

$

19,491

Tax-exempt

 

454

 

439

Income from available-for-sale debt securities:

 

 

Taxable

 

1,969

 

1,113

Tax-exempt

 

722

 

642

Other interest and dividend income

 

79

 

69

Total interest and dividend income

 

21,773

 

21,754

INTEREST EXPENSE

 

  

 

Interest on deposits

 

910

 

1,278

Interest on short-term borrowings

 

1

 

15

Interest on long-term borrowings - FHLB advances

 

49

 

134

Interest on senior notes, net

 

118

0

Interest on subordinated debt, net

 

363

 

244

Total interest expense

 

1,441

 

1,671

Net interest income

 

20,332

 

20,083

Provision for loan losses

 

891

 

259

Net interest income after provision for loan losses

 

19,441

 

19,824

NONINTEREST INCOME

 

  

 

  

Trust revenue

 

1,786

 

1,626

Brokerage and insurance revenue

 

522

 

326

Service charges on deposit accounts

 

1,235

 

1,015

Interchange revenue from debit card transactions

 

963

 

881

Net gains from sale of loans

 

382

 

1,064

Loan servicing fees, net

 

210

 

248

Increase in cash surrender value of life insurance

 

135

 

150

Other noninterest income

 

588

 

1,472

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

2

0

Total noninterest income

 

5,823

 

6,782

NONINTEREST EXPENSE

 

 

Salaries and employee benefits

10,607

8,895

Net occupancy and equipment expense

1,411

1,304

Data processing and telecommunications expense

1,623

1,380

Automated teller machine and interchange expense

 

384

 

337

Pennsylvania shares tax

 

488

 

491

Professional fees

 

489

 

547

Other noninterest expense

 

1,884

 

2,755

Total noninterest expense

 

16,886

 

15,709

Income before income tax provision

 

8,378

 

10,897

Income tax provision

 

1,483

 

2,110

NET INCOME

$

6,895

$

8,787

EARNINGS PER COMMON SHARE - BASIC

$

0.44

$

0.55

EARNINGS PER COMMON SHARE - DILUTED

$

0.44

$

0.55

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive (Loss) Income

(In Thousands) (Unaudited)

    

Three Months Ended

March 31, 

March 31, 

 

2022

    

2021

Net income

$

6,895

$

8,787

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

(32,025)

(6,114)

Reclassification adjustment for (gains) realized in income

(2)

0

Other comprehensive loss on available-for-sale debt securities

(32,027)

(6,114)

Unfunded pension and postretirement obligations:

 

 

Changes from plan amendments and actuarial gains and losses

 

133

 

(5)

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

 

(11)

 

(4)

Other comprehensive income (loss) on pension and postretirement obligations

 

122

 

(9)

Other comprehensive loss before income tax

 

(31,905)

 

(6,123)

Income tax related to other comprehensive loss

 

6,701

 

1,287

Net other comprehensive loss

 

(25,204)

 

(4,836)

Comprehensive (loss) income

$

(18,309)

$

3,951

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

Three Months Ended

March 31, 

March 31, 

2022

    

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

6,895

$

8,787

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

 

 

Provision for loan losses

 

891

 

259

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

 

(2)

 

0

Net amortization of securities

714

488

Increase in cash surrender value of life insurance

 

(135)

 

(150)

Depreciation and amortization of bank premises and equipment

 

507

 

553

Net accretion of purchase accounting adjustments

 

(340)

 

(818)

Stock-based compensation

 

368

 

341

Deferred income taxes

 

770

 

462

Increase in fair value of servicing rights

 

(2)

 

(75)

Gains on sales of loans, net

 

(382)

 

(1,064)

Origination of loans held for sale

 

(14,752)

 

(32,478)

Proceeds from sales of loans held for sale

 

13,661

 

30,727

Increase in accrued interest receivable and other assets

 

(963)

 

(2,190)

(Decrease) increase in accrued interest payable and other liabilities

 

(1,663)

 

891

Other

 

81

 

(20)

Net Cash Provided by Operating Activities

 

5,648

 

5,713

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Purchase of certificates of deposit

0

(1,250)

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

 

18,746

 

17,093

Purchase of available-for-sale debt securities

 

(62,949)

 

(34,494)

Redemption of Federal Home Loan Bank of Pittsburgh stock

 

337

 

584

Purchase of Federal Home Loan Bank of Pittsburgh stock

 

(282)

 

(473)

Net decrease in loans

 

26,807

 

29,936

Proceeds from bank owned life insurance

 

0

 

287

Proceeds from sales of premises and equipment

 

0

 

495

Purchase of premises and equipment

 

(993)

 

(239)

Proceeds from sale of foreclosed assets

 

139

 

0

Other

 

75

 

70

Net Cash (Used in) Provided by Investing Activities

 

(18,120)

 

12,009

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

Net increase in deposits

 

35,952

 

103,793

Net increase (decrease) in short-term borrowings

 

554

 

(10,211)

Repayments of long-term borrowings - FHLB advances

 

(7,380)

 

(4,024)

Sale of treasury stock

 

141

 

77

Purchases of treasury stock

 

(3,380)

 

(157)

Common dividends paid

 

(4,017)

 

(3,912)

Net Cash Provided by Financing Activities

 

21,870

 

85,566

INCREASE IN CASH AND CASH EQUIVALENTS

 

9,398

 

103,288

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

95,848

 

96,017

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

105,246

$

199,305

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

Accrued purchase of certificates of deposit

$

0

$

750

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

$

3,770

$

6,245

Assets acquired through foreclosure of real estate loans

$

0

$

134

Interest paid

$

1,116

$

2,193

Income taxes paid

$

46

$

47

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

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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 March 31, 2022

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Stock

 

Total

Balance, December 31, 2021

 

16,030,172

 

271,082

$

16,030

$

144,453

$

142,612

$

5,026

$

(6,716)

$

301,405

Net income

 

 

 

 

 

6,895

 

 

 

6,895

Other comprehensive loss, net

 

 

 

 

 

 

(25,204)

 

 

(25,204)

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

 

 

 

 

 

(4,434)

 

 

 

(4,434)

Shares issued for dividend reinvestment plan

 

 

(16,134)

 

 

12

 

 

 

405

 

417

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

(7,024)

(34)

175

141

Restricted stock granted

 

 

(78,243)

 

 

(1,932)

 

 

 

1,932

 

0

Forfeiture of restricted stock

 

 

6,072

 

 

124

 

 

 

(124)

 

0

Stock-based compensation expense

 

 

 

 

368

 

 

 

 

368

Purchase of restricted stock for tax withholding

6,054

(153)

(153)

Treasury stock purchases

129,642

(3,227)

(3,227)

Balance, March 31, 2022

 

16,030,172

 

311,449

$

16,030

$

142,991

$

145,073

$

(20,178)

$

(7,708)

$

276,208

Three Months Ended March 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2020

 

15,982,815

 

70,831

$

15,983

$

143,644

$

129,703

$

11,795

$

(1,369)

$

299,756

Net income

 

 

 

 

 

8,787

 

 

 

8,787

Other comprehensive loss, net

 

 

 

 

 

 

(4,836)

 

 

(4,836)

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

 

 

 

 

 

(4,314)

 

 

 

(4,314)

Shares issued for dividend reinvestment plan

 

19,475

 

 

19

 

383

 

 

 

 

402

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

 

 

(5,414)

 

 

(28)

 

 

 

105

 

77

Restricted stock granted

 

10,989

 

(63,402)

 

11

 

(1,240)

 

 

 

1,229

 

0

Forfeiture of restricted stock

 

 

3,791

 

 

73

 

 

 

(73)

 

0

Stock-based compensation expense

 

 

 

 

341

 

 

 

 

341

Purchase of restricted stock for tax withholding

7,659

(157)

(157)

Balance, March 31, 2021

 

16,013,279

 

13,465

$

16,013

$

143,173

$

134,176

$

6,959

$

(265)

$

300,056

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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, LLC and Northern Tier Holding LLC. C&N Bank is the sole member of C&N Financial Services, LLC and Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2021, 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.

Operating results reported for the three-month period ended March 31, 2022 might not be indicative of the results for the year ending December 31, 2022. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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. 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.

(In Thousands, Except Share and Per Share Data)

Three Months Ended

March 31, 

March 31, 

    

2022

    

2021

Basic

  

 

  

Net income

$

6,895

$

8,787

Less: Dividends and undistributed earnings allocated to participating securities

 

(60)

 

(65)

Net income attributable to common shares

$

6,835

$

8,722

Basic weighted-average common shares outstanding

 

15,645,474

 

15,850,217

Basic earnings per common share (a)

$

0.44

$

0.55

Diluted

 

  

 

  

Net income attributable to common shares

$

6,835

$

8,722

Basic weighted-average common shares outstanding

 

15,645,474

 

15,850,217

Dilutive effect of potential common stock arising from stock options

 

3,701

 

4,234

Diluted weighted-average common shares outstanding

 

15,649,175

 

15,854,451

Diluted earnings per common share (a)

$

0.44

$

0.55

Weighted-average nonvested restricted shares outstanding

 

138,141

 

118,442

(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 periods ended March 31, 2022 and 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

3. COMPREHENSIVE (LOSS) INCOME

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

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended March 31, 2022

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(32,025)

$

6,726

$

(25,299)

Reclassification adjustment for (gains) realized in income

(2)

0

(2)

Other comprehensive loss from available-for-sale debt securities

(32,027)

6,726

(25,301)

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

133

(27)

106

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

 

(11)

 

2

 

(9)

Other comprehensive income on unfunded retirement obligations

122

(25)

97

Total other comprehensive loss

$

(31,905)

$

6,701

$

(25,204)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended March 31, 2021

 

  

 

  

 

  

Available-for-sale debt securities,

Unrealized holding losses on available-for-sale debt securities

$

(6,114)

$

1,285

$

(4,829)

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

 

(4)

 

1

 

(3)

Other comprehensive loss on unfunded retirement obligations

(9)

2

(7)

Total other comprehensive loss

$

(6,123)

$

1,287

$

(4,836)

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

    

Unrealized

    

    

    

Accumulated

(Losses)

Unfunded

Other

Gains

Retirement

Comprehensive

on Securities

Obligations

(Loss) Income

Three Months Ended March 31, 2022

 

  

 

  

 

  

Balance, beginning of period

$

4,809

$

217

$

5,026

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

 

(25,301)

 

97

 

(25,204)

Balance, end of period

$

(20,492)

$

314

$

(20,178)

Three Months Ended March 31, 2021

 

  

 

  

 

  

Balance, beginning of period

$

11,676

$

119

$

11,795

Other comprehensive loss during three months ended March 31, 2021

 

(4,829)

 

(7)

 

(4,836)

Balance, end of period

$

6,847

$

112

$

6,959

4. CASH AND DUE FROM BANKS

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

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

Cash and cash equivalents

$

105,246

$

95,848

Certificates of deposit

 

9,100

 

9,100

Total cash and due from banks

$

114,346

$

104,948

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 March 31, 2022 or December 31, 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

5. SECURITIES

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

(In Thousands)

    

March 31, 2022

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

38,152

$

0

$

(1,658)

$

36,494

Obligations of U.S. Government agencies

24,455

150

(1,197)

23,408

Bank holding company debt securities

24,942

0

(899)

24,043

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

149,140

 

963

 

(6,470)

 

143,633

Taxable

 

73,732

 

293

 

(4,396)

 

69,629

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

112,122

 

107

 

(5,661)

 

106,568

Residential collateralized mortgage obligations

 

45,628

 

4

 

(1,764)

 

43,868

Commercial mortgage-backed securities

 

90,682

 

119

 

(5,531)

 

85,270

Total available-for-sale debt securities

$

558,853

$

1,636

$

(27,576)

$

532,913

(In Thousands)

    

December 31, 2021

Gross

Gross

 

 

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

25,058

$

52

$

(198)

$

24,912

Obligations of U.S. Government agencies

23,936

563

(408)

24,091

Bank holding company debt securities

18,000

18

(31)

17,987

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

143,427

 

4,749

 

(148)

 

148,028

Taxable

 

72,182

 

1,232

 

(649)

 

72,765

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

98,048

 

705

 

(572)

 

98,181

Residential collateralized mortgage obligations

 

44,015

 

437

 

(205)

 

44,247

Commercial mortgage-backed securities

 

86,926

 

1,548

 

(1,006)

 

87,468

Total available-for-sale debt securities

$

511,592

$

9,304

$

(3,217)

$

517,679

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at March 31, 2022 and December 31, 2021:

March 31, 2022

    

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

$

36,494

$

(1,658)

$

0

$

0

$

36,494

$

(1,658)

Obligations of U.S. Government agencies

4,812

(61)

11,363

(1,136)

16,175

(1,197)

Bank holding company debt securities

21,043

(899)

0

0

21,043

(899)

Obligations of states and political subdivisions:

Tax-exempt

104,057

(6,341)

1,719

(129)

105,776

(6,470)

Taxable

 

46,674

 

(3,692)

 

5,814

 

(704)

 

52,488

 

(4,396)

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

 

  

 

  

 

 

  

 

  

 

  

Residential pass-through securities

98,253

(5,374)

3,737

(287)

101,990

(5,661)

Residential collateralized mortgage obligations

 

41,916

 

(1,764)

 

0

 

0

 

41,916

 

(1,764)

Commercial mortgage-backed securities

 

67,400

 

(4,568)

 

7,153

 

(963)

 

74,553

 

(5,531)

Total temporarily impaired available-for-sale debt securities

$

420,649

$

(24,357)

$

29,786

$

(3,219)

$

450,435

$

(27,576)

December 31, 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

$

18,886

$

(198)

$

0

$

0

$

18,886

$

(198)

Obligations of U.S. Government agencies

9,735

(264)

4,856

(144)

14,591

(408)

Bank holding company debt securities

12,969

(31)

0

0

12,969

(31)

Obligations of states and political subdivisions:

Tax-exempt

17,852

(141)

549

(7)

18,401

(148)

Taxable

 

31,261

 

(517)

 

3,277

 

(132)

 

34,538

 

(649)

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

 

  

 

  

 

 

  

 

  

 

  

Residential pass-through securities

71,451

(572)

0

0

71,451

(572)

Residential collateralized mortgage obligations

 

15,117

 

(205)

 

0

 

0

 

15,117

 

(205)

Commercial mortgage-backed securities

 

52,867

 

(1,006)

 

0

 

0

 

52,867

 

(1,006)

Total temporarily impaired available-for-sale debt securities

$

230,138

$

(2,934)

$

8,682

$

(283)

$

238,820

$

(3,217)

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

(In Thousands)

Three Months Ended

March 31, 

March 31, 

    

2022

    

2021

Gross realized gains from sales

$

2

$

0

Gross realized losses from sales

 

0

 

0

Net realized gains

$

2

$

0

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of March 31, 2022. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands)

March 31, 2022

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

12,457

$

12,483

Due from one year through five years

 

77,304

 

75,288

Due from five years through ten years

 

86,104

 

82,906

Due after ten years

 

134,556

 

126,530

Sub-total

 

310,421

 

297,207

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

 

  

 

  

Residential pass-through securities

 

112,122

 

106,568

Residential collateralized mortgage obligations

 

45,628

 

43,868

Commercial mortgage-backed securities

 

90,682

 

85,270

Total

$

558,853

$

532,913

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 $237,165,000 at March 31, 2022 and $241,428,000 at December 31, 2021 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements and Note 11 for information related to securities pledged against interest rate swap obligations.

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 March 31, 2022 is provided below.

Debt Securities

At March 31, 2022 and December 31, 2021, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. As reflected in the table above, the fair value of available-for-sale debt securities as of March 31, 2022 was lower than the amortized cost basis by $25,940,000, or 4.6%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. The unrealized decrease in fair value of the portfolio in the first quarter 2022 was consistent with the significant increase in market interest rates that occurred during the period. Based on the results of the assessment, management believes there were no credit-related declines in fair value and that impairment of debt securities at March 31, 2022 and December 31, 2021 is temporary.

Equity Securities

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was $9,258,000 at March 31, 2022 and $9,313,000 at December 31, 2021. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at March 31, 2022 and December 31, 2021. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $926,000 at March 31, 2022 and $971,000 at December 31, 2021, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $45,000 at March 31, 2022 and $29,000 at December 31, 2021. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

6. LOANS

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at March 31, 2022 and December 31, 2021 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

Commercial:

 

  

 

  

Commercial loans secured by real estate

$

585,677

$

569,840

Commercial and industrial

 

159,793

 

159,073

Paycheck Protection Program - 1st Draw

887

1,356

Paycheck Protection Program - 2nd Draw

11,490

25,508

Political subdivisions

 

81,975

 

81,301

Commercial construction and land

 

37,258

 

60,579

Loans secured by farmland

 

12,507

 

11,121

Multi-family (5 or more) residential

 

53,141

 

50,089

Agricultural loans

 

2,588

 

2,351

Other commercial loans

 

14,827

 

17,153

Total commercial

 

960,143

 

978,371

Residential mortgage:

 

  

 

  

Residential mortgage loans - first liens

481,119

483,629

Residential mortgage loans - junior liens

 

22,572

 

23,314

Home equity lines of credit

 

39,649

 

39,252

1-4 Family residential construction

 

16,945

 

23,151

Total residential mortgage

 

560,285

 

569,346

Consumer

 

17,762

 

17,132

Total

 

1,538,190

 

1,564,849

Less: allowance for loan losses

 

(14,271)

 

(13,537)

Loans, net

$

1,523,919

$

1,551,312

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

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provided SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans are forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.  Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.

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 relief from troubled debt restructurings reporting established under Section 4013 of the CARES Act to 60 days after the date on which the national COVID-19 emergency terminates. The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act. 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 acquired PPP loans, are recognized in interest income as a yield adjustment over the term of the loans.

As of March 31, 2022, the recorded investment in 1st Draw PPP loans was $887,000, including contractual principal balances of $905,000, reduced by net deferred origination fees of $18,000. The recorded investment in 2nd Draw PPP loans was $11,490,000, including contractual principal balances of $11,847,000 reduced by net deferred origination fees of $357,000. Interest and fees on PPP loans which are included in taxable interest and fees on loans in the unaudited consolidated statements of income totaled $575,000 in the three-month period ended March 31, 2022 and $1,998,000 in the three-month period ended March 31, 2021.

Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans. For the three-month periods ended March 31, 2022 and 2021, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:

(In Thousands)

Three Months Ended

March 31, 

March 31, 

2022

2021

Market Rate Adjustment

 

  

 

  

Adjustments to gross amortized cost of loans at beginning of period

$

(637)

$

718

Amortization recognized in interest income

(248)

(366)

Adjustments to gross amortized cost of loans at end of period

$

(885)

$

352

Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$

(3,335)

$

(5,979)

Accretion recognized in interest income

 

553

 

797

Adjustments to gross amortized cost of loans at end of period

$

(2,782)

$

(5,182)

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

(In Thousands)

March 31, 

December 31, 

    

2022

    

2021

Outstanding balance

$

5,966

$

9,802

Carrying amount

 

3,983

 

6,558

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the three-month period ended March 31, 2022, the Corporation received repayments on PCI loans in excess of previous carrying amounts, resulting in income of $1,398,000. This amount is included in interest and fees on taxable loans in the unaudited consolidated statements of income. There was no corresponding income from repayments on PCI loans in the three-month period ended March 31, 2021.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. 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 March 31, 2022 and December 31, 2021, management determined that no allowance for credit losses related to unfunded loan commitments was required.

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

Three Months Ended March 31, 2022

December 31, 2021

    

    

    

    

    

    

    

March 31, 2022

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

4,405

$

0

$

0

$

612

$

5,017

Commercial and industrial

 

2,723

 

(150)

 

0

 

268

 

2,841

Commercial construction and land

 

637

 

0

 

0

 

(246)

 

391

Loans secured by farmland

 

115

 

0

 

0

 

14

 

129

Multi-family (5 or more) residential

 

215

 

0

 

0

 

152

 

367

Agricultural loans

 

25

 

0

 

0

 

2

 

27

Other commercial loans

 

173

 

0

 

0

 

(23)

 

150

Total commercial

 

8,293

 

(150)

 

0

 

779

 

8,922

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,650

0

1

159

3,810

Residential mortgage loans - junior liens

 

184

 

0

 

0

 

(3)

 

181

Home equity lines of credit

 

302

 

0

 

15

 

(11)

 

306

1-4 Family residential construction

 

202

 

0

 

0

 

(54)

 

148

Total residential mortgage

 

4,338

 

0

 

16

 

91

4,445

Consumer

 

235

 

(30)

 

7

 

25

 

237

Unallocated

 

671

 

0

 

0

 

(4)

 

667

Total Allowance for Loan Losses

$

13,537

$

(180)

$

23

$

891

$

14,271

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Three Months Ended March 31, 2021

December 31, 2020

    

    

    

    

    

    

    

March 31, 2021

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

3,051

$

0

$

0

$

299

$

3,350

Commercial and industrial

 

2,245

 

0

 

14

 

(72)

 

2,187

Commercial construction and land

 

454

 

0

 

0

 

22

 

476

Loans secured by farmland

 

120

 

0

 

0

 

(9)

 

111

Multi-family (5 or more) residential

 

236

 

0

 

0

 

19

 

255

Agricultural loans

 

34

 

0

 

0

 

(8)

 

26

Other commercial loans

 

168

 

0

 

0

 

(9)

 

159

Total commercial

 

6,308

 

0

 

14

 

242

 

6,564

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,524

0

1

(18)

3,507

Residential mortgage loans - junior liens

 

349

 

0

 

0

 

(15)

 

334

Home equity lines of credit

 

281

 

0

 

1

 

(1)

 

281

1-4 Family residential construction

 

99

 

0

 

0

 

(21)

 

78

Total residential mortgage

 

4,253

 

0

 

2

 

(55)

 

4,200

Consumer

 

239

 

(11)

 

12

 

(20)

 

220

Unallocated

 

585

 

0

 

0

 

92

 

677

Total Allowance for Loan Losses

$

11,385

$

(11)

$

28

$

259

$

11,661

For the three months ended March 31, 2022, the provision for loan losses was $891,000, an increase in expense of $632,000 as compared to $259,000 for the three months ended March 31, 2021. The first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000), an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. The first quarter 2021 provision included a net charge of $182,000 related to specific loans (increase in specific allowances on loans of $199,000, partially offset by net recoveries of $17,000), an increase of $92,000 in the unallocated portion of the allowance and a reduction of $15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses.

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

18

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

March 31, 2022

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

547,705

$

18,000

$

16,098

$

0

$

3,874

$

585,677

Commercial and Industrial

 

144,864

 

11,030

 

3,860

 

0

 

39

 

159,793

Paycheck Protection Program - 1st Draw

887

0

0

0

0

887

Paycheck Protection Program - 2nd Draw

11,490

0

0

0

0

11,490

Political subdivisions

 

81,975

 

0

 

0

 

0

 

0

 

81,975

Commercial construction and land

 

36,496

 

714

 

48

 

0

 

0

 

37,258

Loans secured by farmland

 

11,319

 

287

 

901

 

0

 

0

 

12,507

Multi-family (5 or more) residential

 

52,274

 

0

 

867

 

0

 

0

 

53,141

Agricultural loans

 

2,054

 

0

 

534

 

0

 

0

 

2,588

Other commercial loans

 

14,826

 

1

 

0

 

0

 

0

 

14,827

Total commercial

 

903,890

 

30,032

 

22,308

 

0

 

3,913

 

960,143

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

466,862

7,548

6,640

0

69

481,119

Residential mortgage loans - junior liens

 

22,182

 

57

 

332

 

0

 

1

 

22,572

Home equity lines of credit

 

38,961

 

59

 

629

 

0

 

0

 

39,649

1-4 Family residential construction

 

16,945

 

0

 

0

 

0

 

0

 

16,945

Total residential mortgage

 

544,950

 

7,664

 

7,601

 

0

 

70

 

560,285

Consumer

 

17,713

 

0

 

49

 

0

 

0

 

17,762

Totals

$

1,466,553

$

37,696

$

29,958

$

0

$

3,983

$

1,538,190

December 31, 2021

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

538,966

$

10,510

$

16,220

$

0

$

4,144

$

569,840

Commercial and Industrial

 

142,775

 

10,841

 

4,694

 

0

 

763

 

159,073

Paycheck Protection Program - 1st Draw

1,356

0

0

0

0

1,356

Paycheck Protection Program - 2nd Draw

25,508

0

0

0

0

25,508

Political subdivisions

 

81,301

 

0

 

0

 

0

 

0

 

81,301

Commercial construction and land

 

59,816

 

715

 

48

 

0

 

0

 

60,579

Loans secured by farmland

 

10,011

 

186

 

924

 

0

 

0

 

11,121

Multi-family (5 or more) residential

 

47,638

 

0

 

873

 

0

 

1,578

 

50,089

Agricultural loans

 

1,802

 

0

 

549

 

0

 

0

 

2,351

Other commercial loans

 

17,150

 

3

 

0

 

0

 

0

 

17,153

Total commercial

 

926,323

 

22,255

 

23,308

 

0

 

6,485

 

978,371

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

469,044

7,981

6,534

0

70

483,629

Residential mortgage loans - junior liens

 

22,914

 

114

 

283

 

0

 

3

 

23,314

Home equity lines of credit

 

38,652

 

59

 

541

 

0

 

0

 

39,252

1-4 Family residential construction

 

23,151

 

0

 

0

 

0

 

0

 

23,151

Total residential mortgage

 

553,761

 

8,154

 

7,358

 

0

 

73

 

569,346

Consumer

 

17,092

 

0

 

40

 

0

 

0

 

17,132

Totals

$

1,497,176

$

30,409

$

30,706

$

0

$

6,558

$

1,564,849

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of March 31, 2022 and December 31, 2021.

March 31, 2022

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

10,593

$

575,084

$

585,677

$

658

$

4,359

$

5,017

Commercial and industrial

 

664

 

159,129

 

159,793

 

72

 

2,769

 

2,841

Paycheck Protection Program - 1st Draw

 

0

 

887

 

887

 

0

 

0

 

0

Paycheck Protection Program - 2nd Draw

0

11,490

11,490

0

0

0

Political subdivisions

 

0

 

81,975

 

81,975

 

0

 

0

 

0

Commercial construction and land

 

48

 

37,210

 

37,258

 

0

 

391

 

391

Loans secured by farmland

 

82

 

12,425

 

12,507

 

0

 

129

 

129

Multi-family (5 or more) residential

 

0

 

53,141

 

53,141

 

0

 

367

 

367

Agricultural loans

 

60

 

2,528

 

2,588

 

0

 

27

 

27

Other commercial loans

 

0

 

14,827

 

14,827

 

0

 

150

 

150

Total commercial

 

11,447

 

948,696

 

960,143

 

730

 

8,192

 

8,922

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

523

480,596

481,119

0

3,810

3,810

Residential mortgage loans - junior liens

 

35

 

22,537

 

22,572

 

0

 

181

 

181

Home equity lines of credit

 

0

 

39,649

 

39,649

 

0

 

306

 

306

1-4 Family residential construction

 

0

 

16,945

 

16,945

 

0

 

148

 

148

Total residential mortgage

 

558

 

559,727

 

560,285

 

0

 

4,445

 

4,445

Consumer

 

0

 

17,762

 

17,762

 

0

 

237

 

237

Unallocated

 

 

 

 

 

 

667

Total

$

12,005

$

1,526,185

$

1,538,190

$

730

$

12,874

$

14,271

20

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 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

$

10,926

$

558,914

$

569,840

$

669

$

3,736

$

4,405

Commercial and industrial

 

2,503

 

156,570

 

159,073

 

71

 

2,652

 

2,723

Paycheck Protection Program - 1st Draw

 

0

 

1,356

 

1,356

 

0

 

0

 

0

Paycheck Protection Program - 2nd Draw

0

25,508

25,508

0

0

0

Political subdivisions

 

0

 

81,301

 

81,301

 

0

 

0

 

0

Commercial construction and land

 

0

 

60,579

 

60,579

 

0

 

637

 

637

Loans secured by farmland

 

83

 

11,038

 

11,121

 

0

 

115

 

115

Multi-family (5 or more) residential

 

1,578

 

48,511

 

50,089

 

0

 

215

 

215

Agricultural loans

 

0

 

2,351

 

2,351

 

0

 

25

 

25

Other commercial loans

 

0

 

17,153

 

17,153

 

0

 

173

 

173

Total commercial

 

15,090

 

963,281

 

978,371

 

740

 

7,553

 

8,293

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

630

482,999

483,629

0

3,650

3,650

Residential mortgage loans - junior liens

 

14

 

23,300

 

23,314

 

0

 

184

 

184

Home equity lines of credit

 

0

 

39,252

 

39,252

 

0

 

302

 

302

1-4 Family residential construction

 

0

 

23,151

 

23,151

 

0

 

202

 

202

Total residential mortgage

 

644

 

568,702

 

569,346

 

0

 

4,338

 

4,338

Consumer

 

0

 

17,132

 

17,132

 

0

 

235

 

235

Unallocated

 

 

 

 

 

 

671

Total

$

15,734

$

1,549,115

$

1,564,849

$

740

$

12,126

$

13,537

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

(In Thousands)

March 31, 2022

December 31, 2021

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

$

6,253

$

4,137

$

0

$

6,600

$

4,458

$

0

Commercial and industrial

 

3,199

 

592

 

0

 

5,213

 

2,431

 

0

Residential mortgage loans - first liens

637

523

0

656

630

0

Residential mortgage loans - junior liens

 

142

 

35

 

0

 

124

 

14

 

0

Loans secured by farmland

 

82

 

82

 

0

 

83

 

83

 

0

Agricultural loans

60

60

0

0

0

0

Construction and other land loans

48

48

0

0

0

0

Multi-family (5 or more) residential

0

0

0

2,734

1,578

0

Total with no related allowance recorded

 

10,421

 

5,477

 

0

 

15,410

 

9,194

 

0

With a related allowance recorded:

 

 

 

 

 

 

Commercial loans secured by real estate

6,456

6,456

658

6,468

6,468

668

Commercial and industrial

 

72

 

72

 

72

 

72

 

72

 

72

Total with a related allowance recorded

 

6,528

 

6,528

 

730

 

6,540

 

6,540

 

740

Total

$

16,949

$

12,005

$

730

$

21,950

$

15,734

$

740

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Three Months Ended

March 31, 

March 31, 

    

2022

2021

2022

2021

Commercial:

Commercial loans secured by real estate

$

10,735

$

12,203

$

129

$

143

Commercial and industrial

1,626

1,082

4

12

Commercial construction and land

48

49

1

1

Loans secured by farmland

82

84

0

1

Multi-family (5 or more) residential

789

1,596

0

61

Agricultural loans

63

69

2

2

Total commercial

13,343

15,083

136

220

Residential mortgage:

 

Residential mortgage loans - first lien

565

2,451

7

37

Residential mortgage loans - junior lien

37

437

1

5

Home equity lines of credit

0

18

1

0

Total residential mortgage

602

2,906

9

42

Total

$

13,945

$

17,989

$

145

$

262

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)

March 31, 2022

December 31, 2021

Past Due

Past Due

90+ Days and

90+ Days and

    

Accruing

    

Nonaccrual

    

Accruing

    

Nonaccrual

Commercial:

 

 

 

  

 

  

Commercial loans secured by real estate

$

1,217

$

10,593

$

738

$

10,885

Commercial and industrial

 

788

 

376

 

30

 

2,299

Commercial construction and land

 

0

 

47

 

0

 

48

Loans secured by farmland

 

0

 

81

 

28

 

83

Multi-family (5 or more) residential

0

0

0

1,578

Agricultural loans

60

0

65

0

Total commercial

 

2,065

 

11,097

 

861

 

14,893

Residential mortgage:

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

1,139

3,638

1,144

4,005

Residential mortgage loans - junior liens

 

76

 

2

 

69

 

3

Home equity lines of credit

 

102

 

167

 

102

 

82

Total residential mortgage

 

1,317

 

3,807

 

1,315

 

4,090

Consumer

 

47

 

41

 

43

 

16

Totals

$

3,429

$

14,945

$

2,219

$

18,999

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 $3,983,000 at March 31, 2022 and $6,558,000 at December 31, 2021 are classified as nonaccrual.

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Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of March 31, 2022 and December 31, 2021. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19 are included in the current and past due less than 30 days category in the table that follows.

(In Thousands)

As of March 31, 2022

As of December 31, 2021

    

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

$

579,837

$

192

$

5,648

$

585,677

$

563,658

$

762

$

5,420

$

569,840

Commercial and industrial

 

159,613

 

75

 

105

 

159,793

 

158,188

 

72

 

813

 

159,073

Paycheck Protection Program - 1st Draw

145

0

742

887

1,339

17

0

1,356

Paycheck Protection Program - 2nd Draw

11,490

0

0

11,490

25,508

0

0

25,508

Political subdivisions

 

81,975

 

0

 

0

 

81,975

 

81,301

 

0

 

0

 

81,301

Commercial construction and land

 

37,083

 

128

 

47

 

37,258

 

60,509

 

70

 

0

 

60,579

Loans secured by farmland

 

12,426

 

0

 

81

 

12,507

 

11,010

 

0

 

111

 

11,121

Multi-family (5 or more) residential

 

53,141

 

0

 

0

 

53,141

 

48,532

 

0

 

1,557

 

50,089

Agricultural loans

 

2,528

 

0

 

60

 

2,588

 

2,279

 

7

 

65

 

2,351

Other commercial loans

 

14,827

 

0

 

0

 

14,827

 

17,153

 

0

 

0

 

17,153

Total commercial

 

953,065

 

395

 

6,683

 

960,143

 

969,477

 

928

 

7,966

 

978,371

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

473,710

5,142

2,267

481,119

475,637

5,038

2,954

483,629

Residential mortgage loans - junior liens

 

22,457

 

39

 

76

 

22,572

 

23,229

 

16

 

69

 

23,314

Home equity lines of credit

 

39,314

 

233

 

102

 

39,649

 

38,830

 

279

 

143

 

39,252

1-4 Family residential construction

 

16,945

 

0

 

0

 

16,945

 

23,151

 

0

 

0

 

23,151

Total residential mortgage

 

552,426

 

5,414

 

2,445

 

560,285

 

560,847

 

5,333

 

3,166

 

569,346

Consumer

 

17,626

 

48

 

88

 

17,762

 

17,001

 

72

 

59

 

17,132

Totals

$

1,523,117

$

5,857

$

9,216

$

1,538,190

$

1,547,325

$

6,333

$

11,191

$

1,564,849

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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 March 31, 2022 and December 31, 2021 is as follows:

(In Thousands)

Current &

 

Past Due

Past Due

Past Due

 

Less than

30-89

90+

 

    

30 Days

    

Days

    

Days

    

Total

March 31, 2022 Nonaccrual Totals

$

7,169

$

1,989

$

5,787

$

14,945

December 31, 2021 Nonaccrual Totals

$

8,800

$

1,227

$

8,972

$

18,999

Loans whose terms are modified are classified as troubled debt restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at March 31, 2022 and December 31, 2021 is as follows:

(In Thousands)

Current &

 

 

Past Due

Past Due

Past Due

 

 

Less than

30-89

90+

 

 

    

30 Days

    

Days

    

Days

    

Nonaccrual

    

Total

March 31, 2022 Totals

$

243

$

36

$

60

$

3,894

$

4,233

December 31, 2021 Totals

$

248

$

40

$

65

$

5,452

$

5,805

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

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

(Balances in Thousands)

Three Months Ended

Three Months Ended

March 31, 2022

March 31, 2021

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

0

    

$

0

    

1

    

$

12

Consumer,

Reduced monthly payments and extended maturity date

0

0

1

24

Total

    

0

    

$

0

    

2

    

$

36

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

(Balances in Thousands)

Three Months Ended

Three Months Ended

March 31, 2022

March 31, 2021

Number

Number

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Commercial loans secured by real estate

0

$

0

1

$

3,392

Total

 

0

$

0

 

1

$

3,392

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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)

    

March 31, 

    

December 31, 

2022

2021

Foreclosed residential real estate

$

256

$

256

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)

    

March 31, 

    

December 31, 

2022

2021

Residential real estate in process of foreclosure

$

1,547

$

1,260

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

Gross amount

$

6,639

$

6,639

Accumulated amortization

 

(3,433)

 

(3,323)

Net

$

3,206

$

3,316

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

March 31, 

March 31, 

    

2022

    

2021

Amortization expense

$

110

    

$

134

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At March 31, 2022 and December 31, 2021, the net carrying value of goodwill was $52,505,000.

8. BORROWED FUNDS

SHORT-TERM BORROWINGS

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

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

FHLB-Pittsburgh borrowings

$

0

$

0

Customer repurchase agreements

 

2,357

 

1,803

Total short-term borrowings

$

2,357

$

1,803

The Corporation had available credit with other correspondent banks totaling $45,000,000 at March 31, 2022 and December 31, 2021. These lines of credit are primarily unsecured. No amounts were outstanding at March 31, 2022 or December 31, 2021.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At March 31, 2022, the Corporation had available credit in the amount of $12,429,000 on this line with no outstanding advances. At December 31, 2021, the

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Corporation had available credit in the amount of $13,642,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $12,817,000 at March 31, 2022 and $14,034,000 at December 31, 2021.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10%at March 31, 2022 and December 31, 2021. The carrying value of the underlying securities was $2,380,000 at March 31, 2022 and $1,820,000 at December 31, 2021.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,077,215,000 at March 31, 2022 and $1,046,242,000 at December 31, 2021. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were $9,258,000 at March 31, 2022 and $9,313,000 at December 31, 2021. The Corporation’s total credit facility with FHLB-Pittsburgh was $757,811,000 at March 31, 2022, including an unused (available) amount of $731,429,000. At December 31, 2021, the Corporation’s total credit facility with FHLB-Pittsburgh was $756,868,000, including an unused (available) amount of $723,557,000.

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

LONG-TERM BORROWINGS – FHLB ADVANCES

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

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

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

$

8,050

$

15,452

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

7,093

7,119

Loan maturing in 2024 with a rate of 0.75%

5,090

5,099

Loan maturing in 2025 with a rate of 4.91%

348

372

Total long-term FHLB-Pittsburgh borrowings

$

20,581

$

28,042

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

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 prior to maturity and the Senior Notes are not subject to redemption by the holders. The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Senior Notes totaling $16,000 in the first quarter 2022 was included in interest expense in the unaudited consolidated statements of income.

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

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

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

$

14,717

$

14,701

Total carrying value

$

14,717

$

14,701

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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 $26,000 in the first quarter 2022 was included in interest expense in the unaudited consolidated statements of income.

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

(In Thousands)

    

March 31, 

    

December 31, 

2022

2021

Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemed 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

2,004

2,008

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

24,527

24,501

Total carrying value

$

33,031

$

33,009

9. 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 2022 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the 2022 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Following is a summary of restricted stock awards granted in the three-month period ended March 31, 2022:

(Dollars in Thousands)

    

    

Aggregate

Grant

Date

Number of

Fair

Shares

Value

1st quarter 2022 awards:

Time-based awards to independent directors

9,588

$

240

Time-based awards to employees

51,638

1,293

Performance-based awards to employees

17,017

426

Total

78,243

$

1,959

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, 2022 is estimated

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to total $1,622,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $368,000 in the first quarter 2022 and $341,000 in the first quarter 2021.

10. CONTINGENCIES

In the normal course of business, the Corporation is subject to pending and threatened litigation in which claims for monetary damages are asserted. In management’s opinion, the Corporation’s financial position and results of operations would not be materially affected by the outcome of these legal proceedings.

11. 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 loan banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. 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 $122,138,000 at March 31, 2022 and $123,904,000 at December 31, 2021. There were no interest rate swaps originated in the first quarter 2022 or first quarter 2021. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at March 31, 2022. The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $317,000 in the first quarter 2022 as compared to a reduction in interest income on loans of $338,000 in the first quarter 2021.

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at March 31, 2022 and December 31, 2021:

(In Thousands)

At March 31, 2022

At December 31, 2021

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

$

61,069

$

137

$

61,069

$

137

$

61,547

$

3,104

$

61,547

$

3,104

(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 $3,965,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at March 31, 2022.

12. 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

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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.

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

March 31, 2022

    

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

$

36,494

$

0

$

0

$

36,494

Obligations of U.S. Government agencies

0

23,408

0

23,408

Bank holding company debt securities

0

24,043

0

24,043

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

143,633

 

0

 

143,633

Taxable

 

0

 

69,629

 

0

 

69,629

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

106,568

 

0

 

106,568

Residential collateralized mortgage obligations

 

0

 

43,868

 

0

 

43,868

Commercial mortgage-backed securities

 

0

 

85,270

 

0

 

85,270

Total available-for-sale debt securities

 

36,494

 

496,419

 

0

 

532,913

Marketable equity security

 

926

 

0

 

0

 

926

Servicing rights

 

0

 

0

 

2,429

 

2,429

Interest rate swap agreements, assets

0

137

0

137

Total recurring fair value measurements, assets

$

37,420

$

496,556

$

2,429

$

536,405

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

137

$

0

$

137

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans, net

$

0

$

0

$

5,798

$

5,798

Foreclosed assets held for sale

 

0

 

0

 

531

 

531

Total nonrecurring fair value measurements, assets

$

0

$

0

$

6,329

$

6,329

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December 31, 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

$

24,912

$

0

$

0

$

24,912

Obligations of U.S. Government agencies

0

24,091

0

24,091

Bank holding company debt securities

0

17,987

0

17,987

Obligations of states and political subdivisions:

 

  

 

 

  

 

Tax-exempt

 

0

 

148,028

 

0

 

148,028

Taxable

 

0

 

72,765

 

0

 

72,765

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

0

 

98,181

 

0

 

98,181

Residential collateralized mortgage obligations

 

0

 

44,247

 

0

 

44,247

Commercial mortgage-backed securities

 

0

 

87,468

 

0

 

87,468

Total available-for-sale debt securities

 

24,912

 

492,767

 

0

 

517,679

Marketable equity security

 

971

 

0

 

0

 

971

Servicing rights

 

0

 

0

 

2,329

 

2,329

Interest rate swap agreements, assets

0

3,104

0

3,104

Total recurring fair value measurements, assets

$

25,883

$

495,871

$

2,329

$

524,083

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$

0

$

3,104

$

0

$

3,104

Nonrecurring fair value measurements, assets:

 

  

 

  

 

  

 

  

Impaired loans, net

$

0

$

0

$

5,800

$

5,800

Foreclosed assets held for sale

 

0

 

0

 

684

 

684

Total nonrecurring fair value measurements, assets

$

0

$

0

$

6,484

$

6,484

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

    

Fair Value at

    

  

    

  

    

  

    

  

3/31/2022

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

3/31/2022

Servicing rights

$

2,429

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

193.00

%  

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

    

  

    

  

    

  

    

  

12/31/2021

Valuation

Unobservable

Method or Value As of

Asset

(In Thousands)

Technique

Input(s)

12/31/2021

Servicing rights

$

2,329

 

Discounted cash flow

 

Discount rate

 

13.00

%  

Rate used through modeling period

 

 

Loan prepayment speeds

209.00

%  

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

    

March 31, 2022

    

March 31, 2021

Servicing rights balance, beginning of period

$

2,329

$

1,689

Originations of servicing rights

 

98

 

192

Unrealized gain included in earnings

 

2

 

75

Servicing rights balance, end of period

$

2,429

$

1,956

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.

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

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted

 

Valuation

  

  

  

Average

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

3/31/2022

3/31/2022

3/31/2022

Technique

Inputs

3/31/2022

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

$

6,456

$

658

$

5,798

 

Sales comparison

 

Discount to appraised value

 

27

%

Commercial and industrial

72

72

0

Liquidation of assets

 

Discount to appraised value

 

100

%

Total impaired loans

$

6,528

$

730

$

5,798

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

275

$

0

$

275

 

Sales comparison

 

Discount to appraised value

 

50

%

Residential (1-4 family)

256

0

256

 

Sales comparison

 

Discount to appraised value

 

53

%

Total foreclosed assets held for sale

$

531

$

0

$

531

 

  

 

  

 

(Dollars In Thousands)

    

    

  

    

  

    

  

    

  

    

Weighted  

 

Valuation

  

  

  

Average  

 

Balance at

Allowance at

Fair Value at

Valuation

Unobservable

Discount at

 

Asset

12/31/2021

12/31/2021

12/31/2021

Technique

Inputs

12/31/2021

 

Impaired loans:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial:

 

  

 

 

 

  

 

  

 

Commercial loans secured by real estate

$

6,468

$

668

$

5,800

 

Sales comparison

 

Discount to appraised value

 

27

%

Commercial and industrial

72

72

0

Liquidation of assets

 

Discount to appraised value

 

100

%

Total impaired loans

$

6,540

$

740

$

5,800

 

  

 

  

 

  

Foreclosed assets held for sale - real estate:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial real estate

$

428

$

0

$

428

 

Sales comparison

 

Discount to appraised value

 

50

%

Residential (1-4 family)

256

0

256

 

Sales comparison

 

Discount to appraised value

 

53

%

Total foreclosed assets held for sale

$

684

$

0

$

684

 

  

 

  

 

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

March 31, 2022

December 31, 2021

Hierarchy

Carrying

Fair

Carrying

Fair

    

Level

    

Amount

    

Value

    

Amount

    

Value

Financial assets:

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

 

Level 1

$

105,246

$

105,246

$

95,848

$

95,848

Certificates of deposit

 

Level 2

 

9,100

 

8,911

 

9,100

 

9,142

Restricted equity securities (included in Other Assets)

 

Level 2

 

9,508

 

9,508

 

9,562

 

9,562

Loans, net

 

Level 3

 

1,523,919

 

1,533,430

 

1,551,312

 

1,573,955

Accrued interest receivable

 

Level 2

 

7,507

 

7,507

 

7,235

 

7,235

Financial liabilities:

 

  

 

  

 

  

 

  

 

  

Deposits with no stated maturity

 

Level 2

 

1,691,457

 

1,691,457

 

1,639,167

 

1,639,167

Time deposits

 

Level 2

 

269,495

 

269,902

 

285,893

 

286,962

Short-term borrowings

 

Level 2

 

2,357

 

1,956

 

1,803

 

1,603

Long-term borrowings

 

Level 2

 

20,581

 

20,518

 

28,042

 

28,347

Senior debt

Level 2

14,717

14,429

14,701

15,016

Subordinated debt

Level 2

33,031

30,293

33,009

33,171

Accrued interest payable

 

Level 2

 

633

 

633

 

205

 

205

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
changes in general economic conditions
the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
the effect of the novel coronavirus (COVID-19) and related events
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
information security breach or other technology difficulties or failures
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.

EARNINGS OVERVIEW

First quarter 2022 net income was $6,895,000, or $0.44 per diluted share. In comparison, first quarter 2021 net income was $8,787,000, or $0.55 per diluted share. Significant variances were as follows:

First quarter 2022 net interest income of $20,332,000 was $249,000 higher than the first quarter 2021 total. Total interest and fees on loans included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in the first quarter 2021. Interest and fees on PPP loans totaled $575,000 in the first quarter 2022, a decrease of $1,423,000 compared to the first quarter 2021 amount. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $960,000 in the first quarter 2022 as compared to the first quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $199.4 million. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $450,000 in the first quarter 2022 as compared to a net positive impact of $952,000 in the first quarter 2021. Average outstanding loans decreased $86.7 million, including a reduction in average PPP loans of $119.7 million, and average total deposits increased $100.6 million (5.5%). The net interest margin for the first quarter 2022 was 3.86% as compared to 4.00% for the first quarter 2021. The average yield on earning assets of 4.13% was down 0.20% from the first quarter 2021, while the average rate on interest-bearing liabilities of 0.40% in the first quarter 2022 was 0.07% lower than the comparable first quarter 2021 average rate.
The provision for loan losses was $891,000 in the first quarter 2022 as compared to $259,000 in the first quarter 2021. The first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000), an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

portion of the allowance reflected the impact of an increase in volume of commercial loans, excluding PPP loans. The first quarter 2021 provision included a net charge of $182,000 related to specific loans (increase in specific allowances on loans of $199,000, partially offset by net recoveries of $17,000), an increase of $92,000 in the unallocated portion of the allowance and a reduction of $15,000 attributable to decreases in the collectively determined portion of the allowance for loan losses.
Noninterest income for the first quarter 2022 was down $959,000 from the first quarter 2021 total. Significant variances included the following:
oOther noninterest income of $588,000 decreased $884,000 from the first quarter 2021 total. There was no income from tax credits in the first quarter 2022 compared to $765,000 in the first quarter 2021. In 2022, the Corporation will make PA Educational Improvement Tax Credit Program donations in the second quarter comparable to total donations made in the first quarter 2021, generating tax credits in 2022 comparable to the first quarter 2021.
oNet gains from sales of loans of $382,000 decreased $682,000 from the first quarter 2021 total, as the volume of residential mortgage loans sold in the first quarter 2022 was down from the first quarter 2021 level.
oService charges on deposit accounts of $1,235,000 increased $220,000 from the first quarter 2021 total, as the volume of consumer and business overdraft and other activity increased.
oBrokerage and insurance revenue of $522,000 increased $196,000 from the first quarter 2021 total, due to commissions on higher transaction volume.
oTrust revenue of $1,786,000 increased $160,000 from the first quarter 2021 total, reflecting the impact of growth in trust assets under management.
Noninterest expense increased $1,177,000 in the first quarter 2022 over the first quarter 2021 amount. Significant variances included the following:
oSalaries and employee benefits of $10,607,000 increased $1,712,000 from the first quarter 2021 total, including an increase in base salaries expense of $1,018,000. In addition to the impact of merit-based salary increases, the number of employees increased, reflecting expansion of the Southcentral PA market with the opening of an office in Lancaster as well as additions to staffing for information technology (IT), human resources and other functions. In total, the number of full-time equivalent employees (FTEs) increased 5.2% to 403 in the first quarter 2022 as compared to the first quarter 2021. Additional increases include $241,000 due to a lower proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated in 2021 and an increase in health care expense of $183,000 due to higher claims on the Corporation’s partially self-insured plan.
oData processing and telecommunications expense of $1,623,000 increased $243,000 from the first quarter 2021 total, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.
oNet occupancy and equipment expense of $1,411,000 increased $107,000 from the first quarter 2021 total, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA.
oOther noninterest expense of $1,884,000 decreased $871,000 from the first quarter 2021 total. Within this category, significant variances included the following:
Donations expense totaled $29,000 in the first quarter 2022, down $785,000 from the first quarter 2021. As noted above, donations of approximately $800,000 related to the PA Educational Improvement Tax Credit Program will be made in the second quarter 2022, comparable to donations made in the first quarter 2021.

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The allowance for SBA claim adjustments decreased, reflecting more favorable claim results than previously estimated, resulting in a reduction in expense of $242,000 in the first quarter 2022 with no comparable amount in the first quarter 2021.
The income tax provision of $1,483,000, or 17.7% of pre-tax income for the first quarter 2022 decreased $627,000 from $2,110,000, or 19.4% of pre-tax income for the first quarter 2021, reflecting lower pre-tax income.

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.

TABLE I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands,

For the Three Months Ended :

Except Per Share Data)

March 31, 

December 31,

September 30,

June 30, 

March 31, 

(Unaudited)

    

2022

    

2021

2021

    

2021

    

2021

Interest income

$

21,773

$

21,246

$

21,073

$

20,428

$

21,754

Interest expense

 

1,441

 

1,530

 

1,614

 

1,747

 

1,671

Net interest income

 

20,332

 

19,716

 

19,459

 

18,681

 

20,083

Provision for loan losses

 

891

 

1,128

 

1,530

 

744

 

259

Net interest income after provision for loan losses

 

19,441

 

18,588

 

17,929

 

17,937

 

19,824

Noninterest income

 

5,823

 

6,415

 

6,382

 

6,302

 

6,782

Noninterest expense

 

16,886

 

16,018

 

15,346

 

15,399

 

15,709

Income before income tax provision

 

8,378

 

8,985

 

8,965

 

8,840

 

10,897

Income tax provision

 

1,483

 

1,677

 

1,566

 

1,780

 

2,110

Net income

$

6,895

$

7,308

$

7,399

$

7,060

$

8,787

Net income attributable to common shares

$

6,835

$

7,256

$

7,336

$

6,999

$

8,722

Basic earnings per common share

$

0.44

$

0.46

$

0.47

$

0.44

$

0.55

Diluted earnings per common share

$

0.44

$

0.46

$

0.47

$

0.44

$

0.55

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.

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 6 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.

Fair Value of Available-For-Sale 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2022 and 2021. 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 March 31, 2022 and 2021

For the three-month periods, fully taxable equivalent net interest income was $20,634,000 in 2022, which was $278,000 (1.4%) higher than in 2021. Interest income in the first quarter was $22,075,000 which was $48,000 higher in 2022 as compared to 2021, while interest expense was lower by $230,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.86% in 2022 as compared to 4.00% in 2021, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.73% in 2022 from 3.86% in 2021. The average yield on earning assets of 4.13% was 0.20% lower in 2022 as compared to 2021, and the average rate on interest- bearing liabilities of 0.40% in 2022 was 0.07% lower.

Income from purchase accounting-related adjustments in the first quarter 2022 had a positive effect on net interest income of $450,000, including an increase in income on loans of $305,000 and net reductions in interest expense on time deposits and borrowed funds totaling $145,000. The positive impact to the first quarter 2022 net interest margin from purchase accounting adjustments was 0.08%. In comparison, the positive impact of purchase accounting adjustments to the first quarter 2021 net interest margin was $952,000, or 0.19%.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $22,075,000 in 2022, an increase of $48,000 from 2021.

Interest and fees from loans receivable decreased $922,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $575,000 in the first quarter 2022, a decrease of $1,423,000 from the first quarter 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In the first quarter 2022, total interest and fees on loans included $1,398,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts with no comparable income in the first quarter 2021.

Average outstanding loans receivable decreased $86,725,000 (5.3%) to $1,547,861,000 in 2022 from $1,634,586,000 in 2021, including a reduction in average PPP loans of $119,715,000. Average total loans outstanding, excluding PPP loans, increased $32,990,000 (2.2%).

The average yield on loans in the first quarter 2022 was 5.01%, up from 4.97% in the first quarter 2021. The average yield on loans included the positive impact of the income on PCI loans in the first quarter 2022 and the comparatively high yield on PPP loans in both quarters.

Interest income from available-for-sale debt securities increased $960,000 in 2022 from 2021. Total average available-for-sale debt securities (at amortized cost) increased to $534,635,000 in 2022 from $335,265,000 in 2021. The increase in available-for-sale debt securities reflects the investment of otherwise excess cash. The average yield on available-for-sale debt securities was 2.18% for 2022, down from 2.32% in 2021.

Income from interest-bearing due from banks totaled $67,000 in 2022, an increase of $17,000 from 2021. The average yield on interest-bearing due from banks was 0.32% in 2022 and 0.22% in 2021. The average balance of interest-bearing due from banks was $84,115,000 in the first quarter 2022 as compared to $92,619,000 in the first quarter 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve.

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INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense decreased $230,000 to $1,441,000 in 2022 from $1,671,000 in 2021. Interest expense on deposits decreased $368,000, as the average rate on interest-bearing deposits decreased to 0.26% in 2022 from 0.38% in 2021. The decrease in average rates on deposits includes decreases of 0.19% on time deposits, 0.08% on money market accounts, and 0.06% on interest checking accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 14.4% of average total deposits in the first quarter 2022 from 20.2% in the first quarter 2021.

Average total deposits increased $100,569,000 (5.5%) to $1,931,681,000 in the first quarter 2022 from $1,831,112,000 in the first quarter 2021. The increase in average deposits includes the impact of PPP-related activity and funding from other government stimulus programs.

Interest expense on short-term borrowings in the first quarter 2022 was $1,000 as compared to $15,000 in 2021. The average balance of short-term borrowings decreased to $1,746,000 in 2022 from $14,365,000 in 2021. The average rate on short-term borrowings was 0.23% in 2021 compared to 0.42% in 2021.

Interest expense on long-term borrowings (FHLB advances) decreased $85,000 to $49,000 in 2022 from $134,000 in 2021. The average balance of long-term borrowings was $26,102,000 in 2022, down from an average balance of $52,847,000 in 2021. 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 0.76% in 2022 compared to 1.03% in 2021.

Interest expense on senior notes issued in May 2021 totaled $118,000 in the first quarter 2022. The average balance of the senior notes was $14,709,000 in the first quarter of 2022 at an average rate of 3.25%.

Interest expense on subordinated debt increased $119,000 to $363,000 in 2022 from $244,000 in 2021. The average balance of subordinated debt increased to $32,948,000 in 2022 from $16,543,000 in 2021, reflecting the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 4.47% in 2022 from 5.98% in 2021.

More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

Three Months Ended

March 31, 

Increase/

(In Thousands)

    

2022

    

2021

    

(Decrease)

INTEREST INCOME

Interest-bearing due from banks

$

67

$

50

$

17

Available-for-sale debt securities:

 

 

 

Taxable

 

1,969

 

1,113

 

856

Tax-exempt

 

905

 

801

 

104

Total available-for-sale debt securities

 

2,874

 

1,914

 

960

Loans receivable:

 

 

 

Taxable

 

17,974

 

17,493

 

481

Paycheck Protection Program - 1st Draw

38

1,812

(1,774)

Paycheck Protection Program - 2nd Draw

537

186

351

Tax-exempt

 

573

 

553

 

20

Total loans receivable

 

19,122

 

20,044

 

(922)

Other earning assets

 

12

 

19

 

(7)

Total Interest Income

 

22,075

 

22,027

 

48

INTEREST EXPENSE

 

 

 

Interest-bearing deposits:

 

 

 

Interest checking

 

194

 

221

 

(27)

Money market

 

262

 

306

 

(44)

Savings

 

61

 

55

 

6

Time deposits

 

393

 

696

 

(303)

Total interest-bearing deposits

 

910

 

1,278

 

(368)

Borrowed funds:

 

 

 

Short-term

 

1

 

15

 

(14)

Long-term - FHLB advances

 

49

 

134

 

(85)

Senior notes, net

118

0

118

Subordinated debt, net

 

363

 

244

 

119

Total borrowed funds

 

531

 

393

 

138

Total Interest Expense

 

1,441

 

1,671

 

(230)

Net Interest Income

$

20,634

$

20,356

$

278

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table III - Analysis of Average Daily Balances and Rates

(Dollars in Thousands)

Three Months

Three Months

 

Ended

Rate of

Ended

Rate of

 

3/31/2022

Return/

3/31/2021

Return/

 

Average

Cost of

Average

Cost of

 

    

Balance

    

Funds %

    

Balance

    

Funds %

 

EARNING ASSETS

 

  

 

  

 

  

 

  

Interest-bearing due from banks

$

84,115

 

0.32

%  

$

92,619

 

0.22

%

Available-for-sale debt securities, at amortized cost:

 

 

 

 

Taxable

390,301

 

2.05

%  

217,733

 

2.07

%

Tax-exempt

 

144,334

 

2.54

%  

 

117,532

 

2.76

%

Total available-for-sale debt securities

 

534,635

 

2.18

%  

 

335,265

 

2.32

%

Loans receivable:

 

  

 

  

 

  

 

  

Taxable

 

1,445,353

 

5.04

%  

 

1,428,721

 

4.97

%

Paycheck Protection Program - 1st Draw

1,049

14.69

%  

104,367

7.04

%

Paycheck Protection Program - 2nd Draw

17,800

12.24

%  

34,197

2.21

%

Tax-exempt

 

83,659

 

2.78

%  

 

67,301

 

3.33

%

Total loans receivable

 

1,547,861

 

5.01

%  

 

1,634,586

 

4.97

%

Other earning assets

 

1,983

 

2.45

%  

 

2,851

 

2.70

%

Total Earning Assets

 

2,168,594

 

4.13

%  

 

2,065,321

 

4.33

%

Cash

 

20,703

 

  

 

23,796

 

  

Unrealized (loss) gain on securities

 

(2,508)

 

  

 

12,890

 

  

Allowance for loan losses

 

(13,783)

 

  

 

(11,739)

 

  

Bank-owned life insurance

30,720

30,154

Bank premises and equipment

 

21,043

 

  

 

21,348

 

  

Intangible assets

 

55,765

 

  

 

56,288

 

  

Other assets

 

44,952

 

  

 

44,628

 

  

Total Assets

$

2,325,486

 

  

$

2,242,686

 

  

 

  

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

 

  

Interest checking

$

419,130

 

0.19

%  

$

355,993

 

0.25

%

Money market

 

456,904

 

0.23

%  

 

406,841

 

0.31

%

Savings

 

249,165

 

0.10

%  

 

213,437

 

0.10

%

Time deposits

 

277,405

 

0.57

%  

 

370,555

 

0.76

%

Total interest-bearing deposits

 

1,402,604

 

0.26

%  

 

1,346,826

 

0.38

%

Borrowed funds:

 

  

 

  

 

  

 

  

Short-term

 

1,746

 

0.23

%  

 

14,365

 

0.42

%

Long-term - FHLB advances

 

26,102

 

0.76

%  

 

52,847

 

1.03

%

Senior notes, net

14,709

3.25

%

0

0.00

%

Subordinated debt, net

 

32,948

 

4.47

%  

 

16,543

 

5.98

%

Total borrowed funds

 

75,505

 

2.85

%  

 

83,755

 

1.90

%

Total Interest-bearing Liabilities

 

1,478,109

 

0.40

%  

 

1,430,581

 

0.47

%

Demand deposits

 

529,077

 

  

 

484,286

 

  

Other liabilities

 

24,046

 

  

 

27,930

 

  

Total Liabilities

 

2,031,232

 

  

 

1,942,797

 

  

Stockholders' equity, excluding accumulated other comprehensive (loss) income

 

295,996

 

  

 

289,591

 

  

Accumulated other comprehensive (loss) income

 

(1,742)

 

  

 

10,298

 

  

Total Stockholders' Equity

 

294,254

 

  

 

299,889

 

  

Total Liabilities and Stockholders' Equity

$

2,325,486

 

  

$

2,242,686

 

  

Interest Rate Spread

 

  

 

3.73

%  

 

  

 

3.86

%

Net Interest Income/Earning Assets

 

  

 

3.86

%  

 

  

 

4.00

%

 

  

 

  

 

  

 

  

Total Deposits (Interest-bearing and Demand)

$

1,931,681

 

  

$

1,831,112

 

  

(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  3/31/22 vs. 3/31/21

Change in

Change in

Total

    

Volume

    

Rate

    

Change

EARNING ASSETS

 

  

 

  

 

  

Interest-bearing due from banks

$

(5)

$

22

$

17

Available-for-sale debt securities:

 

 

 

Taxable

 

871

 

(15)

 

856

Tax-exempt

 

172

 

(68)

 

104

Total available-for-sale debt securities

 

1,043

 

(83)

 

960

Loans receivable:

 

  

 

  

 

Taxable

 

205

 

276

 

481

Paycheck Protection Program - 1st Draw

(2,723)

949

(1,774)

Paycheck Protection Program - 2nd Draw

(128)

479

351

Tax-exempt

 

121

 

(101)

 

20

Total loans receivable

 

(2,525)

 

1,603

 

(922)

Other earning assets

 

(5)

 

(2)

 

(7)

Total Interest Income

 

(1,492)

 

1,540

 

48

 

  

 

  

 

  

INTEREST-BEARING LIABILITIES

 

  

 

  

 

  

Interest-bearing deposits:

 

  

 

  

 

  

Interest checking

 

35

 

(62)

 

(27)

Money market

 

35

 

(79)

 

(44)

Savings

 

9

 

(3)

 

6

Time deposits

 

(153)

 

(150)

 

(303)

Total interest-bearing deposits

 

(74)

 

(294)

 

(368)

Borrowed funds:

 

 

 

Short-term

 

(9)

 

(5)

 

(14)

Long-term - FHLB advances

 

(56)

 

(29)

 

(85)

Senior notes, net

118

0

118

Subordinated debt, net

 

193

 

(74)

 

119

Total borrowed funds

 

246

 

(108)

 

138

Total Interest Expense

 

172

 

(402)

 

(230)

 

 

 

Net Interest Income

$

(1,664)

$

1,942

$

278

(1)Changes in income 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)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

 

March 31, 

$

%

 

    

2022

2021

    

Change

Change

 

Trust revenue

$

1,786

$

1,626

$

160

9.8

%

Brokerage and insurance revenue

 

522

326

196

60.1

%

Service charges on deposit accounts

 

1,235

1,015

220

21.7

%

Interchange revenue from debit card transactions

 

963

881

82

9.3

%

Net gains from sales of loans

 

382

1,064

(682)

(64.1)

%

Loan servicing fees, net

 

210

248

(38)

(15.3)

%

Increase in cash surrender value of life insurance

 

135

150

(15)

(10.0)

%

Other noninterest income

 

588

1,472

(884)

(60.1)

%

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

2

0

2

%

Total noninterest income

$

5,823

$

6,782

$

(959)

(14.1)

%

Total noninterest income decreased $959,000 (14.1%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

NONINTEREST EXPENSE

TABLE VI - COMPARISON OF NONINTEREST EXPENSE

(Dollars in Thousands)

 Three Months Ended 

 

March 31, 

 $ 

 % 

 

 

2022

 

2021

 

 Change 

 

 Change 

Salaries and employee benefits

    

$

10,607

    

$

8,895

    

$

1,712

    

19.2

%

Net occupancy and equipment expense

 

1,411

 

1,304

 

107

 

8.2

%

Data processing and telecommunications expense

 

1,623

 

1,380

 

243

 

17.6

%

Automated teller machine and interchange expense

 

384

 

337

 

47

 

13.9

%

Pennsylvania shares tax

 

488

 

491

 

(3)

 

(0.6)

%

Professional fees

 

489

 

547

 

(58)

 

(10.6)

%

Other noninterest expense

1,884

2,755

(871)

(31.6)

%

Total noninterest expense

$

16,886

$

15,709

$

1,177

 

7.5

%

Total noninterest expense in the first quarter 2022 increased $1,177,000 (7.5%) from the first quarter 2021 total. Changes of significance 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 three months of 2022 was $1,483,000, which was $627,000 lower than the provision for the first three months of 2021. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first three months of 2022 compared to 19.4% in the first three months of 2021. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first three months of 2022 and 2021 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences.

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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 March 31, 2022 and December 31, 2021 represents the following temporary difference components:

    

March 31, 

    

December 31, 

(In Thousands)

2022

2021

Deferred tax assets:

 

  

 

  

Unrealized holding losses on securities

$

5,448

$

0

Allowance for loan losses

3,124

2,935

Purchase accounting adjustments on loans

 

1,237

 

1,621

Deferred compensation

1,060

965

Operating leases liability

 

762

 

821

Net operating loss carryforward

748

778

Accrued incentive compensation

129

529

Other deferred tax assets

 

1,473

 

1,766

Total deferred tax assets

 

13,981

 

9,415

 

  

 

  

Deferred tax liabilities:

 

  

 

  

Unrealized holding gains on securities

 

0

 

1,278

Defined benefit plans - ASC 835

 

82

 

57

Bank premises and equipment

 

425

 

460

Core deposit intangibles

 

702

 

725

Right-of-use assets from operating leases

 

762

 

821

Other deferred tax liabilities

 

192

 

187

Total deferred tax liabilities

 

2,163

 

3,528

Deferred tax asset, net

$

11,818

$

5,887

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 March 31, 2022 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SECURITIES

Management continually evaluates several objectives in determining the size, securities mix and other characteristics of the available-for-sale debt securities (investment) portfolio. Key objectives include supporting liquidity needs, maximizing return on earning assets within reasonable risk parameters and providing a means to hedge the Corporation’s overall interest rate risk exposure, while maintaining high credit quality.

The composition of the available-for-sale debt securities portfolio at March 31, 2022, December 31, 2021 and December 31, 2020 is as follows:

(Dollars In Thousands)

March 31, 2022

December 31, 2021

 

December 31, 2020

Amortized

Fair

Amortized

Fair

 

Amortized

Fair

 

Cost

 

Value

 

Cost

 

Value

Cost

 

Value

Obligations of the U.S. Treasury

$

38,152

$

36,494

$

25,058

$

24,912

$

12,184

$

12,182

Obligations of U.S. Government agencies

24,455

23,408

23,936

24,091

25,349

26,344

Bank holding company debt securities

24,942

24,043

18,000

17,987

0

0

Obligations of states and political subdivisions:

 

 

 

 

 

 

Tax-exempt

 

149,140

 

143,633

 

143,427

 

148,028

 

116,427

 

122,401

Taxable

 

73,732

 

69,629

 

72,182

 

72,765

 

45,230

 

47,452

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

 

  

 

  

 

  

 

  

 

  

 

  

Residential pass-through securities

 

112,122

 

106,568

 

98,048

 

98,181

 

36,853

 

38,176

Residential collateralized mortgage obligations

 

45,628

 

43,868

 

44,015

 

44,247

 

56,048

 

57,467

Commercial mortgage-backed securities

 

90,682

 

85,270

 

86,926

 

87,468

 

42,461

 

45,310

Total Available-for-Sale Debt Securities

$

558,853

$

532,913

$

511,592

$

517,679

$

334,552

$

349,332

Aggregate Unrealized (Loss) Gain

$

(25,940)

$

6,087

$

14,780

Aggregate Unrealized (Loss) Gain as a % of Amortized Cost

(4.6)

%

1.2

%

4.4

%

Market Yield on 5-Year U.S. Treasury Obligations (a)

2.42

%

1.26

%

0.36

%

(a) Source: Treasury.gov (Daily Treasury Par Yield Curve Rates)

The amortized cost of available-for-sale debt securities increased to $558,853,000 at March 31, 2022 from $511,592,000 at December 31, 2021 and $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020, 2021 and the first quarter 2022.

As reflected in the table above, the fair value of available-for-sale securities as of March 31, 2022 was lower than the amortized cost basis by $25,940,000, or 4.6%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021 and $14,780,000 (4.4%) at December 31, 2020. The unrealized decrease in fair value of the portfolio in the first quarter 2022 and in 2021 resulted from an increase in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was 1.16% higher at March 31, 2022 in comparison to December 31, 2021, and 2.06% higher than at December 31, 2020.

Management reviewed the Corporation’s holdings as of March 31, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 March 31, 2022, 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 2022.

Table VII shows the composition of the loan portfolio at March 31, 2022 and at year-end from 2017 through 2021. The significant loan growth in 2019 and 2020 reflects the impact of acquisitions. Also, the Corporation has increased the proportion of residential mortgage loans sold into the secondary market, contributing to a reduction of $59,887,000 in residential mortgage loans outstanding at March 31, 2022 compared to December 31, 2020. At March 31, 2022, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 36% of the portfolio.

At March 31, 2022, gross loans outstanding totaled $1,538,190,000, a decrease of $26,659,000 from December 31, 2021, including a reduction in PPP loans of $14,487,000 due to repayments and a net reduction in residential mortgage loans of $9,061,000. Excluding PPP loans, total commercial loans at March 31, 2022 were down $3,741,000 from December 31, 2021. Recently, residential mortgage lending activity has slowed, consistent with the rapid increase in interest rates. The “pipeline” of commercial lending opportunities has grown substantially in recent months as portions of the economy have shown signs of recovery from the pandemic. The pace of loan growth for the remainder of 2022 will depend on the impact of potential further increases in interest rates and many other factors.

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 $46,083,000 at March 31, 2022, down from $54,372,000 at December 31, 2021. At March 31, 2022, the balance of participation loans outstanding includes a total of $25,767,000 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 $6,742,000 at March 31, 2022 and $7,469,000 at December 31, 2021.

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 March 31, 2022, the Corporation’s activity under the MPF Direct Program has been minimal.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 March 31, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,557,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000.

At March 31, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $338,482,000, including loans sold through the MPF Xtra program of $163,199,000 and loans sold through the Original program of $175,283,000. At December 31, 2021, outstanding balances of loans sold and serviced through the two programs totaled $334,741,000, including loans sold through the MPF Xtra program of $165,668,000 and loans sold through the Original Program of $169,073,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of March 31, 2022 and December 31, 2021.

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 March 31, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,998,000, and the Corporation has recorded a related allowance for credit losses in the amount of $660,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $90,000 for the three months ended March 31, 2022 and $115,000 for the three months ended March 31, 2021. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $25,000 was recorded in the three months ended March 31, 2022 with a provision for losses of $30,000 in the three months ended March 31, 2021. 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. Pursuant to an 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 purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. 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 purchased loans was $8,907,000 at March 31, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $215,000 at March 31, 2022 and $457,000 at December 31, 2021. In the three months ended March 31, 2022, the Corporation recorded a reduction in other noninterest expense of $242,000 representing amounts realized on SBA claims in excess of prior estimates, with no corresponding expense or reduction in expense in the first quarter 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

March 31, 

December 31, 

    

2022

    

2021

    

2020

    

2019

    

2018

    

2017

Commercial:

 

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

585,677

$

569,840

$

531,810

$

301,227

$

162,611

$

159,266

Commercial and industrial

 

159,793

 

159,073

 

159,577

 

126,374

 

91,856

 

88,276

Paycheck Protection Program - 1st Draw

887

1,356

132,269

0

0

0

Paycheck Protection Program - 2nd Draw

11,490

25,508

0

0

0

0

Political subdivisions

 

81,975

 

81,301

 

53,221

 

53,570

 

53,263

 

59,287

Commercial construction and land

 

37,258

 

60,579

 

42,874

 

33,555

 

11,962

 

14,527

Loans secured by farmland

 

12,507

 

11,121

 

11,736

 

12,251

 

7,146

 

7,255

Multi-family (5 or more) residential

 

53,141

 

50,089

 

55,811

 

31,070

 

7,180

 

7,713

Agricultural loans

 

2,588

 

2,351

 

3,164

 

4,319

 

5,659

 

6,178

Other commercial loans

 

14,827

 

17,153

 

17,289

 

16,535

 

13,950

 

10,986

Total commercial

 

960,143

 

978,371

 

1,007,751

 

578,901

 

353,627

 

353,488

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

481,119

483,629

532,947

510,641

372,339

$

359,987

Residential mortgage loans - junior liens

 

22,572

 

23,314

 

27,311

 

27,503

 

25,450

 

25,325

Home equity lines of credit

 

39,649

 

39,252

 

39,301

 

33,638

 

34,319

 

35,758

1-4 Family residential construction

 

16,945

 

23,151

 

20,613

 

14,798

 

24,698

 

26,216

Total residential mortgage

 

560,285

 

569,346

 

620,172

 

586,580

 

456,806

 

447,286

Consumer

 

17,762

 

17,132

 

16,286

 

16,741

 

17,130

 

14,939

Total

 

1,538,190

 

1,564,849

 

1,644,209

 

1,182,222

 

827,563

 

815,713

Less: allowance for loan losses

 

(14,271)

 

(13,537)

 

(11,385)

 

(9,836)

 

(9,309)

 

(8,856)

Loans, net

$

1,523,919

$

1,551,312

$

1,632,824

$

1,172,386

$

818,254

$

806,857

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 6 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 $14,271,000 at March 31, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $730,000 at March 31, 2022, down slightly from $740,000 at December 31, 2021. Table IX also shows the increase in the allowance in 2022 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $8,192,000 at March 31, 2022 from $7,553,000 at December 31, 2021. The net increase in the collectively determined portion of the allowance includes increases related to management’s updated assessments of purchased performing loans. The impact of changes in the collectively determined portion of the allowance related to purchased performing loans is included in “Changes in loan volume” in the accompanying analysis of the provision.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table X shows the allowance for loan losses totaled 0.93% of gross loans outstanding at March 31, 2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 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 1.11% at March 31, 2022, in line with ratios from the previous years.

The provision (credit) for loan losses by segment in the three-month periods ended March 31, 2022 and 2021 are as follows:

Three Months Ended

March 31, 

March 31, 

(In Thousands)

    

2022

2021

Commercial

$

779

$

242

Residential mortgage

91

(55)

Consumer

 

25

 

(20)

Unallocated

 

(4)

 

92

Total

$

891

$

259

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

Commercial segment

Three Months Ended

March 31, 

March 31, 

(In Thousands)

    

2022

2021

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

$

140

$

193

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

Changes in loan volume

577

142

Changes in historical loss experience factors

62

(49)

Changes in qualitative factors

0

(44)

Total provision for loan losses - Commercial segment

$

779

$

242

Residential mortgage segment

Three Months Ended

March 31, 

March 31, 

(In Thousands)

    

2022

2021

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

$

(16)

$

(10)

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

Changes in loan volume

68

(7)

Changes in historical loss experience factors

(10)

(38)

Changes in qualitative factors

49

0

Total provision for loan losses - Residential mortgage segment

$

91

$

(55)

Consumer segment

Three Months Ended

March 31, 

March 31, 

(In Thousands)

    

2022

2021

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

$

23

$

(1)

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

Changes in loan volume

0

(10)

Changes in historical loss experience factors

(3)

(10)

Changes in qualitative factors

5

1

Total provision for loan losses - Consumer segment

$

25

$

(20)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total - All segments

Three Months Ended

March 31, 

March 31, 

(In Thousands)

    

2022

2021

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

$

147

$

182

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

Changes in loan volume

645

125

Changes in historical loss experience factors

49

(97)

Changes in qualitative factors

54

(43)

Sub-total

895

167

Unallocated

(4)

92

Total provision for loan losses - All segments

$

891

$

259

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).

In the three months ended March 31, 2022, net charge-offs were $157,000, including recoveries of $23,000 and charge-offs of $180,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.01% in the three months ended March 31, 2022, 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 1.19% at March 31, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.81% at March 31, 2022, down from 0.94% at December 31, 2021. Table X presents data at the end of each of the years ended December 31, 2017 through 2021. Table X shows that total nonperforming loans as a percentage of loans of 1.19% at March 31, 2022, though up from December 31, 2019, was lower than the corresponding year-end ratio for all other years presented. Similarly, the March 31, 2022 ratio of total nonperforming assets as a percentage of assets of 0.81% was lower than the corresponding ratio for all years presented except December 31, 2019.

Total impaired loans of $12,005,000 at March 31, 2022 are down $3,729,000 from the corresponding amount at December 31, 2021 of $15,734,000. Purchased credit impaired loans were included in impaired loans and had carrying values totaling $3,983,000 at March 31, 2022 and $6,558,000 at December 31, 2021. In the first quarter 2022, the Corporation received pay-offs on a few purchased credit impaired loans and recognized interest income of $1,398,000 for the excess received over previous carrying amounts.

Over the period 2017-2021 and the first three months of 2022, 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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of March 31, 2022. 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)

Three Months Ended

 

March 31, 

March 31, 

Years Ended December 31, 

    

2022

    

2021

  

  

2021

    

2020

    

2019

    

2018

    

2017

 

Balance, beginning of year

$

13,537

$

11,385

$

11,385

$

9,836

$

9,309

$

8,856

$

8,473

Charge-offs:

 

 

 

  

 

  

 

  

 

  

 

  

Commercial

 

(150)

 

0

 

(1,464)

 

(2,343)

 

(6)

 

(165)

 

(132)

Residential mortgage

 

0

 

0

 

(11)

 

0

 

(190)

 

(158)

 

(197)

Consumer

 

(30)

 

(11)

 

(100)

 

(122)

 

(183)

 

(174)

 

(150)

Total charge-offs

 

(180)

 

(11)

 

(1,575)

 

(2,465)

 

(379)

 

(497)

 

(479)

Recoveries:

 

 

 

  

 

  

 

  

 

  

 

  

Commercial

 

0

 

14

 

22

 

16

 

6

 

317

 

4

Residential mortgage

 

16

 

2

 

6

 

44

 

12

 

8

 

19

Consumer

 

7

 

12

 

38

 

41

 

39

 

41

 

38

Total recoveries

 

23

 

28

 

66

 

101

 

57

 

366

 

61

Net (charge-offs) recoveries

 

(157)

 

17

 

(1,509)

 

(2,364)

 

(322)

 

(131)

 

(418)

Provision for loan losses

 

891

 

259

 

3,661

 

3,913

 

849

 

584

 

801

Balance, end of period

$

14,271

$

11,661

$

13,537

$

11,385

$

9,836

$

9,309

$

8,856

Net charge-offs as a % of average loans

 

0.01

%  

 

0.00

%  

 

0.09

%  

 

0.16

%  

 

0.03

%  

 

0.02

%  

 

0.05

%

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

March 31, 

As of December 31, 

    

2022

    

2021

    

2020

    

2019

    

2018

    

2017

ASC 310 - Impaired loans - individually evaluated

$

730

$

740

$

925

$

1,051

$

1,605

$

1,279

ASC 450 - Collectively evaluated:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial

 

8,192

 

7,553

 

5,545

 

3,913

 

3,102

 

3,078

Residential mortgage

 

4,445

 

4,338

 

4,091

 

4,006

 

3,870

 

3,841

Consumer

 

237

 

235

 

239

 

281

 

233

 

159

Unallocated

 

667

 

671

 

585

 

585

 

499

 

499

Total Allowance

$

14,271

$

13,537

$

11,385

$

9,836

$

9,309

$

8,856

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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)

March 31, 

As of December 31, 

 

    

2022

    

2021

    

2020

    

2019

    

2018

    

2017

 

Impaired loans with a valuation allowance

$

6,528

$

6,540

$

8,082

$

3,375

$

4,851

$

4,100

Impaired loans without a valuation allowance

 

1,494

 

2,636

 

2,895

 

1,670

 

4,923

 

5,411

Purchased credit impaired loans

3,983

6,558

6,841

441

0

0

Total impaired loans

$

12,005

$

15,734

$

17,818

$

5,486

$

9,774

$

9,511

Total loans past due 30-89 days and still accruing

$

3,868

$

5,106

$

5,918

$

8,889

$

7,142

$

9,449

Nonperforming assets:

 

 

  

 

  

 

  

 

  

 

  

Purchased credit impaired loans

$

3,983

$

6,558

$

6,841

$

441

$

0

$

0

Other nonaccrual loans

10,962

12,441

14,575

8,777

13,113

13,404

Total nonaccrual loans

14,945

18,999

21,416

9,218

13,113

13,404

Total loans past due 90 days or more and still accruing

 

3,429

 

2,219

 

1,975

 

1,207

 

2,906

 

3,724

Total nonperforming loans

 

18,374

 

21,218

 

23,391

 

10,425

 

16,019

 

17,128

Foreclosed assets held for sale (real estate)

 

531

 

684

 

1,338

 

2,886

 

1,703

 

1,598

Total nonperforming assets

$

18,905

$

21,902

$

24,729

$

13,311

$

17,722

$

18,726

Loans subject to troubled debt restructurings (TDRs):

 

 

  

 

  

 

  

 

  

 

  

Performing

$

279

$

288

$

166

$

889

$

655

$

636

Nonperforming

 

3,954

 

5,517

 

7,285

 

1,737

 

2,884

 

3,027

Total TDRs

$

4,233

$

5,805

$

7,451

$

2,626

$

3,539

$

3,663

Total nonperforming loans as a % of loans

 

1.19

%  

 

1.36

%  

 

1.42

%  

 

0.88

%  

 

1.94

%  

 

2.10

%

Total nonperforming assets as a % of assets

 

0.81

%  

 

0.94

%  

 

1.10

%  

 

0.80

%  

 

1.37

%  

 

1.47

%

Allowance for loan losses as a % of total loans

 

0.93

%  

 

0.87

%  

 

0.69

%  

 

0.83

%  

 

1.12

%  

 

1.09

%

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

1.11

%  

1.08

%  

1.05

%  

0.93

%  

1.12

%  

1.09

%

Allowance for loan losses as a % of nonperforming loans

 

77.67

%  

 

63.80

%  

 

48.67

%  

 

94.35

%  

 

58.11

%  

 

51.70

%

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

$

2,783

$

3,335

$

5,979

$

1,216

$

0

$

0

Allowance for loan losses

14,271

13,537

11,385

9,836

9,309

8,856

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

$

17,054

$

16,872

$

17,364

$

11,052

$

9,309

$

8,856

Total loans receivable

$

1,538,190

$

1,564,849

$

1,644,209

$

1,182,222

$

827,563

$

815,713

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

2,783

3,335

5,979

1,216

0

0

Total (2)

$

1,540,973

$

1,568,184

$

1,650,188

$

1,183,438

$

827,563

$

815,713

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

1.11

%  

1.08

%  

1.05

%  

0.93

%  

1.12

%  

1.09

%  

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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 March 31, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $85,775,000. The Corporation’s cash position at March 31, 2022 was elevated in comparison to historical (pre-pandemic) 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 $12,817,000 at March 31, 2022.

The Corporation’s outstanding, available, and total credit facilities at March 31, 2022 and December 31, 2021 are as follows:

Outstanding

Available

Total Credit

(In Thousands)

    

March 31, 

    

December 31, 

    

March 31, 

    

December 31, 

    

March 31, 

    

December 31, 

2022

2021

2022

2021

2022

2021

Federal Home Loan Bank of Pittsburgh

$

26,382

$

33,311

$

731,429

$

723,557

$

757,811

$

756,868

Federal Reserve Bank Discount Window

 

0

 

0

 

12,429

 

13,642

 

12,429

 

13,642

Other correspondent banks

 

0

 

0

 

45,000

 

45,000

 

45,000

 

45,000

Total credit facilities

$

26,382

$

33,311

$

788,858

$

782,199

$

815,240

$

815,510

At March 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $20,348,000 and letters of credit totaling $6,034,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. Additional information regarding borrowed funds is included in Note 8 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 March 31, 2022, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $328,909,000.

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 March 31, 2022; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Details concerning capital ratios at March 31, 2022 and December 31, 2021 are presented below. Management believes, as of March 31, 2022, 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 March 31, 2022 and December 31, 2021 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

 

March 31, 2022:

  

  

  

  

  

  

  

  

  

  

 

Total capital to risk-weighted assets:

  

  

  

  

  

  

  

  

  

  

 

Consolidated

$

288,530

18.23

%  

N/A

N/A

N/A

N/A

N/A

N/A

$

166,142

≥10.5

%

C&N Bank

 

256,215

 

16.26

%  

126,278

 

≥8

%

165,740

 

≥10.5

%

157,848

 

≥10

%

165,740

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

 

 

 

 

 

  

 

 

  

 

 

  

Consolidated

 

240,568

 

15.20

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

134,496

 

≥8.5

%

C&N Bank

 

241,284

 

15.29

%  

94,709

 

≥6

%

134,171

 

≥8.5

%

126,278

 

≥8

%

134,171

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

  

 

  

 

 

  

 

 

  

 

 

  

 

  

Consolidated

 

240,568

 

15.20

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

110,762

 

≥7

%

C&N Bank

 

241,284

 

15.29

%  

71,032

 

≥4.5

%

110,494

 

≥7.0

%

102,601

 

≥6.5

%

110,494

 

≥7

%

Tier 1 capital to average assets:

 

 

 

 

  

 

 

  

 

 

  

 

 

  

Consolidated

 

240,568

 

10.59

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

181,748

 

≥8

%

C&N Bank

 

241,284

 

10.70

%  

90,215

 

≥4

%

N/A

 

N/A

 

112,769

 

≥5

%

180,430

 

≥8

%

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

December 31, 2021:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

$

287,614

 

18.21

%  

N/A

 

N/A

N/A

 

N/A

 

N/A

 

N/A

$

165,846

 

≥10.5

%

C&N Bank

 

252,606

 

16.04

%  

126,012

 

≥8

%

165,390

 

≥10.5

%

157,514

 

≥10

%

 

165,390

 

≥10.5

%

Tier 1 capital to risk-weighted assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

240,433

 

15.22

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

134,256

 

≥8.5

%

C&N Bank

 

238,434

 

15.14

%  

94,509

 

≥6

%

133,887

 

≥8.5

%

126,012

 

≥8

%

 

133,887

 

≥8.5

%

Common equity tier 1 capital to risk-weighted assets:

 

  

 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

240,433

 

15.22

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

110,564

 

≥7

%

C&N Bank

 

238,434

 

15.14

%  

70,881

 

≥4.5

%

110,260

 

≥7.0

%

102,384

 

≥6.5

%

 

110,260

 

≥7

%

Tier 1 capital to average assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Consolidated

 

240,433

 

10.53

%  

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

N/A

 

182,683

 

≥8

%

C&N Bank

 

238,434

 

10.52

%  

90,688

 

≥4

%

N/A

 

N/A

 

113,360

 

≥5

%

 

181,376

 

≥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 first quarter 2022, 129,867 shares were repurchased for a total cost of $3,227,000, at an average price of $24.85 per share. Cumulatively through March 31, 2022, 428,926 shares have been repurchased for a total cost of $10,639,000, at an average price of $24.80 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, 2022, 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 March 31, 2022, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.23%.

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 (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $20,492,000 at March 31, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000 at December 31, 2021. The decrease in stockholders’ equity in the first quarter 2022 from the change in accumulated other comprehensive (loss) income resulted from an increase in interest rates. Changes in accumulated other comprehensive (loss) 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. The securities section of Management’s Discussion and Analysis and Note 5 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 March 31, 2022.

INFLATION

Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies, have led to high inflation. The annual inflation rate for the 12-month period ended March 31, 2022, based on changes in the Consumer Price Index, was 8.5%. The 8.5% increase was the largest 12-month advance since 1981.

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The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate (at the high end of the range) from 1.75% to 0.25% and resumed injections of massive amounts of liquidity into the nation’s monetary system through a variety of programs including purchases of large amounts of securities. At its March 15-16, 2022 meeting, the Federal Open Market Committee (FOMC) changed course, raising the high end of the fed funds target rate to 0.50% and announcing that it anticipates ongoing increases to its target rate will be appropriate and that it expects to begin reducing its holdings of securities at a coming meeting. The Committee noted its desire to achieve maximum employment and inflation at a rate of 2 percent over the longer run.

Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including indicators of inflationary pressures, in managing interest rate and other financial risks.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss arising from adverse changes in market rates and prices of the Corporation’s financial instruments. In addition to the effects of interest rates, the market prices of the Corporation’s debt securities within the available-for-sale securities portfolio are affected by fluctuations in the risk premiums (amounts of spread over risk-free rates) demanded by investors. Management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).

The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.

INTEREST RATE RISK

Business risk arising from changes in interest rates is an inherent factor in operating a bank. A significant portion of the Corporation’s assets are long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change.

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects the amount of potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 100-400 basis points of current rates.

The model makes estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and market value of portfolio equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.

The Corporation’s Board of Directors has established policy guidelines for acceptable levels of interest rate risk, based on an immediate increase or decrease in interest rates. The policy limits acceptable fluctuations in net interest income from the baseline (flat rates) one-year scenario and variances in the market value of portfolio equity from the baseline values based on current rates.

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Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of March 31, 2022 and December 31, 2021. The table shows the Corporation is asset-sensitive, meaning the amounts of net interest income and market value of portfolio equity increase in the upward rate scenarios and decrease in the downward rate scenarios. The table also shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

March 31, 2022 Data

(In Thousands)

Period Ending March 31, 2023

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$

101,995

$

17,804

$

84,191

19.5

%

25.0

%

+300

95,469

14,798

80,671

14.5

%

20.0

%

+200

89,022

11,793

77,229

9.6

%

15.0

%

+100

82,584

8,788

73,796

4.7

%

10.0

%

0

76,265

5,783

70,482

0.0

%

0.0

%

-100

72,037

4,664

67,373

(4.4)

%

10.0

%

-200

69,795

4,238

65,557

(7.0)

%

15.0

%

Market Value of Portfolio Equity at March 31, 2022

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

498,635

10.0

%

50.0

%

+300

488,691

7.8

%

45.0

%

+200

478,667

5.6

%

35.0

%

+100

466,970

3.0

%

25.0

%

0

453,227

0.0

%

0.0

%

-100

435,057

(4.0)

%

25.0

%

-200

409,709

(9.6)

%

35.0

%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2021 Data

(In Thousands)

Period Ending December 31, 2022

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$

98,839

$

18,142

$

80,697

19.1

%

25.0

%

+300

92,438

15,061

77,377

14.2

%

20.0

%

+200

86,112

11,981

74,131

9.4

%

15.0

%

+100

79,740

8,900

70,840

4.5

%

10.0

%

0

73,536

5,760

67,776

0.0

%

0.0

%

-100

70,118

4,820

65,298

(3.7)

%

10.0

%

-200

68,824

4,503

64,321

(5.1)

%

15.0

%

Market Value of Portfolio Equity at December 31, 2021

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$

471,951

14.1

%

50.0

%

+300

459,810

11.1

%

45.0

%

+200

447,354

8.1

%

35.0

%

+100

431,856

4.4

%

25.0

%

0

413,767

0.0

%

0.0

%

-100

388,721

(6.1)

%

25.0

%

-200

365,331

(11.7)

%

35.0

%

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.

There were no significant changes in the Corporation’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting.

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 February 22, 2022.

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 March 31, 2022, 428,926 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 first quarter 2022.

    

    

    

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

January 1 - 31, 2022

 

10,000

$

25.00

 

309,059

 

690,941

February 1 - 28, 2022

 

23,413

$

24.88

 

332,472

 

667,528

March 1 - 31, 2022

 

96,454

$

24.83

 

428,926

 

571,074

Item 3.       Defaults Upon Senior Securities

None

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

3.1

Articles of Incorporation

    

Filed herewith

 

 

3.2

By-laws

 

Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 8-K filed February 18, 2022

 

 

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

 

 

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

 

 

 

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

 

 

 

 

 

May 6, 2022

 

By: /s/ J. Bradley Scovill

Date

 

President and Chief Executive Officer

 

 

 

 

 

 

 

May 6, 2022

 

By: /s/ Mark A. Hughes

Date

 

Treasurer and Chief Financial Officer

 

 

60