UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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)	15,500,416 Shares Outstanding on November 2, 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) – September 30, 2022 and December 31, 2021			Page 3

Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2022 and 2021			Page 4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, 2022 and 2021			Page 5

Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, 2022 and 2021			Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods September 30, 2022 and 2021			Pages 7 – 8

Notes to Unaudited Consolidated Financial Statements			Pages 9 – 37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 38 – 63

Item 3. Quantitative and Qualitative Disclosures About Market Risk			Pages 63 – 65

Item 4. Controls and Procedures			Page 65

Part II. Other Information			Pages 65 – 67

Signatures			Page 68

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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)


	September 30,		December 31,
	2022		2021
ASSETS
Cash and due from banks:
Noninterest-bearing	$	30,959	$	16,729
Interest-bearing		33,085		88,219
Total cash and due from banks		64,044		104,948
Available-for-sale debt securities, at fair value		487,980		517,679

Loans receivable		1,690,246		1,564,849
Allowance for loan losses		(16,170)		(13,537)
Loans, net		1,674,076		1,551,312

Bank-owned life insurance		31,074		30,669
Accrued interest receivable		8,425		7,235
Bank premises and equipment, net		21,881		20,683
Foreclosed assets held for sale		454		684
Deferred tax asset, net		22,327		5,887
Goodwill		52,505		52,505
Core deposit intangibles, net		2,987		3,316
Other assets		34,427		32,730
TOTAL ASSETS	$	2,400,180	$	2,327,648

LIABILITIES
Deposits:
Noninterest-bearing	$	557,769	$	521,206
Interest-bearing		1,481,826		1,403,854
Total deposits		2,039,595		1,925,060
Short-term borrowings		2,457		1,803
Long-term borrowings - FHLB advances		55,463		28,042
Senior notes, net		14,749		14,701
Subordinated debt, net		24,580		33,009
Accrued interest and other liabilities		24,547		23,628
TOTAL LIABILITIES		2,161,391		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 30,000,000 shares;
issued 16,030,172 and outstanding 15,500,416 at September 30, 2022;
issued 16,030,172 and outstanding 15,759,090 at December 31, 2021		16,030		16,030
Paid-in capital		143,894		144,453
Retained earnings		148,304		142,612
Treasury stock, at cost; 529,756 shares at September 30, 2022 and 271,082
shares at December 31, 2021		(12,970)		(6,716)
Accumulated other comprehensive (loss) income		(56,469)		5,026
TOTAL STOCKHOLDERS' EQUITY		238,789		301,405
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	2,400,180	$	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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
INTEREST INCOME
Interest and fees on loans:
Taxable	$	20,085	$	18,529	$	56,561	$	56,095
Tax-exempt		505		450		1,426		1,300
Income from available-for-sale debt securities:
Taxable		2,138		1,304		6,143		3,604
Tax-exempt		768		668		2,258		1,973
Other interest and dividend income		214		122		404		283
Total interest and dividend income		23,710		21,073		66,792		63,255
INTEREST EXPENSE
Interest on deposits		1,972		1,063		4,012		3,558
Interest on short-term borrowings		179		0		302		22
Interest on long-term borrowings - FHLB advances		332		87		436		330
Interest on senior notes, net		119		118		357		175
Interest on subordinated debt, net		229		346		849		947
Total interest expense		2,831		1,614		5,956		5,032
Net interest income		20,879		19,459		60,836		58,223
Provision for loan losses		3,794		1,530		4,993		2,533
Net interest income after provision for loan losses		17,085		17,929		55,843		55,690
NONINTEREST INCOME
Trust revenue		1,744		1,821		5,245		5,254
Brokerage and insurance revenue		696		560		1,784		1,392
Service charges on deposit accounts		1,105		1,249		3,662		3,337
Interchange revenue from debit card transactions		1,031		975		3,050		2,854
Net gains from sale of loans		131		797		733		2,786
Loan servicing fees, net		189		153		757		547
Increase in cash surrender value of life insurance		133		139		405		434
Other noninterest income		622		665		2,666		2,837
Realized gains on available-for-sale debt securities, net		20		23		21		25
Total noninterest income		5,671		6,382		18,323		19,466
NONINTEREST EXPENSE
Salaries and employee benefits		10,826		9,427		31,698		27,821
Net occupancy and equipment expense		1,498		1,217		4,217		3,740
Data processing and telecommunications expense		1,719		1,475		5,062		4,342
Automated teller machine and interchange expense		397		357		1,128		1,049
Pennsylvania shares tax		487		482		1,463		1,463
Professional fees		521		538		1,490		1,683
Other noninterest expense		1,995		1,850		6,310		6,356
Total noninterest expense		17,443		15,346		51,368		46,454
Income before income tax provision		5,313		8,965		22,798		28,702
Income tax provision		858		1,566		3,959		5,456
NET INCOME	$	4,455	$	7,399	$	18,839	$	23,246
EARNINGS PER COMMON SHARE - BASIC	$	0.29	$	0.47	$	1.21	$	1.46
EARNINGS PER COMMON SHARE - DILUTED	$	0.29	$	0.47	$	1.21	$	1.46

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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Net income	$	4,455	$	7,399	$	18,839	$	23,246

Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities		(25,880)		(3,608)		(77,923)		(6,781)
Reclassification adjustment for gains realized in income		(20)		(23)		(21)		(25)
Other comprehensive loss on available-for-sale debt securities		(25,900)		(3,631)		(77,944)		(6,806)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		0		0		133		(5)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(9)		(5)		(31)		(13)
Other comprehensive (loss) income on pension and postretirement obligations		(9)		(5)		102		(18)

Other comprehensive loss before income tax		(25,909)		(3,636)		(77,842)		(6,824)
Income tax related to other comprehensive loss		5,442		765		16,347		1,434

Net other comprehensive loss		(20,467)		(2,871)		(61,495)		(5,390)

Comprehensive (loss) income	$	(16,012)	$	4,528	$	(42,656)	$	17,856

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)


	Nine Months Ended
	September 30,		September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,839	$	23,246
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,993		2,533
Realized gains on available-for-sale debt securities, net		(21)		(25)
Net amortization of securities		2,174		1,554
Increase in cash surrender value of life insurance		(405)		(434)
Depreciation and amortization of bank premises and equipment		1,780		1,602
Net accretion of purchase accounting adjustments		(1,017)		(1,827)
Stock-based compensation		1,169		970
Deferred income taxes		(93)		(989)
(Increase) decrease in fair value of servicing rights		(128)		9
Gains on sales of loans, net		(733)		(2,786)
Origination of loans held for sale		(25,003)		(86,428)
Proceeds from sales of loans held for sale		26,752		87,483
(Increase) decrease in accrued interest receivable and other assets		(1,562)		295
Decrease in accrued interest payable and other liabilities		(352)		(50)
Other		148		(18)
Net Cash Provided by Operating Activities		26,541		25,135
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit		(250)		(3,000)
Proceeds from maturities of certificates of deposit		750		0
Proceeds from sales of available-for-sale debt securities		4,100		2,027
Proceeds from calls and maturities of available-for-sale debt securities		50,263		48,262
Purchase of available-for-sale debt securities		(104,601)		(145,445)
Redemption of Federal Home Loan Bank of Pittsburgh stock		10,765		1,934
Purchase of Federal Home Loan Bank of Pittsburgh stock		(12,009)		(1,614)
Net (increase) decrease in loans		(126,792)		68,018
Proceeds from bank owned life insurance		0		287
Proceeds from sales of premises and equipment		0		575
Purchase of premises and equipment		(2,986)		(1,173)
Proceeds from sale of foreclosed assets		351		303
Other		161		176
Net Cash Used in Investing Activities		(180,248)		(29,650)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		114,667		120,386
Net increase (decrease) in short-term borrowings		654		(18,082)
Proceeds from long-term borrowings - FHLB advances		39,041		0
Repayments of long-term borrowings - FHLB advances		(11,430)		(15,571)
Proceeds from issuance of senior notes, net of issuance costs		0		14,663
Proceeds from issuance of subordinated debt, net of issuance costs		0		24,437
Redemption of subordinated debt		(8,500)		(8,000)
Sale of treasury stock		141		212
Purchases of treasury stock		(9,349)		(7,412)
Common dividends paid		(11,921)		(11,980)
Net Cash Provided by Financing Activities		113,303		98,653
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(40,404)		94,138
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		95,848		96,017
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	55,444	$	190,155
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Increase in accrued purchase of available-for-sale debt securities	$	160	$	1,704
Assets acquired through foreclosure of real estate loans	$	51	$	317
Leased assets obtained in exchange for new operating lease liabilities	$	904	$	739
Interest paid	$	5,729	$	6,063
Income taxes paid	$	3,835	$	8,076

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 September 30, 2022	Shares	Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, June 30, 2022	16,030,172	530,958	$	16,030	$	143,417	$	148,187	$	(36,002)	$	(13,013)	$	258,619
Net income								4,455						4,455
Other comprehensive loss, net										(20,467)				(20,467)
Cash dividends declared on common stock, $.28 per share								(4,338)						(4,338)
Shares issued for dividend reinvestment plan		(16,019)				8						392		400
Forfeiture of restricted stock		3,638				81						(81)		0
Stock-based compensation expense						388								388
Purchase of restricted stock for tax withholding		910										(22)		(22)
Treasury stock purchases		10,269										(246)		(246)
Balance, September 30, 2022	16,030,172	529,756	$	16,030	$	143,894	$	148,304	$	(56,469)	$	(12,970)	$	238,789

Three Months Ended September 30, 2021
Balance, June 30, 2021	16,030,172	72,660	$	16,030	$	143,817	$	136,756	$	9,276	$	(1,746)	$	304,133
Net income								7,399						7,399
Other comprehensive loss, net										(2,871)				(2,871)
Cash dividends declared on common stock, $.28 per share								(4,440)						(4,440)
Shares issued for dividend reinvestment plan		(16,833)				10						415		425
Shares issued from treasury related to exercise of stock options		(7,000)										135		135
Stock-based compensation expense						345								345
Purchase of restricted stock for tax withholding		691										(17)		(17)
Treasury stock purchases		230,404										(5,707)		(5,707)
Balance, September 30, 2021	16,030,172	279,922	$	16,030	$	144,172	$	139,715	$	6,405	$	(6,920)	$	299,402

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

(Continued)


									Accumulated
									Other
	Common	Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
Nine Months Ended September 30, 2022	Shares	Shares	Stock		Capital		Earnings		(Loss) Income		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								18,839						18,839
Other comprehensive loss, net										(61,495)				(61,495)
Cash dividends declared on common stock, $.84 per share								(13,147)						(13,147)
Shares issued for dividend reinvestment plan		(49,221)				10						1,216		1,226
Shares issued from treasury 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		10,782				228						(228)		0
Stock-based compensation expense						1,169								1,169
Purchase of restricted stock for tax withholding		6,964										(175)		(175)
Treasury stock purchases		375,416										(9,174)		(9,174)
Balance, September 30, 2022	16,030,172	529,756	$	16,030	$	143,894	$	148,304	$	(56,469)	$	(12,970)	$	238,789

Nine Months Ended September 30, 2021
Balance, December 31, 2020	15,982,815	70,831	$	15,983	$	143,644	$	129,703	$	11,795	$	(1,369)	$	299,756
Net income								23,246						23,246
Other comprehensive loss, net										(5,390)				(5,390)
Cash dividends declared on common stock, $.83 per share								(13,234)						(13,234)
Shares issued for dividend reinvestment plan	36,368	(16,833)		36		803						415		1,254
Shares issued from treasury related to exercise of stock options		(12,414)				(28)						240		212
Restricted stock granted	10,989	(67,402)		11		(1,319)						1,308		0
Forfeiture of restricted stock		5,290				102						(102)		0
Stock-based compensation expense						970								970
Purchase of restricted stock for tax withholding		8,350										(174)		(174)
Treasury stock purchases		292,100										(7,238)		(7,238)
Balance, September 30, 2021	16,030,172	279,922	$	16,030	$	144,172	$	139,715	$	6,405	$	(6,920)	$	299,402

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 nine-month period ended September 30, 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.

Recent Accounting Pronouncements - Adopted

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.

●

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

The Corporation has elected to apply the optional expedients prospectively for applicable loan and other contracts, and implementation of this election did not have a material effect on the Corporation’s financial position or results of operations.

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. 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. 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. The allowance for credit losses will be based on the

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions and other relevant factors. The Corporation will also apply qualitative factors to account for information that may not be reflected in quantitatively derived results or other relevant factors to ensure the allowance reflects management’s best estimate of current expected credit losses. Preliminary expected loss estimates have been determined and continue to be validated and reviewed. In the fourth quarter 2022, the Corporation will continue to refine its expected credit loss estimates and will finalize the operational and control structure supporting the process.

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for TDRs by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation will adopt ASU 2022-02 on January 1, 2023. The Corporation does not expect the adoption of ASU 2022-02 to have a material impact on its consolidated financial statements.

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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Basic
Net income	$	4,455	$	7,399	$	18,839	$	23,246
Less: Dividends and undistributed earnings allocated to participating securities		(39)		(63)		(169)		(189)
Net income attributable to common shares	$	4,416	$	7,336	$	18,670	$	23,057
Basic weighted-average common shares outstanding		15,364,075		15,703,932		15,482,672		15,806,897
Basic earnings per common share (a)	$	0.29	$	0.47	$	1.21	$	1.46
Diluted
Net income attributable to common shares	$	4,416	$	7,336	$	18,670	$	23,057
Basic weighted-average common shares outstanding		15,364,075		15,703,932		15,482,672		15,806,897
Dilutive effect of potential common stock arising from stock options		3,114		6,413		3,276		6,232
Diluted weighted-average common shares outstanding		15,367,189		15,710,345		15,485,948		15,813,129
Diluted earnings per common share (a)	$	0.29	$	0.47	$	1.21	$	1.46
Weighted-average nonvested restricted shares outstanding		136,040		133,053		139,761		129,456

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

Anti-dilutive stock options are excluded from earnings per share calculations. There were no anti-dilutive instruments in the three-month and nine-month periods ended September 30, 2022 and 2021.

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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 September 30, 2022
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(25,880)	$	5,437	$	(20,443)
Reclassification adjustment for (gains) realized in income		(20)		4		(16)
Other comprehensive loss from available-for-sale debt securities		(25,900)		5,441		(20,459)
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(9)		1		(8)
Total other comprehensive loss	$	(25,909)	$	5,442	$	(20,467)


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Three Months Ended September 30, 2021
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(3,608)	$	759	$	(2,849)
Reclassification adjustment for (gains) realized in income		(23)		5		(18)
Other comprehensive loss from available-for-sale debt securities	$	(3,631)	$	764	$	(2,867)
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(5)		1		(4)
Total other comprehensive loss	$	(3,636)	$	765	$	(2,871)


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2022
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(77,923)	$	16,365	$	(61,558)
Reclassification adjustment for (gains) realized in income		(21)		4		(17)
Other comprehensive loss from available-for-sale debt securities		(77,944)		16,369		(61,575)
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		(31)		5		(26)
Other comprehensive income on unfunded retirement obligations		102		(22)		80
Total other comprehensive loss	$	(77,842)	$	16,347	$	(61,495)

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(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2021
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(6,781)	$	1,425	$	(5,356)
Reclassification adjustment for (gains) realized in income		(25)		5		(20)
Other comprehensive loss from available-for-sale debt securities		(6,806)		1,430		(5,376)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		(5)		1		(4)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(13)		3		(10)
Other comprehensive loss on unfunded retirement obligations		(18)		4		(14)
Total other comprehensive loss	$	(6,824)	$	1,434	$	(5,390)

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

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 September 30, 2022
Balance, beginning of period	$	(36,307)	$	305	$	(36,002)
Other comprehensive loss during three months ended September 30, 2022		(20,459)		(8)		(20,467)
Balance, end of period	$	(56,766)	$	297	$	(56,469)

Three Months Ended September 30, 2021
Balance, beginning of period	$	9,167	$	109	$	9,276
Other comprehensive loss during three months ended September 30, 2021		(2,867)		(4)		(2,871)
Balance, end of period	$	6,300	$	105	$	6,405


(In Thousands)	Unrealized				Accumulated
	(Losses)		Unfunded		Other
	Gains		Retirement		Comprehensive
	on Securities		Obligations		(Loss) Income
Nine Months Ended September 30, 2022
Balance, beginning of period	$	4,809	$	217	$	5,026
Other comprehensive loss during nine months ended September 30, 2022		(61,575)		80		(61,495)
Balance, end of period	$	(56,766)	$	297	$	(56,469)

Nine Months Ended September 30, 2021
Balance, beginning of period	$	11,676	$	119	$	11,795
Other comprehensive loss during nine months ended September 30, 2021		(5,376)		(14)		(5,390)
Balance, end of period	$	6,300	$	105	$	6,405

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4. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, 2022 and December 31, 2021 include the following:


(In Thousands)	September 30,		December 31,
	2022		2021
Cash and cash equivalents	$	55,444	$	95,848
Certificates of deposit		8,600		9,100
Total cash and due from banks	$	64,044	$	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 September 30, 2022 or December 31, 2021.

5. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, 2022 and December 31, 2021 are summarized as follows:


(In Thousands)	September 30, 2022
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value

Obligations of the U.S. Treasury	$	35,155	$	0	$	(3,556)	$	31,599
Obligations of U.S. Government agencies		23,939		0		(2,550)		21,389
Bank holding company debt securities		28,944		0		(3,512)		25,432
Obligations of states and political subdivisions:
Tax-exempt		146,847		153		(20,290)		126,710
Taxable		69,902		0		(11,585)		58,317
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		116,833		0		(14,094)		102,739
Residential collateralized mortgage obligations		44,075		0		(4,443)		39,632
Commercial mortgage-backed securities		89,349		0		(11,966)		77,383
Private label commercial mortgage-backed securities		4,793		0		(14)		4,779
Total available-for-sale debt securities	$	559,837	$	153	$	(72,010)	$	487,980

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(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

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021:


September 30, 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	$	20,913	$	(2,195)	$	10,686	$	(1,361)	$	31,599	$	(3,556)
Obligations of U.S. Government agencies		8,486		(454)		12,903		(2,096)		21,389		(2,550)
Bank holding company debt securities		25,432		(3,512)		0		0		25,432		(3,512)
Obligations of states and political subdivisions:
Tax-exempt		107,565		(16,818)		13,122		(3,472)		120,687		(20,290)
Taxable		37,480		(6,189)		20,837		(5,396)		58,317		(11,585)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		66,747		(7,746)		35,992		(6,348)		102,739		(14,094)
Residential collateralized mortgage obligations		31,957		(2,763)		7,675		(1,680)		39,632		(4,443)
Commercial mortgage-backed securities		47,633		(4,214)		29,750		(7,752)		77,383		(11,966)
Private label commercial mortgage-backed securities		4,779		(14)		0		0		4,779		(14)
Total temporarily impaired available-for-sale debt securities	$	350,992	$	(43,905)	$	130,965	$	(28,105)	$	481,957	$	(72,010)

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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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Gross realized gains from sales	$	44	$	23	$	48	$	27
Gross realized losses from sales		(24)		0		(27)		(2)
Net realized gains	$	20	$	23	$	21	$	25

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, 2022. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	September 30, 2022
	Amortized		Fair
	Cost		Value
Due in one year or less	$	12,648	$	12,490
Due from one year through five years		71,702		66,612
Due from five years through ten years		92,119		81,106
Due after ten years		128,318		103,239
Sub-total		304,787		263,447
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		116,833		102,739
Residential collateralized mortgage obligations		44,075		39,632
Commercial mortgage-backed securities		89,349		77,383
Private label commercial mortgage-backed securities		4,793		4,779
Total	$	559,837	$	487,980

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 $281,096,000 at September 30, 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.

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Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery.

A summary of information management considered in evaluating debt and equity securities for OTTI at September 30, 2022 is provided below.

Debt Securities

At September 30, 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 September 30, 2022 was lower than the amortized cost basis by $71,857,000, or 12.8%. 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 nine months of 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 September 30, 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 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 $10,557,000 at September 30, 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 September 30, 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 $857,000 at September 30, 2022 and $971,000 at December 31, 2021, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $143,000 at September 30, 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.

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6. LOANS

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at September 30, 2022 and December 31, 2021 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)


	September 30,		December 31,
	2022		2021
Commercial:
Commercial loans secured by real estate	$	658,861	$	569,840
Commercial and industrial		172,258		159,073
Paycheck Protection Program - 1st Draw		24		1,356
Paycheck Protection Program - 2nd Draw		2,011		25,508
Political subdivisions		83,725		81,301
Commercial construction and land		76,194		60,579
Loans secured by farmland		12,839		11,121
Multi-family (5 or more) residential		59,315		50,089
Agricultural loans		2,492		2,351
Other commercial loans		14,636		17,153
Total commercial		1,082,355		978,371
Residential mortgage:
Residential mortgage loans - first liens		492,854		483,629
Residential mortgage loans - junior liens		24,208		23,314
Home equity lines of credit		42,972		39,252
1-4 Family residential construction		29,950		23,151
Total residential mortgage		589,984		569,346
Consumer		17,907		17,132
Total		1,690,246		1,564,849
Less: allowance for loan losses		(16,170)		(13,537)
Loans, net	$	1,674,076	$	1,551,312

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $4,221,000 at September 30, 2022 and $4,247,000 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.

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.

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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 September 30, 2022, the recorded investment in 1st Draw PPP loans was $24,000, including contractual principal balances of $26,000, reduced by net deferred origination fees of $2,000. The recorded investment in 2nd Draw PPP loans was $2,011,000, including contractual principal balances of $2,093,000 reduced by net deferred origination fees of $82,000. Interest and fees on PPP loans which are included in taxable interest and fees on loans in the unaudited consolidated statements of income totaled $118,000 in the third quarter 2022 and $1,639,000 in the third quarter 2021, and $899,000 in the nine-month period ended September 30, 2022 and $4,886,000 in the nine-month period ended September 30, 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 and nine-month periods ended September 30, 2022 and 2021, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(866)	$	(5)	$	(637)	$	718
Accretion (amortization) recognized in interest income		5		(368)		(224)		(1,091)
Adjustments to gross amortized cost of loans at end of period	$	(861)	$	(373)	$	(861)	$	(373)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(2,403)	$	(4,502)	$	(3,335)	$	(5,979)
Accretion recognized in interest income		308		666		1,240		2,143
Adjustments to gross amortized cost of loans at end of period	$	(2,095)	$	(3,836)	$	(2,095)	$	(3,836)

A summary of PCI loans held at September 30, 2022 and December 31, 2021 is as follows:


(In Thousands)	September 30,		December 31,
	2022		2021
Outstanding balance	$	5,564	$	9,802
Carrying amount		3,783		6,558

In the third quarter 2022, the Corporation received repayments on PCI loans in excess of previous carrying amounts, resulting in income of $173,000 as compared to $17,000 in the third quarter 2021. In the nine-month period ended September 30, 2022, the Corporation received repayments on PCI loans in excess of previous carrying amounts, resulting in income of $1,585,000 as compared to $35,000 in the nine-month period ended September 30, 2021. These amounts are included in interest and fees on taxable loans in the unaudited consolidated statements of income.

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

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of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of September 30, 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 and nine-month periods ended September 30, 2022 and 2021 were as follows:


Three Months Ended September 30, 2022	June 30, 2022								September 30, 2022
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	4,982	$	(2,160)	$	0	$	3,225	$	6,047
Commercial and industrial		2,792		0		0		31		2,823
Commercial construction and land		515		0		0		169		684
Loans secured by farmland		112		0		0		1		113
Multi-family (5 or more) residential		339		0		0		88		427
Agricultural loans		23		0		0		(1)		22
Other commercial loans		131		0		0		(9)		122
Total commercial		8,894		(2,160)		0		3,504		10,238
Residential mortgage:
Residential mortgage loans - first liens		3,689		0		1		229		3,919
Residential mortgage loans - junior liens		180		0		0		14		194
Home equity lines of credit		308		0		0		25		333
1-4 Family residential construction		215		0		0		36		251
Total residential mortgage		4,392		0		1		304		4,697
Consumer		261		(36)		24		(14)		235
Unallocated		1,000		0		0		0		1,000
Total Allowance for Loan Losses	$	14,547	$	(2,196)	$	25	$	3,794	$	16,170


Three Months Ended September 30, 2021	June 30, 2021								September 30, 2021
(In Thousands)	Balance		Charge-offs		Recoveries		Provision (Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	3,452	$	0	$	0	$	368	$	3,820
Commercial and industrial		2,781		(1,194)		6		947		2,540
Commercial construction and land		452		0		0		107		559
Loans secured by farmland		113		0		0		(1)		112
Multi-family (5 or more) residential		150		0		0		46		196
Agricultural loans		25		0		0		8		33
Other commercial loans		145		0		0		28		173
Total commercial		7,118		(1,194)		6		1,503		7,433
Residential mortgage:
Residential mortgage loans - first liens		3,536		0		1		29		3,566
Residential mortgage loans - junior liens		327		0		0		(6)		321
Home equity lines of credit		294		0		0		(11)		283
1-4 Family residential construction		198		0		0		(9)		189
Total residential mortgage		4,355		0		1		3		4,359
Consumer		231		(26)		8		24		237
Unallocated		671		0		0		0		671
Total Allowance for Loan Losses	$	12,375	$	(1,220)	$	15	$	1,530	$	12,700

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For the three months ended September 30, 2022, the provision for loan losses was $3,794,000, an increase in expense of $2,264,000 as compared to $1,530,000 for the three months ended September 30, 2021. The third quarter 2022 provision included net charge-offs of $2,171,000 and an increase of $1,623,000 in the collectively determined portion of the allowance. In the third quarter 2022, the Corporation recorded a partial charge-off of $2,160,000 on a commercial real estate secured loan with a principal balance of $6,920,000 at the time of charge-off. This is a participation loan to a borrower in the health care industry. The charge-off resulted from the borrower’s default due to deterioration in financial performance accompanied by a significant decrease in the appraised value of property at a recently closed facility that had been one of the primary sources of collateral on the loan. Realization of the recorded investment in the loan of $4,760,000 at September 30, 2022 is principally dependent upon the amount of proceeds from sales of the real estate and, if necessary, payments of any shortfall by the guarantors.

The third quarter 2021 provision included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. At September 30, 2022, the recorded investment in this loan was $196,000. In addition, there is a PPP loan to this borrower with a balance of $727,000 at September 30, 2022 that is in the process of collection. At September 30, 2022, there was no specific allowance related to loans to this borrower.


	December 31,								September 30,
Nine Months Ended September 30, 2022	2021						Provision		2022
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	4,405	$	(2,160)	$	0	$	3,802	$	6,047
Commercial and industrial		2,723		(150)		0		250		2,823
Commercial construction and land		637		0		0		47		684
Loans secured by farmland		115		0		0		(2)		113
Multi-family (5 or more) residential		215		0		0		212		427
Agricultural loans		25		0		0		(3)		22
Other commercial loans		173		0		0		(51)		122
Total commercial		8,293		(2,310)		0		4,255		10,238
Residential mortgage:
Residential mortgage loans - first liens		3,650		0		3		266		3,919
Residential mortgage loans - junior liens		184		0		0		10		194
Home equity lines of credit		302		0		15		16		333
1-4 Family residential construction		202		0		0		49		251
Total residential mortgage		4,338		0		18		341		4,697
Consumer		235		(107)		39		68		235
Unallocated		671		0		0		329		1,000
Total Allowance for Loan Losses	$	13,537	$	(2,417)	$	57	$	4,993	$	16,170

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


	December 31,								September 30,
Nine Months Ended September 30, 2021	2020						Provision		2021
(In Thousands)	Balance		Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate	$	3,051	$	0	$	2	$	767	$	3,820
Commercial and industrial		2,245		(1,194)		20		1,469		2,540
Commercial construction and land		454		0		0		105		559
Loans secured by farmland		120		0		0		(8)		112
Multi-family (5 or more) residential		236		0		0		(40)		196
Agricultural loans		34		0		0		(1)		33
Other commercial loans		168		0		0		5		173
Total commercial		6,308		(1,194)		22		2,297		7,433
Residential mortgage:
Residential mortgage loans - first liens		3,524		(11)		3		50		3,566
Residential mortgage loans - junior liens		349		0		0		(28)		321
Home equity lines of credit		281		0		2		0		283
1-4 Family residential construction		99		0		0		90		189
Total residential mortgage		4,253		(11)		5		112		4,359
Consumer		239		(73)		33		38		237
Unallocated		585		0		0		86		671
Total Allowance for Loan Losses	$	11,385	$	(1,278)	$	60	$	2,533	$	12,700

For the nine months ended September 30, 2022, the provision for loan losses was $4,993,000, an increase in expense of $2,460,000 as compared to $2,533,000 recorded for the first nine months ended September 30, 2021. The provision for the first nine months of 2022 includes $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first nine months of 2021 includes $1,176,000 related to specific loans (net charge-offs of $1,218,000 and a decrease in specific allowances on loans of $42,000), an increase of $1,271,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion.

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 September 30, 2022 and December 31, 2021:


September 30, 2022									Purchased
(In Thousands)			Special						Credit
	Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate	$	637,390	$	5,938	$	11,789	$	0	$	3,744	$	658,861
Commercial and Industrial		159,735		9,085		3,399		0		39		172,258
Paycheck Protection Program - 1st Draw		24		0		0		0		0		24
Paycheck Protection Program - 2nd Draw		2,011		0		0		0		0		2,011
Political subdivisions		83,725		0		0		0		0		83,725
Commercial construction and land		75,433		714		47		0		0		76,194
Loans secured by farmland		10,903		618		1,318		0		0		12,839
Multi-family (5 or more) residential		58,458		0		857		0		0		59,315
Agricultural loans		1,875		29		588		0		0		2,492
Other commercial loans		14,636		0		0		0		0		14,636
Total commercial		1,044,190		16,384		17,998		0		3,783		1,082,355
Residential Mortgage:
Residential mortgage loans - first liens		478,768		7,398		6,688		0		0		492,854
Residential mortgage loans - junior liens		23,739		164		305		0		0		24,208
Home equity lines of credit		42,424		59		489		0		0		42,972
1-4 Family residential construction		29,950		0		0		0		0		29,950
Total residential mortgage		574,881		7,621		7,482		0		0		589,984
Consumer		17,844		0		63		0		0		17,907
Totals	$	1,636,915	$	24,005	$	25,543	$	0	$	3,783	$	1,690,246


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 September 30, 2022 and December 31, 2021.


September 30, 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	$	12,080	$	646,781	$	658,861	$	427	$	5,620	$	6,047
Commercial and industrial		369		171,889		172,258		0		2,823		2,823
Paycheck Protection Program - 1st Draw		0		24		24		0		0		0
Paycheck Protection Program - 2nd Draw		0		2,011		2,011		0		0		0
Political subdivisions		0		83,725		83,725		0		0		0
Commercial construction and land		47		76,147		76,194		0		684		684
Loans secured by farmland		78		12,761		12,839		0		113		113
Multi-family (5 or more) residential		0		59,315		59,315		0		427		427
Agricultural loans		60		2,432		2,492		0		22		22
Other commercial loans		0		14,636		14,636		0		122		122
Total commercial		12,634		1,069,721		1,082,355		427		9,811		10,238
Residential mortgage:
Residential mortgage loans - first liens		576		492,278		492,854		0		3,919		3,919
Residential mortgage loans - junior liens		31		24,177		24,208		0		194		194
Home equity lines of credit		68		42,904		42,972		0		333		333
1-4 Family residential construction		0		29,950		29,950		0		251		251
Total residential mortgage		675		589,309		589,984		0		4,697		4,697
Consumer		0		17,907		17,907		0		235		235
Unallocated												1,000

Total	$	13,309	$	1,676,937	$	1,690,246	$	427	$	14,743	$	16,170

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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 September 30, 2022 and December 31, 2021 is provided in the table immediately below.


(In Thousands)	September 30, 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	$	12,680	$	8,684	$	0	$	6,600	$	4,458	$	0
Commercial and industrial		2,135		369		0		5,213		2,431		0
Residential mortgage loans - first liens		601		576		0		656		630		0
Residential mortgage loans - junior liens		71		31		0		124		14		0
Home equity lines of credit		68		68		0		0		0		0
Loans secured by farmland		78		78		0		83		83		0
Agricultural loans		60		60		0		0		0		0
Construction and other land loans		47		47		0		0		0		0
Multi-family (5 or more) residential		0		0		0		2,734		1,578		0
Total with no related allowance recorded		15,740		9,913		0		15,410		9,194		0

With a related allowance recorded:
Commercial loans secured by real estate		3,396		3,396		427		6,468		6,468		668
Commercial and industrial		0		0		0		72		72		72
Total with a related allowance recorded		3,396		3,396		427		6,540		6,540		740
Total	$	19,136	$	13,309	$	427	$	21,950	$	15,734	$	740

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)									Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2022		2021		2022		2021		2022		2021		2022		2021
Commercial:
Commercial loans secured by real estate	$	9,710	$	11,252	$	9,804	$	11,811	$	143	$	172	$	483	$	401
Commercial and industrial		371		3,844		839		2,566		4		4		207		25
Commercial construction and land		47		48		47		48		0		2		1		2
Loans secured by farmland		79		84		81		84		0		0		0		1
Multi-family (5 or more) residential		0		1,578		263		1,584		0		31		1,156		122
Agricultural loans		59		66		61		67		0		0		2		3
Total commercial		10,266		16,872		11,095		16,160		147		209		1,849		554
Residential mortgage:
Residential mortgage loans - first lien		612		1,322		587		1,830		5		11		17		68
Residential mortgage loans - junior lien		31		386		33		417		0		1		6		10
Home equity lines of credit		68		0		34		0		1		0		3		0
Total residential mortgage		711		1,708		654		2,247		6		12		26		78
Total	$	10,977	$	18,580	$	11,749	$	18,407	$	153	$	221	$	1,875	$	632

The increase in interest income recognized on a cash basis on impaired loans in 2022 resulted mainly from repayments received on loans that had been classified as purchased credit impaired at December 31, 2021.

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


(In Thousands)	September 30, 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	$	1,898	$	12,079	$	738	$	10,885
Commercial and industrial		248		304		30		2,299
Commercial construction and land		25		47		0		48
Loans secured by farmland		0		78		28		83
Multi-family (5 or more) residential		0		0		0		1,578
Agricultural loans		59		0		65		0
Total commercial		2,230		12,508		861		14,893
Residential mortgage:
Residential mortgage loans - first liens		985		4,271		1,144		4,005
Residential mortgage loans - junior liens		55		0		69		3
Home equity lines of credit		186		132		102		82
Total residential mortgage		1,226		4,403		1,315		4,090
Consumer		43		48		43		16
Totals	$	3,499	$	16,959	$	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 $3,783,000 at September 30, 2022 and $6,558,000 at December 31, 2021 are classified as nonaccrual.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of September 30, 2022 and December 31, 2021.


(In Thousands)	As of September 30, 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	$	655,851	$	0	$	3,010	$	658,861	$	563,658	$	762	$	5,420	$	569,840
Commercial and industrial		171,819		129		310		172,258		158,188		72		813		159,073
Paycheck Protection Program - 1st Draw		24		0		0		24		1,339		17		0		1,356
Paycheck Protection Program - 2nd Draw		1,062		949		0		2,011		25,508		0		0		25,508
Political subdivisions		83,725		0		0		83,725		81,301		0		0		81,301
Commercial construction and land		75,925		197		72		76,194		60,509		70		0		60,579
Loans secured by farmland		12,675		86		78		12,839		11,010		0		111		11,121
Multi-family (5 or more) residential		59,315		0		0		59,315		48,532		0		1,557		50,089
Agricultural loans		2,433		0		59		2,492		2,279		7		65		2,351
Other commercial loans		14,636		0		0		14,636		17,153		0		0		17,153
Total commercial		1,077,465		1,361		3,529		1,082,355		969,477		928		7,966		978,371

Residential mortgage:
Residential mortgage loans - first liens		487,629		1,934		3,291		492,854		475,637		5,038		2,954		483,629
Residential mortgage loans - junior liens		24,106		47		55		24,208		23,229		16		69		23,314
Home equity lines of credit		42,465		227		280		42,972		38,830		279		143		39,252
1-4 Family residential construction		29,950		0		0		29,950		23,151		0		0		23,151
Total residential mortgage		584,150		2,208		3,626		589,984		560,847		5,333		3,166		569,346
Consumer		17,674		142		91		17,907		17,001		72		59		17,132
Totals	$	1,679,289	$	3,711	$	7,246	$	1,690,246	$	1,547,325	$	6,333	$	11,191	$	1,564,849

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, 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
September 30, 2022 Nonaccrual Totals	$	12,542	$	670	$	3,747	$	16,959
December 31, 2021 Nonaccrual Totals	$	8,800	$	1,227	$	8,972	$	18,999

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Loans whose terms are modified are classified as troubled debt restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, 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
September 30, 2022 Totals	$	211	$	20	$	92	$	3,868	$	4,191
December 31, 2021 Totals	$	248	$	40	$	65	$	5,452	$	5,805

At September 30, 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 and nine-month periods ended September 30, 2022 and 2021 are as follows:


(Balances in Thousands)	Three Months Ended			Three Months Ended
	September 30, 2022			September 30, 2021
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Home equity lines of credit,
Reduced monthly payments for an eighteen-month period	0	$	0	1	$	70
Total	0	$	0	1	$	70


	Nine Months Ended			Nine Months Ended
(Balances in Thousands)	September 30, 2022			September 30, 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
Reduced monthly payments for a fifteen-month period	0		0	1		116
Home equity lines of credit:
Reduced monthly payments and extended maturity date	0		0	1		24
Reduced monthly payments for an eighteen-month period	0		0	1		70
Total	0	$	0	4	$	222

In the third quarters of 2022 and 2021, there were no defaults on loans for which TDRs were entered into within the previous 12 months. In the nine-month periods ended September 30, 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)	Nine Months Ended			Nine Months Ended
	September 30, 2022			September 30, 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)	September 30,		December 31,
	2022		2021
Foreclosed residential real estate	$	179	$	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)	September 30,		December 31,
	2022		2021
Residential real estate in process of foreclosure	$	1,306	$	1,260

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:


(In Thousands)	September 30,		December 31,
	2022		2021
Gross amount	$	6,639	$	6,639
Accumulated amortization		(3,652)		(3,323)
Net	$	2,987	$	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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021
Amortization expense	$	110	$	133	$	329	$	401

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 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)	September 30,		December 31,
	2022		2021
FHLB-Pittsburgh borrowings	$	0	$	0
Customer repurchase agreements		2,457		1,803
Total short-term borrowings	$	2,457	$	1,803

The Corporation had available credit with other correspondent banks totaling $95,000,000 at September 30, 2022 and $45,000,000 at December 31, 2021. These lines of credit are primarily unsecured. No amounts were outstanding at September 30, 2022 or December 31, 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At September 30, 2022, the Corporation had available credit in the amount of $22,376,000 on this line with no outstanding advances. At December 31, 2021, the 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 $23,420,000 at September 30, 2022 and $14,034,000 at December 31, 2021.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, 2022 and December 31, 2021. The carrying value of the underlying securities was $2,480,000 at September 30, 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 $1,182,945,000 at September 30, 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 $10,557,000 at September 30, 2022 and $9,313,000 at December 31, 2021. The Corporation’s total credit facility with FHLB-Pittsburgh was $821,608,000 at September 30, 2022, including an unused (available) amount of $754,743,000. At December 31, 2021, the Corporation’s total credit facility with FHLB-Pittsburgh was $756,868,000, including an unused (available) amount of $723,557,000.

At September 30, 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)	September 30,		December 31,
	2022		2021
Loans maturing in 2022 with a weighted-average rate of 0.61%	$	4,013	$	15,452
Loans maturing in 2023 with a weighted-average rate of 1.35%		9,330		7,119
Loans maturing in 2024 with a weighted-average rate of 2.89%		29,822		5,099
Loans maturing in 2025 with a weighted-average rate of 3.38%		12,298		372
Total long-term FHLB-Pittsburgh borrowings	$	55,463	$	28,042

Note: Weighted-average rates are presented as of September 30, 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 third quarter 2022 and $48,000 in the nine-month period ended September 30, 2022, and $15,000 in the third quarter 2021 and $22,000 in the nine-month period ended September 30, 2021, was included in interest expense in the unaudited consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2022 and December 31, 2021, outstanding Senior Notes are as follows:


(In Thousands)	September 30,		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	$	14,749	$	14,701
Total carrying value	$	14,749	$	14,701

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 $27,000 in the third quarter 2022 and $79,000 in the nine-month period ended September 30, 2022, and $25,000 in the third quarter 2021 and $38,000 in the nine-month period ended September 30, 2021, was included in interest expense in the unaudited consolidated statements of income.

At September 30, 2022 and December 31, 2021, the carrying amounts of subordinated debt agreements are as follows:


(In Thousands)	September 30,		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	$	0	$	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 redeemed at par in June 2022		0		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		24,580		24,501
Total carrying value	$	24,580	$	33,009

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 nine-month period ended September 30, 2022, all of which were granted in the first quarter:


(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 to total between $1,228,000 and $1,574,000, depending on whether applicable performance-based awards vest based on annual 2022 earnings performance criteria as defined in the grant documents. Total stock-based compensation expense attributable to restricted stock awards amounted to $388,000 in the third quarter 2022 and $345,000 in the third quarter 2021. Total stock-based compensation expense attributable to restricted stock awards amounted to $1,169,000 in the nine-month period ended September 30, 2022 and $970,000 in the nine-month period ended September 30, 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 $111,364,000 at September 30, 2022 and $123,094,000 at December 31, 2021. There were no interest rate swaps originated in the nine-month periods ended September 30, 2022 and 2021. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at September 30, 2022. The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $4,000 in the third quarter 2022 and $541,000 in the nine months ended September 30, 2022 as compared to a reduction in interest income on loans of $335,000 in the third quarter 2021 and $1,013,000 in the nine months ended September 30, 2021.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at September 30, 2022 and December 31, 2021:


(In Thousands)	At June 30, 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	$	55,682	$	3,795	$	55,682	$	3,795	$	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 $2,242,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at September 30, 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 Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

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

Level 2 – Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets or liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities and other observable inputs.

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

The Corporation monitors and evaluates available data relating to fair value measurements on an ongoing basis and recognizes transfers among the levels of the fair value hierarchy as of the date of an event or change in circumstances that affects the valuation method chosen. Examples of such changes may include the market for a particular asset or liability becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 2022 and December 31, 2021, assets and liabilities measured at fair value and the valuation methods used are as follows:


	September 30, 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	$	31,599	$	0	$	0	$	31,599
Obligations of U.S. Government agencies		0		21,389		0		21,389
Bank holding company debt securities		0		25,432		0		25,432
Obligations of states and political subdivisions:
Tax-exempt		0		126,710		0		126,710
Taxable		0		58,317		0		58,317
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		102,739		0		102,739
Residential collateralized mortgage obligations		0		39,632		0		39,632
Commercial mortgage-backed securities		0		77,383		0		77,383
Private label commercial mortgage-backed securities		0		4,779		0		4,779
Total available-for-sale debt securities		31,599		456,381		0		487,980
Marketable equity security		857		0		0		857
Servicing rights		0		0		2,649		2,649
Interest rate swap agreements, assets		0		3,795		0		3,795
Total recurring fair value measurements, assets	$	32,456	$	460,176	$	2,649	$	495,281

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,795	$	0	$	3,795

Nonrecurring fair value measurements, assets:
Impaired loans, net	$	0	$	0	$	2,969	$	2,969
Foreclosed assets held for sale		0		0		454		454
Total nonrecurring fair value measurements, assets	$	0	$	0	$	3,423	$	3,423

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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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, 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
	9/30/2022		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				9/30/2022
Servicing rights	$	2,649	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		141.00	%	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				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Servicing rights balance, beginning of period	$	2,640	$	2,116	$	2,329	$	1,689
Originations of servicing rights		33		176		192		567
Unrealized (loss) gain included in earnings		(24)		(45)		128		(9)
Servicing rights balance, end of period	$	2,649	$	2,247	$	2,649	$	2,247

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 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 September 30, 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	9/30/2022		9/30/2022		9/30/2022		Technique	Inputs	9/30/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	3,396	$	427	$	2,969	Sales comparison	Discount to appraised value	25	%
Total impaired loans	$	3,396	$	427	$	2,969
Foreclosed assets held for sale - real estate:
Commercial real estate	$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)		179		0		179	Sales comparison	Discount to appraised value	52	%
Total foreclosed assets held for sale	$	454	$	0	$	454


(Dollars In Thousands)									Weighted
			Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/2021		12/31/2021		12/31/2021		Technique	Inputs	12/31/2021

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,468	$	668	$	5,800	Sales comparison	Discount to appraised value	27	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%
Total impaired loans	$	6,540	$	740	$	5,800
Foreclosed assets held for sale - real estate:
Commercial real estate	$	428	$	0	$	428	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)		256		0		256	Sales comparison	Discount to appraised value	53	%
Total foreclosed assets held for sale	$	684	$	0	$	684

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

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


(In Thousands)	Fair Value	September 30, 2022				December 31, 2021
	Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	55,444	$	55,444	$	95,848	$	95,848
Certificates of deposit	Level 2		8,600		8,184		9,100		9,142
Restricted equity securities (included in Other Assets)	Level 2		10,807		10,807		9,562		9,562
Loans, net	Level 3		1,674,076		1,643,468		1,551,312		1,573,955
Accrued interest receivable	Level 2		8,425		8,425		7,235		7,235

Financial liabilities:
Deposits with no stated maturity	Level 2		1,745,817		1,745,817		1,639,167		1,639,167
Time deposits	Level 2		293,778		292,703		285,893		286,962
Short-term borrowings	Level 2		2,457		1,849		1,803		1,603
Long-term borrowings	Level 2		55,463		54,129		28,042		28,347
Senior debt	Level 2		14,749		10,492		14,701		15,016
Subordinated debt	Level 2		24,580		17,567		33,009		33,171
Accrued interest payable	Level 2		635		635		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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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

Third Quarter 2022 as Compared to Third Quarter 2021

Third quarter 2022 net income was $4,455,000, or $0.29 per diluted share. In comparison, third quarter 2021 net income was $7,399,000, or $0.47 per diluted share. Significant variances were as follows:

●

Third quarter 2022 net interest income of $20,879,000 was $1,420,000 higher than the third quarter 2021 total. The net interest rate spread remained unchanged at 3.46%, as the average yield on earning assets increased 0.29% to 4.18%, and the average rate on interest-bearing liabilities increased 0.29% to 0.72%. The net interest margin was 3.69% in the third quarter 2022, up from 3.59% in the third quarter 2021. Total interest and fees from loans excluding loans originated under the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) were $20,602,000 in the third quarter 2022, an increase of $3,144,000 from the third quarter 2021 total of $17,458,000. Total interest and fees from SBA PPP loans were $118,000 in the third quarter 2022, a decrease of $1,521,000 from the third quarter 2021 total of $1,639,000. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $939,000 in the third quarter 2022 as compared to the third quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $173.8 million. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $400,000 in the third quarter 2022 as compared to a net positive impact of $563,000 in the third quarter 2021. Average outstanding loans increased $82.4 million, despite a reduction in average PPP loans of $83.0 million. Average loans, excluding PPP loans, were up $165.5 million in the third quarter 2022 over the third quarter 2021, an increase of 11.0%. Average total deposits increased $61.8 million (3.2%).

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●

The provision for loan losses was $3,794,000 in the third quarter 2022, up $2,264,000 from $1,530,000 in the third quarter 2021. The third quarter 2022 provision included net charge-offs of $2,171,000 and an increase of $1,623,000 in the collectively determined portion of the allowance. In the third quarter 2022, the Corporation recorded a partial charge-off of $2,160,000 on a commercial real estate secured loan with a principal balance of $6,920,000 at the time of charge-off. The charge-off resulted from the borrower’s default due to deterioration in financial performance accompanied by a significant decrease in the appraised value of property at a recently closed facility that had been one of the primary sources of collateral on the loan. In comparison, the third quarter 2021 provision included a net charge of $611,000 related to specific loans (net charge-offs of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off.

●

Noninterest income for the third quarter 2022 was down $711,000 from the third quarter 2021 total. Significant variances included the following:

o

Net gains from sales of loans of $131,000 decreased $666,000 from the third quarter 2021, reflecting a reduction in volume of residential mortgage loans sold.

o

Service charges on deposit accounts of $1,105,000 decreased $144,000 from the third quarter 2021. In the third quarter 2022, the Corporation recorded accrued refunds of consumer overdraft fees totaling $290,000 as the result of updated regulatory guidance on certain overdraft fees.

o

Brokerage and insurance revenue of $696,000 increased $136,000 from the third quarter 2021, due to commissions on higher transaction volume.

●

Noninterest expense increased $2,097,000 in the third quarter 2022 over the third quarter 2021 amount. Significant variances included the following:

o

Salaries and employee benefits of $10,826,000 increased $1,399,000 from the third quarter 2021 total, including an increase in base salaries expense of $992,000. 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 by 21 (5.4%) to 412 in the third quarter 2022 as compared to the third quarter 2021. Also within this category, there was an increase in health care expense of $220,000 due to higher claims on the Corporation’s partially self-insured plan.

o

Net occupancy and equipment expense of $1,498,000 increased $281,000 from the third quarter 2021 total, including accelerated depreciation expense of $205,000 related to planned closures of two branches in November 2022.

o

Data processing and telecommunications of $1,719,000 increased $244,000 from the third 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.

●

The income tax provision was $858,000, or 16.1% of pre-tax income for the third quarter 2022, down from $1,566,000, or 17.5% of pre-tax income for the third quarter 2021. The decrease in income tax provision reflected the decrease in pre-tax income of $3,652,000.

Nine Months Ended September 30, 2022 as Compared to Nine Months Ended September 30, 2021

Net income for the nine-month period ended September 30, 2022 was $18,839,000, or $1.21 per diluted share, while net income for the first nine months of 2021 was $23,246,000 or $1.46 per diluted share. Significant variances were as follows:

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●

For the nine-month period ended September 30, 2022, net interest income of $60,836,000 was $2,613,000 higher than in the same period in 2021. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $2,883,000 in 2022 as compared to 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $192.7 million. Total interest and fees on loans increased $623,000 in 2022 as compared to 2021. Interest and fees on loans included $1,585,000 in 2022 and $35,000 in 2021 from repayments received on purchased credit impaired loans in excess of previous carrying amounts. Total interest and fees from PPP loans were $899,000 in 2022, a decrease of $3,987,000 from the 2021 total of $4,886,000. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $1,347,000 in 2022 as compared to a net positive impact of $2,228,000 in 2021. Average outstanding loans decreased $6.9 million, including a reduction in average PPP loans of $106.2 million. Average loans, excluding PPP loans, were up $99.3 million (6.6%) in the first nine months of 2022 as compared to the first nine months of 2021. Average total deposits increased $68.6 million (3.6%) in comparing the first nine months of 2022 over the total for the first nine months of 2021.

●

For the first nine months of 2022, the provision for loan losses was $4,993,000, an increase in expense of $2,460,000 as compared to $2,533,000 recorded in the first nine months of 2021. The provision for the first nine months of 2022 includes $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first nine months of 2021 includes $1,176,000 related to specific loans (net charge-offs of $1,218,000 and a decrease in specific allowances on loans of $42,000), an increase of $1,271,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion.

●

Noninterest income of $18,323,000 for the first nine months of 2022 decreased $1,143,000 from the total for the first nine months of 2021. Significant variances included the following:

o

Net gains from sales of loans of $733,000 decreased $2,053,000 reflecting a reduction in volume of residential mortgage loans sold.

o

Other noninterest income totaled $2,666,000, a decrease of $171,000. Within this category, the fair value of a marketable equity security decreased $114,000 in 2022 as compared to a decrease of $19,000 in 2021.

o

Brokerage and insurance revenue of $1,784,000 increased $392,000, due to commissions on higher transaction volumes.

o

Service charges on deposit accounts of $3,662,000 increased $325,000 as the volume of consumer and business overdraft and other activity increased partially offset by the impact of accrued refunds of $290,000 related to consumer overdraft fees.

o

Loan servicing fees, net of $757,000 increased $210,000, reflecting growth in volume of residential mortgage loans sold with servicing retained. Further, the fair value of servicing rights increased $128,000 in 2022 as compared to a decrease of $9,000 in 2021 mainly due to changes in assumptions related to prepayments of mortgage loans.

●

Noninterest expense of $51,368,000 for the first nine months of 2022 increased $4,914,000 from the total for the first nine months of 2021. Significant variances included the following:

o

Salaries and employee benefits of $31,698,000 increased $3,877,000, including an increase in base salaries expense of $2.8 million reflecting merit-based salary increases and an increase in number of personnel related to expansion of the Southcentral PA market with the opening of an office in Lancaster. Additional increases include an increase in health care expense of $665,000 due to higher claims on the Corporation’s partially self-insured plan, $227,000 due to a lower portion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated in 2021, and $204,000 related to payroll taxes. Decreases include a reduction in estimated cash and stock-based incentive compensation expense of $126,000 and severance expense of $248,000 in 2021 with no comparable amount in 2022.

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o

Data processing and telecommunications of $5,062,000 increased $720,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

o

Net occupancy and equipment expense of $4,217,000 increased $477,000, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA as well as accelerated depreciation expense of $205,000 related to planned closures of two branches in November 2022.

o

Professional fees of $1,490,000 decreased $193,000, mainly due to decreases in recruiting services and PPP loan processing-related professional fees.

●

The income tax provision of $3,959,000, or 17.4% of pre-tax income for the nine months ended September 30, 2022 decreased $1,497,000 from $5,456,000, or 19.0% of pre-tax income for the nine months ended September 30, 2021. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of higher tax-exempt interest as a percentage of pre-tax income, a larger permanent difference (deduction) related to restricted stock compensation and the benefit of a $301,000 reduction in expense from the reversal of tax penalties being non-taxable.

TABLE I – QUARTERLY FINANCIAL DATA


(Dollars In Thousands,	For the Three Months Ended :
Except Per Share Data)	September 30,		June 30,		March 31,		December 31,		September 30,		June 30,		March 31,
(Unaudited)	2022		2022		2022		2021		2021		2021		2021
Interest income	$	23,710	$	21,309	$	21,773	$	21,246	$	21,073	$	20,428	$	21,754
Interest expense		2,831		1,684		1,441		1,530		1,614		1,747		1,671
Net interest income		20,879		19,625		20,332		19,716		19,459		18,681		20,083
Provision for loan losses		3,794		308		891		1,128		1,530		744		259
Net interest income after provision for loan losses		17,085		19,317		19,441		18,588		17,929		17,937		19,824
Noninterest income		5,671		6,829		5,823		6,415		6,382		6,302		6,782
Noninterest expense		17,443		17,039		16,886		16,018		15,346		15,399		15,709
Income before income tax provision		5,313		9,107		8,378		8,985		8,965		8,840		10,897
Income tax provision		858		1,618		1,483		1,677		1,566		1,780		2,110
Net income	$	4,455	$	7,489	$	6,895	$	7,308	$	7,399	$	7,060	$	8,787
Net income attributable to common shares	$	4,416	$	7,419	$	6,835	$	7,256	$	7,336	$	6,999	$	8,722
Basic earnings per common share	$	0.29	$	0.48	$	0.44	$	0.46	$	0.47	$	0.44	$	0.55
Diluted earnings per common share	$	0.29	$	0.48	$	0.44	$	0.46	$	0.47	$	0.44	$	0.55

NONINTEREST INCOME

TABLE II – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Three Months Ended
	September 30,					$	%
	2022		2021			Change	Change
Trust revenue	$	1,744	$	1,821	$	(77)	(4.2)	%
Brokerage and insurance revenue		696		560		136	24.3	%
Service charges on deposit accounts		1,105		1,249		(144)	(11.5)	%
Interchange revenue from debit card transactions		1,031		975		56	5.7	%
Net gains from sales of loans		131		797		(666)	(83.6)	%
Loan servicing fees, net		189		153		36	23.5	%
Increase in cash surrender value of life insurance		133		139		(6)	(4.3)	%
Other noninterest income		622		665		(43)	(6.5)	%
Realized gains on available-for-sale debt securities, net		20		23		(3)	(13.0)	%
Total noninterest income	$	5,671	$	6,382	$	(711)	(11.1)	%

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(Dollars in Thousands)	Nine Months Ended
	September 30,					$	%
	2022		2021			Change	Change
Trust revenue	$	5,245	$	5,254	$	(9)	(0.2)	%
Brokerage and insurance revenue		1,784		1,392		392	28.2	%
Service charges on deposit accounts		3,662		3,337		325	9.7	%
Interchange revenue from debit card transactions		3,050		2,854		196	6.9	%
Net gains from sales of loans		733		2,786		(2,053)	(73.7)	%
Loan servicing fees, net		757		547		210	38.4	%
Increase in cash surrender value of life insurance		405		434		(29)	(6.7)	%
Other noninterest income		2,666		2,837		(171)	(6.0)	%
Realized gains on available-for-sale debt securities, net		21		25		(4)	(16.0)	%
Total noninterest income	$	18,323	$	19,466	$	(1,143)	(5.9)	%

NONINTEREST EXPENSE

TABLE III - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Three Months Ended
	September 30,				$		%
	2022		2021		Change		Change
Salaries and employee benefits	$	10,826	$	9,427	$	1,399	14.8	%
Net occupancy and equipment expense		1,498		1,217		281	23.1	%
Data processing and telecommunications expense		1,719		1,475		244	16.5	%
Automated teller machine and interchange expense		397		357		40	11.2	%
Pennsylvania shares tax		487		482		5	1.0	%
Professional fees		521		538		(17)	(3.2)	%
Other noninterest expense		1,995		1,850		145	7.8	%
Total noninterest expense	$	17,443	$	15,346	$	2,097	13.7	%


(Dollars in Thousands)	Nine Months Ended
	September 30,				$		%
	2022		2021		Change		Change
Salaries and employee benefits	$	31,698	$	27,821	$	3,877	13.9	%
Net occupancy and equipment expense		4,217		3,740		477	12.8	%
Data processing and telecommunications expense		5,062		4,342		720	16.6	%
Automated teller machine and interchange expense		1,128		1,049		79	7.5	%
Pennsylvania shares tax		1,463		1,463		0	0.0	%
Professional fees		1,490		1,683		(193)	(11.5)	%
Other noninterest expense		6,310		6,356		(46)	(0.7)	%
Total noninterest expense	$	51,368	$	46,454	$	4,914	10.6	%

Additional 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.

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

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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.

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 IV, V and VI include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, 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. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended September 30, 2022 and 2021

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) was $21,188,000 in 2022, which was $1,437,000 (7.3%) higher than in 2021. Interest income in the third quarter 2022 was $24,019,000 which was $2,654,000 higher as compared to 2021. Interest expense of $2,831,000 in 2022 was $1,217,000 higher than in 2021. As presented in Table V, the Net Interest Margin was 3.69% in 2022 as compared to 3.59% 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) remained unchanged at 3.46%. The average yield on earning assets of 4.18% was 0.29% higher in 2022 as compared to 2021, and the average rate on interest-bearing liabilities of 0.72% in 2022 was 0.29% higher.

Income from purchase accounting-related adjustments in the third quarter 2022 had a positive effect on net interest income of $400,000, including an increase in income on loans of $313,000 and net reductions in interest expense on time deposits and borrowed funds totaling $87,000. The positive impact to the third quarter 2022 net interest margin from purchase accounting adjustments was 0.07%. In comparison, the positive impact of purchase accounting adjustments to the third quarter 2021 net interest margin was $563,000, or 0.10%.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $24,019,000 in 2022, an increase of $2,654,000 from 2021.

Interest and fees from loans receivable increased $1,623,000 in 2022 as compared to 2021. Total interest and fees from loans excluding PPP loans increased $3,144,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $118,000 in the third quarter 2022, a decrease of $1,521,000 from the third quarter 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

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Average outstanding loans receivable increased $82,413,000 (5.2%) to $1,674,270,000 in 2022 from $1,591,857,000 in 2021, despite a reduction in average PPP loans of $83,038,000. Average total loans outstanding, excluding PPP loans, increased $165,451,000 (11.0%).

The average yield on loans in the third quarter 2022 was 4.91%, up from 4.76% in the third quarter 2021. Excluding PPP loans, the average yield on loans was 4.90% in the third quarter 2022, up from 4.60% excluding PPP loans in the third quarter 2021. The increase in loan yields reflects the impact of higher interest rates on loans originated in 2022 and higher yields on floating-rate loans. Floating-rate loans totaled approximately 18% of gross loans receivable at September 30, 2022.

Interest income from available-for-sale debt securities increased $939,000 in 2022 from 2021. The average balance of available-for-sale debt securities (at amortized cost) increased to $564,920,000 in 2022 from $391,148,000 in 2021. The increase in available-for-sale debt securities reflects the investment of funds, primarily in the fourth quarter 2021 and first quarter 2022, that would otherwise have represented excess cash. The average yield on available-for-sale debt securities was 2.17% for 2022, down slightly from 2.18% in 2021.

Income from interest-bearing due from banks totaled $176,000 in 2022, an increase of $70,000 from 2021. The average yield on interest-bearing due from banks was 2.03% in 2022 and 0.22% in 2021. The average balance of interest-bearing due from banks was $34,465,000 in the third quarter 2022, down from $195,359,000 in the third quarter 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense increased $1,217,000 to $2,831,000 in 2022 from $1,614,000 in 2021. Interest expense on deposits increased $909,000, as the average rate on interest-bearing deposits increased to 0.54% in 2022 from 0.30% in 2021. The increase in average rate on deposits includes increases of 0.40% on time deposits, 0.34% on money market accounts and 0.22% on interest checking accounts. The Corporation’s deposit rates have increased in response to the impact on market rates of increases in the Fed Funds Target Rate. The Fed Funds Target Rate ranged from 0% to 0.25% throughout 2021, while the Federal Reserve implemented a series of rate increases in March, May, June, July, and September 2022 resulting in a Fed Funds Target Rate ranging from 3% to 3.25% at September 30, 2022.

Average total deposits increased $61,825,000 (3.2%) to $1,998,583,000 in the third quarter 2022 from $1,936,758,000 in the third quarter 2021. Average time deposits decreased $14,351,000 and average money market accounts decreased $7,615,000, while the average total balance of other categories of noninterest-bearing demand and other deposits increased $83,791,000. The increase in average deposits includes the impact of funding received by consumers, businesses and municipal entities from government stimulus programs as well as growth in commercial deposits from new business.

Interest expense on short-term borrowings in the third quarter 2022 was $179,000 as compared to less than $1,000 in 2021. The average balance of short-term borrowings increased to $33,970,000 in 2022 from $2,185,000 in 2021 reflecting an increase in overnight borrowings to provide temporary funding to support loan growth. The average rate on short-term borrowings was 2.09% in 2022.

Interest expense on long-term borrowings (FHLB advances) increased $245,000 to $332,000 in 2022 from $87,000 in 2021. The average balance of long-term borrowings was $51,628,000 in 2022, up from an average balance of $41,083,000 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 2.55% in 2022 compared to 0.84% in 2021.

Interest expense on subordinated debt decreased $117,000 to $229,000 in 2022 from $346,000 in 2021. The average balance of subordinated debt decreased to $24,566,000 in 2022 from $32,978,000 in 2021. The average rate on subordinated debt decreased to 3.70% in 2022 from 4.16% in 2021. In the second quarter 2022, the Corporation redeemed subordinated debt with aggregate par values of $8.5 million and a weighted average interest rate of 6.29%.

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

Nine-Month Periods Ended September 30, 2022 and 2021

For the nine-month periods, fully taxable equivalent net interest income was $61,759,000 in 2022, which was $2,703,000 (4.6%) higher than in 2021. Interest income in 2022 was $67,715,000 which was $3,627,000 higher in 2022 as compared to 2021, while interest expense of $5,956,000 was higher by $924,000 in comparing the same periods. As presented in Table V, the Net Interest Margin was 3.72% in 2022 as compared to 3.70% 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) remained unchanged at 3.55% in 2022 and 2021. The average yield on earning assets of 4.08% was 0.07% higher in 2022 as compared to 2021, and the average rate on interest-bearing liabilities of 0.53% in 2022 was also 0.07% higher.

Income from purchase accounting-related adjustments in the nine months ended September 30, 2022 had a positive effect on net interest income of $1,347,000, including an increase in income on loans of $1,016,000 and net reductions in interest expense on time deposits and borrowed funds totaling $331,000. The positive impact of purchase accounting-related adjustments to the net interest margin was 0.08% in the first nine months of 2022. In comparison, the net positive impact of purchase accounting-related adjustments was $2,228,000, with a positive impact on the net interest margin of 0.14% in the first nine months of 2021.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $67,715,000 in 2022, an increase of $3,627,000 from 2021.

Interest income from available-for-sale debt securities increased $2,883,000 in 2022 from 2021. The average balance of available-for-sale debt securities (at amortized cost) increased to $557,155,000 in 2022 from $364,452,000 in 2021. The increase in available-for-sale debt securities reflects the investment of funds that would otherwise have represented excess cash over the course of 2021 and the first quarter 2022. The average yield on available-for-sale debt securities was 2.15% for 2022, down from 2.23% in 2021.

Interest and fees from loans receivable increased $623,000 in 2022 as compared to 2021. Total interest and fees from loans excluding PPP loans increased $4,610,000 in 2022 as compared to 2021. Interest and fees on PPP loans totaled $899,000 in 2022, a decrease of $3,987,000 from 2021, as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers. In 2022, total interest and fees on loans included $1,585,000 from repayments received on purchased credit impaired loans in excess of previous carrying amounts as compared to income from similar repayments of $35,000 in 2021.

Average outstanding loans receivable decreased $6,897,000 (0.4%) to $1,604,135,000 in 2022 from $1,611,032,000 in 2021, including a reduction in average PPP loans of $106,186,000. Average total loans outstanding, excluding PPP loans, increased $99,289,000 (6.6%).

The average yield on loans in 2022 was 4.86%, up from 4.79% in 2021. The average yield on loans included the positive impact of the income on PCI loans in 2022. The comparatively high yield on PPP loans provided a benefit to the margin in both periods though the higher volume resulted in a larger benefit in 2021. Excluding PPP loans and income from excess repayments on purchased credit impaired loans, the adjusted yield on loans was 4.69% for the first nine months of 2022, up from the similarly adjusted yield of 4.38% in 2021.

Income from interest-bearing due from banks totaled $335,000 in 2022, an increase of $105,000 from 2021. The average yield on interest-bearing due from banks was 0.81% in 2022 and 0.20% in 2021. The average balance of interest-bearing due from banks was $55,154,000 in 2022 as compared to $157,231,000 in 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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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the nine-month periods, interest expense increased $924,000 to $5,956,000 in 2022 from $5,032,000 in 2021. Interest expense on deposits increased $454,000, as the average rate on interest-bearing deposits increased to 0.38% in 2022 from 0.34% in 2021 reflecting the impact of increases in market rates in 2022 as described earlier.

Average total deposits increased $68,640,000 (3.6%) to $1,964,663,000 in 2022 from $1,896,023,000 in 2021. Average time deposits decreased $57,885,000, while the average total balance of other categories of deposits increased $126,525,000, or 8.1%. The increase in average deposits includes the impact of funding received from government stimulus programs as well as growth in commercial deposits from new business.

Interest expense on short-term borrowings in 2022 was $302,000 as compared to $22,000 in 2021. The average balance of short-term borrowings increased to $24,306,000 in 2022 from $7,648,000 in 2021. The average rate on short-term borrowings was 1.66% in 2022 compared to 0.38% in 2021.

Interest expense on long-term borrowings (FHLB advances) increased $106,000 to $436,000 in 2022 from $330,000 in 2021. The average balance of long-term borrowings was $32,509,000 in 2022, down from an average balance of $46,863,000 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 1.79% in 2022 compared to 0.94% in 2021.

Interest expense on senior notes issued in May 2021 totaled $357,000 in 2022 as compared to $175,000 in 2021. The average balance of the senior notes increased to $14,725,000 in 2022 from $7,255,000 in 2021. The average rate on senior notes was 3.24% in 2022 and 3.23% in 2021.

Interest expense on subordinated debt decreased $98,000 to $849,000 in 2022 from $947,000 in 2021. The average balance of subordinated debt increased to $27,966,000 in 2022 from $25,539,000 in 2021. The average rate on subordinated debt decreased to 4.06% in 2022 from 4.96% in 2021 including 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 the second quarter 2021 and $8,500,000 in the second quarter 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE


	Three Months Ended							Nine Months Ended
	September 30,				Increase/		.	September 30,				Increase/
(In Thousands)	2022		2021		(Decrease)			2022		2021		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	176	$	106	$	70		$	335	$	230	$	105
Available-for-sale debt securities:
Taxable		2,138		1,304		834			6,143		3,604		2,539
Tax-exempt		947		842		105			2,811		2,467		344
Total available-for-sale debt securities		3,085		2,146		939			8,954		6,071		2,883
Loans receivable:
Taxable		19,967		16,890		3,077			55,662		51,209		4,453
Paycheck Protection Program - 1st Draw		4		618		(614)			53		3,289		(3,236)
Paycheck Protection Program - 2nd Draw		114		1,021		(907)			846		1,597		(751)
Tax-exempt		635		568		67			1,796		1,639		157
Total loans receivable		20,720		19,097		1,623			58,357		57,734		623
Other earning assets		38		16		22			69		53		16
Total Interest Income		24,019		21,365		2,654			67,715		64,088		3,627

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		487		230		257			989		686		303
Money market		639		269		370			1,270		895		375
Savings		66		58		8			191		170		21
Time deposits		780		506		274			1,562		1,807		(245)
Total interest-bearing deposits		1,972		1,063		909			4,012		3,558		454
Borrowed funds:
Short-term		179		0		179			302		22		280
Long-term - FHLB advances		332		87		245			436		330		106
Senior notes, net		119		118		1			357		175		182
Subordinated debt, net		229		346		(117)			849		947		(98)
Total borrowed funds		859		551		308			1,944		1,474		470
Total Interest Expense		2,831		1,614		1,217			5,956		5,032		924

Net Interest Income	$	21,188	$	19,751	$	1,437		$	61,759	$	59,056	$	2,703

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis (a non-GAAP measure), using the Corporation’s marginal federal income tax rate of 21%. The following table is a reconciliation of net interest income under U.S. GAAP as compared to net interest income as adjusted to a fully taxable-equivalent basis.


(In Thousands)	Three Months Ended						Nine Months Ended
	September 30,				Increase/		September 30,				Increase/
	2022		2021		(Decrease)		2022		2021		(Decrease)
Net Interest Income Under U.S. GAAP	$	20,879	$	19,459	$	1,420	$	60,836	$	58,223	$	2,613
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities		179		173		6		553		494		59
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans		130		119		11		370		339		31
Net Interest Income as adjusted to a fully taxable-equivalent basis	$	21,188	$	19,751	$	1,437	$	61,759	$	59,056	$	2,703

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE V - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)	Three Months				Three Months				Nine Months				Nine Months
	Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of
	9/30/2022		Return/		9/30/2021		Return/		9/30/2022		Return/		9/30/2021		Return/
	Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of
	Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %
EARNING ASSETS
Interest-bearing due from banks	$	34,465	2.03	%	$	195,359	0.22	%	$	55,154	0.81	%	$	157,231	0.20	%
Available-for-sale debt securities, at amortized cost:
Taxable		414,147	2.05	%		263,682	1.96	%		408,178	2.01	%		241,716	1.99	%
Tax-exempt		150,773	2.49	%		127,466	2.62	%		148,977	2.52	%		122,736	2.69	%
Total available-for-sale debt securities		564,920	2.17	%		391,148	2.18	%		557,155	2.15	%		364,452	2.23	%
Loans receivable:
Taxable		1,582,245	5.01	%		1,426,503	4.70	%		1,507,756	4.94	%		1,424,457	4.81	%
Paycheck Protection Program - 1st Draw		34	46.68	%		19,625	12.49	%		593	11.95	%		58,900	7.47	%
Paycheck Protection Program - 2nd Draw		4,661	9.70	%		68,108	5.95	%		10,294	10.99	%		58,173	3.67	%
Tax-exempt		87,330	2.88	%		77,621	2.90	%		85,492	2.81	%		69,502	3.15	%
Total loans receivable		1,674,270	4.91	%		1,591,857	4.76	%		1,604,135	4.86	%		1,611,032	4.79	%
Other earning assets		3,925	3.84	%		2,355	2.70	%		2,750	3.35	%		2,556	2.77	%
Total Earning Assets		2,277,580	4.18	%		2,180,719	3.89	%		2,219,194	4.08	%		2,135,271	4.01	%
Cash		23,731				24,436				22,527				24,564
Unrealized (loss) gain on securities		(44,559)				12,411				(28,068)				11,831
Allowance for loan losses		(14,914)				(12,688)				(14,406)				(12,143)
Bank-owned life insurance		30,991				30,445				30,857				30,301
Bank premises and equipment		21,874				20,620				21,494				20,860
Intangible assets		55,547				56,021				55,655				56,153
Other assets		57,012				43,947				52,610				43,694
Total Assets	$	2,407,262			$	2,355,911			$	2,359,863			$	2,310,531

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	442,647	0.44	%	$	423,371	0.22	%	$	431,344	0.31	%	$	389,349	0.24	%
Money market		438,770	0.58	%		446,385	0.24	%		448,377	0.38	%		428,985	0.28	%
Savings		261,422	0.10	%		231,093	0.10	%		255,433	0.10	%		224,050	0.10	%
Time deposits		298,628	1.04	%		312,979	0.64	%		281,673	0.74	%		339,558	0.71	%
Total interest-bearing deposits		1,441,467	0.54	%		1,413,828	0.30	%		1,416,827	0.38	%		1,381,942	0.34	%
Borrowed funds:
Short-term		33,970	2.09	%		2,185	0.00	%		24,306	1.66	%		7,648	0.38	%
Long-term - FHLB advances		51,628	2.55	%		41,083	0.84	%		32,509	1.79	%		46,863	0.94	%
Senior notes, net		14,741	3.20	%		14,674	3.19	%		14,725	3.24	%		7,255	3.23	%
Subordinated debt, net		24,566	3.70	%		32,978	4.16	%		27,966	4.06	%		25,539	4.96	%
Total borrowed funds		124,905	2.73	%		90,920	2.40	%		99,506	2.61	%		87,305	2.26	%
Total Interest-bearing Liabilities		1,566,372	0.72	%		1,504,748	0.43	%		1,516,333	0.53	%		1,469,247	0.46	%
Demand deposits		557,116				522,930				547,836				514,081
Other liabilities		23,588				25,386				22,565				25,729
Total Liabilities		2,147,076				2,053,064				2,086,734				2,009,057
Stockholders' equity, excluding accumulated other comprehensive (loss) income		295,086				292,936				295,019				292,017
Accumulated other comprehensive (loss) income		(34,900)				9,911				(21,890)				9,457
Total Stockholders' Equity		260,186				302,847				273,129				301,474
Total Liabilities and Stockholders' Equity	$	2,407,262			$	2,355,911			$	2,359,863			$	2,310,531
Interest Rate Spread			3.46	%			3.46	%			3.55	%			3.55	%
Net Interest Income/Earning Assets			3.69	%			3.59	%			3.72	%			3.70	%

Total Deposits (Interest-bearing and Demand)	$	1,998,583			$	1,936,758			$	1,964,663			$	1,896,023

(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 VI - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)	Three Months Ended 9/30/22 vs. 9/30/21						.	Nine Months Ended 9/30/22 vs. 9/30/21
	Change in		Change in		Total			Change in		Change in		Total
	Volume		Rate		Change			Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks	$	(138)	$	208	$	70		$	(229)	$	334	$	105
Available-for-sale debt securities:
Taxable		779		55		834			2,505		34		2,539
Tax-exempt		147		(42)		105			502		(158)		344
Total available-for-sale debt securities		926		13		939			3,007		(124)		2,883
Loans receivable:
Taxable		1,922		1,155		3,077			3,050		1,403		4,453
Paycheck Protection Program - 1st Draw		(796)		182		(614)			(4,473)		1,237		(3,236)
Paycheck Protection Program - 2nd Draw		(1,371)		464		(907)			(2,080)		1,329		(751)
Tax-exempt		68		(1)		67			349		(192)		157
Total loans receivable		(177)		1,800		1,623			(3,154)		3,777		623
Other earning assets		11		11		22			4		12		16
Total Interest Income		622		2,032		2,654			(372)		3,999		3,627

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		16		241		257			80		223		303
Money market		(5)		375		370			42		333		375
Savings		7		1		8			23		(2)		21
Time deposits		(56)		330		274			(318)		73		(245)
Total interest-bearing deposits		(38)		947		909			(173)		627		454
Borrowed funds:
Short-term		81		98		179			111		169		280
Long-term - FHLB advances		0		245		245			(124)		230		106
Senior notes, net		(1)		2		1			181		1		182
Subordinated debt, net		(102)		(15)		(117)			85		(183)		(98)
Total borrowed funds		(22)		330		308			253		217		470
Total Interest Expense		(60)		1,277		1,217			80		844		924

Net Interest Income	$	682	$	755	$	1,437		$	(452)	$	3,155	$	2,703

(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.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first nine months of 2022 was $3,959,000, which was $1,497,000 lower than the provision for the first nine months of 2021. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.4% in the first nine months of 2022 compared to 19.0% in the first nine months of 2021. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2022 and 2021 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of higher tax-exempt interest income as a percentage of pre-tax income, a larger permanent difference

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(deduction) related to restricted stock compensation and the benefit of a $301,000 reduction in expense from the reversal of tax penalties being non-taxable.

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, 2022 and December 31, 2021 represents the following temporary difference components:


	September 30,		December 31,
(In Thousands)	2022		2021
Deferred tax assets:
Unrealized holding losses on securities	$	15,089	$	0
Allowance for loan losses		3,540		2,935
Purchase accounting adjustments on loans		1,037		1,621
Deferred compensation		1,112		965
Operating leases liability		897		821
Net operating loss carryforward		689		778
Accrued incentive compensation		340		529
Other deferred tax assets		1,778		1,766
Total deferred tax assets		24,482		9,415

Deferred tax liabilities:
Unrealized holding gains on securities		0		1,278
Defined benefit plans - ASC 835		79		57
Bank premises and equipment		323		460
Core deposit intangibles		654		725
Right-of-use assets from operating leases		897		821
Other deferred tax liabilities		202		187
Total deferred tax liabilities		2,155		3,528
Deferred tax asset, net	$	22,327	$	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 September 30, 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.

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 asset-sensitive interest rate risk exposure, while maintaining high credit quality.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The composition of the available-for-sale debt securities portfolio at September 30, 2022, December 31, 2021 and December 31, 2020 is as follows:


(Dollars In Thousands)	September 30, 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	$	35,155	$	31,599		$	25,058	$	24,912		$	12,184	$	12,182
Obligations of U.S. Government agencies		23,939		21,389			23,936		24,091			25,349		26,344
Bank holding company debt securities		28,944		25,432			18,000		17,987			0		0
Obligations of states and political subdivisions:
Tax-exempt		146,847		126,710			143,427		148,028			116,427		122,401
Taxable		69,902		58,317			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		116,833		102,739			98,048		98,181			36,853		38,176
Residential collateralized mortgage obligations		44,075		39,632			44,015		44,247			56,048		57,467
Commercial mortgage-backed securities		89,349		77,383			86,926		87,468			42,461		45,310
Private label commercial mortgage-backed securities		4,793		4,779			0		0			0		0
Total Available-for-Sale Debt Securities	$	559,837	$	487,980		$	511,592	$	517,679		$	334,552	$	349,332

Aggregate Unrealized (Loss) Gain			$	(71,857)				$	6,087				$	14,780
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost				(12.8)	%				1.2	%				4.4	%
Market Yield on 5-Year U.S. Treasury Obligations (a)				4.06	%				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 $559,837,000 at September 30, 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 September 30, 2022 was lower than the amortized cost basis by $71,857,000, or 12.8%. 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 nine months of 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 2.80% higher at September 30, 2022 in comparison to December 31, 2021, and 3.70% higher than at December 31, 2020.

Management reviewed the Corporation’s holdings as of September 30, 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.

Additional information regarding the potential impact of interest rate changes on all of the Corporation’s financial instruments is provided in Item 3, Quantitative and Qualitative Disclosures about Market Risk.

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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 September 30, 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 September 30, 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 increased the proportion of residential mortgage loans sold into the secondary market, particularly in 2020 and 2021 when mortgage refinancings and other originations were at historically high volumes, contributing to a reduction of $30,188,000 in residential mortgage loans outstanding at September 30, 2022 compared to December 31, 2020. At September 30, 2022, commercial loans represented approximately 64% of the portfolio while residential mortgage loans totaled 35% of the portfolio.

At September 30, 2022, gross loans outstanding totaled $1,690,246,000, an increase of $125,397,000 from December 31, 2021, despite a reduction in PPP loans of $24,829,000 due to repayments. Excluding PPP loans, total commercial loans at September 30, 2022 were up $128,813,000 from December 31, 2021. Commercial lending activity was particularly robust in the second and third quarters of 2022 as commercial real estate investors and other business borrowers generally displayed a sense of urgency to execute transactions prior to potential additional increases in interest rates. The pace of loan growth in the fourth quarter 2022 and in 2023 will depend on the impact of potential further increases in interest rates, potential deterioration in economic conditions and 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 $41,451,000 at September 30, 2022, down from $54,372,000 at December 31, 2021. As described in more detail in the Provision and Allowance for Loan Losses section of Management’s Discussion and Analysis, in the third quarter 2022 the Corporation recorded a partial charge-off of $2,160,000 on a commercial real estate secured participation loan with a recorded investment of $4,740,000 at September 30, 2022. At September 30, 2022, the balance of participation loans outstanding includes a total of $13,667,000 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 $6,600,000 at September 30, 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 September 30, 2022, the Corporation’s activity under the MPF Direct Program has been minimal.

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For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At September 30, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,529,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000.

At September 30, 2022, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $331,495,000, including loans sold through the MPF Xtra program of $158,612,000 and loans sold through the Original program of $172,883,000. 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 September 30, 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 September 30, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $9,090,000, and the Corporation has recorded a related allowance for credit losses in the amount of $500,000 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 $251,000 for the nine months ended September 30, 2022 and $265,000 for the nine months ended September 30, 2021. A credit for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $97,000 was recorded in the nine months ended September 30, 2022 with a provision for losses of $50,000 in the nine months ended September 30, 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 $5,992,000 at September 30, 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 $90,000 at September 30, 2022 and $457,000 at December 31, 2021. In the nine months ended September 30, 2022, the Corporation recorded a reduction in other noninterest expense of $367,000 representing amounts realized on SBA claims in excess of prior estimates, as compared to a reduction of $208,000 in the nine months ended September 30, 2021.

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TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type


(In Thousands)	September 30,		December 31,
	2022		2021		2020		2019		2018		2017
Commercial:
Commercial loans secured by real estate	$	658,861	$	569,840	$	531,810	$	301,227	$	162,611	$	159,266
Commercial and industrial		172,258		159,073		159,577		126,374		91,856		88,276
Paycheck Protection Program - 1st Draw		24		1,356		132,269		0		0		0
Paycheck Protection Program - 2nd Draw		2,011		25,508		0		0		0		0
Political subdivisions		83,725		81,301		53,221		53,570		53,263		59,287
Commercial construction and land		76,194		60,579		42,874		33,555		11,962		14,527
Loans secured by farmland		12,839		11,121		11,736		12,251		7,146		7,255
Multi-family (5 or more) residential		59,315		50,089		55,811		31,070		7,180		7,713
Agricultural loans		2,492		2,351		3,164		4,319		5,659		6,178
Other commercial loans		14,636		17,153		17,289		16,535		13,950		10,986
Total commercial		1,082,355		978,371		1,007,751		578,901		353,627		353,488
Residential mortgage:
Residential mortgage loans - first liens		492,854		483,629		532,947		510,641		372,339	$	359,987
Residential mortgage loans - junior liens		24,208		23,314		27,311		27,503		25,450		25,325
Home equity lines of credit		42,972		39,252		39,301		33,638		34,319		35,758
1-4 Family residential construction		29,950		23,151		20,613		14,798		24,698		26,216
Total residential mortgage		589,984		569,346		620,172		586,580		456,806		447,286
Consumer		17,907		17,132		16,286		16,741		17,130		14,939
Total		1,690,246		1,564,849		1,644,209		1,182,222		827,563		815,713
Less: allowance for loan losses		(16,170)		(13,537)		(11,385)		(9,836)		(9,309)		(8,856)
Loans, net	$	1,674,076	$	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 $16,170,000 at September 30, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $427,000 at September 30, 2022, down 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 $9,811,000 at September 30, 2022 from $7,553,000 at December 31, 2021.

Table X shows the allowance for loan losses totaled 0.96% of gross loans outstanding at September 30, 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 1.08% at September 30, 2022, in line with ratios from the previous years.

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The provision (credit) for loan losses by segment in the three-month and nine-month periods ended September 30, 2022 and 2021 are as follows:


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2022		2021		2022		2021
Commercial	$	3,504	$	1,503	$	4,255	$	2,297
Residential mortgage		304		3		341		112
Consumer		(14)		24		68		38
Unallocated		0		0		329		86
Total	$	3,794	$	1,530	$	4,993	$	2,533

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


Commercial segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2022		2021		2022		2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	2,160	$	596	$	1,997	$	1,154
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		515		568		2,604		1,061
Changes in historical loss experience factors		705		339		730		82
Changes in qualitative factors		124		0		(1,076)		0
Total provision for loan losses - Commercial segment	$	3,504	$	1,503	$	4,255	$	2,297


Residential mortgage segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2022		2021		2022		2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(1)	$	(2)	$	(18)	$	(17)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		256		11		564		222
Changes in historical loss experience factors		(2)		(6)		(56)		(48)
Changes in qualitative factors		51		0		(149)		(45)
Total provision for loan losses - Residential mortgage segment	$	304	$	3	$	341	$	112


Consumer segment	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2022		2021		2022		2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	12	$	17	$	68	$	39
(Decrease) increase in collectively determined portion of the allowance attributable to:
Changes in loan volume		(14)		9		12		13
Changes in historical loss experience factors		(16)		(7)		(11)		(15)
Changes in qualitative factors		4		5		(1)		1
Total (credit) provision for loan losses - Consumer segment	$	(14)	$	24	$	68	$	38

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


Total - All segments	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
(In Thousands)	2022		2021		2022		2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	2,171	$	611	$	2,047	$	1,176
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		757		588		3,180		1,296
Changes in historical loss experience factors		687		326		663		19
Changes in qualitative factors		179		5		(1,226)		(44)
Sub-total		3,794		1,530		4,664		2,447
Unallocated		0		0		329		86
Total provision for loan losses - All segments	$	3,794	$	1,530	$	4,993	$	2,533

As presented in the tables above, the provision for the third quarter 2022 includes the impact of a partial charge-off of $2,160,000 on a commercial real estate secured loan with a principal balance of $6,920,000 at the time of charge-off. This is a participation loan to a borrower in the health care industry. The charge-off resulted from the borrower’s default due to deterioration in financial performance accompanied by a significant decrease in the appraised value of property at a recently closed facility that had been one of the primary sources of collateral on the loan. Realization of the recorded investment in the loan of $4,760,000 at September 30, 2022 is principally dependent upon the amount of proceeds from sales of the real estate and, if necessary, payments of any shortfall by the guarantors. The third quarter 2022 provision also includes $687,000 related to changes in historical loss factors, most of which resulted from the partial charge-off just described. Further, the third quarter 2022 provision includes $757,000 attributable to increases in loan volume resulting from significant loan growth, particularly for the commercial segment, as well as an increase in the collectively determined portion of the allowance related to management’s updated assessment of purchased performing loans.

Similar to the discussion of the third quarter 2022 above, the provision for the nine months ended September 30, 2022 includes the impact of the $2,160,000 partial charge-off and related increase in the Corporation’s historical loss experience as well as $3,180,000 attributable to increases in loan volume. In the nine months ended September 30, 2022, changes in qualitative factors resulted in a reduction in the provision of $1,226,000. The reduction in the provision related to changes in qualitative factors reflects management’s judgment that despite concerns related to the commercial loan described above, the credit quality of the portfolio has generally been improving over the past several quarters.

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 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 nine months ended September 30, 2022, net charge-offs were $2,360,000, including recoveries of $57,000 and charge-offs of $2,417,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.15% in the nine months ended September 30, 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. At September 30, 2022, the recorded investment of $4,760,000 in the commercial loan with the partial charge-off referred to above was classified as nonperforming (nonaccrual) and impaired with no specific allowance. Total nonperforming loans of $20,458,000 at September 30, 2022 was down from $21,218,000 at December 31, 2021. Total nonperforming loans as a percentage of outstanding loans was 1.21% at September 30, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.87% at September 30, 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 1.21% at September

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30, 2022, though up from December 31, 2019, was lower than the corresponding year-end ratio for all other years presented. Similarly, the September 30, 2022 ratio of total nonperforming assets as a percentage of assets of 0.87% was lower than the corresponding ratio for all years presented except December 31, 2019.

Total impaired loans of $13,309,000 at September 30, 2022 are down $2,425,000 from the corresponding amount at December 31, 2021 of $15,734,000. Although impaired loans without a valuation allowance increased $3,494,000, mainly due to the classification in the third quarter 2022 as impaired of the commercial loan with the partial charge-off described above, the balances of purchased credit impaired loans and impaired loans with a valuation allowance decreased. Purchased credit impaired loans totaled $3,783,000 at September 30, 2022, down from $6,558,000 at December 31, 2021. In the nine months ended September 30, 2022, the Corporation received pay-offs on a few purchased credit impaired loans and recognized interest income of $1,585,000 for the excess received over previous carrying amounts. Total impaired loans with a valuation allowance was $3,396,000 at September 30, 2022, down from $6,540,000 at December 31, 2021. At September 30, 2022, there was one commercial real estate secured loan within this category with a related valuation allowance of $427,000. This loan was also classified as impaired at December 31, 2021, when the balance was $3,409,000 and the allowance was $427,000. There were two other commercial loans classified as impaired at December 31, 2021, with balances totaling $3,136,000 and specific allowances totaling $313,000, that were removed from that classification with the allowances reversed in 2022 because of improved circumstances.

Over the period 2017-2021 and the first nine 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 provision for loan losses and the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, 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)	Nine Months Ended
	September 30,			September 30,			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		(2,310)			(1,194)			(1,464)			(2,343)			(6)			(165)			(132)
Residential mortgage		0			(11)			(11)			0			(190)			(158)			(197)
Consumer		(107)			(73)			(100)			(122)			(183)			(174)			(150)
Total charge-offs		(2,417)			(1,278)			(1,575)			(2,465)			(379)			(497)			(479)
Recoveries:
Commercial		0			22			22			16			6			317			4
Residential mortgage		18			5			6			44			12			8			19
Consumer		39			33			38			41			39			41			38
Total recoveries		57			60			66			101			57			366			61
Net charge-offs		(2,360)			(1,218)			(1,509)			(2,364)			(322)			(131)			(418)
Provision for loan losses		4,993			2,533			3,661			3,913			849			584			801
Balance, end of period	$	16,170		$	12,700		$	13,537		$	11,385		$	9,836		$	9,309		$	8,856
Net charge-offs as a % of average loans		0.15	%		0.08	%		0.09	%		0.16	%		0.03	%		0.02	%		0.05	%

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TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES


(In Thousands)	September 30,		As of December 31,
	2022		2021		2020		2019		2018		2017
ASC 310 - Impaired loans - individually evaluated	$	427	$	740	$	925	$	1,051	$	1,605	$	1,279
ASC 450 - Collectively evaluated:
Commercial		9,811		7,553		5,545		3,913		3,102		3,078
Residential mortgage		4,697		4,338		4,091		4,006		3,870		3,841
Consumer		235		235		239		281		233		159
Unallocated		1,000		671		585		585		499		499
Total Allowance	$	16,170	$	13,537	$	11,385	$	9,836	$	9,309	$	8,856

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TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)


(Dollars In Thousands)	September 30,			As of December 31,
	2022			2021			2020			2019			2018			2017
Impaired loans with a valuation allowance	$	3,396		$	6,540		$	8,082		$	3,375		$	4,851		$	4,100
Impaired loans without a valuation allowance		6,130			2,636			2,895			1,670			4,923			5,411
Purchased credit impaired loans		3,783			6,558			6,841			441			0			0
Total impaired loans	$	13,309		$	15,734		$	17,818		$	5,486		$	9,774		$	9,511
Total loans past due 30-89 days and still accruing	$	3,041		$	5,106		$	5,918		$	8,889		$	7,142		$	9,449
Nonperforming assets:
Purchased credit impaired loans	$	3,783		$	6,558		$	6,841		$	441		$	0		$	0
Other nonaccrual loans		13,176			12,441			14,575			8,777			13,113			13,404
Total nonaccrual loans		16,959			18,999			21,416			9,218			13,113			13,404
Total loans past due 90 days or more and still accruing		3,499			2,219			1,975			1,207			2,906			3,724
Total nonperforming loans		20,458			21,218			23,391			10,425			16,019			17,128
Foreclosed assets held for sale (real estate)		454			684			1,338			2,886			1,703			1,598
Total nonperforming assets	$	20,912		$	21,902		$	24,729		$	13,311		$	17,722		$	18,726
Loans subject to troubled debt restructurings (TDRs):
Performing	$	231		$	288		$	166		$	889		$	655		$	636
Nonperforming		3,960			5,517			7,285			1,737			2,884			3,027
Total TDRs	$	4,191		$	5,805		$	7,451		$	2,626		$	3,539		$	3,663

Total nonperforming loans as a % of loans		1.21	%		1.36	%		1.42	%		0.88	%		1.94	%		2.10	%
Total nonperforming assets as a % of assets		0.87	%		0.94	%		1.10	%		0.80	%		1.37	%		1.47	%
Allowance for loan losses as a % of total loans		0.96	%		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)		1.08	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for loan losses as a % of nonperforming loans		79.04	%		63.80	%		48.67	%		94.35	%		58.11	%		51.70	%

(a) Credit adjustment on purchased non-impaired loans at end of period	$	2,095		$	3,335		$	5,979		$	1,216		$	0		$	0
Allowance for loan losses		16,170			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)	$	18,265		$	16,872		$	17,364		$	11,052		$	9,309		$	8,856
Total loans receivable	$	1,690,246		$	1,564,849		$	1,644,209		$	1,182,222		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans at end of period		2,095			3,335			5,979			1,216			0			0
Total (2)	$	1,692,341		$	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)		1.08	%		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 September 30, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $24,485,000.

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 $23,420,000 at September 30, 2022.

The Corporation’s outstanding, available, and total credit facilities at September 30, 2022 and December 31, 2021 are as follows:


	Outstanding				Available				Total Credit
(In Thousands)	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021		2022		2021
Federal Home Loan Bank of Pittsburgh	$	66,865	$	33,311	$	754,743	$	723,557	$	821,608	$	756,868
Federal Reserve Bank Discount Window		0		0		22,376		13,642		22,376		13,642
Other correspondent banks		0		0		95,000		45,000		95,000		45,000
Total credit facilities	$	66,865	$	33,311	$	872,119	$	782,199	$	938,984	$	815,510

At September 30, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $55,338,000 and letters of credit totaling $11,527,000. 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. In light of the unrealized loss at September 30, 2022 resulting from increases in interest rates in 2022, as described in more detail in the Securities section of Management’s Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. At September 30, 2022, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $218,473,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 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 September 30, 2022 and December 31, 2021 are presented below. Management believes, as of September 30, 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 September 30, 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
September 30, 2022:
Total capital to risk-weighted assets:
Consolidated	$	280,928	15.80	%	N/A	N/A		N/A	N/A		N/A	N/A		$	186,683	≥10.5	%
C&N Bank		261,440	14.74	%	141,875	≥8	%	186,211	≥10.5	%	177,344	≥10	%		186,211	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		239,678	13.48	%	N/A	N/A		N/A	N/A		N/A	N/A			151,124	≥8.5	%
C&N Bank		244,770	13.80	%	106,406	≥6	%	150,742	≥8.5	%	141,875	≥8	%		150,742	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		239,678	13.48	%	N/A	N/A		N/A	N/A		N/A	N/A			124,455	≥7	%
C&N Bank		244,770	13.80	%	79,805	≥4.5	%	124,141	≥7.0	%	115,273	≥6.5	%		124,141	≥7	%
Tier 1 capital to average assets:
Consolidated		239,678	10.04	%	N/A	N/A		N/A	N/A		N/A	N/A			190,977	≥8	%
C&N Bank		244,770	10.32	%	94,844	≥4	%	N/A	N/A		118,555	≥5	%		189,688	≥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 third quarter 2022, 10,269 shares were repurchased for a total cost of $246,000, at an average price of $23.97 per share. Cumulatively through September 30, 2022, 674,700 shares have been repurchased for a total cost of $16,587,000, at an average price of $24.58 per share.

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

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To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, 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 September 30, 2022, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 6.74%.

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 $56,766,000 at September 30, 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 nine months of 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 September 30, 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, government policies and the Russia-Ukraine war, have led to high inflation. The annual inflation rate for the 12-month period ended September 30, 2022, based on changes in the Consumer Price Index, was 8.2%, significantly higher than the Federal Reserve’s 2% objective.

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The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. In March of 2020, in response to significant concerns about the impact of the COVID-19 pandemic on the U.S. economy, the Federal Reserve lowered the fed funds target rate (at the high end of the range) from 1.75% to 0.25% and resumed injections of massive amounts of liquidity into the nation’s monetary system through a variety of programs including purchases of large amounts of securities. In 2022, the Federal Open Market Committee (FOMC) has changed course, raising the fed funds target rate in March, May, June, July and September, with the high end of the range at 3.25% at September 22, 2022. Further, at its September 21-22, 2022 meeting, the FOMC announced that it anticipates ongoing increases to its target rate will be appropriate and that it expects to continue reducing its holdings of securities. The Committee noted its desire to achieve maximum employment and that it is strongly committed to returning inflation to its 2% objective.

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 available-for-sale debt securities 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

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the economic value of equity. For purposes of these calculations, the economic value of equity includes the discounted present 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 projected results based on the model includes the impact of 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. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). 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 economic value of 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 economic value of equity from the baseline values based on current rates.

Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of September 30, 2022 and December 31, 2021. The table shows the Corporation is asset-sensitive, meaning the amounts of net interest income and

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

economic value of 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 economic value were within the policy limits in all scenarios.

Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive income (loss) within stockholders’ equity. Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss of $56.8 million at September 30, 2022. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.

As noted above, for purposes of calculations based on the simulation model, the discounted present values of all of the Corporation’s financial instruments are estimated for each interest rate shock scenario. As shown in Table XI, the results of the simulation model indicate the economic value of equity would increase in upward rate shock scenarios and decrease in downward rate shock scenarios. In the upward rate shock scenarios, although the value of securities and fixed rate loans would decline, the magnitude of the projected economic benefit from changes in the value of nonmaturity deposits would exceed the negative impact related to securities and loans. Conversely, in the downward rate shock scenarios, the magnitude of the negative impact to the value of nonmaturity deposits would exceed the amount of appreciation in the value of securities and loans.

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES


September 30, 2022 Data
(In Thousands)	Period Ending September 30, 2023

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	122,856	$	25,997		$	96,859		11.9	%	25.0	%
+300		116,812		22,596			94,216		8.9	%	20.0	%
+200		111,011		19,194			91,817		6.1	%	15.0	%
+100		104,967		15,792			89,175		3.1	%	10.0	%
0		98,912		12,390			86,522		0.0	%	0.0	%
-100		92,780		9,709			83,071		(4.0)	%	10.0	%
-200		86,905		8,387			78,518		(9.3)	%	15.0	%

	Economic Value of Equity at September 30, 2022

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	496,614		4.1	%		50.0	%
+300		491,836		3.1	%		45.0	%
+200		490,243		2.8	%		35.0	%
+100		483,666		1.4	%		25.0	%
0		477,023		0.0	%		0.0	%
-100		465,772		(2.4)	%		25.0	%
-200		449,662		(5.7)	%		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	%

	Economic Value of 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 September 30, 2022, 674,700 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 second 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
July 1 - 31, 2022	1,736	$	23.95	666,167	333,833
August 1 - 31, 2022	0	$	N/A	666,167	333,833
September 1 - 30, 2022	8,533	$	23.98	674,700	325,300

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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Item 6. Exhibits

3.1	Articles of Incorporation	Incorporated by reference to Exhibit 3.1 of The Corporation’s Form 10-Q filed May 6, 2022

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.INS	Inline XBRL Instance Document.	Filed herewith

101.SCH	Inline XBRL Schema Document.	Filed herewith

101.CAL	Inline XBRL Calculation Linkbase Document.	Filed herewith

101.DEF	Inline XBRL Definition Linkbase Document.	Filed herewith

101.LAB	Inline XBRL Label Linkbase Document.	Filed herewith

101.PRE	Inline XBRL Presentation Linkbase Document.	Filed herewith

104	The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline XBRL (contained in Exhibit 101).	Filed herewith

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SIGNATURES

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


		CITIZENS & NORTHERN CORPORATION


November 7, 2022		By: /s/ J. Bradley Scovill
Date		President and Chief Executive Officer



November 7, 2022		By: /s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer