10-Q - CZNC - Equibles

Table of Contents

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 June 30, 2021

◻ 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)	15,844,666 Shares Outstanding on August 3, 2021

Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index


Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) – June 30, 2021 and December 31, 2020			Page 3
Consolidated Statements of Income (Unaudited) – Three-month and Six-month Periods Ended June 30, 2021 and 2020			Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Six-month Periods Ended June 30, 2021 and 2020			Page 5
Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2021 and 2020			Page 6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Six-month Periods Ended June 30, 2021 and 2020			Pages 7 – 8
Notes to Unaudited Consolidated Financial Statements			Pages 9 – 39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 40 – 67
Item 4. Controls and Procedures			Page 67
Part II. Other Information			Pages 68 – 70
Signatures			Page 72

Table of Contents CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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


	****	June 30,		****	December 31,
		2021			2020
ASSETS
Cash and due from banks:
Noninterest-bearing		$	22,404		$	24,780
Interest-bearing			186,456			77,077
Total cash and due from banks			208,860			101,857
Available-for-sale debt securities, at fair value			391,881			349,332

Loans receivable			1,597,856			1,644,209
Allowance for loan losses			(12,375)			(11,385)
Loans, net			1,585,481			1,632,824

Bank-owned life insurance			30,391			30,096
Accrued interest receivable			7,293			8,293
Bank premises and equipment, net			20,620			21,526
Foreclosed assets held for sale			1,332			1,338
Deferred tax asset, net			3,408			2,705
Goodwill			52,505			52,505
Core deposit intangibles, net			3,583			3,851
Other assets			33,709			34,773
TOTAL ASSETS		$	2,339,063		$	2,239,100

LIABILITIES
Deposits:
Noninterest-bearing		$	525,592		$	465,332
Interest-bearing			1,391,217			1,355,137
Total deposits			1,916,809			1,820,469
Short-term borrowings			2,125			20,022
Long-term borrowings - FHLB advances			44,325			54,608
Senior notes, net			14,670			0
Subordinated debt, net			32,967			16,553
Accrued interest and other liabilities			24,034			27,692
TOTAL LIABILITIES			2,034,930			1,939,344

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; no shares issued			0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares;
issued 16,030,172 and outstanding 15,957,512 at June 30, 2021;
issued 15,982,815 and outstanding 15,911,984 at December 31, 2020			16,030			15,983
Paid-in capital			143,817			143,644
Retained earnings			136,756			129,703
Treasury stock, at cost; 72,660 shares at June 30, 2021 and 70,831
shares at December 31, 2020			(1,746)			(1,369)
Accumulated other comprehensive income			9,276			11,795
TOTAL STOCKHOLDERS' EQUITY			304,133			299,756
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	2,339,063		$	2,239,100

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

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Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)


	****	Three Months Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
		2021		2020		2021		2020
INTEREST INCOME
Interest and fees on loans:
Taxable		$	18,075	$	14,126	$	37,566	$	28,587
Tax-exempt			411		439		850		898
Income from available-for-sale debt securities:
Taxable			1,187		1,380		2,300		2,968
Tax-exempt			663		507		1,305		944
Other interest and dividend income			92		61		161		153
Total interest and dividend income			20,428		16,513		42,182		33,550
INTEREST EXPENSE
Interest on deposits			1,217		1,784		2,495		3,939
Interest on short-term borrowings			7		64		22		262
Interest on long-term borrowings - FHLB advances			109		313		243		608
Interest on senior notes, net			57		0		57		0
Interest on subordinated debt, net			357		106		601		213
Total interest expense			1,747		2,267		3,418		5,022
Net interest income			18,681		14,246		38,764		28,528
Provision (credit) for loan losses			744		(176)		1,003		1,352
Net interest income after provision (credit) for loan losses			17,937		14,422		37,761		27,176
NONINTEREST INCOME
Trust revenue			1,807		1,565		3,433		3,044
Brokerage and insurance revenue			506		384		832		739
Service charges on deposit accounts			1,073		831		2,088		2,081
Interchange revenue from debit card transactions			998		718		1,879		1,449
Net gains from sale of loans			925		1,564		1,989		1,879
Loan servicing fees, net			146		(158)		394		(172)
Increase in cash surrender value of life insurance			145		98		295		202
Other noninterest income			700		526		2,172		1,587
Sub-total			6,300		5,528		13,082		10,809
Realized gains on available-for-sale debt securities, net			2		0		2		0
Total noninterest income			6,302		5,528		13,084		10,809
NONINTEREST EXPENSE
Salaries and employee benefits			9,499		6,983		18,394		14,361
Net occupancy and equipment expense			1,219		975		2,523		2,078
Data processing and telecommunications expense			1,487		1,253		2,867		2,477
Automated teller machine and interchange expense			355		275		692		572
Pennsylvania shares tax			490		423		981		845
Professional fees			598		464		1,145		843
Merger-related expenses			0		983		0		1,124
Other noninterest expense			1,751		1,901		4,506		4,010
Total noninterest expense			15,399		13,257		31,108		26,310
Income before income tax provision			8,840		6,693		19,737		11,675
Income tax provision			1,780		1,255		3,890		2,071
NET INCOME		$	7,060	$	5,438	$	15,847	$	9,604
EARNINGS PER COMMON SHARE - BASIC		$	0.44	$	0.39	$	0.99	$	0.70
EARNINGS PER COMMON SHARE - DILUTED		$	0.44	$	0.39	$	0.99	$	0.70

The accompanying notes are an integral part of these unaudited consolidated financial statements. 4

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Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)


	****	Three Months Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
	****	2021		2020		2021		2020
Net income		$	7,060	$	5,438	$	15,847	$	9,604

Unrealized gains (losses) on available-for-sale debt securities:
Unrealized holding gains (losses) on available-for-sale debt securities			2,941		2,835		(3,173)		10,075
Reclassification adjustment for (gains) realized in income			(2)		0		(2)		0
Other comprehensive income (loss) on available-for-sale debt securities			2,939		2,835		(3,175)		10,075

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			0		0		(5)		88
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(4)		(6)		(8)		(14)
Other comprehensive (loss) income on unfunded retirement obligations			(4)		(6)		(13)		74

Other comprehensive income (loss) before income tax			2,935		2,829		(3,188)		10,149
Income tax related to other comprehensive income (loss)			(618)		(592)		669		(2,129)

Net other comprehensive income (loss)			2,317		2,237		(2,519)		8,020

Comprehensive income		$	9,377	$	7,675	$	13,328	$	17,624

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)


	****	Six Months Ended
		June 30,		June 30,
		2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	15,847	$	9,604
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,003		1,352
Realized gains on available-for-sale debt securities, net			(2)		0
Net amortization of securities			1,021		802
Increase in cash surrender value of life insurance			(295)		(202)
Depreciation and amortization of bank premises and equipment			1,081		897
Net accretion of purchase accounting adjustments			(1,397)		(578)
Stock-based compensation			625		424
Deferred income taxes			(34)		396
(Increase) decrease in fair value of servicing rights			(36)		396
Gains on sales of loans, net			(1,989)		(1,879)
Origination of loans held for sale			(60,590)		(60,830)
Proceeds from sales of loans held for sale			60,867		61,815
Decrease (increase) in accrued interest receivable and other assets			761		(9,085)
(Decrease) increase in accrued interest payable and other liabilities			(1,396)		2,630
Other			(55)		15
Net Cash Provided by Operating Activities			15,411		5,757
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit			(2,000)		0
Proceeds from maturities of certificates of deposit			0		250
Proceeds from sales of available-for-sale debt securities			421		6,722
Proceeds from calls and maturities of available-for-sale debt securities			33,117		43,718
Purchase of available-for-sale debt securities			(80,249)		(26,632)
Redemption of Federal Home Loan Bank of Pittsburgh stock			1,367		5,076
Purchase of Federal Home Loan Bank of Pittsburgh stock			(997)		(3,616)
Net decrease (increase) in loans			46,960		(58,591)
Proceeds from bank owned life insurance			287		0
Proceeds from sales of premises and equipment			575		0
Purchase of premises and equipment			(741)		(2,085)
Proceeds from sale of foreclosed assets			178		1,265
Other			115		116
Net Cash Used in Investing Activities			(967)		(33,777)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			96,914		128,464
Net decrease in short-term borrowings			(17,832)		(71,822)
Proceeds from long-term borrowings - FHLB advances			0		25,891
Repayments of long-term borrowings - FHLB advances			(10,047)		(5,114)
Proceeds from issuance of senior notes, net of issuance costs			14,663		0
Proceeds from issuance of subordinated debt, net of issuance costs			24,437		0
Redemption of subordinated debt			(8,000)		0
Sale of treasury stock			77		124
Purchases of treasury stock			(1,688)		(163)
Common dividends paid			(7,965)		(6,670)
Net Cash Provided by Financing Activities			90,559		70,710
INCREASE IN CASH AND CASH EQUIVALENTS			105,003		42,690
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			96,017		31,122
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	201,020	$	73,812
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Increase in accrued purchase of available-for-sale debt securities		$	32	$	0
Assets acquired through foreclosure of real estate loans		$	134	$	0
Interest paid		$	4,508	$	4,961
Income taxes paid		$	5,770	$	42

The accompanying notes are an integral part of these unaudited consolidated financial statements. 6

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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 June 30, 2021	Shares	****	Shares	****	Stock		****	Capital		****	Earnings		****	Income		****	Stock		****	Total
Balance, March 31, 2021	16,013,279	****	13,465		$	16,013		$	143,173		$	134,176		$	6,959		$	(265)		$	300,056
Net income												7,060									7,060
Other comprehensive income, net															2,317						2,317
Cash dividends declared on common stock, .28 per share												(4,480)									(4,480)
Shares issued for dividend reinvestment plan	16,893					17			410												427
Restricted stock granted			(4,000)						(79)									79			0
Forfeiture of restricted stock			1,499						29									(29)			0
Stock-based compensation expense									284												284
Treasury stock purchases			61,696															(1,531)			(1,531)
Balance, June 30, 2021	16,030,172	****	72,660		$	16,030		$	143,817		$	136,756		$	9,276		$	(1,746)		$	304,133

Three Months Ended June 30, 2020
Balance, March 31, 2020	13,934,996	****	147,836		$	13,935		$	103,731		$	126,944		$	9,474		$	(2,856)		$	251,228
Net income												5,438									5,438
Other comprehensive income, net															2,237						2,237
Cash dividends declared on common stock, .27 per share												(3,721)									(3,721)
Shares issued for dividend reinvestment plan			(20,755)						(22)									401			379
Forfeiture of restricted stock			758						15									(15)			0
Stock-based compensation expense									230												230
Balance, June 30, 2020	13,934,996	****	127,839		$	13,935		$	103,954		$	128,661		$	11,711		$	(2,470)		$	255,791

All values are in US Dollars.

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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
Six Months Ended June 30, 2021	Shares		Shares	Stock		Capital		Earnings		Income		Stock		Total
Balance, December 31, 2020	15,982,815	****	70,831	$	15,983	$	143,644	$	129,703	$	11,795	$	(1,369)	$	299,756
Net income									15,847						15,847
Other comprehensive loss, net											(2,519)				(2,519)
Cash dividends declared on common stock, .55 per share									(8,794)						(8,794)
Shares issued for dividend reinvestment plan	36,368				36		793								829
Shares issued from treasury and redeemed related to exercise of stock options			(5,414)				(28)						105		77
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							625								625
Purchase of restricted stock for tax withholding			7,659										(157)		(157)
Treasury stock purchases			61,696										(1,531)		(1,531)
Balance, June 30, 2021	16,030,172	****	72,660	$	16,030	$	143,817	$	136,756	$	9,276	$	(1,746)	$	304,133

Six Months Ended June 30, 2020
Balance, December 31, 2019	13,934,996	****	218,551	$	13,935	$	104,519	$	126,480	$	3,691	$	(4,173)	$	244,452
Net income									9,604						9,604
Other comprehensive income, net											8,020				8,020
Cash dividends declared on common stock, .54 per share									(7,423)						(7,423)
Shares issued for dividend reinvestment plan			(34,700)				82						671		753
Shares issued from treasury and redeemed related to exercise of stock options			(9,652)				(62)						186		124
Restricted stock granted			(55,864)				(1,079)						1,079		0
Forfeiture of restricted stock			3,642				70						(70)		0
Stock-based compensation expense							424								424
Purchase of restricted stock for tax withholding			5,862										(163)		(163)
Balance, June 30, 2020	13,934,996	****	127,839	$	13,935	$	103,954	$	128,661	$	11,711	$	(2,470)	$	255,791

All values are in US Dollars.

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

BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”). The consolidated financial statements also include C&N Bank’s wholly-owned subsidiaries, C&N Financial Services Corporation and Northern Tier Holding LLC. C&N Bank is the sole member of Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, 2020, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2020 information has been reclassified for consistency with the 2021 presentation.

Operating results reported for the six-month period ended June 30, 2021 might not be indicative of the results for the year ending December 31, 2021. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues Accounting Standards Updates (ASUs) to the FASB Accounting Standards Codification (ASC). This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

Recently Issued But Not Yet Effective Accounting Pronouncements

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

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Corporation has formed a cross functional management team to evaluate and implement changes to contracts with rates indexed to LIBOR and expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.

BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

On July 1, 2020, the Corporation completed its acquisition of Covenant Financial, Inc. (“Covenant”). Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. The Covenant acquisition has contributed significantly to growth in the size of the Corporation’s balance sheet and in net interest income and noninterest expenses.

In connection with the transaction, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Total loans acquired on July 1, 2020 were valued at $464.2 million, while total deposits assumed were valued at $481.8 million, borrowings were valued at $64.0 million and subordinated debt was valued at $10.1 million. The Corporation acquired available-for-sale debt securities valued at $10.8 million and bank-owned life insurance valued at $11.2 million. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets acquired or liabilities assumed in the six months ended June 30, 2021.

Merger-related expenses related to the acquisition of Covenant totaled $983,000 in the second quarter 2020 and $1,124,000 in the six months ended June 30, 2020. There were no merger-related expenses in the six months ended June 30, 2021.

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. 10

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


(In Thousands, Except Share and Per Share Data)		Three Months Ended				****	Six Months Ended
		June 30,		June 30,			June 30,		June 30,
		2021		2020			2021		2020
Basic
Net income		$	7,060	$	5,438		$	15,847	$	9,604
Less: Dividends and undistributed earnings allocated to participating securities			(61)		(33)			(126)		(54)
Net income attributable to common shares		$	6,999	$	5,405		$	15,721	$	9,550
Basic weighted-average common shares outstanding			15,868,150		13,710,118			15,859,236		13,697,617
Basic earnings per common share (a)		$	0.44	$	0.39		$	0.99	$	0.70
Diluted
Net income attributable to common shares		$	6,999	$	5,405		$	15,721	$	9,550
Basic weighted-average common shares outstanding			15,868,150		13,710,118			15,859,236		13,697,617
Dilutive effect of potential common stock arising from stock options			6,833		2,269			5,922		8,116
Diluted weighted-average common shares outstanding			15,874,983		13,712,387			15,865,158		13,705,733
Diluted earnings per common share (a)		$	0.44	$	0.39		$	0.99	$	0.70
Weighted-average nonvested restricted shares outstanding			136,711		88,514			127,627		77,093
(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 six month periods ended June 30, 2021. Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended June 30, 2020 and 19,506 shares in the six-month period ended June 30, 2020.

COMPREHENSIVE INCOME

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


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended June 30, 2021	****		****
Available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		$	2,941		$	(619)		$	2,322
Reclassification adjustment for (gains) realized in income			(2)			0			(2)
Other comprehensive income from available-for-sale debt securities			2,939			(619)			2,320
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(4)			1			(3)
Other comprehensive loss on unfunded retirement obligations			(4)			1			(3)
Total other comprehensive income		$	2,935		$	(618)		$	2,317

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(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended June 30, 2020	****		****
Available-for-sale debt securities,
Unrealized holding gains on available-for-sale debt securities		$	2,835		$	(593)		$	2,242
Unfunded pension and postretirement obligations,
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(6)			1			(5)
Total other comprehensive income		$	2,829		$	(592)		$	2,237


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Six Months Ended June 30, 2021
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities		$	(3,173)		$	666		$	(2,507)
Reclassification adjustment for (gains) realized in income			(2)			0			(2)
Other comprehensive loss from available-for-sale debt securities			(3,175)			666			(2,509)
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			(8)			2			(6)
Other comprehensive loss on unfunded retirement obligations			(13)			3			(10)
Total other comprehensive loss		$	(3,188)		$	669		$	(2,519)


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Six Months Ended June 30, 2020
Available-for-sale debt securities,
Unrealized holding gains on available-for-sale debt securities		$	10,075		$	(2,114)		$	7,961
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			88			(18)			70
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(14)			3			(11)
Other comprehensive income on unfunded retirement obligations			74			(15)			59
Total other comprehensive income		$	10,149		$	(2,129)		$	8,020

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


		Affected Line Item in the
Description	****	Consolidated Statements of Income
Reclassification adjustment for (gains) realized in income (before-tax)		Realized gains on available-for-sale debt securities, net
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)		Other noninterest expense
Income tax effect		Income tax provision

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


(In Thousands)	****			****	****		****	Accumulated
		Unrealized			Unfunded			Other
		Gains			Retirement			Comprehensive
		on Securities			Obligations			Income
Three Months Ended June 30, 2021	****		****
Balance, beginning of period		$	6,847		$	112		$	6,959
Other comprehensive income during three months ended June 30, 2021			2,320			(3)			2,317
Balance, end of period		$	9,167		$	109		$	9,276

Three Months Ended June 30, 2020		****	****
Balance, beginning of period		$	9,230		$	244		$	9,474
Other comprehensive income during three months ended June 30, 2020			2,242			(5)			2,237
Balance, end of period		$	11,472		$	239		$	11,711


(In Thousands)	****	Unrealized		****				Accumulated
		Gains			Unfunded			Other
	****	(Losses)		****	Retirement		****	Comprehensive
	****	on Securities		****	Obligations		****	Income (Loss)
Six Months Ended June 30, 2021
Balance, beginning of period		$	11,676		$	119		$	11,795
Other comprehensive loss during six months ended June 30, 2021			(2,509)			(10)			(2,519)
Balance, end of period		$	9,167		$	109		$	9,276

Six Months Ended June 30, 2020
Balance, beginning of period		$	3,511		$	180		$	3,691
Other comprehensive income during six months ended June 30, 2020			7,961			59			8,020
Balance, end of period		$	11,472		$	239		$	11,711

CASH AND DUE FROM BANKS

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


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
Cash and cash equivalents		$	201,020		$	96,017
Certificates of deposit			7,840			5,840
Total cash and due from banks		$	208,860		$	101,857

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

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at June 30, 2021 and December 31, 2020.

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SECURITIES

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


(In Thousands)	****	June 30, 2021
					Gross			Gross
					Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of the U.S. Treasury		$	22,981		$	106		$	(14)		$	23,073
Obligations of U.S. Government agencies			24,764			866			(257)			25,373
Obligations of states and political subdivisions:
Tax-exempt			127,122			5,258			(70)			132,310
Taxable			58,921			1,849			(242)			60,528
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			50,397			1,039			(108)			51,328
Residential collateralized mortgage obligations			44,536			1,042			(3)			45,575
Commercial mortgage-backed securities			51,555			2,334			(195)			53,694
Total available-for-sale debt securities		$	380,276		$	12,494		$	(889)		$	391,881


(In Thousands)	****	December 31, 2020
					Gross			Gross
	****			****	Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of the U.S. Treasury		$	12,184		$	0		$	(2)		$	12,182
Obligations of U.S. Government agencies			25,349			1,003			(8)			26,344
Obligations of states and political subdivisions:
Tax-exempt			116,427			6,000			(26)			122,401
Taxable			45,230			2,246			(24)			47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			36,853			1,323			0			38,176
Residential collateralized mortgage obligations			56,048			1,428			(9)			57,467
Commercial mortgage-backed securities			42,461			2,849			0			45,310
Total available-for-sale debt securities		$	334,552		$	14,849		$	(69)		$	349,332

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


June 30, 2021		Less Than 12 Months						12 Months or More						Total
(In Thousands)		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
	****	Value		****	Losses		****	Value		****	Losses		****	Value		****	Losses
Obligations of the U.S. Treasury		$	6,994		$	(14)		$	0		$	0		$	6,994		$	(14)
Obligations of U.S. Government agencies			12,242			(257)			0			0			12,242			(257)
Obligations of states and political subdivisions:
Tax-exempt			11,127			(70)			0			0			11,127			(70)
Taxable			11,957			(230)			531			(12)			12,488			(242)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			19,905			(108)			0			0			19,905			(108)
Residential collateralized mortgage obligations			5,210			(3)			0			0			5,210			(3)
Commercial mortgage-backed securities			7,987			(195)			0			0			7,987			(195)
Total temporarily impaired available-for-sale debt securities		$	75,422		$	(877)		$	531		$	(12)		$	75,953		$	(889)


December 31, 2020		Less Than 12 Months						12 Months or More						Total
(In Thousands)		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
	****	Value		****	Losses		****	Value		****	Losses		****	Value		****	Losses
Obligations of the U.S. Treasury		$	9,159		$	(2)		$	0		$	0		$	9,159		$	(2)
Obligations of U.S. Government agencies			4,992			(8)			0			0			4,992			(8)
Obligations of states and political subdivisions:
Tax-exempt			3,811			(26)			0			0			3,811			(26)
Taxable			5,235			(24)			0			0			5,235			(24)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,
Residential collateralized mortgage obligations			2,861			(9)			0			0			2,861			(9)
Total temporarily impaired available-for-sale debt securities		$	26,058		$	(69)		$	0		$	0		$	26,058		$	(69)

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


(In Thousands)		Three Months Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
	****	2021		2020		2021		2020
Gross realized gains from sales		$	4	$	0	$	4	$	52
Gross realized losses from sales			(2)		0		(2)		(52)
Net realized gains		$	2	$	0	$	2	$	0

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The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2021. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)		June 30, 2021
		Amortized			Fair
	****	Cost		****	Value
Due in one year or less		$	14,515		$	14,605
Due from one year through five years			48,413			49,640
Due from five years through ten years			55,176			57,185
Due after ten years			115,684			119,854
Sub-total			233,788			241,284
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			50,397			51,328
Residential collateralized mortgage obligations			44,536			45,575
Commercial mortgage-backed securities			51,555			53,694
Total		$	380,276		$	391,881

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 $250,123,000 at June 30, 2021 and $247,373,000 at December 31, 2020 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements and Note 12 for information related to securities pledged against interest rate swap obligations.

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

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

Debt Securities

At June 30, 2021 and December 31, 2020, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at June 30, 2021 and December 31, 2020 to be temporary.

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $9,350,000 at June 30, 2021 and $9,720,000 at December 31, 2020. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2021 and December 31, 2020. In making this determination, management concluded that recovery of total 16

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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 $985,000 at June 30, 2021 and $1,000,000 at December 31, 2020, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $15,000 at June 30, 2021 and no unrealized gain or loss on the mutual fund at December 31, 2020. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

LOANS

The loans receivable portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding at June 30, 2021 and December 31, 2020 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)


	****	June 30,		****	December 31,
		2021			2020
Commercial:
Commercial loans secured by real estate		$	544,202		$	531,810
Commercial and industrial			158,907			159,577
Paycheck Protection Program - 1st Draw			37,902			132,269
Paycheck Protection Program - 2nd Draw			72,409			0
Political subdivisions			48,849			53,221
Commercial construction and land			43,178			42,874
Loans secured by farmland			10,950			11,736
Multi-family (5 or more) residential			51,916			55,811
Agricultural loans			2,379			3,164
Other commercial loans			14,711			17,289
Total commercial			985,403			1,007,751
Residential mortgage:
Residential mortgage loans - first liens			507,579			532,947
Residential mortgage loans - junior liens			25,287			27,311
Home equity lines of credit			39,432			39,301
1-4 Family residential construction			23,567			20,613
Total residential mortgage			595,865			620,172
Consumer			16,588			16,286
Total			1,597,856			1,644,209
Less: allowance for loan losses			(12,375)			(11,385)
Loans, net		$	1,585,481		$	1,632,824

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $7,044,000 at June 30, 2021 and $6,286,000 at December 31, 2020.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration 17

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(“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program. Information related to PPP loans advanced pursuant to the CARES Act are labeled “1st Draw” within the tables.

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

In addition, the banking regulators and other financial regulators, on March 22, 2020 and revised April 7, 2020, issued a joint interagency statement titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of the COVID-19 pandemic. Pursuant to the interagency statement, loan modifications that do not meet the conditions of Section 4013 of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. Specifically, the agencies confirmed with the FASB staff that short-term modifications made in good faith in response to the pandemic to borrowers who were current prior to any relief are not TDRs under U.S. GAAP. This includes short-term (e.g. six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Appropriate allowances for loan and lease losses are expected to be maintained. With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to the pandemic as past due because of the deferral. The interagency statement also states that during short-term pandemic-related loan modifications, these loans generally should not be reported as nonaccrual.

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates. The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act. Information related to PPP loans advanced pursuant to the CAA are labeled “2nd Draw” within the tables.

The maximum term of PPP loans is five years. Most of the Corporation’s 1st Draw PPP loans have two-year terms, while 2nd Draw PPP loans have five-year terms and the Corporation will be repaid sooner to the extent the loans are forgiven. The interest rate on PPP loans is 1%, and the Corporation has received fees from the SBA ranging between 1% and 5% per loan, depending on the size of the loan. Fees on PPP loans, net of origination costs and a market rate adjustment on PPP loans acquired from Covenant, are recognized in interest income as a yield adjustment over the term of the loans.

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of June 30, 2021, the recorded investment in 1st Draw PPP loans was $37,902,000, including contractual principal balances of $38,706,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $50,000 and reduced by net deferred origination fees of $854,000. The recorded investment in 2nd Draw PPP loans was $72,409,000, including contractual principal balances of $75,446,000 reduced by net deferred origination fees of $3,037,000. Accretion of fees received on 1st Draw PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $722,000 and the accretion of fees on 2nd Draw PPP loans was $200,000 in the three-month period ended June 30, 2021. For the six-month period ended June 30, 2021, accretion of fees received on 1st Draw PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $2,270,000 and the accretion of fees on 2nd Draw PPP loans was $297,000. For the three-month and six-month periods ended June 30, 2020, accretion of fees on 1st draw PPP loans was $337,000.

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similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2021. Most of the initial modifications under the program became effective in March 2020 or the second quarter 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. Many of the loans for which deferrals were granted returned to full payment status prior to June 30, 2021, while additional deferrals have been granted on certain loans.

At June 30, 2021, there were 12 loans in deferral status subject to CARES Act Section 4013 guidance with a total recorded investment of $6.7 million. Total loans in deferral status at June 30, 2021 is down from $26.0 million at March 31, 2021 and down significantly from 693 loans and $241.2 million (including 152 loans and $82.5 million reported by Covenant) at June 30, 2020. The amount of loans in deferral status has fallen over the past several quarters as the local and U.S. economy has reopened. The quantity and balances of modifications outstanding under the program and a summary of their risk ratings at June 30, 2021 are as follows:


	Deferrals Remaining
	As of June 30, 2021
(Dollars in Thousands)	Number					Purchased
	of			Special		Credit
	Loans	Pass		Mention		Impaired		Total
COVID-19-related loan modifications:
Commercial
Accommodation and food services - hotels	1	$	0	$	3,094	$	0	$	3,094
Lessors of residential buildings and dwellings	3		113		0		1,557		1,670
Transportation and warehousing	4		1,197		0		0		1,197
Real estate rental and leasing - other	1		438		0		0		438
Total commercial	9		1,748		3,094		1,557		6,399
Residential mortgage	3		254		0		0		254
Total	12	$	2,002	$	3,094	$	1,557	$	6,653

For the loans in the table above, the deferral periods as of June 30, 2021 expire in the third quarter of 2021. The Corporation will continue to evaluate requests for additional deferrals on a case-by-case basis.

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As described in Note 2, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant, and effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument Bancorp, Inc. (“Monument”). The acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequent to the acquisitions, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI) loans. For the three-month and six-month periods ended June 30, 2021 and 2020, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)	****
		Three Months Ended				Six Months Ended
		June 30,		June 30,		June 30,		June 30,
		2021		2020		2021		2020
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period		$	352	$	(1,268)	$	718	$	(1,415)
(Amortization) accretion recognized in interest income			(357)		165		(723)		312
Adjustments to gross amortized cost of loans at end of period		$	(5)	$	(1,103)	$	(5)	$	(1,103)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period		$	(5,182)	$	(1,011)	$	(5,979)	$	(1,216)
Accretion recognized in interest income			680		133		1,477		338
Adjustments to gross amortized cost of loans at end of period		$	(4,502)	$	(878)	$	(4,502)	$	(878)

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


(In Thousands)		June 30,			December 31,
	****	2021		****	2020
Outstanding balance		$	10,189		$	10,316
Carrying amount			6,733			6,841

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of June 30, 2021 and December 31, 2020, management determined that no allowance for credit losses related to unfunded loan commitments was required. 20

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


Three Months Ended June 30, 2021		March 31, 2021		****	****								****	June 30, 2021
(In Thousands)	****	Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	Balance
Allowance for Loan Losses:	****		****
Commercial:
Commercial loans secured by real estate		$	3,350		$	0		$	2		$	100		$	3,452
Commercial and industrial			2,187			0			0			594			2,781
Commercial construction and land			476			0			0			(24)			452
Loans secured by farmland			111			0			0			2			113
Multi-family (5 or more) residential			255			0			0			(105)			150
Agricultural loans			26			0			0			(1)			25
Other commercial loans			159			0			0			(14)			145
Total commercial			6,564			0			2			552			7,118
Residential mortgage:
Residential mortgage loans - first liens			3,507			(11)			1			39			3,536
Residential mortgage loans - junior liens			334			0			0			(7)			327
Home equity lines of credit			281			0			1			12			294
1-4 Family residential construction			78			0			0			120			198
Total residential mortgage			4,200			(11)			2			164			4,355
Consumer			220			(36)			13			34			231
Unallocated			677			0			0			(6)			671
Total Allowance for Loan Losses		$	11,661		$	(47)		$	17		$	744		$	12,375


Three Months Ended June 30, 2020		March 31, 2020		****	****								****	June 30, 2020
(In Thousands)	****	Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	Balance
Allowance for Loan Losses:	****		****
Commercial:
Commercial loans secured by real estate		$	1,932		$	0		$	0		$	494		$	2,426
Commercial and industrial			2,645			0			0			(149)			2,496
Commercial construction and land			970			(107)			0			(443)			420
Loans secured by farmland			144			0			0			2			146
Multi-family (5 or more) residential			199			0			0			(36)			163
Agricultural loans			39			0			0			1			40
Other commercial loans			160			0			0			7			167
Total commercial			6,089			(107)			0			(124)			5,858
Residential mortgage:
Residential mortgage loans - first liens			3,572			0			1			(42)			3,531
Residential mortgage loans - junior liens			414			0			0			(49)			365
Home equity lines of credit			278			0			1			8			287
1-4 Family residential construction			119			0			0			18			137
Total residential mortgage			4,383			0			2			(65)			4,320
Consumer			273			(39)			16			13			263
Unallocated			585			0			0			0			585
Total Allowance for Loan Losses		$	11,330		$	(146)		$	18		$	(176)		$	11,026

For the three months ended June 30, 2021, the provision for loan losses was $744,000, an increase in expense of $920,000 as compared to the credit for loan losses of $176,000 for the three months ended June 30, 2020. The second quarter 2021 provision included a net charge of $383,000 related to specific loans (net increase in specific allowances on loans of $353,000 and net charge-offs of $30,000), an increase of $367,000 in the collectively determined portion of the allowance and a $6,000 decrease in the unallocated portion. The credit for loan losses in the second quarter 2020 included the benefit of repayment of a loan for less than the full principal balance, 21

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resulting in a charge-off of $107,000 on a commercial loan for which an allowance for loan losses of $674,000 had been recorded at March 31, 2020.


	****	December 31,		****							June 30,
Six Months Ended June 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	$	399	$	3,452
Commercial and industrial			2,245			0		14		522		2,781
Commercial construction and land			454			0		0		(2)		452
Loans secured by farmland			120			0		0		(7)		113
Multi-family (5 or more) residential			236			0		0		(86)		150
Agricultural loans			34			0		0		(9)		25
Other commercial loans			168			0		0		(23)		145
Total commercial			6,308			0		16		794		7,118
Residential mortgage:
Residential mortgage loans - first liens			3,524			(11)		2		21		3,536
Residential mortgage loans - junior liens			349			0		0		(22)		327
Home equity lines of credit			281			0		2		11		294
1-4 Family residential construction			99			0		0		99		198
Total residential mortgage			4,253			(11)		4		109		4,355
Consumer			239			(47)		25		14		231
Unallocated			585			0		0		86		671
Total Allowance for Loan Losses		$	11,385		$	(58)	$	45	$	1,003	$	12,375


	****	December 31,		****							June 30,
Six Months Ended June 30, 2020		2019							Provision		2020
(In Thousands)		Balance			Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Commercial:
Commercial loans secured by real estate		$	1,921		$	0	$	0	$	505	$	2,426
Commercial and industrial			1,391			(17)		0		1,122		2,496
Commercial construction and land			966			(107)		0		(439)		420
Loans secured by farmland			158			0		0		(12)		146
Multi-family (5 or more) residential			156			0		0		7		163
Agricultural loans			41			0		0		(1)		40
Other commercial loans			155			0		0		12		167
Total commercial			4,788			(124)		0		1,194		5,858
Residential mortgage:
Residential mortgage loans - first liens			3,405			0		2		124		3,531
Residential mortgage loans - junior liens			384			0		1		(20)		365
Home equity lines of credit			276			0		2		9		287
1-4 Family residential construction			117			0		0		20		137
Total residential mortgage			4,182			0		5		133		4,320
Consumer			281			(70)		27		25		263
Unallocated			585			0		0		0		585
Total Allowance for Loan Losses		$	9,836		$	(194)	$	32	$	1,352	$	11,026

For the six months ended June 30, 2021, the provision for loan losses was $1,003,000, a decrease in expense of $349,000 as compared to $1,352,000 recorded for the first six months ended June 30, 2020. The provision for the six months ended June 30, 2021, includes a net charge of $565,000 related to specific loans (increase in specific allowances on loans of $552,000 and net charge-offs of $13,000), 22

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an increase of $352,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first six months of 2020 included the effects of recording a specific allowance of $1,193,000 on a commercial loan for which a charge-off of $2,219,000 was subsequently recorded in the third quarter 2020.

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

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2021 and December 31, 2020:


June 30, 2021	****									Purchased
(In Thousands)				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate		$	504,470	$	15,967	$	19,529	$	0	$	4,236	$	544,202
Commercial and Industrial			143,810		7,585		6,731		0		781		158,907
Paycheck Protection Program - 1st Draw			37,902		0		0		0		0		37,902
Paycheck Protection Program - 2nd Draw			72,409		0		0		0		0		72,409
Political subdivisions			48,849		0		0		0		0		48,849
Commercial construction and land			42,415		715		48		0		0		43,178
Loans secured by farmland			9,735		390		825		0		0		10,950
Multi-family (5 or more) residential			47,089		2,367		882		0		1,578		51,916
Agricultural loans			1,810		0		569		0		0		2,379
Other commercial loans			14,704		7		0		0		0		14,711
Total commercial			923,193		27,031		28,584		0		6,595		985,403
Residential Mortgage:
Residential mortgage loans - first liens			492,636		5,335		9,535		0		73		507,579
Residential mortgage loans - junior liens			24,485		125		612		0		65		25,287
Home equity lines of credit			38,739		59		634		0		0		39,432
1-4 Family residential construction			23,567		0		0		0		0		23,567
Total residential mortgage			579,427		5,519		10,781		0		138		595,865
Consumer			16,476		0		112		0		0		16,588
Totals		$	1,519,096	$	32,550	$	39,477	$	0	$	6,733	$	1,597,856

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2020	****									Purchased
(In Thousands)				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate		$	494,876	$	17,374	$	15,262	$	0	$	4,298	$	531,810
Commercial and Industrial			143,500		8,025		7,268		0		784		159,577
Paycheck Protection Program - 1st Draw			132,269		0		0		0		0		132,269
Political subdivisions			53,221		0		0		0		0		53,221
Commercial construction and land			42,110		715		49		0		0		42,874
Loans secured by farmland			10,473		405		858		0		0		11,736
Multi-family (5 or more) residential			50,563		2,405		1,229		0		1,614		55,811
Agricultural loans			2,569		0		595		0		0		3,164
Other commercial loans			17,289		0		0		0		0		17,289
Total commercial			946,870		28,924		25,261		0		6,696		1,007,751
Residential Mortgage:
Residential Mortgage loans - first liens			516,685		6,192		9,994		0		76		532,947
Residential Mortgage loans - junior liens			26,480		141		621		0		69		27,311
Home equity lines of credit			38,529		59		713		0		0		39,301
1-4 Family residential construction			20,613		0		0		0		0		20,613
Total residential mortgage			602,307		6,392		11,328		0		145		620,172
Consumer			16,172		0		114		0		0		16,286
Totals		$	1,565,349	$	35,316	$	36,703	$	0	$	6,841	$	1,644,209

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of June 30, 2021 and December 31, 2020.


June 30, 2021	****	Loans:						Allowance for Loan Losses:
(In Thousands)
		Individually		Collectively				Individually		Collectively
		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate		$	11,400	$	532,802	$	544,202	$	683	$	2,769	$	3,452
Commercial and industrial			4,654		154,253		158,907		654		2,127		2,781
Paycheck Protection Program - 1st Draw			0		37,902		37,902		0		0		0
Paycheck Protection Program - 2nd Draw			0		72,409		72,409		0		0		0
Political subdivisions			0		48,849		48,849		0		0		0
Commercial construction and land			0		43,178		43,178		0		452		452
Loans secured by farmland			84		10,866		10,950		0		113		113
Multi-family (5 or more) residential			1,578		50,338		51,916		0		150		150
Agricultural loans			0		2,379		2,379		0		25		25
Other commercial loans			0		14,711		14,711		0		145		145
Total commercial			17,716		967,687		985,403		1,337		5,781		7,118
Residential mortgage:
Residential mortgage loans - first liens			1,027		506,552		507,579		0		3,536		3,536
Residential mortgage loans - junior liens			403		24,884		25,287		140		187		327
Home equity lines of credit			0		39,432		39,432		0		294		294
1-4 Family residential construction			0		23,567		23,567		0		198		198
Total residential mortgage			1,430		594,435		595,865		140		4,215		4,355
Consumer			0		16,588		16,588		0		231		231
Unallocated													671

Total		$	19,146	$	1,578,710	$	1,597,856	$	1,477	$	10,227	$	12,375

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December 31, 2020	****	Loans:						Allowance for Loan Losses:
(In Thousands)
		Individually		Collectively				Individually		Collectively
		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate		$	11,962	$	519,848	$	531,810	$	692	$	2,359	$	3,051
Commercial and industrial			1,359		158,218		159,577		71		2,174		2,245
Paycheck Protection Program - 1st Draw			0		132,269		132,269		0		0		0
Political subdivisions			0		53,221		53,221		0		0		0
Commercial construction and land			0		42,874		42,874		0		454		454
Loans secured by farmland			84		11,652		11,736		0		120		120
Multi-family (5 or more) residential			1,614		54,197		55,811		0		236		236
Agricultural loans			0		3,164		3,164		0		34		34
Other commercial loans			0		17,289		17,289		0		168		168
Total commercial			15,019		992,732		1,007,751		763		5,545		6,308
Residential mortgage:
Residential mortgage loans - first liens			2,385		530,562		532,947		9		3,515		3,524
Residential mortgage loans - junior liens			414		26,897		27,311		153		196		349
Home equity lines of credit			0		39,301		39,301		0		281		281
1-4 Family residential construction			0		20,613		20,613		0		99		99
Total residential mortgage			2,799		617,373		620,172		162		4,091		4,253
Consumer			0		16,286		16,286		0		239		239
Unallocated													585

Total		$	17,818	$	1,626,391	$	1,644,209	$	925	$	9,875	$	11,385

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


(In Thousands)		June 30, 2021									December 31, 2020
		Unpaid									Unpaid
		Principal			Recorded			Related			Principal			Recorded			Related
	****	Balance		****	Investment		****	Allowance		****	Balance		****	Investment		****	Allowance
With no related allowance recorded:
Commercial loans secured by real estate		$	6,667		$	4,909		$	0		$	7,168		$	5,398		$	0
Commercial and industrial			1,636			1,235			0			1,781			1,287			0
Residential mortgage loans - first liens			736			648			0			1,248			1,248			0
Residential mortgage loans - junior liens			151			98			0			160			105			0
Loans secured by farmland			84			84			0			84			84			0
Multi-family (5 or more) residential			2,734			1,578			0			2,770			1,614			0
Total with no related allowance recorded			12,008			8,552			0			13,211			9,736			0

With a related allowance recorded:
Commercial loans secured by real estate			6,491			6,491			683			6,501			6,501			691
Commercial and industrial			3,419			3,419			654			72			72			72
Residential mortgage loans - first liens			379			379			0			1,200			1,200			9
Residential mortgage loans - junior liens			305			305			140			309			309			153
Total with a related allowance recorded			10,594			10,594			1,477			8,082			8,082			925
Total		$	22,602		$	19,146		$	1,477		$	21,293		$	17,818		$	925

In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net 25

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proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $140,000 at June 30, 2021 and $153,000 at December 31, 2020.

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


(In Thousands)									Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
	2021		2020		2021		2020		2021		2020		2021		2020
Commercial:
Commercial loans secured by real estate	$	12,022	$	3,771	$	12,137	$	2,079	$	85	$	12	$	229	$	16
Commercial and industrial		2,754		4,460		1,927		3,666		9		19		21		20
Commercial construction and land		0		678		0		993		0		1		0		13
Loans secured by farmland		84		422		84		469		0		7		1		24
Multi-family (5 or more) residential		1,578		0		1,587		0		30		0		91		0
Agricultural loans		67		76		68		76		1		2		3		2
Other commercial loans		0		25		0		37		0		0		0		1
Total commercial		16,505		9,432		15,803		7,320		125		41		345		76
Residential mortgage:
Residential mortgage loans - first lien		1,717		1,398		2,084		1,315		20		35		57		43
Residential mortgage loans - junior lien		430		391		433		387		4		13		9		13
Home equity lines of credit		0		65		0		65		0		1		0		2
Total residential mortgage		2,147		1,854		2,517		1,767		24		49		66		58
Total	$	18,652	$	11,286	$	18,320	$	9,087	$	149	$	90	$	411	$	134

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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)		June 30, 2021						December 31, 2020
		Past Due						Past Due
		90+ Days and						90+ Days and
	****	Accruing		****	Nonaccrual		****	Accruing		****	Nonaccrual
Commercial:
Commercial loans secured by real estate		$	756		$	11,300		$	395		$	11,550
Commercial and industrial			91			4,282			142			970
Commercial construction and land			0			48			0			49
Loans secured by farmland			188			84			188			84
Multi-family (5 or more) residential			0			1,578			0			1,614
Agricultural loans			66			0			0			0
Other commercial			0			0			71			0
Total commercial			1,101			17,292			796			14,267
Residential mortgage:
Residential mortgage loans - first liens			600			4,941			838			6,387
Residential mortgage loans - junior liens			61			367			52			378
Home equity lines of credit			98			294			233			299
Total residential mortgage			759			5,602			1,123			7,064
Consumer			21			77			56			85
Totals		$	1,881		$	22,971		$	1,975		$	21,416

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $6,733,000 at June 30, 2021 and $6,841,000 at December 31, 2020 are classified as nonaccrual. 27

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The table below presents a summary of the contractual aging of loans as of June 30, 2021 and December 31, 2020. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows.


(In Thousands)		As of June 30, 2021											As of December 31, 2020
	****	Current &		****			****					****	Current &		****
		Past Due			Past Due			Past Due					Past Due			Past Due		Past Due
		Less than			30-89			90+					Less than			30-89		90+
		30 Days			Days			Days		Total			30 Days			Days		Days		Total
Commercial:
Commercial loans secured by real estate		$	538,713		$	110		$	5,379	$	544,202		$	529,998		$	66	$	1,746	$	531,810
Commercial and industrial			157,967			25			915		158,907			158,523			55		999		159,577
Paycheck Protection Program - 1st Draw			37,902			0			0		37,902			132,269			0		0		132,269
Paycheck Protection Program - 2nd Draw			72,409			0			0		72,409			0			0		0		0
Political subdivisions			48,849			0			0		48,849			53,221			0		0		53,221
Commercial construction and land			42,649			529			0		43,178			42,590			284		0		42,874
Loans secured by farmland			10,647			31			272		10,950			11,419			95		222		11,736
Multi-family (5 or more) residential			51,916			0			0		51,916			53,860			1,951		0		55,811
Agricultural loans			2,313			0			66		2,379			3,091			2		71		3,164
Other commercial loans			14,711			0			0		14,711			17,289			0		0		17,289
Total commercial			978,076			695			6,632		985,403			1,002,260			2,453		3,038		1,007,751

Residential mortgage:
Residential mortgage loans - first liens			502,311			3,143			2,125		507,579			523,191			5,703		4,053		532,947
Residential mortgage loans - junior liens			25,138			32			117		25,287			27,009			111		191		27,311
Home equity lines of credit			39,010			280			142		39,432			38,919			101		281		39,301
1-4 Family residential construction			23,567			0			0		23,567			20,457			156		0		20,613
Total residential mortgage			590,026			3,455			2,384		595,865			609,576			6,071		4,525		620,172
Consumer			16,433			57			98		16,588			16,063			83		140		16,286
Totals		$	1,584,535		$	4,207		$	9,114	$	1,597,856		$	1,627,899		$	8,607	$	7,703	$	1,644,209

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Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at June 30, 2021 and December 31, 2020 is as follows:


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Total
June 30, 2021 Nonaccrual Totals		$	14,009		$	1,729		$	7,233		$	22,971
December 31, 2020 Nonaccrual Totals		$	12,999		$	2,689		$	5,728		$	21,416

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at June 30, 2021 and December 31, 2020 is as follows:


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Nonaccrual		****	Total
June 30, 2021 Totals		$	174		$	25		$	160		$	5,464		$	5,823
December 31, 2020 Totals		$	166		$	0		$	418		$	6,867		$	7,451

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

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


(Balances in Thousands)	Three Months Ended			Three Months Ended
	June 30, 2021			June 30, 2020
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - first liens,
Reduced monthly payments for a fifteen-month period	1	$	116	0	$	0
Commercial and industrial,
Interest only payments for a nine-month period	0		0	1		240
Total	1	$	116	1	$	240


(Balances in Thousands)	Six Months Ended				Six Months Ended
	June 30, 2021				June 30, 2020
		****	Post-			****	Post-
	Number		Modification		Number		Modification
	of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment
Residential mortgage - first liens:
Reduced monthly payments and extended maturity date	1		$	12	0		$	0
Reduced monthly payments for a fifteen-month period	1			116	0			0
Residential mortgage - junior liens,
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted	0			0	1			30
Home equity lines of credit,
Reduced monthly payments and extended maturity date	1			24	0			0
Commercial and industrial,
Interest only payments for a nine-month period	0			0	1			240
Total	3		$	152	2		$	270

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In the second quarters of 2021 and 2020, there were no defaults on loans for which TDRs were entered into within the previous 12 months. In the six-month periods ended June 30, 2021 and 2020, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:


(Balances in Thousands)	Six Months Ended			Six Months Ended
	June 30, 2021			June 30, 2020
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Commercial loans secured by real estate	1	$	3,392	0	$	0
Total	1	$	3,392	0	$	0

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)	June 30,		December 31,
	2021		2020
Foreclosed residential real estate	$	116	$	80

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


(In Thousands)	June 30,		December 31,
	2021		2020
Residential real estate in process of foreclosure	$	1,684	$	1,246

GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
Gross amount		$	6,639		$	6,639
Accumulated amortization			(3,056)			(2,788)
Net		$	3,583		$	3,851

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


(In Thousands)	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Amortization expense	$	134	$	62	$	268	$	124

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At June 30, 2021 and December 31, 2020, the net carrying value of goodwill was $52,505,000. There were no changes in the carrying value of goodwill in the three-month or six-month periods ended June 30, 2021 and 2020.

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BORROWED FUNDS

SHORT-TERM BORROWINGS

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


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
FHLB-Pittsburgh borrowings		$	0		$	18,066
Customer repurchase agreements			2,125			1,956
Total short-term borrowings		$	2,125		$	20,022

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At June 30, 2021, the Corporation had available credit in the amount of $14,588,000 on this line with no outstanding advances. At December 31, 2020, the Corporation had available credit in the amount of $14,654,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $15,035,000 at June 30, 2021 and $15,126,000 at December 31, 2020.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10%at June 30, 2021 and December 31, 2020. The carrying value of the underlying securities was $2,150,000 at June 30, 2021 and $1,980,000 at December 31, 2020.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,038,860,000 at June 30, 2021 and $1,049,690,000 at December 31, 2020. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were $9,350,000 at June 30, 2021 and $9,720,000 at December 31, 2020. In addition to the short-term and long-term borrowings shown in these tables, there was a $400,000 letter of credit from FHLB-Pittsburgh outstanding at June 30, 2021. The Corporation’s total credit facility with FHLB-Pittsburgh was $749,994,000 at June 30, 2021, including an unused (available) amount of $705,819,000. At December 31, 2020, the Corporation’s total credit facility with FHLB-Pittsburgh was $771,199,000, including an unused (available) amount of $698,977,000.

At June 30, 2021, there were no outstanding short-term borrowings from FHLB-Pittsburgh. At December 31, 2020, short-term borrowings from FHLB-Pittsburgh included five advances totaling $18,000,000 par value, with a weighted average effective interest rate of 0.43%.

LONG-TERM BORROWINGS – FHLB ADVANCES

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


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
Loans maturing in 2021 with a weighted-average rate of 1.17%		$	16,047		$	26,098
Loans maturing in 2022 with a weighted-average rate of 0.60%			15,568			15,682
Loans maturing in 2023 with a weighted-average rate of 0.73%			7,172			7,224
Loans maturing in 2024 with a weighted-average rate of 0.75%			5,118			5,137
Loan maturing in 2025 with a rate of 4.91%			420			467
Total long-term FHLB-Pittsburgh borrowings		$	44,325		$	54,608

Note: Weighted-average rates are presented as of June 30, 2021. 31

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SENIOR NOTES

On May 19, 2021, the Corporation issued and sold $15.0 million in aggregate principal amount of 2.75% Fixed Rate Senior Unsecured Notes due 2026 (the "Senior Notes"). The Senior Notes mature on June 1, 2026 and bear interest at a fixed annual rate of 2.75%. The Corporation is not entitled to redeem the Senior Notes, in whole or in part, at any time and the Senior Notes are not subject to redemption by the holders. The Senior Notes are unsecured and unsubordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation.

The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. In the three-month and six-month periods ended June 30, 2021, amortization of debt issuance costs associated with the Senior Notes totaling $7,000 was included in interest expense in the unaudited consolidated statements of income.

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


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026		$	14,670		$	0
Total carrying value		$	14,670		$	0

SUBORDINATED DEBT

On May 19, 2021, the Corporation issued and sold $25.0 million in aggregate principal amount of 3.25% Fixed-to-Floating Rate Subordinated Notes due 2031 (the "Subordinated Notes"). The Subordinated Notes mature on June 1, 2031 and bear interest at a fixed annual rate of 3.25%, to June 1, 2026. From June 1, 2026 to maturity or early redemption, the interest rate will reset quarterly to an interest rate per annum equal to the three-month Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York plus 259 basis points. The Corporation is entitled to redeem the Subordinated Notes, in whole or in part, at any time on or after June 1, 2026, and to redeem the Subordinated Notes at any time in whole upon certain other events. Any redemption of the Subordinated Notes will be subject to prior regulatory approval to the extent required.

The Subordinated Notes are not subject to redemption at the option of the holders. The Subordinated Notes are unsecured, subordinated obligations of the Corporation only and are not obligations of, and are not guaranteed by, any subsidiary of the Corporation. The Subordinated Notes rank junior in right to payment to the Corporation's current and future senior indebtedness, including the Senior Notes (described above). The Subordinated Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. In the three-month and six-month periods ended June 30, 2021, amortization of debt issuance costs associated with the Subordinated Notes totaling $13,000 was included in interest expense in the unaudited consolidated statements of income. 32

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


(In Thousands)	****	June 30,		****	December 31,
		2021			2020
Agreements with an aggregate par value of $8,000,000; bearing interest at 6.25% with an effective interest rate of 5.49%; redeemed at par in June 2021		$	0		$	8,027
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemable at par in April 2022			6,500			6,500
Agreement with a par value of $2,000,000; bearing interest at 6.50% with an effective interest rate of 5.60%; maturing in July 2027 and redeemable at par in July 2022			2,017			2,026
Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026			24,450			0
Total carrying value		$	32,967		$	16,553

STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The 2021 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the 2021 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Following is a summary of restricted stock awards granted in the six-month period ended June 30, 2021:


(Dollars in Thousands)	****		****	Aggregate
				Grant
				Date
		Number of		Fair
		Shares		Value
1st quarter 2021 awards:
Time-based awards to independent directors		10,989		$	220
Time-based awards to employees		46,178			924
Performance-based awards to employees		17,224			345
2nd quarter 2021 awards,
Time-based awards to employees		4,000			100
Total		78,391		$	1,589

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, 2021 is estimated to total $1,314,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $284,000 in the second quarter 2021 and $230,000 in the second quarter 2020. Total stock-based compensation expense attributable to restricted stock awards amounted to $625,000 in the six-month period ended June 30, 2021 and $424,000 in the six-month period ended June 30, 2020.

CONTINGENCIES

Litigation Matters

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

Trust Department Tax Reporting Contingency

The Corporation has incurred operational losses from compliance oversight related to trust department tax preparation and administration activities that occurred prior to 2020. In 2020, the Corporation made changes in internal controls and personnel responsible for trust 33

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department tax administration activities. Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities. There were no losses related to trust department tax compliance matters in the second quarter 2021. Losses related to trust department tax compliance matters totaled $107,000 in the six months ended June 30, 2021, and $300,000 in the three-month and six-month periods ended June 30, 2020. These losses are included in other noninterest expense in the consolidated statements of income. The balance of accrued interest and other liabilities in the consolidated balance sheets includes $429,000 at June 30, 2021 and $322,000 at December 31, 2020 related to specific tax compliance matters that have been identified; however, no estimate can be made of the amount of additional expenses that may be incurred related to these matters.

DERIVATIVE FINANCIAL INSTRUMENTS

The Corporation is a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements which contain master netting and collateral provisions designed to protect the party at risk.

Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps with a third party, such that the Corporation has effectively exchanged its fixed interest rate exposures for floating rate exposures. These derivatives are not designated as hedges and are not speculative. Rather, these derivatives result from a service provided to certain customers. As the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.

The aggregate notional amount of interest rate swaps was $126,716,000 at June 30, 2021 and $135,740,000 at December 31, 2020. There were no interest rate swaps originated in the six-month period ended June 30, 2021. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at June 30, 2021. The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $340,000 in the second quarter 2021 and $678,000 in the six months ended June 30, 2021. There were no interest rate swaps in place in the six months ended June 30, 2020.

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 June 30, 2021 and December 31, 2020:


(In Thousands)	At June 30, 2021								At December 31, 2020
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	63,358	$	4,468	$	63,358	$	4,468	$	67,870	$	6,566	$	67,870	$	6,566

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

The Corporation’s agreement with its derivative counterparty provides that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of $9,109,000 were pledged as collateral against the Corporation’s liability related to the interest rate swaps at June 30, 2021.

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 34

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Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

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

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

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

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

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


		June 30, 2021
	****	Quoted		****
		Prices			Other
		in Active			Observable		Unobservable		Total
		Markets			Inputs		Inputs		Fair
(In Thousands)		(Level 1)			(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	0		$	23,073	$	0	$	23,073
Obligations of U.S. Government agencies			0			25,373		0		25,373
Obligations of states and political subdivisions:
Tax-exempt			0			132,310		0		132,310
Taxable			0			60,528		0		60,528
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			51,328		0		51,328
Residential collateralized mortgage obligations			0			45,575		0		45,575
Commercial mortgage-backed securities			0			53,694		0		53,694
Total available-for-sale debt securities			0			391,881		0		391,881
Marketable equity security			985			0		0		985
Servicing rights			0			0		2,116		2,116
Interest rate swap agreements, assets			0			4,468		0		4,468
Total recurring fair value measurements, assets		$	985		$	396,349	$	2,116	$	399,450

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	4,468	$	0	$	4,468

Nonrecurring fair value measurements, assets:
Impaired loans with a valuation allowance		$	0		$	0	$	10,594	$	10,594
Valuation allowance			0			0		(1,477)		(1,477)
Impaired loans, net			0			0		9,117		9,117
Foreclosed assets held for sale			0			0		1,332		1,332
Total nonrecurring fair value measurements, assets		$	0		$	0	$	10,449	$	10,449

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		December 31, 2020
	****	Quoted		****
		Prices			Other
		in Active			Observable		Unobservable		Total
		Markets			Inputs		Inputs		Fair
(In Thousands)		(Level 1)			(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	0		$	12,182	$	0	$	12,182
Obligations of U.S. Government agencies			0			26,344		0		26,344
Obligations of states and political subdivisions:
Tax-exempt			0			122,401		0		122,401
Taxable			0			47,452		0		47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			38,176		0		38,176
Residential collateralized mortgage obligations			0			57,467		0		57,467
Commercial mortgage-backed securities			0			45,310		0		45,310
Total available-for-sale debt securities			0			349,332		0		349,332
Marketable equity security			1,000			0		0		1,000
Servicing rights			0			0		1,689		1,689
Interest rate swap agreements, assets			0			6,566		0		6,566
Total recurring fair value measurements, assets		$	1,000		$	355,898	$	1,689	$	358,587

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	6,566	$	0	$	6,566

Nonrecurring fair value measurements, assets:
Impaired loans with a valuation allowance		$	0		$	0	$	8,082	$	8,082
Valuation allowance			0			0		(925)		(925)
Impaired loans, net			0			0		7,157		7,157
Foreclosed assets held for sale			0			0		1,338		1,338
Total nonrecurring fair value measurements, assets		$	0		$	0	$	8,495	$	8,495

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. 36

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


	****	Fair Value at
		6/30/2021		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				6/30/2021
Servicing rights		$	2,116	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
					Loan prepayment speeds		225.00	%	Weighted-average PSA
					Servicing fees		0.25	%	of loan balances
							4.00	%	of payments are late
							5.00	%	late fees assessed
						$	1.94		Miscellaneous fees per account per month
					Servicing costs	$	6.00		Monthly servicing cost per account
						$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
							1.50	%	of loans more than 30 days delinquent
							3.00	%	annual increase in servicing costs


	****	Fair Value at
		12/31/2020		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				12/31/2020
Servicing rights		$	1,689	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
					Loan prepayment speeds		277.00	%	Weighted-average PSA
					Servicing fees		0.25	%	of loan balances
							4.00	%	of payments are late
							5.00	%	late fees assessed
						$	1.94		Miscellaneous fees per account per month
					Servicing costs	$	6.00		Monthly servicing cost per account
						$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
							1.50	%	of loans more than 30 days delinquent
							3.00	%	annual increase in servicing costs

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

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


(In Thousands)		Three Months Ended						Six Months Ended
	****	June 30, 2021		****	June 30, 2020		****	June 30, 2021		****	June 30, 2020
Servicing rights balance, beginning of period		$	1,956		$	1,226		$	1,689		$	1,277
Originations of servicing rights			199			328			391			403
Unrealized (loss) gain included in earnings			(39)			(270)			36			(396)
Servicing rights balance, end of period		$	2,116		$	1,284		$	2,116		$	1,284

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 37

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assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property. For commercial and industrial and agricultural loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

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


(Dollars In Thousands)	****									Weighted
				Valuation						Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		6/30/2021		6/30/2021		6/30/2021		Technique	Inputs	6/30/2021

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	6,491	$	683	$	5,808	Sales comparison	Discount to appraised value	28	%
Commercial and industrial			3,347		582		2,765	Liquidation of accounts receivable and equipment	Discount to borrower's financial statement value	49	%
Commercial and industrial			72		72		0	Liquidation of assets	Discount to appraised value	100	%
Residential mortgage loans - first and junior liens			684		140		544	Sales comparison	Discount to appraised value	32	%
Total impaired loans		$	10,594	$	1,477	$	9,117
Foreclosed assets held for sale - real estate:
Commercial real estate		$	1,216	$	0	$	1,216	Sales comparison	Discount to appraised value	46	%
Residential (1-4 family)			116		0		116	Sales comparison	Discount to appraised value	34	%
Total foreclosed assets held for sale		$	1,332	$	0	$	1,332


(Dollars In Thousands)	****									Weighted
				Valuation						Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		12/31/2020		12/31/2020		12/31/2020		Technique	Inputs	12/31/2020	****

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	6,501	$	691	$	5,810	Sales comparison	Discount to appraised value	28	%
Commercial and industrial			72		72		0	Liquidation of assets	Discount to appraised value	100	%
Residential mortgage loans - first and junior liens			1,509		162		1,347	Sales comparison	Discount to appraised value	31	%
Total impaired loans		$	8,082	$	925	$	7,157
Foreclosed assets held for sale - real estate:
Commercial real estate		$	1,258	$	0	$	1,258	Sales comparison	Discount to appraised value	44	%
Residential (1-4 family)			80		0		80	Sales comparison	Discount to appraised value	36	%
Total foreclosed assets held for sale		$	1,338	$	0	$	1,338

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation. 38

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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		June 30, 2021						December 31, 2020
		Hierarchy		Carrying			Fair			Carrying			Fair
	****	Level	****	Amount		****	Value		****	Amount		****	Value
Financial assets:
Cash and cash equivalents		Level 1		$	201,020		$	201,020		$	96,017		$	96,017
Certificates of deposit		Level 2			7,840			7,995			5,840			6,054
Restricted equity securities (included in Other Assets)		Level 2			9,600			9,600			9,970			9,970
Loans, net		Level 3			1,585,481			1,601,240			1,632,824			1,646,207
Accrued interest receivable		Level 2			7,293			7,293			8,293			8,293
Interest rate swap agreements		Level 2			4,468			4,468			6,566			6,566

Financial liabilities:
Deposits with no stated maturity		Level 2			1,596,954			1,596,954			1,430,062			1,430,062
Time deposits		Level 2			319,855			321,758			390,407			393,566
Short-term borrowings		Level 2			2,125			1,940			20,022			19,974
Long-term borrowings		Level 2			44,325			45,022			54,608			55,723
Senior debt		Level 2			14,670			15,000			0			0
Subordinated debt		Level 2			32,967			33,593			16,553			16,680
Accrued interest payable		Level 2			151			151			390			390
Interest rate swap agreements		Level 2			4,468			4,468			6,566			6,566

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

CORONAVIRUS (COVID-19) RESPONSE AND PAYCHECK PROTECTION PROGRAM

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

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

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

At June 30, 2021, there were 12 loans in deferral status subject to CARES Act Section 4013 guidance with a total recorded investment of $6.7 million. Total loans in deferral status at June 30, 2021 is down from $26.0 million at March 31, 2021 and down significantly from 693 loans and $241.2 million (including 152 loans and $82.5 million reported by Covenant) at June 30, 2020. The amount of loans in deferral status has fallen over the past several quarters as the local and U.S. economy has reopened. At June 30, 2021, a breakdown of the loans in deferral status, along with a summary of their risk ratings, is as follows:


	Deferrals Remaining
	As of June 30, 2021
(Dollars in Thousands)	Number					Purchased
	of			Special		Credit
	Loans	Pass		Mention		Impaired		Total
COVID-19-related loan modifications:
Commercial
Accommodation and food services - hotels	1	$	0	$	3,094	$	0	$	3,094
Lessors of residential buildings and dwellings	3		113		0		1,557		1,670
Transportation and warehousing	4		1,197		0		0		1,197
Real estate rental and leasing - other	1		438		0		0		438
Total commercial	9		1,748		3,094		1,557		6,399
Residential mortgage	3		254		0		0		254
Total	12	$	2,002	$	3,094	$	1,557	$	6,653

The recorded investment in Paycheck Protection Program (“PPP”) loans at June 30, 2021 of $110.3 million included a first draw amount of $37.9 million and a second draw amount of $72.4 million with contractual principal balances totaling $38.7 million and $75.4 million, respectively, adjusted by net deferred loan origination fees and a market rate adjustment on PPP loans acquired from Covenant. The recorded investment of $37.9 million in first draw PPP loans at June 30, 2021 decreased $94.4 million from $132.3 million at December 31, 2020, reflecting the impact of loans forgiven and repaid by the Small Business Administration (“SBA”). The term of most first draw PPP loans is two years (some later originated first draw loans are five year terms), with repayment from the SBA to occur sooner to the extent the loans are forgiven. Second draw PPP loans have terms of five years, with repayment from the SBA to occur sooner to the extent the loans are forgiven. 41

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Capital Strength

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

C&N Bank’s leverage ratio (Tier 1 capital to average assets) at June 30, 2021 of 10.31% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $119.6 million. Similarly, the total capital to risk-weighted assets ratio at June 30, 2021 is 16.40%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $95.6 million.

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

EARNINGS OVERVIEW

Net income was $0.44 per diluted share in the second quarter 2021, down from $0.55 in the first quarter 2021 and up $0.05 (12.8%) from $0.39 in the second quarter 2020. For the six months ended June 30, 2021, net income per diluted share was $0.99, up from $0.70 per share for the first six months of 2020. As described below, earnings of $0.44 per share for the second quarter 2021 were 0.2% lower than second quarter 2020 non-U.S. generally accepted accounting principles (U.S. GAAP) earnings per share of $0.45 as adjusted to exclude the impact of merger-related expenses. For the six months ended June 30, 2021, earnings of $0.99 per share were 30.3% higher than the first six months of 2020 non-U.S. GAAP earnings per share of $0.76 as adjusted to exclude the impact of merger-related expenses.

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

RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE

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


	2nd Quarter 2021								2nd Quarter 2020
	Income						Diluted		Income						Diluted
	Before						Earnings		Before						Earnings
	Income		Income				per		Income		Income				per
	Tax		Tax		Net		Common		Tax		Tax		Net		Common
	Provision		Provision		Income		Share		Provision		Provision		Income		Share
Results as Presented Under U.S. GAAP	$	8,840	$	1,780	$	7,060	$	0.44	$	6,693	$	1,255	$	5,438	$	0.39
Add: Merger-Related Expenses (1)		0		0		0				983		200		783
Adjusted Earnings (Non-U.S. GAAP)	$	8,840	$	1,780	$	7,060	$	0.44	$	7,676	$	1,455	$	6,221	$	0.45

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	****	Six Months Ended June 30, 2021								Six Months Ended June 30, 2020
		Income						Diluted		Income						Diluted
		Before						Earnings		Before						Earnings
		Income		Income				per		Income		Income				per
		Tax		Tax		Net		Common		Tax		Tax		Net		Common
		Provision		Provision		Income		Share		Provision		Provision		Income		Share
Results as Presented Under U.S. GAAP		$	19,737	$	3,890	$	15,847	$	0.99	$	11,675	$	2,071	$	9,604	$	0.70
Add: Merger-Related Expenses (1)			0		0		0				1,124		229		895
Adjusted Earnings (Non-U.S. GAAP)		$	19,737	$	3,890	$	15,847	$	0.99	$	12,799	$	2,300	$	10,499	$	0.76

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

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

Second Quarter 2021 as Compared to Second Quarter 2020

Second quarter 2021 net income was $7,060,000. In comparison, second quarter 2020 net income was $5,438,000, and excluding merger-related expenses, adjusted (non-U.S. GAAP) earnings were $6,221,000. Other significant variances were as follows:

●	Second quarter 2021 net interest income of $18,681,000 was $4,435,000 higher than the second quarter 2020 total, reflecting the impact of growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $375.7 million, and average total deposits increased $569.9 million. The net interest margin for the second quarter 2021 was 3.52% as compared to 3.65% for the second quarter 2020. The average yield on earning assets of 3.85% for the second quarter 2021 was down 0.37% from the second quarter 2020, while the average rate on interest-bearing liabilities of 0.48% in the second quarter 2021 was 0.35% lower than the comparable second quarter 2020 average rate. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $713,000 in the second quarter 2021 as compared to a net positive impact of $285,000 in the second quarter 2020.
●	The provision for loan losses was $744,000 in the second quarter 2021 as compared to a credit for loan losses of $176,000 in the second quarter 2020. The provision for loan losses in the second quarter 2021 included a net charge of $383,000 related to specific loans (net increase in specific allowances on loans of $353,000 and net charge-offs of $30,000), an increase of $367,000 in the collectively determined portion of the allowance and a $6,000 decrease in the unallocated portion. The credit for loan losses in the second quarter 2020 included the benefit of repayment of a loan for less than the full principal balance, resulting in a charge-off of $107,000 on a commercial loan for which an allowance for loan losses of $674,000 had been recorded at March 31, 2020.
---	---
●	Noninterest income for the second quarter 2021 was up $772,000 from the second quarter 2020 total. Significant variances included the following:
---	---
o	Loan servicing fees, net, were $146,000 in the second quarter 2021, an increase of $304,000 over the second quarter 2020 reduction in revenue of $158,000. The fair value of servicing rights decreased $39,000 in the second quarter 2021 as compared to a reduction in fair value of $270,000 in the second quarter 2020, mainly due to changes in assumptions related to prepayments of loans.
---	---
o	Interchange revenue from debit card transactions totaled $998,000 in the second quarter 2021, an increase of $280,000 over the second quarter 2020 total, reflecting an increase in transaction volumes.
---	---
o	Service charges on deposit accounts of $1,073,000 in the second quarter 2021 were up $242,000 from the second quarter 2020 amount, as the volume of consumer and business overdraft activity increased.
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o	Trust revenue of $1,807,000 increased $242,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation.
o	Other noninterest income totaled $700,000, an increase of $174,000 from the second quarter 2020. In the second quarter 2021, fee income for providing credit enhancement on sale of mortgage loans increased $45,000, credit card interchange income increased $41,000, merchant services income increased $28,000 and income from title services increased $26,000.
---	---
o	Brokerage and insurance revenue of $506,000 increased $122,000 from the second quarter 2020 total, due to commissions on higher transaction volume.
---	---
o	Net gains from sales of loans of $925,000 for the second quarter 2021 were down $639,000 from the total for the second quarter 2020, as the volume of residential mortgage loans sold in the second quarter 2021 was down from the second quarter 2020 level.
---	---
●	Noninterest expense, excluding merger-related expenses, increased $3,125,000 in the second quarter 2021 over the second quarter 2020 amount. Significant variances included the following:
---	---
o	Salaries and employee benefits expense of $9,499,000 increased $2,516,000. In addition to merit-based salary increases, there were increases in personnel from the Covenant acquisition and for expansion of services in the Southeastern and Southcentral Pennsylvania locations and additional support staff to accommodate overall growth.
---	---
o	Net occupancy and equipment expense increased $244,000, primarily reflecting an increase due to the Covenant acquisition.
---	---
o	Data processing and telecommunications expenses increased $234,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs.
---	---
●	The income tax provision of $1,780,000 for the second quarter 2021 was up $525,000 from $1,255,000 for the second quarter 2020, reflecting higher pre-tax income and an increase in city of Philadelphia and state tax provisions.
---	---

Six Months Ended June 30, 2021 as Compared to Six Months Ended June 30, 2020

Net income for the six-month period ended June 30, 2021 was $15,847,000, or $0.99 per diluted share, while net income for the first six months of 2020 was $9,604,000, or $0.70 per share. Excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share. Other significant variances were as follows:

●

Net interest income was up $10,236,000 (35.9%) for the first six months of 2021 over the same period in 2020, reflecting the growth mainly attributable to the Covenant acquisition. Average outstanding loans increased $420.8 million, and average total deposits increased $570.6 million. The net interest margin was 3.75% for the six months ended June 30, 2021, up from 3.73% for the first six months of 2020. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $1,665,000 in the first six months of 2021 as compared to a net positive impact of $702,000 in the first six months of 2020.

●

For the first six months of 2021, the provision for loan losses was $1,003,000, a decrease in expense of $349,000 as compared to $1,352,000 recorded in the first six months of 2020. The provision for the first six months of 2021 includes a net charge of $565,000 related to specific loans (increase in specific allowances on loans of $552,000 and net charge-offs of $13,000), an increase of $352,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first six months of 2020 included the effects of recording a specific allowance of $1,193,000 on a commercial loan for which a charge-off of $2,219,000 was subsequently recorded in the third quarter 2020.

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●	Noninterest income for the first six months of 2021 was up $2,273,000 from the total for the first six months of 2020. Significant variances included the following:
o	Other noninterest income totaled $2,172,000, an increase of $585,000 over 2020. Income from realization of tax credits was $265,000 higher in the first six months of 2021 as compared to 2020 due to higher PA Educational Improvement Tax Credit Program donations. Other increases include: fee income for providing credit enhancement on sale of mortgage loans increased $144,000, income from title services increased $73,000, credit card interchange income increased $69,000 and merchant services income increased $43,000.
---	---
o	Loan servicing fees, net, were $394,000 in the first six months of 2021, an increase of $566,000 over the 2020 total of negative $172,000 (a decrease in revenue). The fair value of servicing rights increased $36,000 in the first six months of 2021 as compared to a reduction in fair value of $396,000 in 2020 mainly due to changes in assumptions related to prepayments of mortgage loans.
---	---
o	Interchange revenue from debit card transactions totaled $1,879,000 for the first six months of 2021, an increase of $430,000, reflecting an increase in transaction volumes.
---	---
o	Trust revenue of $3,433,000 increased $389,000 reflecting the impact of growth in trust assets under management including the impact of market value appreciation.
---	---
o	Net gains from sales of loans totaled $1,989,000 in the first six months of 2021, an increase of $110,000 over the total for the first six months of 2020. The increase reflects an increase in volume of mortgage loans sold, resulting mainly from lower interest rates.
---	---
●	Noninterest expense, excluding merger-related expenses, increased $5,922,000 for the six months ended June 30, 2021 over the total for the first six months of 2020. Significant variances included the following:
---	---
o	Total salaries and employee benefits expense increased $4,033,000. In addition to merit-based salary increases, there were increases in personnel from the Covenant acquisition and for expansion of services in the Southeastern and Southcentral Pennsylvania locations and additional support staff to accommodate overall growth.
---	---
o	Other noninterest expense increased $496,000. Within this category, significant variances included the following:
---	---
o	Donations expense increased $232,000, mainly due to an increase in donations associated with the PA Educational Improvement Tax Credit program.
---	---
o	Business development expenses totaled $260,000, an increase of $169,000, due primarily to an increase in public relations expense.
---	---
o	FDIC insurance expense totaled $275,000, an increase of $162,000.
---	---
o	Amortization of core deposit intangibles increased $144,000 related to the Covenant acquisition.
---	---
o	Other operational losses totaled $149,000, a decrease of $195,000. Expenses associated with trust department tax compliance matters totaled $107,000 in the first six months of 2021 as compared to $300,000 in the first six months of 2020.
---	---
o	Net occupancy and equipment expense increased $445,000, primarily reflecting an increase due to the Covenant acquisition.
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o	Data processing and telecommunications expenses increased $390,000, including the impact of growth related to the Covenant acquisition, increased costs from outsourced support services and other increases in software licensing and maintenance costs.
o	Professional fees expense increased $302,000, mainly due to increases in recruiting services and PPP loan processing professional fees.
---	---
●	The income tax provision was $3,890,000 for the six months ended June 30, 2021, up from $2,071,000 for the first six months of 2020. Pre-tax income was $8,062,000 higher in the first six months of 2021 as compared to 2020. The effective tax rate was 19.7% for the first six months of 2021, higher than the 17.7% effective tax rate for the first six months of 2020. The tax benefit of tax-exempt interest income was 2.3% of pre-tax income in the first six months of 2021 as compared to a 3.3% benefit in 2020. Also, city and state income taxes, net of federal benefit, totaled 1.6% of pre-tax income in the first six months of 2021, up from 0.7% in 2020.
---	---

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

ACQUISITION OF COVENANT FINANCIAL, INC.

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

In connection with the Covenant acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition. There were no adjustments to the fair values of assets acquired and liabilities assumed in the Covenant acquisition in the six months ended June 30, 2021. 46

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TABLE I – QUARTERLY FINANCIAL DATA


	For the Three Months Ended :
(Dollars In Thousands, Except Per Share Data)	June 30,		March 31,		December 31,		September 30,		June 30,		March 31,
(Unaudited)	2021		2021		2020		2020		2020		2020
Interest income	$	20,428	$	21,754	$	21,859	$	21,751	$	16,513	$	17,037
Interest expense		1,747		1,671		2,104		2,469		2,267		2,755
Net interest income		18,681		20,083		19,755		19,282		14,246		14,282
Provision (credit) for loan losses		744		259		620		1,941		(176)		1,528
Net interest income after provision (credit) for loan losses		17,937		19,824		19,135		17,341		14,422		12,754
Noninterest income		6,300		6,782		6,565		6,970		5,528		5,281
Net gains on securities		2		0		144		25		0		0
Loss on prepayment of borrowings		0		0		1,636		0		0		0
Merger-related expenses		0		0		182		6,402		983		141
Other noninterest expenses		15,399		15,709		15,775		14,648		12,274		12,912
Income before income tax provision		8,840		10,897		8,251		3,286		6,693		4,982
Income tax provision		1,780		2,110		1,481		438		1,255		816
Net income	$	7,060	$	8,787	$	6,770	$	2,848	$	5,438	$	4,166
Net income attributable to common shares	$	6,999	$	8,722	$	6,727	$	2,830	$	5,405	$	4,146
Basic earnings per common share	$	0.44	$	0.55	$	0.43	$	0.18	$	0.39	$	0.30
Diluted earnings per common share	$	0.44	$	0.55	$	0.43	$	0.18	$	0.39	$	0.30

CRITICAL ACCOUNTING POLICIES

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

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

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

Fair Value of Debt Securities– Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. 47

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NET INTEREST INCOME

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

Three-Month Periods Ended June 30, 2021 and 2020

For the three-month periods, fully taxable equivalent net interest income was $18,949,000 in 2021, which was $4,466,000 (30.8%) higher than in 2020. Interest income in the second quarter was $20,696,000 which was $3,946,000 (23.6%) higher in 2021 as compared to 2020, while interest expense was lower by $520,000 in comparing the same periods. The increase in net interest income reflects the impact of growth mainly attributable to the Covenant acquisition. Table IV shows the net effect of changes in volume resulted in an increase in net interest income of $4,022,000, while changes in interest rates had a net positive impact of $444,000. As presented in Table III, the Net Interest Margin was 3.52% in 2021 as compared to 3.65% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.37% in 2021 from 3.39% in 2020. The average yield on earning assets of 3.85% was 0.37% lower in 2021 as compared to 2020, and the average rate on interest- bearing liabilities of 0.48% in 2021 was 0.35% lower.

Income from purchase accounting-related adjustments in the second quarter 2021 had a positive effect on net interest income of $713,000, including an increase in income on loans of $323,000 and net reductions in interest expense on time deposits and borrowed funds totaling $390,000. The positive impact to the second quarter 2021 net interest margin from purchase accounting adjustments was 0.13%. In comparison, the positive impact to the second quarter 2020 net interest margin was $285,000, or 0.07%.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $20,696,000 in 2021, an increase of $3,946,000 (23.6%) from 2020. Interest and fees from loans receivable increased $3,915,000, or 26.7%, in 2021 as compared to 2020. Table IV shows the increase in interest and fees on loans includes the net impact of $4,121,000 related to an increase in average volume and a reduction of $206,000 attributable to a decrease in average rate. Average outstanding loans receivable increased $375,680,000 (30.5%) to $1,607,121,000 in 2021 from $1,231,441,000 in 2020. The increase in loans outstanding is due largely to the Covenant acquisition and the significant growth of PPP loans over the course of 2020 and the first quarter 2021. The average balance of PPP loans totaled $125,480,000 in the second quarter 2021 compared to $77,832,000 in 2020.

The average yield on loans in the second quarter 2021 was 4.64%, down from 4.79% in the second quarter 2020, as rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, due to decreases in market interest rates throughout most of 2020. Further, yields on loans acquired from Covenant reflect market yields at the acquisition date (July 1, 2020), which were lower than the Corporation’s average portfolio yield before the transaction. The average yield on loans in the second quarter 2021 was also affected by the comparatively low average yield on 2nd Draw PPP loans with a total average balance of $71,841,000 and a yield of 2.18%. The yield of 6.42% on 1st Draw PPP loans with an average balance of $53,639,000 helped to bolster the average yield on loans in the second quarter 2021 as previously deferred fees were recognized in income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.

Interest income from available-for-sale debt securities remained flat in 2021 from 2020. Total average available-for-sale debt securities (at amortized cost) increased to $366,329,000 in 2021 from $326,069,000 in 2020. The average balance of tax-exempt securities increased $41,051,000, while the average balance of mortgage-backed securities and other taxable securities decreased by $791,000. The average yield on available-for-sale debt securities was 2.20% for 2021, down from 2.48% in 2020. The reduction in yield on available-for-sale securities reflects accelerating calls and prepayments of amortizing securities attributable to lower interest rates as well as purchases of lower yielding securities at recent market rates. 48

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Income from interest-bearing due from banks totaled $74,000 in 2021, an increase of $33,000 (80.5%) from $41,000 in 2020. The average yield on interest-bearing due from banks decreased to 0.16% in 2021 from 0.44% in 2020, consistent with the decrease in market rates. The average balance increased $144,787,000 as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense decreased $520,000 to $1,747,000 in 2021 from $2,267,000 in 2020. Interest expense on deposits decreased $567,000, as the average rate on interest-bearing deposits decreased to 0.35% in 2021 from 0.72% in 2020. The decrease in average rates on deposits includes decreases of 0.80% on time deposits, 0.13% on money market accounts, 0.07% on interest checking accounts and 0.02% on saving accounts. The change in mix of deposits also contributed to the reduction in average rate, as time deposits fell to 17.5% of total deposits in the second quarter 2021 from 25.4% in the second quarter 2020.

Average total deposits increased $570,035,000 (42.2%) to $1,919,038,000 in the second quarter from $1,349,003,000 in 2020. The increase in average balance on deposits reflects the impact of deposits assumed in the Covenant acquisition, PPP-related activity and funding from other government stimulus programs.

Interest expense on total borrowed funds increased $47,000 in 2021 as compared to 2020. The average balance of total borrowed funds decreased to $87,162,000 in the second quarter 2021 from $99,261,000 in the second quarter 2020, while the average rate on borrowed funds increased to 2.44% in the second quarter 2021 from 1.96% in the second quarter 2020. The net decrease in average balance of borrowed funds includes the impact of the prepayment of higher cost FHLB advances of $48.0 million completed in December 2020, partially offset by net increases in senior notes and subordinated debt.

Interest expense on short-term borrowings decreased $57,000 to $7,000 in 2021 from $64,000 in 2020. The average balance of short-term borrowings decreased to $6,528,000 in 2021 from $19,844,000 in 2020. The average rate on short-term borrowings decreased to 0.43% in 2021 from 1.30% in 2020, reflecting the impact of lower short term rates.

Interest expense on long-term borrowings (FHLB advances) decreased $204,000 to $109,000 in 2021 from $313,000 in 2020. The average balance of long-term borrowings was $46,788,000 in 2021, down from an average balance of $72,917,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.93% in 2021 compared to 1.73% in 2020.

In May 2021, the Corporation issued unsecured senior notes with a total carrying value at issuance of $14,663,000, net of issuance costs. Interest expense on the senior notes totaled $57,000 in 2021. The average balance of the senior notes was $6,930,000 in the second quarter of 2021 at an average rate of 3.30%.

Interest expense on subordinated debt increased $251,000 to $357,000 in 2021 from $106,000 in 2020. The average balance of subordinated debt increased to $26,916,000 in 2021 from $6,500,000 in 2020 as a result of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020 and the new issue of subordinated debt with a total carrying value at issuance of $24,437,000, net of issuance costs, in May 2021, partially offset by the redemption of subordinated notes totaling $8,000,000 in June 2021. The subordinated notes issued in May 2021 bear interest at 3.25% with an effective interest rate of 3.74%, maturing in June 2031 and redeemable at par beginning in June 2026. If not redeemed, the subordinated notes will bear interest at a variable rate, resetting quarterly, from June 1, 2026 until maturity. The average rate incurred on subordinated debt was 5.32% in 2021, down from 6.56% in 2020.

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

Six-Month Periods Ended June 30, 2021 and 2020

For the six-month periods, fully taxable equivalent net interest income was $39,305,000 in 2021, $10,316,000 (35.6%) higher than in 2020. Interest income was $42,723,000 or $8,712,000 (25.6%) higher in 2021 as compared to 2020, while interest expense was $3,418,000 or lower by $1,604,000 (31.9%) in comparing the same periods. As presented in Table III, the Net Interest Margin was 49

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3.75% in 2021 as compared to 3.73% in 2020, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.61% in 2021, up from 3.46% in 2020. The overall increase in net interest income resulted mainly from the acquisition of Covenant in the third quarter 2020 and growth of the PPP loan program.

Accretion and amortization of purchase accounting adjustments related to the Covenant and Monument acquisitions had a positive effect on net interest income in the six months ended June 30, 2021 of $1,665,000, including an increase in income on loans of $754,000 and net reductions in interest expense on time deposits and borrowed funds totaling $911,000. The net positive impact to the net interest margin from purchase accounting adjustments was 0.16% in the first six months of 2021 as compared to 0.09% in the first six months of 2020.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $42,723,000 in 2021, an increase of $8,712,000 (25.6%) from 2020. Interest and fees on loans receivable increased $8,923,000, or 30.0%, to $38,637,000 in 2021 from $29,714,000 in 2020. Table IV shows the increase in interest on loans includes an increase of $9,320,000 attributable to changes in volume and a decrease of $397,000 related to changes in average rates.

For the first six months of 2021, average outstanding loans totaled $1,620,778,000, an increase of $420,815,000 (35.1%) over the comparative amount for the first six months of 2020. The increase in average loans outstanding includes the effect of loans acquired from Covenant, effective July 1, 2020, as well as subsequent loan growth in the PPP loan program.

The fully taxable equivalent yield on loans in 2021 was 4.81% compared to 4.98% in 2020 as current rates on variable rate loans and rates on recent new loan originations have decreased, and prepayments of loans have increased, consistent with decreases in market interest rates. Further, yields on loans acquired from Covenant on July 1, 2020 were recorded at then-current market yields, which were lower than the Corporation’s average portfolio yield before acquisition. For the six months ended June 30, 2021, 2nd Draw PPP loans had an average balance of $53,123,000 and an average yield of 2.19%. The average balance of 1st Draw PPP loans was $78,863,000 at an average yield of 6.83% in the first six months of 2021 as fees were recognized due to the loans being repaid by the SBA upon forgiveness of the underlying borrowers. In comparison, the average balance of 1st Draw PPP loans in the six months ended June 30, 2020 was $38,916,000 at an average yield of 2.79%.

Interest income on available-for-sale debt securities totaled $3,925,000 in 2021, a decrease of $219,000 from the total for 2020. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $350,883,000 in 2021, an increase of $20,345,000 (6.2%) from 2020. The average yield on available-for-sale debt securities decreased to 2.26% in 2021 from 2.52% in 2020, reflecting acceleration of calls and prepayments of amortizing securities and purchases of lower-yielding securities at recent market rates.

For the six-month periods, interest income from interest-bearing due from banks totaled $124,000 in 2021, an increase of $2,000 from $122,000 in 2020. The average balance increased $109,251,000, as increases in deposits and funds from loan repayments outpaced uses of funds for loan originations, purchases of securities and repayments of borrowings. The average yield on interest-bearing due from banks was 0.18% in 2021 as compared to 0.86% in 2020, due to decreases in market rates.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense decreased $1,604,000 to $3,418,000 in 2021 from $5,022,000 in 2020. Table III shows that the overall cost of funds on interest-bearing liabilities decreased to 0.47% in 2021 from 0.92% in 2020. The average rate on interest-bearing deposits decreased to 0.37% in 2021 from 0.80% in 2020. Table IV shows the reduction in interest expense related to changes in rate accounted for $2,337,000 of the decrease in expense, partially offset by an increase in expense of $733,000 attributable to volume.

For the six-month period ended June 30, 2021, average total deposits increased $570,649,000 (43.7%) to $1,875,318,000 in 2021 from $1,304,669,000 in 2020. The increase in average deposits includes the impact of the Covenant acquisition. The average rate on interest-bearing deposits decreased to 0.37% in 2021 from 0.80% in 2020. The decrease in average rate on deposits includes decreases of 0.86% on time deposits, 0.18% on money market accounts, 0.12% on interest checking accounts and 0.03% on saving accounts. The average 50

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balance of time deposits fell to 18.8% of average total deposits in 2021 from 27.8% in 2020, further contributing to the reduction in average rate on deposits.

Interest expense on borrowed funds decreased $160,000 in 2021 as compared to 2020. Total average borrowed funds decreased $21,886,000 to $85,468,000 in 2021 from $107,354,000 in 2020, while the average rate on borrowed funds increased to 2.18% in 2021 from 2.03% in 2020.

Interest expense on short-term borrowings decreased $240,000 to $22,000 in 2021 from $262,000 in 2020. The average balance of short-term borrowings decreased to $10,425,000 in 2021 from $32,363,000 in 2020. The average rate on short-term borrowings decreased to 0.43% in 2021 from 1.63% in 2020.

Interest expense on long-term borrowings (FHLB advances) decreased $365,000 to $243,000 in 2021 from $608,000 in 2020. The average balance of long-term borrowings was $49,801,000 in 2021, down from an average balance of $68,491,000 in 2020. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.98% in 2021 compared to 1.79% in 2020. The reduction in both average balance and rate reflects the prepayment of higher cost borrowings done in December 2020.

Interest expense on the senior notes totaled $57,000 in 2021. The average balance of the senior notes was $3,484,000 in 2021 with an average rate of 3.30%.

Interest expense on subordinated debt increased $388,000 to $601,000 in 2021 from $213,000 in 2020. The average balance of subordinated debt increased to $21,758,000 in 2021 from $6,500,000 in 2020 reflecting the net impact of subordinated debt agreements assumed in the Covenant transaction of $10,091,000 in July 2020, the new issue of subordinated debt of $24,437,000, net, in May 2021 and the redemption of subordinated notes totaling $8,000,000 in June 2021. The average rate on subordinated debt decreased to 5.57% in 2021 from 6.59% in 2020.

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TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE


	Three Months Ended							Six Months Ended
	June 30,				Increase/		.	June 30,				Increase/
(In Thousands)	2021		2020		(Decrease)			2021		2020		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	74	$	41	$	33		$	124	$	122	$	2
Available-for-sale debt securities:
Taxable		1,187		1,380		(193)			2,300		2,968		(668)
Tax-exempt		824		631		193			1,625		1,176		449
Total available-for-sale debt securities		2,011		2,011		0			3,925		4,144		(219)
Loans receivable:
Taxable		16,826		13,586		3,240			34,319		28,047		6,272
Paycheck Protection Program - 1st Draw		859		540		319			2,671		540		2,131
Paycheck Protection Program - 2nd Draw		390		0		390			576		0		576
Tax-exempt		518		552		(34)			1,071		1,127		(56)
Total loans receivable		18,593		14,678		3,915			38,637		29,714		8,923
Other earning assets		18		20		(2)			37		31		6
Total Interest Income		20,696		16,750		3,946			42,723		34,011		8,712

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		235		202		33			456		445		11
Money market		320		232		88			626		495		131
Savings		57		54		3			112		118		(6)
Time deposits		605		1,296		(691)			1,301		2,881		(1,580)
Total interest-bearing deposits		1,217		1,784		(567)			2,495		3,939		(1,444)
Borrowed funds:
Short-term		7		64		(57)			22		262		(240)
Long-term - FHLB advances		109		313		(204)			243		608		(365)
Senior notes, net		57		0		57			57		0		57
Subordinated debt, net		357		106		251			601		213		388
Total borrowed funds		530		483		47			923		1,083		(160)
Total Interest Expense		1,747		2,267		(520)			3,418		5,022		(1,604)

Net Interest Income	$	18,949	$	14,483	$	4,466		$	39,305	$	28,989	$	10,316

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% 52

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Table III - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)		Three Months				Three Months				Six Months				Six Months
		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of
		6/30/2021		Return/		6/30/2020		Return/		6/30/2021		Return/		6/30/2020		Return/
		Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of
		Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %
EARNING ASSETS
Interest-bearing due from banks		$	182,586	0.16	%	$	37,799	0.44	%	$	137,851	0.18	%	$	28,600	0.86	%
Available-for-sale debt securities,
at amortized cost:
Taxable			243,228	1.96	%		244,019	2.27	%		230,551	2.01	%		254,588	2.34	%
Tax-exempt			123,101	2.68	%		82,050	3.09	%		120,332	2.72	%		75,950	3.11	%
Total available-for-sale debt securities			366,329	2.20	%		326,069	2.48	%		350,883	2.26	%		330,538	2.52	%
Loans receivable:
Taxable			1,418,171	4.76	%		1,094,432	4.99	%		1,423,417	4.86	%		1,101,275	5.12	%
Paycheck Protection Program - 1st Draw			53,639	6.42	%		77,832	2.79	%		78,863	6.83	%		38,916	2.79	%
Paycheck Protection Program - 2nd Draw			71,841	2.18	%		0	0.00	%		53,123	2.19	%		0	0.00	%
Tax-exempt			63,470	3.27	%		59,177	3.75	%		65,375	3.30	%		59,772	3.79	%
Total loans receivable			1,607,121	4.64	%		1,231,441	4.79	%		1,620,778	4.81	%		1,199,963	4.98	%
Other earning assets			2,467	2.93	%		2,206	3.65	%		2,658	2.81	%		1,833	3.40	%
Total Earning Assets			2,158,503	3.85	%		1,597,515	4.22	%		2,112,170	4.08	%		1,560,934	4.38	%
Cash			25,453				18,960				24,629				18,501
Unrealized gain on securities			10,197				12,574				11,536				10,375
Allowance for loan losses			(11,992)				(11,471)				(11,866)				(10,743)
Bank-owned life insurance			30,301				18,779				30,228				18,728
Bank premises and equipment			20,620				18,230				20,982				17,981
Intangible assets			56,153				29,543				56,220				29,575
Other assets			42,516				30,723				43,566				30,658
Total Assets		$	2,331,751			$	1,714,853			$	2,287,465			$	1,676,009

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		$	387,942	0.24	%	$	260,177	0.31	%	$	372,056	0.25	%	$	243,623	0.37	%
Money market			433,295	0.30	%		215,441	0.43	%		420,141	0.30	%		208,066	0.48	%
Savings			227,426	0.10	%		183,933	0.12	%		220,470	0.10	%		176,452	0.13	%
Time deposits			335,773	0.72	%		343,257	1.52	%		353,068	0.74	%		362,439	1.60	%
Total interest-bearing deposits			1,384,436	0.35	%		1,002,808	0.72	%		1,365,735	0.37	%		990,580	0.80	%
Borrowed funds:
Short-term			6,528	0.43	%		19,844	1.30	%		10,425	0.43	%		32,363	1.63	%
Long-term - FHLB advances			46,788	0.93	%		72,917	1.73	%		49,801	0.98	%		68,491	1.79	%
Senior notes, net			6,930	3.30	%		0	0.00	%		3,484	3.30	%		0	0.00	%
Subordinated debt, net			26,916	5.32	%		6,500	6.56	%		21,758	5.57	%		6,500	6.59	%
Total borrowed funds			87,162	2.44	%		99,261	1.96	%		85,468	2.18	%		107,354	2.03	%
Total Interest-bearing Liabilities			1,471,598	0.48	%		1,102,069	0.83	%		1,451,203	0.47	%		1,097,934	0.92	%
Demand deposits			534,602				346,285				509,583				314,089
Other liabilities			23,898				15,891				25,903				14,981
Total Liabilities			2,030,098				1,464,245				1,986,689				1,427,004
Stockholders' equity, excluding
other comprehensive income			293,487				240,434				291,550				240,576
Accumulated other comprehensive income			8,166				10,174				9,226				8,429
Total Stockholders' Equity			301,653				250,608				300,776				249,005
Total Liabilities and Stockholders' Equity		$	2,331,751			$	1,714,853			$	2,287,465			$	1,676,009
Interest Rate Spread				3.37	%			3.39	%			3.61	%			3.46	%
Net Interest Income/Earning Assets				3.52	%			3.65	%			3.75	%			3.73	%

Total Deposits (Interest-bearing
and Demand)		$	1,919,038			$	1,349,093			$	1,875,318			$	1,304,669
(1)	Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
---	---
(2)	Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
---	---
(3)	Rates of return on earning assets and costs of funds are presented on an annualized basis.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)		Three Months Ended 6/30/21 vs. 6/30/20						.	Six Months Ended 6/30/21 vs. 6/30/20
		Change in		Change in		Total			Change in		Change in		Total
		Volume		Rate		Change			Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks		$	72	$	(39)	$	33		$	161	$	(159)	$	2
Available-for-sale debt securities:
Taxable			0		(193)		(193)			(267)		(401)		(668)
Tax-exempt			285		(92)		193			612		(163)		449
Total available-for-sale debt securities			285		(285)		0			345		(564)		(219)
Loans receivable:
Taxable			3,902		(662)		3,240			7,762		(1,490)		6,272
Paycheck Protection Program - 1st Draw			(210)		529		319			884		1,247		2,131
Paycheck Protection Program - 2nd Draw			390		0		390			576		0		576
Tax-exempt			39		(73)		(34)			98		(154)		(56)
Total loans receivable			4,121		(206)		3,915			9,320		(397)		8,923
Other earning assets			3		(5)		(2)			12		(6)		6
Total Interest Income			4,481		(535)		3,946			9,838		(1,126)		8,712

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking			83		(50)		33			186		(175)		11
Money market			179		(91)		88			365		(234)		131
Savings			11		(8)		3			25		(31)		(6)
Time deposits			(28)		(663)		(691)			(73)		(1,507)		(1,580)
Total interest-bearing deposits			245		(812)		(567)			503		(1,947)		(1,444)
Borrowed funds:
Short-term			(28)		(29)		(57)			(115)		(125)		(240)
Long-term - FHLB advances			(93)		(111)		(204)			(138)		(227)		(365)
Senior notes, net			57		0		57			57		0		57
Subordinated debt, net			278		(27)		251			426		(38)		388
Total borrowed funds			214		(167)		47			230		(390)		(160)
Total Interest Expense			459		(979)		(520)			733		(2,337)		(1,604)

Net Interest Income		$	4,022	$	444	$	4,466		$	9,105	$	1,211	$	10,316
(1)	Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
---	---
(2)	The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.
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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE V – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Three Months Ended
	June 30,					$	%
	2021		2020			Change	Change
Trust revenue	$	1,807	$	1,565	$	242	15.5	%
Brokerage and insurance revenue		506		384		122	31.8	%
Service charges on deposit accounts		1,073		831		242	29.1	%
Interchange revenue from debit card transactions		998		718		280	39.0	%
Net gains from sales of loans		925		1,564		(639)	(40.9)	%
Loan servicing fees, net		146		(158)		304	N/M
Increase in cash surrender value of life insurance		145		98		47	48.0	%
Other noninterest income		700		526		174	33.1	%
Total noninterest income, excluding realized gains on securities, net		6,300		5,528		772	14.0	%
Realized gains on available-for-sale debt securities, net		2		0		2
Total noninterest income	$	6,302	$	5,528	$	774	14.0	%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net in the second quarter 2021 increased $772,000 (14.0%) from the second quarter 2020 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.


(Dollars in Thousands)	Six Months Ended
	June 30,					$	%
	2021		2020			Change	Change
Trust revenue	$	3,433	$	3,044	$	389	12.8	%
Brokerage and insurance revenue		832		739		93	12.6	%
Service charges on deposit accounts		2,088		2,081		7	0.3	%
Interchange revenue from debit card transactions		1,879		1,449		430	29.7	%
Net gains from sales of loans		1,989		1,879		110	5.9	%
Loan servicing fees, net		394		(172)		566	N/M
Increase in cash surrender value of life insurance		295		202		93	46.0	%
Other noninterest income		2,172		1,587		585	36.9	%
Total noninterest income, excluding realized gains on securities, net		13,082		10,809		2,273	21.0	%
Realized gains on available-for-sale debt securities, net		2		0		2
Total noninterest income	$	13,084	$	10,809	$	2,275	21.0	%

N/M = Not Meaningful

Total noninterest income, excluding realized gains on securities, net for the first six months of 2021 increased $2,273,000 (21.0%) from the total for the first six months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE

TABLE VI - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Three Months Ended
	June 30,					%
	2021		2020		Change	Change
Salaries and employee benefits	$	9,499	$	6,983		36.0	%
Net occupancy and equipment expense		1,219		975		25.0	%
Data processing and telecommunications expense		1,487		1,253		18.7	%
Automated teller machine and interchange expense		355		275		29.1	%
Pennsylvania shares tax		490		423		15.8	%
Professional fees		598		464		28.9	%
Other noninterest expense		1,751		1,901		(7.9)	%
Total noninterest expense, excluding merger-related expenses		15,399		12,274		25.5	%
Merger-related expenses		0		983		(100.0)	%
Total noninterest expense	$	15,399	$	13,257		16.2	%

All values are in US Dollars.

Total noninterest expense in the second quarter 2021 increased $2,142,000 (16.2%) from the second quarter 2020 total. Excluding merger-related expenses from the second quarter 2020, total noninterest expense in the second quarter 2021 increased $3,125,000 (25.5%) from the second quarter 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.


(Dollars in Thousands)	Six Months Ended
	June 30,					%
	2021		2020		Change	Change
Salaries and employee benefits	$	18,394	$	14,361		28.1	%
Net occupancy and equipment expense		2,523		2,078		21.4	%
Data processing and telecommunications expense		2,867		2,477		15.7	%
Automated teller machine and interchange expense		692		572		21.0	%
Pennsylvania shares tax		981		845		16.1	%
Professional fees		1,145		843		35.8	%
Other noninterest expense		4,506		4,010		12.4	%
Total noninterest expense, excluding merger-related expenses		31,108		25,186		23.5	%
Merger-related expenses		0		1,124		(100.0)	%
Total noninterest expense	$	31,108	$	26,310		18.2	%

All values are in US Dollars.

Total noninterest expense for the first six months of 2021 increased $4,798,000 (18.2%) from the total for the first six months of 2020. Total noninterest expense for the first six months of 2021 increased $5,922,000 (23.5%) from the total excluding merger-related expenses, for the first six months of 2020. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first six months of 2021 was $3,890,000, which was $1,819,000 higher than the provision for the first six months of 2020. The effective tax rate (tax provision as a percentage of pre-tax income) was 19.7% in the first six months of 2021 compared to 17.7% in the first six months of 2020. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first six months of 2021 and 2020 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. The higher effective tax rate in the first six months of 2021 as compared to 2020 resulted mainly from a reduction in the proportion of tax-exempt interest income to total pre-tax income and an increase in city and state income taxes. 56

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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 June 30, 2021 and December 31, 2020 represents the following temporary difference components:


	****	June 30,		****	December 31,
(In Thousands)		2021			2020
Deferred tax assets:
Allowance for loan losses		$	2,537		$	2,154
Purchase accounting adjustments on loans			1,784			1,930
Net operating loss carryforward			837			896
Operating leases liability			680			724
Other deferred tax assets			2,850			3,089
Total deferred tax assets			8,688			8,793

Deferred tax liabilities:
Unrealized holding gains on securities			2,438			3,104
Defined benefit plans - ASC 835			29			32
Bank premises and equipment			1,082			1,216
Core deposit intangibles			783			840
Right-of-use assets from operating leases			680			724
Other deferred tax liabilities			268			172
Total deferred tax liabilities			5,280			6,088
Deferred tax asset, net		$	3,408		$	2,705

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

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

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

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at June 30, 2021, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021. 57

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At June 30, 2021, gross loans outstanding totaled $1,597,856,000, an increase of $356.4 million (28.7%) from June 30, 2020. On July 1, 2020, the Corporation acquired loans valued at $464.2 million pursuant to the Covenant acquisition. The net reduction in loans outstanding over the past 12 months, excluding the impact of the Covenant acquisition, reflects the impact of high levels of loan prepayments consistent with low interest rates, slow demand for new commercial loans (excluding PPP) and a high proportion of new mortgage loans being sold into the secondary market. At June 30, 2021, commercial loans represented approximately 62% of the portfolio while residential mortgage loans totaled 37% of the portfolio.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $57,858,000 at June 30, 2021, down from $65,741,000 at December 31, 2020. At June 30, 2021, the balance of participation loans outstanding includes a total of $34,465,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $7,642,000 at June 30, 2021 and $8,437,000 at December 31, 2020.

Since 2009, the Corporation has originated and sold 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. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also 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 June 30, 2021, the Corporation’s activity under the MPF Direct Program has been minimal.

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At June 30, 2021, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,599,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2020 was $1,714,000.

At June 30, 2021, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $314,174,000, including loans sold through the MPF Xtra program of $160,535,000 and loans sold through the Original program of $153,639,000. At December 31, 2020, outstanding balances of loans sold and serviced through the two programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original Program of $129,394,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of June 30, 2021 and December 31, 2020.

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At June 30, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $7,695,000, and the Corporation has recorded a related allowance for credit losses in the amount of $550,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the related allowance for credit losses was $500,000. Income related to providing the credit enhancement (included 58

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

in other noninterest income in the consolidated statements of income) totaled $199,000 for the six months ended June 30, 2021 and $55,000 for the six months ended June 30, 2020. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $50,000 was recorded in the six months ended June 30, 2021 with a credit for losses of $50,000 in the six months ended June 30, 2020. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $12,974,000 at June 30, 2021 and $17,041,000 at December 31, 2020 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $530,000 at June 30, 2021 and $730,000 at December 31, 2020. In the six months ended June 30, 2021, the Corporation recorded charges against the allowance for SBA claims totaling $37,000 and a reduction in other noninterest expense of $163,000 representing amounts realized on SBA claims in excess of prior estimates.

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type


(In Thousands)		June 30,			December 31,
	****	2021		****	2020		****	2019		****	2018		****	2017		****	2016
Commercial:
Commercial loans secured by real estate		$	544,202		$	531,810		$	301,227		$	162,611		$	159,266		$	150,468
Commercial and industrial			158,907			159,577			126,374			91,856			88,276			83,854
Paycheck Protection Program - 1st Draw			37,902			132,269			0			0			0			0
Paycheck Protection Program - 2nd Draw			72,409			0			0			0			0			0
Political subdivisions			48,849			53,221			53,570			53,263			59,287			38,068
Commercial construction and land			43,178			42,874			33,555			11,962			14,527			14,287
Loans secured by farmland			10,950			11,736			12,251			7,146			7,255			7,294
Multi-family (5 or more) residential			51,916			55,811			31,070			7,180			7,713			7,896
Agricultural loans			2,379			3,164			4,319			5,659			6,178			3,998
Other commercial loans			14,711			17,289			16,535			13,950			10,986			11,475
Total commercial			985,403			1,007,751			578,901			353,627			353,488			317,340
Residential mortgage:
Residential mortgage loans - first liens			507,579			532,947			510,641			372,339		$	359,987			334,102
Residential mortgage loans - junior liens			25,287			27,311			27,503			25,450			25,325			23,706
Home equity lines of credit			39,432			39,301			33,638			34,319			35,758			38,057
1-4 Family residential construction			23,567			20,613			14,798			24,698			26,216			24,908
Total residential mortgage			595,865			620,172			586,580			456,806			447,286			420,773
Consumer			16,588			16,286			16,741			17,130			14,939			13,722
Total			1,597,856			1,644,209			1,182,222			827,563			815,713			751,835
Less: allowance for loan losses			(12,375)			(11,385)			(9,836)			(9,309)			(8,856)			(8,473)
Loans, net		$	1,585,481		$	1,632,824		$	1,172,386		$	818,254		$	806,857		$	743,362

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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

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

The allowance for loan losses was $12,375,000 at June 30, 2021, up from $11,385,000 at December 31, 2020. Table IX shows total specific allowances on impaired loans increased $552,000 to $1,477,000 at June 30, 2021 from $925,000 at December 31, 2020. This net increase included the impact of recording specific allowances totaling $850,000 on loans to two commercial customers with total outstanding principal balances of $6,440,000 at June 30, 2021. These increases in specific allowances were partially offset by the elimination in the second quarter 2021 of specific allowances of $285,000 at December 31, 2020 on loans to a customer with outstanding balances totaling $3,900,000 at June 30, 2021 and $3,927,000 at December 31, 2020.

Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,431,000 at June 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Covenant are presented net of a discount for credit losses of $4,071,000 at June 30, 2021 and $5,362,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $7,219,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Loans acquired from Monument that were identified as PCI were valued at $441,000 at April 1, 2019 and $302,000 at June 30, 2021. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $431,000 at June 30, 2021 and $617,000 at December 31, 2020. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Table X shows the allowance for loan losses totaled 0.77% of gross loans outstanding at June 30, 2021, up from 0.69% at December 31, 2020 and down from levels in excess of 1.00% from 2016 to 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at June 30, 2021, in line with ratios from the previous years.

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


	Three Months Ended				****	Six Months Ended
	June 30,		June 30,			June 30,		June 30,
(In Thousands)	2021		2020			2021		2020
Commercial	$	552	$	(124)		$	794	$	1,194
Residential mortgage		164		(65)			109		133
Consumer		34		13			14		25
Unallocated		(6)		0			86		0
Total	$	744	$	(176)		$	1,003	$	1,352

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


Commercial segment	Three Months Ended				****	Six Months Ended
	June 30,		June 30,			June 30,		June 30,
(In Thousands)	2021		2020			2021		2020
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	365	$	(134)		$	558	$	1,041
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		351		(117)			493		(110)
Changes in historical loss experience factors		(208)		14			(257)		(7)
Changes in qualitative factors		44		113			0		270
Total provision for loan losses - Commercial segment	$	552	$	(124)		$	794	$	1,194


Residential mortgage segment	Three Months Ended				****	Six Months Ended
	June 30,		June 30,			June 30,		June 30,
(In Thousands)	2021		2020			2021		2020
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(5)	$	(32)		$	(15)	$	(17)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		218		(126)			211		(140)
Changes in historical loss experience factors		(4)		(42)			(42)		(82)
Changes in qualitative factors		(45)		135			(45)		372
Total provision (credit) for loan losses - Residential mortgage segment	$	164	$	(65)		$	109	$	133


Consumer segment	Three Months Ended				****	Six Months Ended
	June 30,		June 30,			June 30,		June 30,
(In Thousands)	2021		2020			2021		2020
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	23	$	23		$	22	$	43
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		14		(12)			4		(22)
Changes in historical loss experience factors		2		6			(8)		0
Changes in qualitative factors		(5)		(4)			(4)		4
Total provision for loan losses - Consumer segment	$	34	$	13		$	14	$	25


Total - All segments	Three Months Ended					Six Months Ended
	June 30,		June 30,		****	June 30,		June 30,
(In Thousands)	2021		2020			2021		2020
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	383	$	(143)		$	565	$	1,067
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		583		(255)			708		(272)
Changes in historical loss experience factors		(210)		(22)			(307)		(89)
Changes in qualitative factors		(6)		244			(49)		646
Sub-total		750		(176)			917		1,352
Unallocated		(6)		0			86		0
Total provision for loan losses - All segments	$	744	$	(176)		$	1,003	$	1,352

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

In the three months ended June 30, 2021, net charge-offs were $30,000, including recoveries of $17,000 and charge-offs of $47,000. For the six months ended June 30, 2021, net charge-offs were $13,000 including recoveries of $45,000 and charge-offs of $58,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.00% in the six months ended June 30, 2021, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.56% at June 30, 2021, up from 1.42% at December 31, 2020, and nonperforming assets as a percentage of total assets was 1.12% at June 30, 2021, up from 1.10% at December 31, 2020. Table X presents data at the end of each of the years ended December 31, 2016 through 2020. Table X shows that total nonperforming loans as a percentage of loans of 1.56% at June 30, 2021, though up from December 31, 2020 and 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the June 30, 2021 ratio of total nonperforming assets as a percentage of assets of 1.12% was lower than the corresponding ratio from 2016 through 2018.

Total impaired loans of $19,146,000 at June 30, 2021 are up $1,328,000 from the corresponding amount at December 31, 2020 of $17,818,000. Purchased credit impaired loans, primarily acquired from Covenant, were included in impaired loans and had carrying values totaling $6,733,000 at June 30, 2021 and $6,841,000 at December 31, 2020. Table X shows that the total balance of impaired loans at June 30, 2021 was higher than the year-end amounts over the period 2016-2020, which ranged from a low of $5,486,000 in 2019 to the high of $17,818,000 at December 31, 2020. Similarly, total nonperforming assets of $26,184,000 at June 30, 2021 and $24,729,000 at December 31, 2020 were up from the prior periods including the impact of purchased credit impaired loans from the Covenant acquisition.

As reflected in Table X, total loans past due 30-89 days and still accruing interest amounted to $2,478,000 at June 30, 2021, down from $5,918,000 at December 31, 2020. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $1,836,000 at June 30, 2021, down from $5,084,000 at December 31, 2020. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable through the first six months of 2021, in evaluating the allowance for loan losses at June 30, 2021.

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

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of June 30, 2021. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate. 62

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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)		Six Months Ended																					****
		June 30,			June 30,				Years Ended December 31,
	****	2021		****	2020		****	****	2020		****	2019		****	2018		****	2017		****	2016		****
Balance, beginning of year		$	11,385		$	9,836			$	9,836		$	9,309		$	8,856		$	8,473		$	7,889
Charge-offs:
Commercial			0			(124)				(2,343)			(6)			(165)			(132)			(597)
Residential mortgage			(11)			0				0			(190)			(158)			(197)			(73)
Consumer			(47)			(70)				(122)			(183)			(174)			(150)			(87)
Total charge-offs			(58)			(194)				(2,465)			(379)			(497)			(479)			(757)
Recoveries:
Commercial			16			0				16			6			317			4			35
Residential mortgage			4			5				44			12			8			19			3
Consumer			25			27				41			39			41			38			82
Total recoveries			45			32				101			57			366			61			120
Net charge-offs			(13)			(162)				(2,364)			(322)			(131)			(418)			(637)
Provision for loan losses			1,003			1,352				3,913			849			584			801			1,221
Balance, end of period		$	12,375		$	11,026			$	11,385		$	9,836		$	9,309		$	8,856		$	8,473
Net charge-offs as a % of average loans			0.00	%		0.01	%			0.16	%		0.03	%		0.02	%		0.05	%		0.09	%

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES


(In Thousands)		June 30,			As of December 31,
	****	2021		****	2020		****	2019		****	2018		****	2017		****	2016
ASC 310 - Impaired loans		$	1,477		$	925		$	1,051		$	1,605		$	1,279		$	674
ASC 450 - Collective segments:
Commercial			5,781			5,545			3,913			3,102			3,078			3,373
Residential mortgage			4,215			4,091			4,006			3,870			3,841			3,890
Consumer			231			239			281			233			159			138
Unallocated			671			585			585			499			499			398
Total Allowance		$	12,375		$	11,385		$	9,836		$	9,309		$	8,856		$	8,473

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)


(Dollars In Thousands)		June 30,			As of December 31,														****
	****	2021		****	2020		****	2019		****	2018		****	2017		****	2016		****
Impaired loans with a valuation allowance		$	10,594		$	8,082		$	3,375		$	4,851		$	4,100		$	3,372
Impaired loans without a valuation allowance			1,819			2,895			1,670			4,923			5,411			7,488
Purchased credit impaired loans			6,733			6,841			441			0			0			0
Total impaired loans		$	19,146		$	17,818		$	5,486		$	9,774		$	9,511		$	10,860
Total loans past due 30-89 days and still accruing		$	2,478		$	5,918		$	8,889		$	7,142		$	9,449		$	7,735
Nonperforming assets:
Purchased credit impaired loans		$	6,733		$	6,841		$	441		$	0		$	0		$	0
Other nonaccrual loans			16,238			14,575			8,777			13,113			13,404			8,736
Total nonaccrual loans			22,971			21,416			9,218			13,113			13,404			8,736
Total loans past due 90 days or more and still accruing			1,881			1,975			1,207			2,906			3,724			6,838
Total nonperforming loans			24,852			23,391			10,425			16,019			17,128			15,574
Foreclosed assets held for sale (real estate)			1,332			1,338			2,886			1,703			1,598			2,180
Total nonperforming assets		$	26,184		$	24,729		$	13,311		$	17,722		$	18,726		$	17,754
Loans subject to troubled debt restructurings (TDRs):
Performing		$	199		$	166		$	889		$	655		$	636		$	5,803
Nonperforming			5,624			7,285			1,737			2,884			3,027			2,874
Total TDRs		$	5,823		$	7,451		$	2,626		$	3,539		$	3,663		$	8,677

Total nonperforming loans as a % of loans			1.56	%		1.42	%		0.88	%		1.94	%		2.10	%		2.07	%
Total nonperforming assets as a % of assets			1.12	%		1.10	%		0.80	%		1.37	%		1.47	%		1.43	%
Allowance for loan losses as a % of total loans			0.77	%		0.69	%		0.83	%		1.12	%		1.09	%		1.13	%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)			1.05	%		1.05	%		0.93	%		1.12	%		1.09	%		1.13	%
Allowance for loan losses as a % of nonperforming loans			49.79	%		48.67	%		94.35	%		58.11	%		51.70	%		54.40	%
(a) Credit adjustment on purchased non-impaired loans at end of period		$	4,502		$	5,979		$	1,216		$	0		$	0		$	0
Allowance for loan losses			12,375			11,385			9,836			9,309			8,856			8,473
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)		$	16,877		$	17,364		$	11,052		$	9,309		$	8,856		$	8,473
Total loans receivable		$	1,597,856		$	1,644,209		$	1,182,222		$	827,563		$	815,713		$	751,835
Credit adjustment on purchased non-impaired loans at end of period			4,502			5,979			1,216			0			0			0
Total (2)		$	1,602,358		$	1,650,188		$	1,183,438		$	827,563		$	815,713		$	751,835
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)			1.05	%		1.05	%		0.93	%		1.12	%		1.09	%		1.13	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At June 30, 2021, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $178,616,000. The Corporation’s cash position throughout 2021 has been elevated in comparison to historical levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $15,035,000 at June 30, 2021.

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


		Outstanding						Available						Total Credit
(In Thousands)	****	June 30,		****	December 31,		****	June 30,		****	December 31,		****	June 30,		****	December 31,
		2021			2020			2021			2020			2021			2020
Federal Home Loan Bank of Pittsburgh		$	44,175		$	72,222		$	705,819		$	698,977		$	749,994		$	771,199
Federal Reserve Bank Discount Window			0			0			14,588			14,654			14,588			14,654
Other correspondent banks			0			0			45,000			45,000			45,000			45,000
Total credit facilities		$	44,175		$	72,222		$	765,407		$	758,631		$	809,582		$	830,853

At June 30, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $43,775,000 and a letter of credit of $400,000. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. Additional information regarding borrowed funds is included in Note 9 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At June 30, 2021, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $182,489,000.

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 June 30, 2021; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. 65

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(Dollars in Thousands)															Minimum To Be								****
											Minimum To Maintain				Well								****
							Minimum				Capital Conservation				Capitalized Under				Minimum To Meet				****
							Capital				Buffer at Reporting				Prompt Corrective				the Corporation's				****
		Actual					Requirement				Date				Action Provisions				Policy Thresholds				****
	****	Amount		****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount		****	Ratio	****
June 30, 2021:
Total capital to risk-weighted assets:
Consolidated		$	284,576		18.99	%	N/A		N/A		N/A		N/A		N/A		N/A		$	157,351		≥10.5	%
C&N Bank			245,054		16.40	%	119,543		≥8	%	156,900		≥10.5	%	149,428		≥10	%		156,900		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			238,684		15.93	%	N/A		N/A		N/A		N/A		N/A		N/A			127,380		≥8.5	%
C&N Bank			232,129		15.53	%	89,657		≥6	%	127,014		≥8.5	%	119,543		≥8	%		127,014		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			238,684		15.93	%	N/A		N/A		N/A		N/A		N/A		N/A			104,901		≥7	%
C&N Bank			232,129		15.53	%	67,243		≥4.5	%	104,600		≥7.0	%	97,128		≥6.5	%		104,600		≥7	%
Tier 1 capital to average assets:
Consolidated			238,684		10.52	%	N/A		N/A		N/A		N/A		N/A		N/A			181,440		≥8	%
C&N Bank			232,129		10.31	%	90,049		≥4	%	N/A		N/A		112,561		≥5	%		180,097		≥8	%

December 31, 2020:
Total capital to risk-weighted assets:
Consolidated		$	260,015		17.49	%	N/A		N/A		N/A		N/A		N/A		N/A		$	156,113		≥10.5	%
C&N Bank			236,943		15.98	%	118,602		≥8	%	155,665		≥10.5	%	148,252		≥10	%		155,665		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			231,577		15.58	%	N/A		N/A		N/A		N/A		N/A		N/A			126,377		≥8.5	%
C&N Bank			225,058		15.18	%	88,951		≥6	%	126,015		≥8.5	%	118,602		≥8	%		126,015		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			231,577		15.58	%	N/A		N/A		N/A		N/A		N/A		N/A			104,075		≥7	%
C&N Bank			225,058		15.18	%	66,714		≥4.5	%	103,777		≥7.0	%	96,364		≥6.5	%		103,777		≥7	%
Tier 1 capital to average assets:
Consolidated			231,577		10.34	%	N/A		N/A		N/A		N/A		N/A		N/A			179,206		≥8	%
C&N Bank			225,058		10.12	%	88,959		≥4	%	N/A		N/A		111,199		≥5	%		177,919		≥8	%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. Through June 30, 2021, 61,696 shares were repurchased for a total cost of $1,531,000, at an average price of $24.81 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. 66

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


Minimum common equity tier 1 capital ratio	4.5	%
Minimum common equity tier 1 capital ratio plus capital conservation buffer	7.0	%
Minimum tier 1 capital ratio	6.0	%
Minimum tier 1 capital ratio plus capital conservation buffer	8.5	%
Minimum total capital ratio	8.0	%
Minimum total capital ratio plus capital conservation buffer	10.5	%

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


Capital Conservation Buffer	****	Maximum Payout	****
(as a % of risk-weighted assets)		(as a % of eligible retained income)	****
Greater than 2.5%		No payout limitation applies
≤2.5% and >1.875%		60	%
≤1.875% and >1.25%		40	%
≤1.25% and >0.625%		20	%
≤0.625%		0	%

At June 30, 2021, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.40%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $9,167,000 at June 30, 2021 and $11,676,000 at December 31, 2020. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at June 30, 2021.

ITEM 4. CONTROLS AND PROCEDURES

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. As of June 30, 2021, 61,696 shares have been repurchased under the repurchase program originally approved in 2016 and modified in 2021. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases under the new program 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 2021.


	****		****			****	Total Number of	****	Maximum
							Shares		Number of
							Purchased		Shares that May
							as Part of		Yet
							Publicly		be Purchased
		Total Number		Average			Announced		Under
		of Shares		Price Paid			Plans		the Plans or
Period		Purchased		per Share			or Programs		Programs
April 1 - 30, 2021		0		$	0		0		1,000,000
May 1 - 31, 2021		0		$	0		0		1,000,000
June 1 - 30, 2021		61,696		$	24.81		61,696		938,304

Item 3. Defaults Upon Senior Securities

None 68

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6. Exhibits

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

2.1	Agreement and Plan of Merger dated September 27, 2018, between the Corporation and Monument Bancorp, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018

2.2	Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019

3.	(i) Articles of Incorporation	Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009

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

4.	Instruments defining the rights of Security holders, including Indentures

4.1	Indenture, dated May 19, 2021 between Citizens & Northern Corporation and UMB Bank, National Association, as trustee	Incorporated by reference to Exhibit 4.1 of the Corporation’s Form 8-K filed May 19, 2021

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

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

10.	Material contracts

10.1	Employment Agreement dated April 6, 2021 between the Corporation and Alexander Balagour	Filed herewith

10.2	Indemnification Agreement dated April 27, 2021 between the Corporation and Helen S. Santiago	Filed herewith

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

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

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

15.	Letter re: unaudited interim information	Not applicable

18.	Letter re: change in accounting principles	Not applicable

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


22.	Published report regarding matters submitted to vote of security holders	Not applicable

23.	Consents of experts and counsel	Not applicable

24.	Power of attorney	Not applicable

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

31.1	Certification of Chief Executive Officer	Filed herewith

31.2	Certification of Chief Financial Officer	Filed herewith

32.	Section 1350 certifications	Filed herewith

99.	Additional exhibits	Not applicable

100.	XBRL-related documents	Not applicable

101.	Interactive data file	Filed herewith

104.	Cover page interactive data file	Filed herewith

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

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

	CITIZENS & NORTHERN CORPORATION
August 6, 2021	By: /s/ J. Bradley Scovill
Date	President and Chief Executive Officer
August 6, 2021	By: /s/ Mark A. Hughes
Date	Treasurer and Chief Financial Officer

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of this 6^th^ day April, 2021, between CITIZENS & NORTHERN CORPORATION, a Pennsylvania business corporation (the “Corporation”), CITIZENS & NORTHERN BANK (the “Bank”), a Pennsylvania chartered bank, and Alexander Balagour, an adult individual (“Executive”).

WITNESSETH:

WHEREAS, the Bank is a wholly-owned subsidiary of the Corporation; and

WHEREAS, the Corporation and the Bank each desire to employ Executive and Executive desires to accept such employment, all upon the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows:

1.Employment. The Corporation and the Bank each hereby employs Executive and Executive hereby accepts employment with Corporation and the Bank, effective as of May 10, 2021 on the terms and conditions set forth in this Agreement.

2.Duties of Executive. Executive shall serve as the Executive Vice President and Chief Information Officer of the Bank, reporting to the President and Chief Executive Officer and the Board of Directors of the Corporation and the Bank and shall have supervision and control over, and responsibility for, all of the enterprise IT systems in support of business operations activities of the Bank, and shall have such other powers and duties as may from time to time be prescribed by the President and Chief Executive Officer or the Board of Directors of the Corporation and the Bank, provided such powers and duties are consistent with the Executive’s position. Executive shall devote his full time, attention and energies to the business of the Corporation and the Bank during the Employment Period (as defined in Section 3 of this Agreement); provided, however, that this Section 2 shall not be construed as preventing Executive from (a) engaging in activities incident or necessary to personal investments, (b) acting as a member of the board of directors of any non-profit association or corporation, or (c) being involved in any other activity with the prior approval of the Board of Directors of the Corporation or the Bank. The Executive shall not engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation or the Bank, nor may the Executive serve as a director or officer or in any other capacity in a company which competes with the Corporation or the Bank.

3.	Term of Agreement.

(a)Employment Period. This Agreement shall be for a three (3) year period (the “Employment Period”) beginning on the date set forth in section 1 above and, if not previously terminated pursuant to the terms of this Agreement, ending on May 10, 2024. Unless written notice of nonrenewal is given by either party on or before February 10, 2024 and by February 10^th^ of each successive calendar year thereafter, the Employment Period shall be automatically extended for additional successive

twelve (12) month periods.

(b)Termination for Cause. Notwithstanding the provisions of Section 3(a) of this Agreement, this Agreement may be terminated by the Corporation or the Bank for Cause (as defined herein) provided that the Board of Directors of the Corporation gives Executive written notice thirty (30) days prior to the effective date of such termination setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination. As used in this Agreement, “Cause” shall mean any of the following:

(i)Executive’s conviction of or plea of guilty or nolo contendere to a felony, a crime of falsehood or a crime involving moral turpitude, or the actual incarceration of Executive for a period of thirty (30) consecutive days or more;

(ii)Executive’s willful continuing failure to follow the lawful instructions of the President and Chief Executive Officer or the Board of Directors of the Corporation or the Bank (which instructions must be consistent with the terms of this Agreement), after the Executive’s receipt of written notice of such instructions, other than a failure resulting from Executive’s incapacity because of physical or mental illness;

(iii)A government regulatory agency recommends or orders in writing that the Corporation or the Bank terminate the employment of the Executive with the Corporation or the Bank or relieve Executive of his duties as such relate to the Corporation or the Bank;

(iv)Executive’s intentional violation of any of the provisions of this Agreement;

(v)conduct on the part of the Executive bringing public discredit to the

Bank;

(vi)	Executive’s breach of fiduciary duty involving personal profit; or

(vii)	Executive’s material violation of Bank policies and procedures.

If this Agreement is terminated for Cause, all of Executive’s rights under this Agreement shall cease as of the effective date of such termination, except that:

(i)the Bank shall pay to Executive the unpaid portion, if any, of his Annual Base Salary (as defined herein) through the date of termination; and

(ii)the Bank shall provide to Executive such post-employment benefits, if any, as may be provided for under the terms of the employee benefit plans of the Bank then in effect.

(c)	Termination for Good Reason. Notwithstanding the provisions of Section

3(a) of this Agreement, this Agreement shall terminate automatically upon Executive’s termination of employment for Good Reason. The term “Good Reason” shall mean (i) a material reduction in salary or benefits, including any incentive compensation plan, (ii) a reassignment which assigns full-time employment duties to Executive at a location more than fifty (50) miles from the Corporation’s principal executive office on the date of this Agreement, (iii) any other material breach or default by the Corporation or the Bank under any term or provision of this Agreement, including any reduction, in any material respect and without Executive’s consent, of the authority, duties or other terms and conditions of Executive’s employment hereunder; provided that in all instances set forth in this Section 3(c), Executive has delivered written notice to the Corporation within thirty (30) days after the initial existence of any such condition that the condition constitutes Good Reason, and the Corporation and Bank fails to cure such condition within thirty (30) days after receipt of said notice.

If such termination occurs for Good Reason, then Bank shall pay Executive such benefits as are set forth in Section 7 of this Agreement.

(d)Death. Notwithstanding the provisions of Section 3(a) of this Agreement, this Agreement shall terminate automatically upon Executive’s death and Executive’s rights under this Agreement shall cease as of the date of such termination, except that (i) the Bank shall pay to Executive’s spouse, personal representative, or estate the unpaid portion, if any, of his Annual Base Salary through date of death and the balance of the payments (if any) owing pursuant to Section 18(b) below, and (ii) the Bank shall provide to Executive’s dependents any benefits due under the Bank’s employee benefit plans.

(e)Disability. If the Executive becomes disabled because of sickness, physical or mental disability, or any other reason, the Corporation and the Bank shall have the option to terminate this Agreement by giving thirty (30) days’ written notice of termination to the Executive; provided, however, that Executive shall continue to be eligible for benefits under the Bank’s long term disability insurance plan. Executive shall be deemed to have become “disabled” at such time as he qualifies (after expiration of any applicable waiting period) to receive benefits for partial or total disability under the Bank’s employee long term disability insurance plan. If Executive’s employment shall be terminated by reason of Executive’s disability, the Bank shall pay Executive his then current Annual Base Salary (less applicable taxes and withholdings) prorated through the date of termination, together

with the amount of any unreimbursed business expenses as of the date of termination and, except as otherwise provided in this Section 3(e), the Corporation and the Bank shall have no further obligation to the Executive under this Agreement.

(f)Resignation from Board of Directors. In the event Executive’s employment under this Agreement is terminated for any reason, Executive’s service, if any, as a Director of the Corporation, the Bank, and any affiliate or subsidiary thereof shall immediately terminate. This Section 3(f) shall constitute a resignation notice for such purposes.

4.	Employment Period Compensation, Benefits and Expenses.

(a)Annual Base Salary. For services performed by Executive under this Agreement, Bank shall pay Executive an annual base salary during the Employment Period at the rate of Two Hundred and Fifty Thousand Dollars ($250,000) per year, minus applicable withholdings and deductions, payable at the same times as salaries are payable to other executive employees of the Bank (“Annual Base Salary”). The Annual Base Salary shall be reviewed annually by the Compensation Committee of the Board of Directors (or such other committee as performs such functions, the “Compensation Committee”) and the Compensation Committee may, from time to time, increase Executive’s Annual Base Salary, and any and all such increases shall be deemed to constitute amendments to this Section 4(a) to reflect the increased amounts, effective as of the date established for such increases by the Board. In reviewing adjustments to Annual Base Salary, the Compensation Committee shall consider relevant market data regarding executive salaries at peer financial institutions and the performance of the Corporation and the Bank under the Executive’s leadership.

(b)Bonus. The Compensation Committee may provide for the payment of an annual bonus to the Executive as it deems appropriate to provide incentive to the Executive and to reward the Executive for his performance. Such bonus may, but need not be, determined in accordance with any incentive bonus programs for executive officers as recommended by the Compensation Committee. The payment of any such bonuses will not reduce or otherwise affect any other obligation of the Bank to the Executive provided for in this Agreement.

(c)Vacations, Holidays, etc. During the term of this Agreement, Executive shall be entitled to be paid annual vacation in accordance with the policies as established from time to time by the Board of Directors of the Bank. However, Executive shall not be entitled to receive any additional compensation from Bank for failure to take a vacation, nor shall Executive be able to accumulate unused vacation time from one year to the next, except to the extent authorized by the Board of Directors of Bank. The Executive shall also be entitled to all paid holidays, sick days and personal days provided by the Bank to its regular full-time employees and senior executive officers.

(d)Stock Based Incentives. During the term of this Agreement, Executive shall be entitled to such stock-based incentives as may be recommended from time to time by the Compensation Committee under the Corporation’s stock-based incentive plans and as are consistent with the Executive’s responsibilities and performance.

(e)Employee Benefit Plans. During the term of this Agreement, the Executive shall be eligible to participate in or receive benefits under all Bank employee benefit plans including, but not limited to, any pension plan, profit-sharing plan, savings plan, life insurance plan, medical/health insurance plan, disability insurance plan and other health and welfare benefits as made available by the Bank to its full time employees generally, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements, and provided, further that such participation does not violate any state or federal law, rule or regulation.

(f)Business Expenses. During the term of this Agreement, Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by his, which are properly accounted for, in accordance with the policies and procedures established by the Board of Directors of the Corporation or the Bank for its executive officers.

5.	Termination of Employment Pursuant to a Change in Control - Definitions.

(a)Any of the following events occurring during the period commencing with the date of a “Change in Control” (as defined in Section 5(b) of this Agreement) and ending on the second anniversary of the date of the Change in Control, shall constitute a “Termination Pursuant to a Change in Control” for purposes of this Agreement:

(i)Executive’s employment is terminated by the Corporation or Bank or any acquiror or successor thereof without Cause; or

(ii)	Executive terminates Executive’s employment for Good Reason.

(b)As used in this Agreement, “Change in Control” shall mean the occurrence immediately of any of the following:

(i)the consummation of (A) a merger, consolidation, division or other fundamental transaction involving the Corporation or the Bank, (B) a sale, exchange, transfer or other disposition of substantially all of the assets of the Corporation or the Bank to any entity which is not a direct or indirect subsidiary of the Corporation, or (C) a purchase by the Corporation or the Bank of substantially all of the assets of another entity; unless (Y) such merger, consolidation, division, sale, exchange, transfer, purchase, disposition or other transaction is approved in advance by eighty percent (80%) or more of the members of the Board of Directors of the Corporation who are not interested in the transaction and (Z) a majority of the members of the Board of Directors of the legal entity resulting from or existing after any such transaction and a majority of the Board of Directors of such entity’s parent corporation, if any, are former members of the Board of Directors of the Corporation; or

(ii)any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), other than the Corporation, a direct or indirect subsidiary of the Corporation, or a person who is the beneficial owner of more than twenty-five percent (25%) of the Corporation’s

outstanding securities on the date of this Agreement becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing twenty-five percent (25%) or more of the combined voting power of Corporation’s then outstanding securities; or

(iii)during any period of two (2) consecutive years during the term of Executive’s employment under this Agreement, individuals who at the beginning of such period constitute the Board of Directors of the Corporation cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period; or

(iv)any other change in control of the Corporation or the Bank similar in effect to any of the foregoing.

6.	Rights in the Event of Termination of Employment Pursuant to a Change in Control.

(a)Right to Compensation. In the event of a Termination Pursuant to a Change in Control, Executive shall be entitled to receive the compensation and benefits set forth below:

(i)Executive shall be paid, within twenty (20) days following termination, a lump sum cash payment equal to one point five (1.5) times the sum of (1) the highest Annual Base Salary as defined in Section 4(a) during the immediately preceding three calendar years, (2) the highest cash bonus and other cash incentive compensation earned by him with respect to one of the three calendar years immediately preceding the year of termination and (3) the highest value of stock options and other stock based incentives awarded to the Executive with respect to one of the three calendar years immediately preceding the year of termination, which value shall be based upon the grant-date fair value of the award determined in accordance with SFAS 123(R) or any amendments or supplements thereto (“Share-Based Payments”). The amount shall be subject to federal, state, and local tax withholdings.

(ii)In addition, for a period of eighteen (18) months from the date of termination of employment, Executive shall be permitted to continue participation in and the Bank shall maintain the same level of contribution for Executive’s participation in the Bank’s life, disability, medical/health insurance and other health and welfare benefits in effect with respect to Executive during the one (1) year prior to his termination of employment, or, if Bank is not permitted by the insurance carriers to provide such benefits because Executive is no longer an employee, a dollar amount equal to the cost to Executive of obtaining such benefits (or substantially similar benefits).

(b)Mitigation. Executive shall not be required to mitigate the amount of any

payment provided for in this Section 6 by seeking other employment or otherwise, nor

shall the amount of payment or the benefit provided for in this Section 6 be reduced by any compensation earned by Executive as the result of employment by another employer or by reason of Executive’s receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise.

(c)	Limitation on Payment and Benefits.

(i)Anything in this Agreement to the contrary notwithstanding, in the event that a Change in Control occurs and it shall be determined that any payment or distribution by the Corporation or its affiliates to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (“Total Payments”) would otherwise exceed the amount (the “Safe Harbor Amount”) that may be received by the Executive without the imposition of an excise tax under section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) and the Department of the Treasury (the “Department”) Regulations relating thereto, then the Total Payments shall be reduced to the extent, and only to the extent, necessary to assure that their aggregate present value, as determined in accordance with the applicable provisions of section 280G of the Code, does not exceed the greater of the following dollar amounts (the “Benefit Limit”):

(A)the Safe Harbor Amount, or

(B)the greatest after-tax amount payable to the Executive after taking into account any excise tax imposed under section 4999 of the Code on the Total Payments.

(ii)All determinations to be made under this Section 6(c) shall be made by an independent public accounting firm chosen by the Corporation (the “Accounting Firm”). In determining whether such Benefit Limit is exceeded, the Accounting Firm shall make a reasonable determination of the value to be assigned to the restrictive covenants in effect for the Executive pursuant to this Agreement, and the amount of the Executive’s potential parachute payment under section 280G of the Code shall be reduced by the value of those restrictive covenants to the extent consistent with section 280G of the Code.

(iii)In the event the Internal Revenue Service notifies the Executive of an inquiry with respect to the applicability of section 280G of the Code or section 4999 of the Code to any payment by the Corporation or its affiliates, or assessment of tax under section 4999 of the Code with respect to any payment by the Corporation or its affiliates, the Executive shall provide notice to the Corporation of such inquiry or assessment within ten (10) days, and shall take no action with respect to such inquiry or assessment until the Corporation has responded thereto (provided such response is timely with respect to the inquiry or assessment). The Corporation shall have the right to appoint an attorney or accountant to represent the Executive with respect to such inquiry or assessment, and the Executive shall fully

cooperate with such representative as a condition of the Agreement with respect to such inquiry or assessment.

(iv)All of the fees and expenses of the Accounting Firm in performing the determinations referred to in Section 6(c)(ii) or any attorney or accountant appointed to represent the Executive pursuant to Section 6(c)(iii) shall be borne solely by the Corporation.

(v)To the extent a reduction to the Total Payments is required to be made in accordance with this Section 6(c), such reduction and/or cancellation of acceleration of equity awards shall occur in the order that provides the maximum economic benefit to the Executive. In the event that acceleration of equity awards is to be reduced, such acceleration of vesting also shall be canceled in the order that provides the maximum economic benefit to the Executive. Notwithstanding the foregoing, any reduction shall be made in a manner consistent with the requirements of section 409A of the Code and where two economically equivalent amounts are subject to reduction but payable at different times, such amounts shall be reduced on a pro rata basis, but not below zero.

7.	Rights in Event of Termination of Employment Absent Change in Control .

(a)If Executive’s employment is involuntarily terminated by the Corporation or the Bank without Cause or is terminated by Executive for Good Reason pursuant to Section 3(c) (other than a Termination Pursuant to a Change in Control), then Bank shall pay (or cause to be paid) to Executive, within twenty (20) days following termination, a lump sum cash payment equal to the sum of (1) the highest Annual Base Salary as defined in Section 4(a) during the immediately preceding three calendar years, (2) the highest cash bonus and other cash incentive compensation earned by him with respect to one of the three calendar years immediately preceding the year of termination and (3) the highest value of stock options and other stock based incentives awarded to the Executive with respect to one of the three calendar years immediately preceding the year of termination, which value shall be based upon the grant-date fair value of the award determined in accordance with SFAS 123(R) or any amendments or supplements thereto (“Share-Based Payments”). The amount shall be subject to federal, state and local tax withholdings. In addition, for a period of one (1) year from the date of termination of employment, Executive shall be permitted to continue participation in, and the Bank shall maintain the same level of contribution for, Executive’s participation in the Bank’s life, disability, medical/health insurance and other health and welfare benefits in effect with respect to Executive during the one (1) year prior to his termination of employment, or, if Bank cannot provide such benefits because Executive is no longer an employee, a dollar amount equal to the cost of Executive of obtaining such benefits (or substantially similar benefits).

(b)Executive shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the

amount of payment or the benefit provided for in this Section 7 be reduced by any compensation earned by Executive as the result of employment by another employer or by reason of Executive’s receipt of or right to receive any retirement or other benefits after

the date of termination of employment or otherwise.

8.	Covenant Not to Compete.

(a)Executive hereby acknowledges and recognizes the highly competitive nature of the business of the Corporation and the Bank and accordingly agrees that, during and for the applicable period set forth in Section 8(c) hereof, Executive shall not:

(i)enter into or be engaged (other than by the Corporation or the Bank), directly or indirectly, either for his own account or as agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise of any person, firm, corporation or enterprise engaged in (1) the banking (including bank holding company) or financial services industry, including IT department activities and/or acting as an investment advisor or asset manager, (2) starting a new bank or (3) any other activity in which the Corporation, Bank or any of its subsidiaries are engaged during the Employment Period, in either case within a twenty (20) mile radius of the legal or principal executive office of the Corporation or the Bank and within a twenty (20) mile radius of the Bank's Doylestown Regional branch banking office (the “Non-Competition Area”); or

(ii)solicit, directly or indirectly, current or former customers of the Corporation or the Bank or any of their respective subsidiaries to divert their business from the Corporation and/or the Bank; or

(iii)solicit, directly or indirectly, any person who is employed by the Corporation or the Bank or any of their respective subsidiaries to leave the employ of the Corporation or the Bank.

(b)It is expressly understood and agreed that, although the parties consider the restrictions contained in Section 8(a) hereof reasonable for the purpose of preserving for the Corporation, the Bank and its subsidiaries their good will and other proprietary rights, if a final judicial determination is made by a court having jurisdiction that the time or territory or any other restriction contained in this Section 8(a) hereof is an unreasonable or otherwise unenforceable restriction against Executive, the provisions of Section 8(a) hereof shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable.

(c)The provisions of this Section 8 shall be applicable commencing on the date of this Agreement and continuing for twelve (12) months after the effective date of the termination of Executive’s employment. Notwithstanding the above provisions, if the Executive violates the provisions of this Section 8 and the Bank must seek enforcement of the provisions of Section 8 and is successful in enforcing the provisions, either pursuant to a settlement agreement, or pursuant to court order, the covenant not to compete will remain in effect for twelve (12) months following the date of the settlement agreement or court order.

(d)Executive hereby agrees that the provisions of this Section 8 are fully assignable by the Corporation and the Bank to any successor. Executive also acknowledges that the terms and conditions of this Section 8 will not be affected by the circumstances surrounding his termination of employment.

(e)The Executive acknowledges and agrees that any breach of the restrictions set forth in this Section 8 will result in irreparable injury to the Corporation and the Bank for which it shall have no meaningful remedy at law, and the Corporation and the Bank shall be entitled to injunctive relief in order to enforce the provisions hereof. Upon obtaining any such final and nonappealable injunction, the Corporation and the Bank shall be entitled to pursue reimbursement from the Executive and/or the Executive’s employer of attorney’s fees and costs reasonably incurred in obtaining such final and nonappealable injunction. In addition, the Corporation and the Bank shall be entitled to pursue reimbursement from the Executive and/or the Executive’s employer of costs reasonably incurred in securing a qualified replacement for any employee enticed away from the Corporation and the Bank by Executive. Further, the Corporation and the Bank shall be entitled to set off against or obtain reimbursement from Executive of any payments owed or made to the Executive hereunder.

9.Non-Disparagement. Following the termination of the Executive’s employment: (a) the Executive shall not make any public statements which disparage the Corporation or Bank, and (b) members of the Board of Directors of the Corporation and officers of the Corporation shall not make any public statements which disparage Executive. Notwithstanding the foregoing, nothing in this Section shall prohibit either party from making truthful statements when required by order of a court or other governmental or regulatory body having jurisdiction.

10.Unauthorized Disclosure. During the term of Executive’s employment hereunder, or at any later time, the Executive shall not, without the written consent of the Board of Directors of the Corporation and the Bank or a person authorized thereby (except as may be required pursuant to a subpoena or other legal process), knowingly disclose to any person, other than an employee of the Corporation and the Bank or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Executive of his duties as an executive of the Corporation and the Bank, any material confidential information obtained by Executive while in the employ of the Corporation and the Bank with respect to any of the Corporation and the Bank’s services, products, improvements, formulas, designs or styles, processes, customers, methods of business or any business practices the disclosure of which could be or will be damaging to the Corporation and the Bank; provided, however, that confidential information shall not include any information known generally to the public (other than as a result of unauthorized disclosure by the Executive or any person with the assistance, consent or direction of the Executive) or any information of a type not otherwise considered confidential by persons engaged in the same business or a business similar to that conducted by the Corporation and the Bank or any information that must be disclosed as required by law.

11.Release. Notwithstanding any other provision of this Agreement, any severance or termination payments or benefits herein described are conditioned on the Executive’s execution and delivery to the Corporation and Bank of an effective general release agreement in the form

attached hereto as Exhibit "A," as such form may be modified by the Corporation, in a manner consistent with the requirements of the Older Workers Benefit Protection Act and any applicable state law. Notwithstanding any provision of this Agreement to the contrary, in no event shall the timing of the Executive’s execution of the release, directly or indirectly, result in the Executive designating the calendar year of payment, and if a payment that is subject to execution of the release could be made in more than one taxable year, payment shall be made in the later taxable year.

herein:

12.	Preemptive Considerations. Notwithstanding anything to the contrary set forth

(a)If the Executive is suspended and/or temporarily prohibited from participating in the conduct of the Corporation’s or Bank’s affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) or any amendments or supplements thereto, the obligations of the Corporation and Bank under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Corporation and Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while this Agreement’s obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended.

(b)If the Executive is removed and/or permanently prohibited from participating in the conduct of the Corporation’s or Bank’s affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)) or any amendments or supplements thereto, or equivalent provisions relating to a regulator with supervisory authority over the Corporation or Bank, all obligations of the Corporation or Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected.

(c)If the Corporation or Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act or equivalent provisions relating to a regulator with supervisory authority over the Corporation or Bank), all obligations under this Agreement shall terminate as of the date of default, but this Section 12(c) shall not affect any vested rights of the parties.

13.Indemnification; Liability Insurance. The Corporation and the Bank shall indemnify and hold the Executive harmless, to the fullest extent permitted by Pennsylvania law, with respect to any threatened, pending or contemplated action, suit or proceeding (“Proceedings”) brought against Executive by reason of the fact that he is or was a director, officer, employee or agent of the Corporation and the Bank or is or was serving at the written request of the Corporation as a director, officer, employee or agent of another person or entity. The Executive’s right to indemnification provided herein is not exclusive of any other rights to which Executive may be entitled under any bylaw, agreement, vote of shareholders or otherwise, and shall continue beyond the term of this Agreement. The Corporation shall use its best efforts to obtain insurance coverage for the Executive under an insurance policy covering officers and directors of the Corporation and its subsidiaries and affiliates against lawsuits, arbitrations or other legal or regulatory proceedings; however, nothing herein shall be construed to require Corporation to obtain such insurance if the Board of Directors of the Corporation determines that such coverage cannot be obtained at a reasonable price.

14.Notices. Except as otherwise provided in this Agreement, any notice required or permitted to be given under this Agreement shall be deemed properly given if in writing and if mailed by registered or certified mail, postage prepaid with return receipt requested, to Executive’s address, in the case of notices to Executive, and to the principal executive office of the Corporation, in the case of notice to the Corporation or the Bank.

15.Waiver. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and an executive officer specifically designated by the Board of Directors of the Corporation. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

16.Assignment. This Agreement shall not be assignable by any party, except by Bank and the Corporation to any successor in interest to its business.

17.Entire Agreement. This Agreement contains the entire agreement of the parties relating to the subject matter of this Agreement and supersedes and replaces any prior written or oral agreements between them respecting the within subject matter.

18.	Successors; Binding Agreement.

(a)The Corporation and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation and/or the Bank to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Corporation and the Bank would be required to perform it if no such succession had taken place. As used in this Agreement, “Corporation” and “Bank” shall mean the Corporation and the

Bank, as defined previously and any successor to its respective business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.

(b)	This Agreement shall inure to the benefit of and be enforceable by

Executive’s personal or legal representatives, executors, administrators, heirs, distributees, devisees or legatees. If Executive should die: (i) after delivery of a notice of termination pursuant to Section 3(c); (ii) following a Termination Pursuant to a Change in Control; or (iii) following termination of Executive’s employment without Cause, and any amounts would be payable to Executive under this Agreement if Executive had continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee, or other designee, or, if there is no such designee, to Executive’s estate.

19.Arbitration. The Corporation, the Bank and Executive recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues within a reasonable period of time. Consequently, with the exception of the covenant not to compete, non-disparagement and non-disclosure provisions in Sections 8, 9 and 10, respectively, which the Corporation and/or the Bank may seek to enforce in any court of competent jurisdiction, each party agrees that all disputes, disagreements and questions of interpretation concerning this Agreement are to be submitted to resolution, in Wellsboro, Pennsylvania, to the American Arbitration Association (the “Association”) in accordance with the Association’s National Rules for the Resolution of Employment Disputes or other applicable rules then in effect (“Rules”). The Corporation, the Bank or Executive may initiate an arbitration proceeding at any time by giving notice to the other in accordance with the Rules. The Corporation, the Bank and Executive may, as a matter or right, mutually agree on the appointment of a particular arbitrator from the Association’s pool. The arbitrator shall not be bound by the rules of evidence and procedure of the courts of the Commonwealth of Pennsylvania but shall be bound by the substantive law applicable to this Agreement. The decision of the arbitrator, absent fraud, duress, incompetence or gross and obvious error of act, shall be final and binding upon the parties and shall be enforceable in courts of proper jurisdiction. Following written notice of a request for arbitration, the Corporation, Bank and Executive shall be entitled to an injunction restraining all further proceedings in any pending or subsequently filed litigation concerning this Agreement, except as otherwise provided herein.

20.Legal Expenses. Bank will pay to the Executive all reasonable legal fees and expenses when incurred by the Executive in seeking to obtain or enforce any right or benefit provided by this Agreement, provided Executive brings the action in good faith and is successful on the merits.

21.Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

22.Applicable Law. This Agreement shall be governed by and construed in

accordance with the domestic, internal laws of the Commonwealth of Pennsylvania, without regard to its conflicts of laws principles.

23.Headings. The section headings of this Agreement are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement.

24.	409A Safe Harbor.

(a)General. It is intended that this Agreement shall comply with the provisions of section 409A of the Code and the Department of the Treasury (the “Department”) Regulations relating thereto, or an exemption to section 409A of the Code. Any payments that qualify for the “short-term deferral” exception or another exception under section 409A of the Code shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the section 409A of the Code deferral election rules and the exclusion under section 409A of the Code for certain short-term deferral amounts. All payments to be made upon a termination of employment under this Agreement may only be made upon a “separation from service” under section 409A of the Code. In no event may the Executive, directly or indirectly, designate the calendar year of any payment under this Agreement. Within the time period permitted by the applicable Department Regulations (or such later time as may be permitted under section 409A or any Internal Revenue Service or Department rules or other guidance issued thereunder), the Corporation may, in consultation with the Executive, modify the Agreement in order to cause the provisions of the Agreement to comply with the requirements of section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Executive pursuant to section 409A of the Code.

(b)In-Kind Benefits and Reimbursements. Notwithstanding anything to the contrary in this Agreement, all reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of section 409A of the Code including, where applicable, the requirement that (i) any reimbursement is for expenses incurred during the Executive’s lifetime (or during a shorter period of time specified in this Agreement); (ii) the amount of expenses eligible for reimbursement, or in- kind benefits provided, during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (iii) the reimbursement of an eligible expense will be made no later than the last day of the calendar year following the year in which the expense is incurred; and (iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.

(c)Delay of Payments. Notwithstanding any other provision of this Agreement to the contrary, if the Executive is considered a “specified employee” for purposes of section 409A of the Code (as determined in accordance with the methodology established by the Corporation and the Bank as in effect on the date of termination), (i) any payment that constitutes nonqualified deferred compensation within the meaning of section 409A of the Code that is otherwise due to the Executive under this Agreement during the six-month period following his separation from service (as determined in accordance with section

409A of the Code) shall be accumulated and paid to Executive on the first business day of the seventh month following his separation from service (the “Delayed Payment Date”) and (ii) in the event any equity compensation awards held by the Executive that vest upon termination of the Executive’s employment constitute nonqualified deferred compensation within the meaning of section 409A of the Code, the delivery of shares of common stock (or cash) as applicable in settlement of such award shall be made on the earliest permissible payment date (including the Delayed Payment Date) or event under section 409A on which the shares (or cash) would otherwise be delivered or paid. The Executive shall be entitled to interest on any delayed cash payments from the date of termination to the Delayed Payment Date at a rate equal to the applicable federal short-term rate in effect under Code section 1274(d) for the month in which the Executive’s separation from service occurs. If the Executive dies during the postponement period, the amounts and entitlements delayed on account of section 409A of the Code shall be paid to the person designated by the Executive in writing for this purpose, or in the absence of any such designation, to (i) his spouse if she survives him, or (ii) to his estate if his spouse does not survive him, on the first to occur of the Delayed Payment Date or 30 days after the date of the Executive’s death. The foregoing shall apply only to those payments required hereunder, if any, that do not qualify as short-term deferrals or an exempt pay arrangement under section 409A.

25.Recoupment Policy . The Executive agrees that the Executive will be subject to any compensation clawback or recoupment policies that may be applicable to Executive as an executive of the Corporation or Bank, as in effect from time to time and as approved by the Board of Directors or a duly authorized committee thereof, whether or not approved before or after the effective time of this Agreement.

26.Survival. Notwithstanding anything contained herein to the contrary, Executive’s obligations under Sections 8, 9, 10 and 25 shall continue despite the expiration of the term of this Agreement or its termination.

[signature page follows]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.


ATTEST:	CITIZENS & NORTHERN CORPORATION

/s/ Kimberly N. Battin	By:	/s/ J. Bradley Scovill


ATTEST:	CITIZENS & NORTHERN BANK

/s/ Kimberly N. Battin	By:	/s/ J. Bradley Scovill


WITNESS:		EMPLOYEE
/s/ Kristy Bruce		/s/ Alexander Balagour

E X H I B I T****A

Separation Agreement and General Release

THISSEPARATIONAGREEMENTANDGENERALRELEASE(this

"Agreement") is made by and between (the "Executive"), Citizens & Northern Corporation, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Corporation") and Citizens & Northern Bank, a Pennsylvania chartered bank (the "Bank") .

WHEREAS, the Executive, the Corporation and the Bank entered into an Employment Agreement dated , 2021 (the "Employment Agreement") that sets forth the terms and conditions of the Executive's employment with the Corporation and the Bank, including the circumstances under which the Executive is eligible to receive severance pay.

NOW, THEREFORE, the Executive, the Corporation and the Bank each intending to be legally held bound, hereby agree as follows:

1.Consideration. In consideration for a release of claims and other promises and covenants set forth herein, the Corporation and the Bank agree to pay the Executive such consideration as is specified in Sections 6 and 7 of the Employment Agreement in accordance with the terms and conditions of the Employment Agreement.

2.Executive's Release. The Executive on the Executive's own behalf and together with the Executive's heirs, assigns, executors, agents and representatives hereby generally releases and discharges the Corporation and the Bank and their respective subsidiaries, affiliates and the respective predecessors, successors (by merger or otherwise) and assigns of any of the foregoing, together with each and every of the present, past and future officers, managers, directors, shareholders, members, general partners, limited partners, employees and agents of any of the foregoing, and the heirs and executors of any of the foregoing (herein collectively referred to as the "Releasees") from any and all suits, causes of action, complaints, obligations, demands, common law or statutory claims of any kind, whether in law or in equity, direct or indirect, known or unknown (hereinafter "Claims"), which the Executive ever had or now has against the Releasees, or any one of them occurring up to and including the date of this Agreement. Notwithstanding anything herein to the contrary, the Executive's release is not and shall not be construed as a release of any future claim by the Executive against the Corporation or the Bank. This release specifically includes, but is not limited to:

(a)any and all Claims for wages and benefits including, without limitation, salary, stock options, stock, royalties, license fees, health and welfare benefits, severance pay, vacation pay, and bonuses;

(b)any and all Claims for wrongful discharge, breach of contract, whether express or implied, and Claims for breach of implied covenants of good faith and fair dealing;

105/07/2020 SL1 1638730v2 002256.00036

(c)any and all Claims for alleged employment discrimination on the basis of race, color, religion, sex, age, national origin, veteran status, disability and/or handicap, in violation of any federal, state or local statute, ordinance, judicial precedent or Employee order, including but not limited to claims for discrimination under the following statutes: Title VII of the Civil Rights Act of 1964, 42 U.S.C. §2000e et seq.; the Civil Rights Act of 1866, 42 U.S.C.§1981; the Civil Rights Act of 1991; the Age Discrimination in Employment Act, as amended, 29 U.S.C. §621 et seq.; the Older Workers Benefit Protection Act 29 U.S.C. §§ 623, 626 and 630; the Rehabilitation Act of 1972, as amended, 29 U.S.C. §701 et seq.; the Americans with Disabilities Act, 42 U.S.C. §12101 et seq.; the Family and Medical Leave Act of 1993, 29 U.S.C.§2601, et seq.; the Fair Labor Standards Act, as amended, 29 U.S.C. §201, et seq.; the Fair Credit Reporting Act, as amended, 15 U.S.C. §1681, et seq.; and the Employee Retirement Income Security Act of 1974, as amended, 29 U.S.C. § 1000, et seq. ("ERISA") or any comparable state statute or local ordinance;

(d)any and all Claims under any federal or state statute relating to employee benefits or pensions;

(e)any and all Claims in tort, including but not limited to, any Claims for assault, battery, misrepresentation, defamation, interference with contract or prospective economic advantage, intentional or negligent infliction of emotional distress, duress, loss of consortium, invasion of privacy and negligence; and

(f)any and all Claims for attorneys' fees and costs.

3.Acknowledgment. The Executive understands that the release of Claims contained in this Agreement extends to all of the aforementioned Claims and potential Claims which arose on or before the date of this Agreement, whether now known or unknown, suspected or unsuspected, and that this constitutes an essential term of this Agreement. The Executive further understands and acknowledges the significance and consequences of this Agreement and of each specific release and waiver, and expressly consents that this Agreement shall be given full force and effect to each and all of its express terms and provisions, including those relating to unknown and uncompensated Claims, if any, as well as those relating to any other Claims specified herein. Notwithstanding the foregoing, Executive has been advised and understands that nothing contained in this Agreement shall limit Executive's ability to communicate with or to file an administrative complaint or charge against the Corporation or the Bank with any federal, state or local agency, including, for instance, the Securities and Exchange Commission or the US Department of Labor, concerning possible violations of law or to receive an award, for information provided to governmental agencies.

4.Remedies. All remedies at law or in equity shall be available to the Releasees for the enforcement of this Agreement. This Agreement may be pleaded as a full bar to the enforcement of any Claim that the Executive may assert against the Releasees. The non- prevailing party in any litigation shall pay for the prevailing party's costs and expenses of litigation including without limitation the prevailing parties attorney's fees.

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5.No Admission. Neither the execution of this Agreement by the Corporation and the Bank, nor the terms hereof, constitute an admission by the Corporation or the Bank of any liability to the Executive.

6.Entire Agreement. This Agreement contains the entire agreement of the parties with respect to the subject matter hereof, and shall be binding upon their respective heirs, executors, administrators, successors and assigns. In the event there is any inconsistency between the terms of this Agreement and the Employment Agreement, the terms of this Agreement shall control.

7.Severability. If any term or provision of this Agreement shall be held to be invalid or unenforceable for any reason, then such term or provision shall be ineffective to the extent of such invalidity or unenforceability without invalidating the remaining terms or provisions hereof, and such term or provision shall be deemed modified to the extent necessary to make it enforceable.

8.Executive's Representation. The Executive represents and warrants that he has not assigned any claim that he purports to release hereunder and that he has the full power and authority to enter into this Agreement and bind each of the persons and entities that the Executive purports to bind. The Executive further represents and warrants that he is bound by, and agrees to remain bound by, the Executive's post-employment obligations set forth in the Employment Agreement.

9.Amendments. Neither this Agreement nor any term hereof may be changed, waived, discharged, or terminated, except by a written agreement signed by the parties hereto.

10.Governing Authority. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to the principles of conflicts of laws of any jurisdiction. The Executive agrees that the Corporation and the Bank shall have the right to commence and maintain an action hereunder in the state and federal courts appropriate for the location at which the Corporation maintains its corporate offices, and the Executive hereby submits to the jurisdiction and venue of such courts.

11.	Fees and Costs. The parties shall bear their own attorneys' fees and costs.
12.	Counterparts. This Agreement may be executed in counterparts.
---	---

Legally Binding. The terms of this Agreement contained herein are contractual, and not a mere recital.

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IN WITNESS WHEREOF, the Executive, acknowledging that he is acting of his own free will after having had the opportunity to seek the advice of counsel and a reasonable period of time to consider the terms of this Agreement, and the Corporation and the Bank, have caused the execution of this Agreement as of this day and year written below.

EXECUTIVE****WITNESS

By: By:

Name: Name: Date: Date:

CITIZENS & NORTHERN CORPORATION****CITIZENS & NORTHERN BANK

By: By:

Name: Name:

Title: Date: Title: Date:

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Exhibit 10.2

INDEMNIFICATION AGREEMENT

This Agreement made this 27^th^ day of April, 2021, between Citizens & Northern Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and a Pennsylvania corporation (the “Company”) and Helen S. Santiago**,** a director, officer or representative (as hereinafter defined) of the Company (the “Indemnitee”);

WHEREAS, the Company and the Indemnitee are each aware of the exposure to litigation of officers, directors and representatives of the Company as such persons exercise their duties to the Company;

WHEREAS, the Company and the Indemnitee are also aware of conditions in the insurance industry that have affected and may continue to affect the Company’s ability to obtain appropriate directors’ and officers’ liability insurance on an economically acceptable basis;

WHEREAS, the Company desires to continue to benefit from the services of highly qualified, experienced and competent persons such as the Indemnitee;

WHEREAS, the Indemnitee desires to serve or to continue to serve the Company as a director, officer or as a director, officer or trustee of another corporation, joint venture, trust or other enterprise in which the Company has a direct or indirect ownership interest, for so long as the Company continues to provide on an acceptable basis adequate and reliable indemnification against certain liabilities and expenses which may be incurred by the Indemnitee.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein contained, the parties hereto agree as follows:

1.Indemnification. Subject to the terms of this Agreement, the Company shall indemnify the Indemnitee with respect to his or her activities as a director or officer of the Company and/or as a person who is serving or has served on behalf of the Company (“representative”) as a director, officer, or trustee of another corporation, joint venture, trust or other enterprise, domestic or foreign, in which the Company has a direct or indirect ownership interest (an “affiliated entity”) against expenses (including, without limitation, attorneys’ fees, judgments, fines, and amounts paid in settlement) actually and reasonably incurred by him or her (“Expenses”) in connection with any claim against Indemnitee which is the subject of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, investigative or otherwise and whether formal or informal (a “Proceeding”), to which Indemnitee was, is, or is threatened to be made a party by reason of facts which include Indemnitee’s being or having been such a director, officer or representative, to the extent of the highest and most advantageous to the Indemnitee, as determined by the Indemnitee, of one or any combination of the following:

(a)	The benefits provided by the Company’s Articles of Incorporation in effect on the date hereof;

(b)	The benefits provided by the Articles of Incorporation or By-Laws or their equivalent of the Company in effect at the time Expenses are incurred by Indemnitee;

(c)	The benefits allowable under Pennsylvania law in effect at the date hereof;

(d)	The benefits allowable under the law of the jurisdiction under which the Company exists at the time Expenses are incurred by the Indemnitee;

(e)	The benefits available under liability insurance obtained by the Company;

(f)	The benefits available under the Company’s Directors and Officers Liability Insurance Policy in effect at the time of the claim; and

(g)	Such other benefits as are or may be otherwise available to Indemnitee.

Combination of two or more of the benefits provided by (a) through (g) shall be available to the extent that the Applicable Document, as hereafter defined, does not require that the benefits provided therein be exclusive of other benefits. The document or law providing for the benefits listed in items (a) through (g) above is called the “Applicable Document” in this Agreement. Company hereby undertakes to use its best efforts to assist Indemnitee, in all proper legal ways, to obtain the benefits selected by Indemnitee under items (a) through (g) above.

For purposes of this Agreement, references to “other enterprises” shall include employee benefit plans for employees of the Company or of any affiliated entity without regard to ownership of such plans; references to “fines” shall include any excise taxes assessed on the Indemnitee with respect to any employee benefit plan; references to “serving on behalf of the company” shall include any services as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, the Indemnitee with respect to an employee benefits plan, its participants or beneficiaries; references to the singular shall include the plural and vice versa; and if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan Indemnitee shall be deemed to have acted in a manner consistent with the standards required for indemnification by the Company under the Applicable Documents.

2.Insurance. The Company shall maintain directors’ and officers’ liability insurance for so long as Indemnitee’s services are covered hereunder, provided and only to the extent that such insurance is available in amounts and on terms and conditions determined by the Company to be acceptable. However, the Company agrees that the provisions hereof shall remain in effect regardless of whether liability or other insurance coverage is at any time obtained or retained by the Company; except that any payments in fact made to Indemnitee under an insurance policy obtained or retained by the Company shall reduce the obligation of the Company to make payments hereunder by the amount of the payments made under any such insurance policy.

3.Payment of Expenses. At Indemnitee’s request, the Company shall pay the Expenses as and when incurred by Indemnitee, after receipt of written notice pursuant to Section 6 hereof and an undertaking in the form of Exhibit I attached hereto by or on behalf of Indemnitee (i) to repay such amounts so paid on Indemnitee’s behalf if it shall ultimately be determined under the Applicable Document or applicable law that Indemnitee is required to repay such amounts and (ii) to reasonably cooperate with the Company concerning such Proceeding. That portion of Expenses which represents attorneys’ fees and other costs incurred in defending any Proceeding shall be paid by the Company within thirty (30) days of its receipt of such request, together with reasonable documentation (consistent, in the case of attorneys’ fees, with Company practice in payment of legal fees for outside counsel generally) evidencing the amount and nature of such Expenses, subject to its also having received such notice and undertaking.

It is understood and agreed before the Company pays the Expenses incurred in a Proceeding brought by a banking agency in which a final order has not been entered, the following conditions must be met:

(a)	The Board of Directors, in good faith, shall determine in writing after due investigation and consideration that the Indemnitee acted in a manner believed to be in the best interests of the Company;

(b)	The Board of Directors, in good faith, shall determine after due investigation and consideration that the payment of such Expenses will not materially or adversely affect the Company’s safety and soundness.

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(c)	The Indemnitee shall agree in writing to reimburse the Company for Expenses which subsequently are deemed “prohibited indemnification payments”, as defined in 12 C.F.R. § 359.1(1).

The Indemnitee shall not participate in any way in the Board’s discussion and approval of Expenses, provided however, that the Indemnitee may present his or her request to the Board and respond to any inquiries from the Board concerning his or her involvement in the circumstances giving rise to the banking agency Proceeding or civil action.

4.Escrow. The Company may dedicate such amounts as the Board of Directors of the Company may from time to time authorize, as collateral security for the funding of its obligations hereunder (and under similar agreements with other directors, officers and representatives) by depositing assets or bank letters of credit in escrow or reserving lines of credit that may be drawn down by an escrow agent in the dedicated amount (the “Escrow Reserve”). The Company shall promptly provide Indemnitee with a true and complete copy of the agreement relating to the establishment and operation of the Escrow Reserve, together with such additional documentation or information with respect to the escrow as Indemnitee may from time to time reasonably request. The Company shall promptly deliver an executed copy of the Agreement to the escrow agent for the Escrow Reserve to evidence to that agent that Indemnitee is a beneficiary of that Escrow Reserve and shall deliver to Indemnitee the escrow agent’s signed receipt evidencing that delivery.

5.Additional Rights. The indemnification provided in this Agreement shall not be exclusive of any other indemnification or right to which Indemnitee may be entitled and shall continue after Indemnitee has ceased to occupy a position as an officer, director or representative as described in Paragraph 1 above with respect to Proceedings relating to or arising out of Indemnitee’s acts or omissions during his or her service in such position.

6.Notice to Company. Indemnitee shall provide to the Company prompt written notice of any Proceeding brought, threatened, asserted or commenced against Indemnitee with respect to which Indemnitee may assert a right to indemnification hereunder; provided that failure to provide such notice shall not in any way limit Indemnitee’s rights under this Agreement.

7.Cooperation in Defense and Settlement. Indemnitee shall not make any admission or effect any settlement of any Proceeding without the Company’s written consent unless Indemnitee shall have determined to undertake his or her own defense in such matter and has waived the benefits of this Agreement. The Company shall not settle any Proceeding to which Indemnitee is a party in any manner which would impose any Expense on Indemnitee without his or her written consent. Neither Indemnitee nor the Company will unreasonably withhold consent to any proposed settlement. Indemnitee and the Company shall cooperate to the extent reasonably possible with each other and with the Company’s insurers, in attempts to defend and/or settle such Proceeding.

8.Assumption of Defense. Except as otherwise provided below, to the extent that it may wish, the Company (jointly with any other indemnifying party similarly notified), will be entitled to assume Indemnitee’s defense in any Proceeding, with counsel mutually satisfactory to Indemnitee and the Company. Indemnitee shall have the right to employ counsel in such Proceeding, but the fees and expenses of such counsel incurred after notice from the Company of its assumption of the defense thereof shall be at Indemnitee’s expense unless:

(a)	the employment of counsel by Indemnitee has been authorized by the Company;

(b)	counsel employed by the Company initially is unacceptable or later becomes unacceptable to Indemnitee and such unacceptability is reasonable under then existing circumstances;

(c)	Indemnitee shall have reasonably concluded that there may be a conflict of interest between Indemnitee and the Company in the conduct of the defense of such Proceeding; or

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(d)	the Company shall not have employed counsel promptly to assume the defense of such Proceeding,

in each of which case fees and expenses of counsel shall be at the expense of the Company and subject to payment pursuant to this Agreement. The Company shall not be entitled to assume the defense of Indemnitee in any Proceeding brought on behalf of the Company or as to which Indemnitee shall have drawn either of the conclusions provided for in clauses (b) or (c) above.

9.Enforcement. In the event that any dispute or controversy shall arise under this Agreement between Indemnitee and the Company with respect to whether the Indemnitee is entitled to indemnification in connection with any Proceeding or with respect to the amount of Expenses incurred, then with respect to each such dispute or controversy Indemnitee may seek to enforce the Agreement through legal action or, at Indemnitee’s sole option and written request, through arbitration. If arbitration is requested, such dispute or controversy shall be submitted by the parties to binding arbitration in the Borough of Wellsboro in the Commonwealth of Pennsylvania, before a single arbitrator agreeable to both parties. If the parties cannot agree on a designated arbitrator within fifteen (15) days after arbitration is requested in writing by Indemnitee, the arbitration shall proceed in the Borough of Wellsboro in the Commonwealth of Pennsylvania, before an arbitrator appointed by the American Arbitration Association. In either case, the arbitration proceeding shall commence promptly under the rules then in effect of that Association and the arbitrator agreed to by the parties or appointed by that Association shall be an attorney other than an attorney who has, or is associated with a firm having associated with it an attorney which has been retained by or performed services for the Company or Indemnitee at any time during the five years preceding the commencement of arbitration. The award shall be rendered in such form that judgment may be entered thereon in any court having jurisdiction thereof. The prevailing party shall be entitled to prompt reimbursement of any costs and expenses (including, without limitation, reasonable attorneys’ fees) incurred in connection with such legal action or arbitration; provided that Indemnitee shall not be obligated to reimburse the Company unless the arbitrator or court which resolves the dispute determines that Indemnitee acted in bad faith in bringing such action or arbitration.

10.Exclusions. Notwithstanding the scope of indemnification which may be available to Indemnitee from time to time under any Applicable Document, no indemnification, reimbursement or payment shall be required of the Company hereunder with respect to:

(a)	Any claim or any part thereof as to which Indemnitee shall have been determined by a court of competent jurisdiction from which no appeal is or can be taken, by clear and convincing evidence, to have acted or failed to act with deliberate intent to cause injury to the Company or with reckless disregard for the best interest of the Company;

(b)	Any claim or any part thereof arising under Section 16(b) of the Securities Exchange Act of 1934 pursuant to which Indemnitee shall be obligated to pay any penalty, fine, settlement or judgment;

(c)	Any civil money penalty or judgment resulting from any Proceeding instituted by any federal banking agency, or any other liability or legal expense with regard to any administrative proceeding or civil action by any banking agency that results in a final order or settlement pursuant to which Indemnitee:

(1)	is assessed a civil money penalty;
(2)	is removed from office or prohibited from participating in the conduct of the affairs of the Company or its affiliates;
---	---
(3)	is required to cease and desist from taking any affirmative action described under the Federal Deposit Insurance Act or other applicable banking laws with respect to the Company and its affiliates;
---	---

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(d)	Any obligation of Indemnitee based upon or attributable to the Indemnitee gaining in fact any personal gain, profit or advantage to which he or she was not entitled; or

(e)

Any Proceeding initiated by Indemnitee without the consent or authorization of the Board of Directors of the Company, provided that this exclusion shall not apply with respect to any claims brought by Indemnitee (i) to enforce his or her rights under this Agreement or (ii) in any Proceeding initiated by another person or entity whether or not such claims were brought by Indemnitee against a person or entity who was otherwise a party to such Proceeding.

Nothing in this Section 10 shall eliminate or diminish Company’s obligations to advance that portion of Indemnitee’s Expenses which represent attorneys’ fees and other costs incurred in defending any Proceeding pursuant to Section 3 of this Agreement; subject however to the undertaking by Indemnitee in the form attached hereto as Exhibit 1 and incorporated by reference herein.

11.Extraordinary Transactions. The Company covenants and agrees that, in the event of any merger, consolidation or reorganization in which the Company is not the surviving entity, any sale of all or substantially all of the assets of the Company or any liquidation of the Company (each such event is hereinafter referred to as an “extraordinary transaction”), the Company shall:

(a)	have the obligations of the Company under this Agreement expressly assumed by the survivor, purchaser or successor, as the case may be, in such extraordinary transaction; or

(b)	otherwise adequately provide for the satisfaction of the Company’s obligations under this Agreement in a manner acceptable to Indemnitee.

12.No Personal Liability. Indemnitee agrees that neither the directors nor any officer, employee, representative or agent of the Company shall be personally liable for the satisfaction of the Company’s obligations under this Agreement, and Indemnitee shall look solely to the assets of the Company and the escrow the Company may establish, as referred to in Section 4 hereof, for satisfaction of any claims hereunder.

13.Severability. If any provision, phrase, or other portion of this Agreement should be determined by any court of competent jurisdiction to be invalid, illegal or unenforceable, in whole or in part, and such determination should become final, such provision, phrase or other portion shall be deemed to be severed or limited, but only to the extent required to render the remaining provisions and portions of the Agreement enforceable, and the Agreement as thus amended shall be enforced to give effect to the intention of the parties insofar as that is possible.

14.Subrogation. In the event of any payment under this Agreement, the Company shall be subrogated to the extent thereof to all rights to indemnification or reimbursement against any insurer or other entity or person vested in the Indemnitee, who shall execute all instruments and take all other actions as shall be reasonably necessary for the Company to enforce such rights.

15.Governing Law. The parties hereto agree that this Agreement shall be construed and enforced in accordance with and governed by the laws of the Commonwealth of Pennsylvania.

16.Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be considered to have been duly given if delivered by hand and receipted for by the party to whom the notice, request, demand or other communication shall have been directed, or mailed by certified mail, return receipt requested, with postage prepaid:

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(a)	If to the Company, to:

Citizens & Northern Corporation

90-92 Main Street

P.O. Box 58

Wellsboro, PA 16901

(b)	If to Indemnitee, to:

Helen S. Santiago

263 Bridge St. Hill Road

Towanda, PA 18848

or to such other or further address as shall be designated from time to time by the Indemnitee or the Company to the other.

17.Termination. This Agreement may be terminated by either party upon not less than sixty (60) days prior written notice delivered to the other party, but such termination shall not in any way diminish the obligations of Company hereunder with respect to the Indemnitee’s activities prior to the effective date of termination.

18.Amendments and Binding Effect. This Agreement and the Undertaking and the rights and duties of Indemnitee and the Company hereunder and thereunder may not be amended, modified or terminated except by written instrument signed and delivered by the parties hereto. This Agreement is and shall be binding upon and shall inure to the benefits of the parties thereto and their respective heirs, executors, administrator, successors and assigns.

In Witness Whereof, the undersigned have executed this Agreement in triplicate as of the date first above written.

INDEMNITEECITIZENS & NORTHERN CORPORATION

By: /s/ Helen S. SantiagoBy: /s/ J. Bradley Scovill

Title: DirectorTitle: President and Chief Executive

Officer

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EXHIBIT 1

FORM OF UNDERTAKING

THIS UNDERTAKING has been entered into by ___________________ (hereinafter “Indemnitee”) pursuant to an Indemnification Agreement dated ___________ ___, 20__ (the “Indemnification Agreement”), by and between Citizens & Northern Corporation, a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and a Pennsylvania corporation (the “Company”), and Indemnitee.

W I T N E S S E T H:

WHEREAS, pursuant to the Indemnification Agreement, Company agreed to pay Expenses (within the meaning of the Indemnification Agreement) as and when incurred by Indemnitee in connection with any claim against Indemnitee which is the subject of any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative or investigative, to which Indemnitee was, is, or is threatened to be made a party by reason of facts which include Indemnitee’s being or having been a director, officer or representative (within the meaning of the Indemnification Agreement) of the Company;

WHEREAS, such a claim has arisen against Indemnitee and Indemnitee has notified Company thereof in accordance with the terms of Section 6 of the Indemnification Agreement (hereinafter the “Proceeding”);

NOW, THEREFORE, Indemnitee hereby agrees that in consideration of Company’s advance payment of Indemnitee’s Expenses incurred prior to a final disposition of the Proceeding, Indemnitee hereby undertakes to reimburse Company for any and all Expenses paid by Company on behalf of Indemnitee prior to a final disposition of the Proceeding in the event that Indemnitee is determined under the Applicable Document (within the meaning of the Indemnification Agreement) or applicable law to be required to repay such amounts to the Company, provided that if Indemnitee is entitled under the Applicable Document or applicable law to indemnification for some or a portion of such Expenses, Indemnitee’s obligation to reimburse Company shall only be for those Expenses for which Indemnitee is determined to be required to so repay such amounts to the Company pursuant to the Indemnification Agreement or applicable law.

If the Indemnitee is involved in an administrative proceeding or action instituted by an appropriate banking agency and requests the Company to pay the Expenses incurred before a final order is entered, the Indemnitee shall reimburse the Company for all Expenses paid by the Company if a final order is entered (i) assessing civil money penalties; (ii) removing Indemnitee from office or prohibiting Indemnitee from participating in the conduct of the affairs of the Company or its affiliates; or (iii) requiring Indemnitee to cease and desist from taking any affirmative action described under the Federal Deposit Insurance Act or other applicable banking laws with respect to the Company and its affiliates. The Indemnitee hereby agrees to reimburse the Company for Expenses which subsequently are deemed “prohibited indemnification payments”, as defined in 12 C.F.R. § 359.1(1).

Further, the Indemnitee agrees to reasonably cooperate with the Company concerning such Proceeding.

In Witness Whereof, the undersigned has set his hand this _____ day of ______________, 20__.

INDEMNITEE

The Form Provided for Informational Purposes Only

(In the event this form is needed, a blank to be signed and returned will be provided upon request.)

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Exhibit 31.1

CERTIFICATION

I, J. Bradley Scovill, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


August 6, 2021	By:	/s/ J. Bradley Scovill
Date		President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Mark A. Hughes, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Citizens & Northern Corporation;

2.	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


August 6, 2021	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report of Citizens & Northern Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to each of the undersigned’s best knowledge and belief:

(a) the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation.


August 6, 2021	By:	/s/ J. Bradley Scovill
Date		President and Chief Executive Officer

August 6, 2021	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

These certifications accompany this report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Corporation for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Corporation specifically incorporates them by reference.

A signed original of this written statement required by Section 906 has been provided to the Corporation and will be retained by the Corporation and furnished to the Securities and Exchange Commission or its staff upon request.