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

◻ 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

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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

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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.

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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.

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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

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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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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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10%at 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


	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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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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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:

Other 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.

Net 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.

Service 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.

Brokerage and insurance revenue of $522,000 increased $196,000 from the first quarter 2021 total, due to commissions on higher transaction volume.

Trust 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:

Salaries 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.

Data 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.

Net 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.

Other 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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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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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