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, 2020

◻ 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)	15,871,073 Shares Outstanding on August 3, 2020

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, 2020 and December 31, 2019			Page 3
Consolidated Statements of Income (Unaudited) – Three-month and Six-month Periods Ended June 30, 2020 and 2019			Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Six-month Periods Ended June 30, 2020 and 2019			Page 5
Consolidated Statements of Cash Flows (Unaudited) – Six-month Periods Ended June 30, 2020 and 2019			Page 6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Six-month Periods Ended June 30, 2020 and 2019			Page 7 - 8
Notes to Unaudited Consolidated Financial Statements			Pages 9 – 46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 46 – 79
Item 4. Controls and Procedures			Page 79
Part II. Other Information			Pages 79 – 83
Signatures			Page 84

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,
		2020			2019
ASSETS
Cash and due from banks:
Noninterest-bearing		$	24,075		$	17,667
Interest-bearing			53,567			17,535
Total cash and due from banks			77,642			35,202
Available-for-sale debt securities, at fair value			332,188			346,723
Marketable equity security			1,003			979
Loans held for sale			1,258			767

Loans receivable			1,241,413			1,182,222
Allowance for loan losses			(11,026)			(9,836)
Loans, net			1,230,387			1,172,386

Bank-owned life insurance			18,843			18,641
Accrued interest receivable			6,326			5,001
Bank premises and equipment, net			18,332			17,170
Foreclosed assets held for sale			1,593			2,886
Deferred tax asset, net			93			2,618
Goodwill			28,388			28,388
Core deposit intangibles, net			1,123			1,247
Other assets			28,290			22,137
TOTAL ASSETS		$	1,745,466		$	1,654,145

LIABILITIES
Deposits:
Noninterest-bearing		$	353,707		$	285,904
Interest-bearing			1,027,471			966,756
Total deposits			1,381,178			1,252,660
Short-term borrowings			14,404			86,220
Long-term borrowings			72,904			52,127
Subordinated debt			6,500			6,500
Accrued interest and other liabilities			14,689			12,186
TOTAL LIABILITIES			1,489,675			1,409,693

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 13,934,996 and outstanding 13,807,157 at June 30, 2020;
issued 13,934,996 and outstanding 13,716,445 at December 31, 2019			13,935			13,935
Paid-in capital			103,954			104,519
Retained earnings			128,661			126,480
Treasury stock, at cost; 127,839 shares at June 30, 2020 and 218,551
shares at December 31, 2019			(2,470)			(4,173)
Accumulated other comprehensive income			11,711			3,691
TOTAL STOCKHOLDERS' EQUITY			255,791			244,452
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	1,745,466		$	1,654,145

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)


	****	3 Months Ended				6 Months Ended
		June 30,		June 30,		June 30,		June 30,
		2020		2019		2020		2019
INTEREST INCOME
Interest and fees on loans:
Taxable		$	14,126	$	14,098	$	28,587	$	24,046
Tax-exempt			439		524		898		1,088
Interest on mortgages held for sale			15		6		21		9
Interest on balances with depository institutions			41		149		122		265
Income from available-for-sale debt securities:
Taxable			1,380		1,826		2,968		3,660
Tax-exempt			507		531		944		1,125
Dividends on marketable equity security			5		5		10		11
Total interest and dividend income			16,513		17,139		33,550		30,204
INTEREST EXPENSE
Interest on deposits			1,784		2,363		3,939		3,416
Interest on short-term borrowings			64		228		262		307
Interest on long-term borrowings			313		228		608		446
Interest on subordinated debt			106		115		213		115
Total interest expense			2,267		2,934		5,022		4,284
Net interest income			14,246		14,205		28,528		25,920
(Credit) provision for loan losses			(176)		(4)		1,352		(961)
Net interest income after (credit) provision for loan losses			14,422		14,209		27,176		26,881
NONINTEREST INCOME
Trust and financial management revenue			1,565		1,583		3,044		2,943
Brokerage revenue			343		361		676		668
Insurance commissions, fees and premiums			52		48		85		78
Service charges on deposit accounts			831		1,277		2,081		2,527
Service charges and fees			84		89		147		168
Interchange revenue from debit card transactions			718		699		1,449		1,342
Net gains from sale of loans			1,564		221		1,879		308
Loan servicing fees, net			(158)		35		(172)		63
Increase in cash surrender value of life insurance			98		99		202		191
Other noninterest income			431		437		1,418		967
Sub-total			5,528		4,849		10,809		9,255
Realized gains on available-for-sale debt securities, net			0		7		0		7
Total noninterest income			5,528		4,856		10,809		9,262
NONINTEREST EXPENSE
Salaries and wages			5,364		5,276		10,704		9,769
Pensions and other employee benefits			1,619		1,225		3,657		2,843
Occupancy expense, net			664		665		1,409		1,322
Furniture and equipment expense			311		333		669		634
Data processing expenses			1,040		962		2,058		1,765
Automated teller machine and interchange expense			275		277		572		466
Pennsylvania shares tax			423		347		845		694
Professional fees			464		331		843		553
Telecommunications			213		176		419		340
Directors' fees			178		141		348		324
Merger-related expenses			983		3,301		1,124		3,612
Other noninterest expense			1,723		1,689		3,662		3,408
Total noninterest expense			13,257		14,723		26,310		25,730
Income before income tax provision			6,693		4,342		11,675		10,413
Income tax provision			1,255		693		2,071		1,674
NET INCOME		$	5,438	$	3,649	$	9,604	$	8,739
EARNINGS PER COMMON SHARE - BASIC		$	0.39	$	0.27	$	0.70	$	0.67
EARNINGS PER COMMON SHARE - DILUTED		$	0.39	$	0.27	$	0.70	$	0.67

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

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Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)


	****	Three Months Ended				Six Months Ended
		June 30,				June 30,
	****	2020		2019		2020		2019
Net income		$	5,438	$	3,649	$	9,604	$	8,739

Unrealized holding gains on available-for-sale debt securities			2,835		5,163		10,075		9,424

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			0		0		88		214
Amortization of prior service cost and net actuarial loss included in
net periodic benefit cost			(6)		(7)		(14)		(15)
Other comprehensive (loss) gain on unfunded retirement obligations			(6)		(7)		74		199

Other comprehensive income before income tax			2,829		5,156		10,149		9,623
Income tax related to other comprehensive income			(592)		(1,083)		(2,129)		(2,021)

Net other comprehensive income			2,237		4,073		8,020		7,602

Comprehensive income		$	7,675	$	7,722	$	17,624	$	16,341

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)


	****	6 Months Ended
		June 30,		June 30,
		2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	9,604	$	8,739
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses			1,352		(961)
Realized gains on available-for-sale debt securities, net			0		(7)
Accretion and amortization on securities, net			802		505
Increase in cash surrender value of life insurance			(202)		(191)
Depreciation and amortization of bank premises and equipment			897		843
Other accretion and amortization, net			(578)		(138)
Stock-based compensation			424		431
Deferred income taxes			396		583
Decrease in fair value of servicing rights			396		148
Gains on sales of loans, net			(1,879)		(308)
Origination of loans held for sale			(60,830)		(9,783)
Proceeds from sales of loans held for sale			61,815		9,107
Increase in accrued interest receivable and other assets			(9,085)		(254)
Increase (decrease) in accrued interest payable and other liabilities			2,630		(1,188)
Other			15		58
Net Cash Provided by Operating Activities			5,757		7,584
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents used in business combination			0		(1,778)
Proceeds from maturities of certificates of deposit			250		100
Proceeds from sales of available-for-sale debt securities			6,722		95,139
Proceeds from calls and maturities of available-for-sale debt securities			43,718		34,825
Purchase of available-for-sale debt securities			(26,632)		(26,662)
Redemption of Federal Home Loan Bank of Pittsburgh stock			5,076		6,723
Purchase of Federal Home Loan Bank of Pittsburgh stock			(3,616)		(3,148)
Net increase in loans			(58,591)		(30,385)
Proceeds from bank owned life insurance			0		796
Purchase of premises and equipment			(2,085)		(925)
Proceeds from sale of foreclosed assets			1,265		227
Other			116		75
Net Cash (Used in) Provided by Investing Activities			(33,777)		74,987
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			128,464		26,931
Net decrease in short-term borrowings			(71,822)		(96,990)
Proceeds from long-term borrowings			25,891		22,500
Repayments of long-term borrowings and subordinated debt			(5,114)		(25,517)
Sale of treasury stock			124		198
Purchase of vested restricted stock			(163)		(189)
Common dividends paid			(6,670)		(7,386)
Net Cash Provided by (Used in) Financing Activities			70,710		(80,453)
INCREASE IN CASH AND CASH EQUIVALENTS			42,690		2,118
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			31,122		32,827
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	73,812	$	34,945
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Right-of-use assets recognized at adoption of ASU 2016-02		$	0	$	1,132
Leased assets obtained in exchange for new operating lease liabilities		$	0	$	745
Assets acquired through foreclosure of real estate loans		$	0	$	824
Interest paid		$	4,961	$	3,846
Income taxes paid		$	42	$	950

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

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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, 2020	Shares	****	Shares	****	Stock		****	Capital		****	Earnings		****	Income (Loss)		****	Stock		****	Total
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

Three Months Ended June 30, 2019
Balance, March 31, 2019	12,655,171	****	262,127		$	12,655		$	71,963		$	123,155		$	(641)		$	(5,005)		$	202,127
Net income			—			—			—			3,649			—			—			3,649
Other comprehensive income, net			—			—			—			—			4,073			—			4,073
Cash dividends declared on common stock, .27 per share			—			—			—			(3,692)			—			—			(3,692)
Shares issued for dividend reinvestment plan			(12,685)			—			126			—			—			242			368
Shares issued from treasury and redeemed related to exercise of stock options			(5,433)			—			(68)			—			—			104			36
Forfeiture of restricted stock			2,988			—			57			—			—			(57)			0
Stock-based compensation expense			—			—			202			—			—			—			202
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs	1,279,825		—			1,280			31,673			—			—			—			32,953
Balance, June 30, 2019	13,934,996	****	246,997		$	13,935		$	103,953		$	123,112		$	3,432		$	(4,716)		$	239,716

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
	Shares		Shares	Stock		Capital		Earnings		Income (Loss)		Stock		Total
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

Six Months Ended June 30, 2019
Balance, December 31, 2018	12,655,171	****	335,841	$	12,655	$	72,602	$	122,643	$	(4,170)	$	(6,362)	$	197,368
Net income									8,739						8,739
Other comprehensive income, net											7,602				7,602
Cash dividends declared on common stock, .64 per share									(8,270)						(8,270)
Shares issued for dividend reinvestment plan			(33,172)				251						633		884
Shares issued from treasury and redeemed related to exercise of stock options			(18,071)				(146)						344		198
Restricted stock granted			(48,137)				(918)						918		0
Forfeiture of restricted stock			3,144				60						(60)		0
Stock-based compensation expense							431								431
Purchase of restricted stock for tax withholding			7,392										(189)		(189)
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs	1,279,825				1,280		31,673								32,953
Balance, June 30, 2019	13,934,996	****	246,997	****	13,935	$	103,953	$	123,112	$	3,432	$	(4,716)	$	239,716

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, 2019, 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 2019 information has been reclassified for consistency with the 2020 presentation.

Operating results reported for the six-month period ended June 30, 2020 might not be indicative of the results for the year ending December 31, 2020. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

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

Recent Accounting Pronouncements - Adopted

ASU 2018-13, Fair Value Measurement (Topic 820) modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU became effective for the Corporation beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. Note 12 provides disclosure regarding fair value measurements of the Corporation’s financial instruments. Adoption of this ASU did not have a material impact on the Corporation’s consolidated financial position or results of operations. 9

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

●	Simplifies accounting for contract modifications, including modifications to loans receivable and debt, by prospectively adjusting the effective interest rate.
●	Simplifies the assessment of hedge effectiveness and allows hedging relationships affected by reference rate reform to continue.
---	---

The amendments in ASU 2020-04 are effective as of March 12, 2020 through December 31, 2022. The Corporation expects to apply the amendments prospectively for applicable loan and other contracts within the effective period of ASU 2020-04.

BUSINESS COMBINATION AND PENDING ACQUISITION

Business Combination – Acquisition of Monument Bancorp, Inc.

On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank.

Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000. 10

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. 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 or liabilities in 2020.

Merger-related expenses, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $3,301,000 in the second quarter 2019 and $3,612,000 in the six-month period ended June 30, 2019.

Acquisition of Covenant Financial, Inc.

In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”). In July 2020, the Corporation and Covenant announced the completion of the merger as of July 1, 2020. Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of PA. Under the terms of the Agreement and Plan of Merger, Covenant merged into the Corporation, and Covenant Bank merged into C&N Bank. In the transaction, Covenant shareholders elected to receive either 0.6212 shares of Corporation common stock or $16.50 in cash for each share of Covenant common stock owned, subject to proration to ensure that, overall, 25% of the Covenant shares were converted into cash and 75% of the Covenant shares were converted into Corporation stock. The election and proration process commenced in June 2020 and was completed in early July 2020. Holders of Covenant common stock prior to the consummation of the merger own approximately 12.9% of the Corporation’s common stock outstanding following the merger.

Based on the average of the high and low trading price of the Corporation’s common stock of $20.32 per share on July 1, 2020, the total purchase consideration is valued at approximately $63.3 million. As of June 30, 2020, Covenant reported total assets of $608 million, including gross loans of $472 million, total deposits of $480 million and total stockholders’ equity of $44 million. As of the date the Corporation’s June 30, 2020 financial statements are issued, some of the information required to be disclosed under U.S. GAAP was not available since, given the short period between the July 1, 2020 merger date and the financial statement issuance, the calculation of the fair value of all material Covenant assets acquired and liabilities assumed had not yet been completed.

Merger-related expenses related to the planned acquisition of Covenant totaled $983,000 in the second quarter 2020 and $1,124,000 in the six-month period ended June 30, 2020. Merger-related expenses include severance and similar expenses as well as initial expenses related to conversion of Covenant’s core customer data into the Corporation’s core system and legal and other professional expenses. Management estimates total pre-tax merger-related expenses associated with the Covenant transaction will be approximately $8.0 million, including remaining expenses of approximately $6.6 million. Most of the expenses are expected to be incurred in the third quarter 2020.

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. 11

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using weighted-average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation’s common stock during the period.


(In Thousands, Except Share and Per Share Data)		3 Months Ended				****	6 Months Ended
		June 30,		June 30,			June 30,		June 30,
		2020		2019			2020		2019
Basic
Net income		$	5,438	$	3,649		$	9,604	$	8,739
Less: Dividends and undistributed earnings allocated to participating securities			(33)		(19)			(54)		(46)
Net income attributable to common shares		$	5,405	$	3,630		$	9,550	$	8,693
Basic weighted-average common shares outstanding			13,710,118		13,597,848			13,697,617		12,956,916
Basic earnings per common share (a)		$	0.39	$	0.27		$	0.70	$	0.67
Diluted
Net income attributable to common shares		$	5,405	$	3,630		$	9,550	$	8,693
Basic weighted-average common shares outstanding			13,710,118		13,597,848			13,697,617		12,956,916
Dilutive effect of potential common stock arising from stock options			2,269		25,106			8,116		25,445
Diluted weighted-average common shares outstanding			13,712,387		13,622,954			13,705,733		12,982,361
Diluted earnings per common share (a)		$	0.39	$	0.27		$	0.70	$	0.67
Weighted-average nonvested restricted shares outstanding			88,514		70,366			77,093		68,016
(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 net income per share calculations. 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. There were no anti-dilutive instruments in the three-month and six-month periods ended June 30, 2019.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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
Six Months Ended June 30, 2020
Unrealized gains on 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


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Six Months Ended June 30, 2019
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		$	9,431		$	(1,980)		$	7,451
Reclassification adjustment for (gains) realized in income			(7)			1			(6)
Other comprehensive income on available-for-sale debt securities			9,424			(1,979)			7,445

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income			214			(45)			169
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(15)			3			(12)
Other comprehensive income on unfunded retirement obligations			199			(42)			157

Total other comprehensive income		$	9,623		$	(2,021)		$	7,602


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended June 30, 2020	****		****
Unrealized gains on 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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended June 30, 2019	****		****
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		$	5,170		$	(1,085)		$	4,085
Reclassification adjustment for (gains) realized in income			(7)			1			(6)
Other comprehensive income on available-for-sale debt securities			5,163			(1,084)			4,079
Unfunded pension and postretirement obligations:
Amortization of prior service cost and net actuarial loss
included in net periodic benefit cost			(7)			1			(6)
Other comprehensive loss on unfunded retirement obligations			(7)			1			(6)
Total other comprehensive income		$	5,156		$	(1,083)		$	4,073

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
Amortization of prior service cost and		Other noninterest expense
net actuarial loss included in net
periodic benefit cost (Before-Tax)
Reclassification adjustment for (gains)		Realized gains on available-for-sale
realized in income (Before-Tax)		debt securities, net
Income Tax effect		Income tax provision

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


(In Thousands)	****	Unrealized		****	Accumulated
		Gains			Unfunded			Other
	****	(Losses)		****	Retirement		****	Comprehensive
	****	on Securities		****	Obligations		****	Income (Loss)
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

Six Months Ended June 30, 2019
Balance, beginning of period		$	(4,307)		$	137		$	(4,170)
Other comprehensive income during six months ended June 30, 2019			7,445			157			7,602
Balance, end of period		$	3,138		$	294		$	3,432

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


(In Thousands)	****	Unrealized		****	****		****	Accumulated
		Gains			Unfunded			Other
		(Losses)			Retirement			Comprehensive
		on Securities			Obligations			Income (Loss)
Three Months Ended June 30, 2020	****		****
Balance, beginning of period		$	9,230		$	244		$	9,474
Other comprehensive income (loss) during three months ended June 30, 2020			2,242			(5)			2,237
Balance, end of period		$	11,472		$	239		$	11,711

Three Months Ended June 30, 2019		****	****
Balance, beginning of period		$	(941)		$	300		$	(641)
Other comprehensive income (loss) during three months ended June 30, 2019			4,079			(6)			4,073
Balance, end of period		$	3,138		$	294		$	3,432

CASH AND DUE FROM BANKS

Cash and due from banks at June 30, 2020 and December 31, 2019 include the following:


(In thousands)	****	June 30,		****	Dec. 31,
		2020			2019
Cash and cash equivalents		$	73,812		$	31,122
Certificates of deposit			3,830			4,080
Total cash and due from banks		$	77,642		$	35,202

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, 2020. Required reserves were $20,148,000 at December 31, 2019.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SECURITIES

Amortized cost and fair value of available-for-sale debt securities at June 30, 2020 and December 31, 2019 are summarized as follows:


(In Thousands)	****	June 30, 2020
					Gross			Gross
					Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of U.S. Government agencies		$	10,706		$	967		$	0		$	11,673
Obligations of states and political subdivisions:
Tax-exempt			86,897			4,786			(40)			91,643
Taxable			38,022			1,810			(48)			39,784
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			49,852			1,668			0			51,520
Residential collateralized mortgage obligations			87,527			1,951			(43)			89,435
Commercial mortgage-backed securities			44,664			3,469			0			48,133
Total available-for-sale debt securities		$	317,668		$	14,651		$	(131)		$	332,188


(In Thousands)	****	December 31, 2019
					Gross			Gross
	****			****	Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of U.S. Government agencies		$	16,380		$	620		$	0		$	17,000
Obligations of states and political subdivisions:
Tax-exempt			68,787			2,011			(38)			70,760
Taxable			35,446			927			(70)			36,303
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			58,875			472			(137)			59,210
Residential collateralized mortgage obligations			115,025			308			(610)			114,723
Commercial mortgage-backed securities			47,765			1,069			(107)			48,727
Total available-for-sale debt securities		$	342,278		$	5,407		$	(962)		$	346,723

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, 2020 and December 31, 2019:


June 30, 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 states and political subdivisions:
Tax-exempt		$	3,743		$	(40)		$	0		$	0		$	3,743		$	(40)
Taxable			1,476			(48)			0			0			1,476			(48)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential collateralized mortgage obligations			8,809			(43)			0			0			8,809			(43)
Total temporary impaired available for sale debt securities		$	14,028		$	(131)		$	0		$	0		$	14,028		$	(131)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2019		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 states and political subdivisions:
Tax-exempt		$	6,429		$	(38)		$	0		$	0		$	6,429		$	(38)
Taxable			5,624			(68)			161			(2)			5,785			(70)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies
Residential pass-through securities			9,771			(35)			14,787			(102)			24,558			(137)
Residential collateralized mortgage obligations			31,409			(195)			30,535			(415)			61,944			(610)
Commercial mortgage-backed securities			0			0			8,507			(107)			8,507			(107)
Total temporarily impaired available-for-sale debt securities		$	53,233		$	(336)		$	53,990		$	(626)		$	107,223		$	(962)

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


(In Thousands)		3 Months Ended				6 Months Ended
		June 30,		June 30,		June 30,		June 30,
	****	2020		2019		2020		2019
Gross realized gains from sales		$	0	$	7	$	52	$	7
Gross realized losses from sales			0		0		(52)		0
Net realized gains		$	0	$	7	$	0	$	7

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, 2020. 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, 2020
		Amortized			Fair
	****	Cost		****	Value
Due in one year or less		$	7,369		$	7,414
Due from one year through five years			33,740			35,119
Due from five years through ten years			38,294			40,729
Due after ten years			56,222			59,838
Sub-total			135,625			143,100
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			49,852			51,520
Residential collateralized mortgage obligations			87,527			89,435
Commercial mortgage-backed securities			44,664			48,133
Total		$	317,668		$	332,188

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 $196,620,000 at June 30, 2020 and $215,270,000 at December 31, 2019 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. 17

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 other-than-temporary impairment (“OTTI”) at June 30, 2020 is provided below.

Debt Securities

At June 30, 2020 and December 31, 2019, 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, 2020 and December 31, 2019 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 $8,671,000 at June 30, 2020 and $10,131,000 at December 31, 2019. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2020 and December 31, 2019. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

The Corporation’s marketable equity security, with a carrying value of $1,003,000 at June 30, 2020 and $979,000 at December 31, 2019, consisted exclusively of one mutual fund. There was an unrealized gain on the mutual fund of $3,000 at June 30, 2020 and an unrealized loss of $21,000 at December 31, 2019. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LOANS

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at June 30, 2020 and December 31, 2019 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type

(In Thousands)


	****	June 30,		****	Dec. 31,
		2020			2019
Residential mortgage:
Residential mortgage loans - first liens		$	493,214		$	510,641
Residential mortgage loans - junior liens			25,632			27,503
Home equity lines of credit			31,826			33,638
1-4 Family residential construction			15,621			14,798
Total residential mortgage			566,293			586,580
Commercial:
Commercial loans secured by real estate			293,304			301,227
Commercial and industrial			120,202			126,374
Small Business Administration - Paycheck Protection Program			97,103			0
Political subdivisions			43,134			53,570
Commercial construction and land			40,348			33,555
Loans secured by farmland			11,433			12,251
Multi-family (5 or more) residential			32,699			31,070
Agricultural loans			3,874			4,319
Other commercial loans			16,579			16,535
Total commercial			658,676			578,901
Consumer			16,444			16,741
Total			1,241,413			1,182,222
Less: allowance for loan losses			(11,026)			(9,836)
Loans, net		$	1,230,387		$	1,172,386

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $5,519,000 at June 30, 2020 and $2,482,000 at December 31, 2019. 19

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Effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The loans acquired from Monument were recorded at an initial fair value of $259,295,000. The gross amortized cost of loans acquired from Monument on April 1, 2019 was reduced $1,807,000 based on movements in interest rates (market rate adjustment) and was also reduced $1,914,000 based on a credit fair value adjustment on non-impaired loans and by $318,000 based on a credit fair value adjustment on impaired loans. In the last three quarters of 2019 and first six months of 2020, the Corporation recognized accretion of a portion of the market rate adjustment and credit adjustment on non-impaired loans, and a partial recovery of purchased credit impaired (PCI) loans. For the three-month and six-month periods ended June 30, 2020 and 2019, adjustments to the initial market rate and credit fair value adjustments were recognized as follows:


(In Thousands)	****
		3 Months Ended				6 Months Ended
		June 30,		June 30,		June 30,		June 30,
		2020		2019		2020		2019
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period		$	(1,268)	$	0	$	(1,415)	$	0
Market rate adjustment recorded in acquisition			0		(1,807)		0		(1,807)
Accretion recognized in interest income			165		149		312		149
Adjustments to gross amortized cost of loans at end of period		$	(1,103)	$	(1,658)	$	(1,103)	$	(1,658)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period		$	(1,011)	$	0	$	(1,216)	$	0
Credit adjustment recorded in acquisition			0		(1,914)		0		(1,914)
Accretion recognized in interest income			133		261		338		261
Adjustments to gross amortized cost of loans at end of period		$	(878)	$	(1,653)	$	(878)	$	(1,653)

PCI loans acquired from Monument were valued at $441,000 at April 1, 2019, which was $318,000 lower than the total outstanding balance of the loans. The fair values of all of the PCI loans were determined based on the estimated realizable value of underlying real estate collateral, net of estimated selling cost. In the first six months of 2020, the Corporation recorded interest income of $113,000 from the excess of proceeds received on the pay-off of PCI loans over their carrying amounts. A summary of PCI loans held at June 30, 2020 and December 31, 2019 is as follows:


(In Thousands)		June 30,			December 31,
	****	2020		****	2019
Outstanding balance		$	407		$	759
Carrying amount			305			441

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. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either June 30, 2020 or December 31, 2019.

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 (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. 20

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The maximum term of PPP loans is five years, though most of the Corporation’s PPP loans have two-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. Consistent with current SBA guidance, if a borrower uses an agent in the loan process, the Corporation would pay a percentage of the SBA fees to the agent. Fees on PPP loans, net of origination costs, will be 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. As of June 30, 2020, the recorded investment in PPP loans was $97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees received on PPP loans was included in interest and fees on (taxable) loans in the consolidated statements of income in the three-month and six-month periods ended June 30, 2020.

Section 4013 of 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 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

balances of modifications outstanding under the program at June 30, 2020 and July 31, 2020 (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) are as follows:


	Deferrals Remaining			Deferrals Remaining
	As of June 30, 2020			As of July 31, 2020
(Dollars in Thousands)	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
COVID-19-related loan modifications:
Residential mortgage	307	$	40,930	54	$	7,130
Consumer	36		364	—		—
Commercial	198		117,424	24		22,488
Total	541	$	158,718	78	$	29,618

The ultimate effect of COVID-19 on the local or broader economy is not known. In the first six months of 2020, the Corporation increased the allowance for loan losses $646,000, including $244,000 in the second quarter, based on an increase in qualitative factors related to potential deterioration in economic conditions. Further, in June 2020, the Corporation’s credit administration and commercial lending staffs performed a review of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance. Updated risk ratings and specific allowances based on that review have been included in the June 30, 2020 information presented below. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

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, 2020, and December 31, 2019, management determined that no allowance for credit losses related to unfunded loan commitments was required.

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and six-month periods ended June 30, 2020 and 2019 were as follows: 22

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Three Months Ended June 30, 2020		March 31,		****	****								****	June 30,
(In Thousands)	****	2020 Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	2020 Balance
Allowance for Loan Losses:	****		****
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
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
Consumer			273			(39)			16			13			263
Unallocated			585			0			0			0			585
Total Allowance for Loan Losses		$	11,330		$	(146)		$	18		$	(176)		$	11,026


Three Months Ended June 30, 2019		March 31,		****	****								****	June 30,
(In Thousands)	****	2019 Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	2019 Balance
Allowance for Loan Losses:	****		****
Residential mortgage:
Residential mortgage loans - first liens		$	3,178		$	(33)		$	1		$	(16)		$	3,130
Residential mortgage loans - junior liens			329			0			0			4			333
Home equity lines of credit			286			0			1			(7)			280
1-4 Family residential construction			198			0			0			22			220
Total residential mortgage			3,991			(33)			2			3			3,963
Commercial:
Commercial loans secured by real estate			1,887			0			0			(310)			1,577
Commercial and industrial			1,069			(6)			1			182			1,246
Commercial construction and land			114			0			0			38			152
Loans secured by farmland			98			0			0			4			102
Multi-family (5 or more) residential			112			0			0			38			150
Agricultural loans			43			0			0			(1)			42
Other commercial loans			121			0			0			(2)			119
Total commercial			3,444			(6)			1			(51)			3,388
Consumer			236			(29)			13			44			264
Unallocated			585			0			0			0			585
Total Allowance for Loan Losses		$	8,256		$	(68)		$	16		$	(4)		$	8,200

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


	****	Dec. 31,		****							June 30,
Six Months Ended June 30, 2020		2019							Provision		2020
(In Thousands)		Balance			Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
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
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
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


	****	Dec. 31,		****							June 30,
Six Months Ended June 30, 2019		2018							Provision		2019
(In Thousands)		Balance			Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens		$	3,156		$	(83)	$	2	$	55	$	3,130
Residential mortgage loans - junior liens			325			(24)		0		32		333
Home equity lines of credit			302			0		4		(26)		280
1-4 Family residential construction			203			0		0		17		220
Total residential mortgage			3,986			(107)		6		78		3,963
Commercial:
Commercial loans secured by real estate			2,538			0		0		(961)		1,577
Commercial and industrial			1,553			(6)		3		(304)		1,246
Commercial construction and land			110			0		0		42		152
Loans secured by farmland			102			0		0		0		102
Multi-family (5 or more) residential			114			0		0		36		150
Agricultural loans			46			0		0		(4)		42
Other commercial loans			128			0		0		(9)		119
Total commercial			4,591			(6)		3		(1,200)		3,388
Consumer			233			(66)		22		75		264
Unallocated			499			0		0		86		585
Total Allowance for Loan Losses		$	9,309		$	(179)	$	31	$	(961)	$	8,200

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the evaluation of the loan portfolio, management determines two major components for the allowance for loan losses – (1) a specific component based on an assessment of certain larger relationships, mainly commercial purpose loans, on a loan-by-loan basis; and (2) a general component for the remainder of the portfolio, except for performing loans purchased from Monument, based on a collective evaluation of pools of loans with similar risk characteristics. The general component is assigned to each pool of loans based on both historical net charge-off experience, and an evaluation of certain qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the above methodologies for estimating specific and general losses in the portfolio.

Performing loans acquired from Monument are presented net of a discount for credit losses of $878,000 at June 30, 2020 and $1,216,000 at December 31, 2019. 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. At June 30, 2020, it was determined that five purchased loans to two borrowers with recorded investments totaling $6,075,000 were found to be impaired. Specific allowances totaling $350,000 were recorded on these loans at June 30, 2020, based on the excess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

The credit for loan losses of $176,000 in the second quarter 2020 included the benefit of repayment of a commercial construction loan for less than the full principal balance, resulting in a charge-off of $107,000 as compared to a specific allowance on the loan of $674,000 at March 31, 2020.

For the first six months of 2020, the provision for loan losses was $1,352,000, an increase in expense of $2,313,000 as compared to the credit for loan losses of $961,000 recorded in the first six months of 2019. In 2020, the provision includes the effects of recording a specific allowance of $1,193,000 on a commercial loan in the first quarter, partially offset by the benefit from the previously described repayment of the commercial construction loan in the second quarter. In total, the provision for the first six months of 2020 included a net charge of $1,067,000 related to specific loans (net increase in specific allowances on loans of $905,000 and net charge-offs of $162,000); a charge of $646,000 attributable to increases in qualitative factors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $89,000 in the net charge-off experience factors used to estimate the allowance. No provision for loan losses was recognized on PPP loans because the SBA guarantees the loans, subject to compliance with program requirements. The credit for loan losses in the first six months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired.

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. 25

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The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2020 and December 31, 2019:

June 30, 2020

(In Thousands)


	****									Purchased
				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Residential Mortgage:
Residential Mortgage loans - first liens		$	480,338	$	2,977	$	9,822	$	0	$	77	$	493,214
Residential Mortgage loans - junior liens			24,990		130		512		0		0		25,632
Home Equity lines of credit			31,115		59		652		0		0		31,826
1-4 Family residential construction			15,621		0		0		0		0		15,621
Total residential mortgage			552,064		3,166		10,986		0		77		566,293
Commercial:
Commercial loans secured by real estate			276,776		6,536		9,764		0		228		293,304
Commercial and Industrial			107,788		6,225		2,689		3,500		0		120,202
Small Business Administration - Paycheck
Protection Program			97,103		0		0		0		0		97,103
Political subdivisions			43,134		0		0		0		0		43,134
Commercial construction and land			40,082		198		68		0		0		40,348
Loans secured by farmland			9,819		728		886		0		0		11,433
Multi-family (5 or more) residential			29,364		2,434		901		0		0		32,699
Agricultural loans			3,261		0		613		0		0		3,874
Other commercial loans			16,579		0		0		0		0		16,579
Total commercial			623,906		16,121		14,921		3,500		228		658,676
Consumer			16,345		0		99		0		0		16,444
Totals		$	1,192,315	$	19,287	$	26,006	$	3,500	$	305	$	1,241,413

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2019

(In Thousands)


	****									Purchased
				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Residential Mortgage:
Residential Mortgage loans - first liens		$	500,963	$	193	$	9,324	$	84	$	77	$	510,641
Residential Mortgage loans - junior liens			26,953		79		471		0		0		27,503
Home Equity lines of credit			33,170		59		409		0		0		33,638
1-4 Family residential construction			14,798		0		0		0		0		14,798
Total residential mortgage			575,884		331		10,204		84		77		586,580
Commercial:
Commercial loans secured by real estate			294,397		4,773		1,693		0		364		301,227
Commercial and Industrial			114,293		9,538		2,543		0		0		126,374
Political subdivisions			53,570		0		0		0		0		53,570
Commercial construction and land			32,224		0		1,331		0		0		33,555
Loans secured by farmland			6,528		4,681		1,042		0		0		12,251
Multi-family (5 or more) residential			30,160		0		910		0		0		31,070
Agricultural loans			3,343		335		641		0		0		4,319
Other commercial loans			16,416		0		119		0		0		16,535
Total commercial			550,931		19,327		8,279		0		364		578,901
Consumer			16,720		0		21		0		0		16,741
Totals		$	1,143,535	$	19,658	$	18,504	$	84	$	441	$	1,182,222

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, or (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful. The pools of loans are evaluated for loss exposure based upon average historical net charge-off rates for each loan class, adjusted for qualitative factors (described in the following paragraphs). The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. At June 30, 2020 and December 31, 2019, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes.

Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. 27

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Loans are classified as impaired, when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial loans, by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Loans that are individually reviewed, but which are determined to not be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually reviewed, but which have been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of June 30, 2020 and December 31, 2019. All loans classified as troubled debt restructurings (discussed in more detail below) and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment. 28

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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, 2020 and December 31, 2019.

June 30, 2020

(In Thousands)


	****	Loans:								Allowance for Loan Losses:
						Purchased
		Individually		Collectively		Performing				Individually		Collectively
		Evaluated		Evaluated		Loans		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens		$	1,358	$	391,116	$	100,740	$	493,214	$	10	$	3,521	$	3,531
Residential mortgage loans - junior liens			355		23,422		1,855		25,632		154		211		365
Home equity lines of credit			0		30,540		1,286		31,826		0		287		287
1-4 Family residential construction			0		15,621		0		15,621		0		137		137
Total residential mortgage			1,713		460,699		103,881		566,293		164		4,156		4,320
Commercial:
Commercial loans secured by real estate			7,501		186,066		99,737		293,304		494		1,932		2,426
Commercial and industrial			4,645		112,891		2,666		120,202		1,264		1,232		2,496
Small Business Administration - Paycheck
Protection Program			0		97,103		0		97,103		0		0		0
Political subdivisions			0		43,134		0		43,134		0		0		0
Commercial construction and land			0		40,348		0		40,348		0		420		420
Loans secured by farmland			421		10,758		254		11,433		34		112		146
Multi-family (5 or more) residential			0		11,195		21,504		32,699		0		163		163
Agricultural loans			0		3,874		0		3,874		0		40		40
Other commercial loans			0		16,031		548		16,579		0		167		167
Total commercial			12,567		521,400		124,709		658,676		1,792		4,066		5,858
Consumer			0		16,444		0		16,444		0		263		263
Unallocated															585

Total		$	14,280	$	998,543	$	228,590	$	1,241,413	$	1,956	$	8,485	$	11,026

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2019

(In Thousands)


	****	Loans:								Allowance for Loan Losses:
						Purchased
		Individually		Collectively		Performing				Individually		Collectively
		Evaluated		Evaluated		Loans		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens		$	1,023	$	405,186	$	104,432	$	510,641	$	0	$	3,405	$	3,405
Residential mortgage loans - junior liens			368		24,730		2,405		27,503		176		208		384
Home equity lines of credit			0		32,147		1,491		33,638		0		276		276
1-4 Family residential construction			0		14,640		158		14,798		0		117		117
Total residential mortgage			1,391		476,703		108,486		586,580		176		4,006		4,182
Commercial:
Commercial loans secured by real estate			684		198,532		102,011		301,227		0		1,921		1,921
Commercial and industrial			1,467		122,313		2,594		126,374		149		1,242		1,391
Political subdivisions			0		53,570		0		53,570		0		0		0
Commercial construction and land			1,261		29,710		2,584		33,555		678		288		966
Loans secured by farmland			607		11,386		258		12,251		48		110		158
Multi-family (5 or more) residential			0		10,617		20,453		31,070		0		156		156
Agricultural loans			76		4,243		0		4,319		0		41		41
Other commercial loans			0		15,947		588		16,535		0		155		155
Total commercial			4,095		446,318		128,488		578,901		875		3,913		4,788
Consumer			0		16,741		0		16,741		0		281		281
Unallocated			585

Total		$	5,486	$	939,762	$	236,974	$	1,182,222	$	1,051	$	8,200	$	9,836

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Summary information related to impaired loans at June 30, 2020 and December 31, 2019 is provided in the table immediately below. Purchased credit impaired loans of $305,000 at June 30, 2020 and $441,000 at December 31, 2019 are excluded from the table.


(In Thousands)		June 30, 2020									December 31, 2019
		Unpaid									Unpaid
		Principal			Recorded			Related			Principal			Recorded			Related
	****	Balance		****	Investment		****	Allowance		****	Balance		****	Investment		****	Allowance
With no related allowance recorded:
Residential mortgage loans - first liens		$	179		$	152		$	0		$	645		$	617		$	0
Residential mortgage loans - junior liens			41			41			0			42			42			0
Commercial loans secured by real estate			747			747			0			684			684			0
Commercial and industrial			1,065			1,065			0			563			563			0
Loans secured by farmland			86			86			0			129			129			0
Agricultural loans			0			0			0			76			76			0
Total with no related allowance recorded			2,118			2,091			0			2,139			2,111			0

With a related allowance recorded:
Residential mortgage loans - first liens			1,206			1,206			10			406			406			0
Residential mortgage loans - junior liens			314			314			154			326			326			176
Commercial loans secured by real estate			6,754			6,754			494			0			0			0
Commercial and industrial			3,580			3,580			1,264			904			904			149
Construction and other land loans			0			0			0			1,261			1,261			678
Loans secured by farmland			335			335			34			478			478			48
Total with a related allowance recorded			12,189			12,189			1,956			3,375			3,375			1,051
Total		$	14,307		$	14,280		$	1,956		$	5,514		$	5,486		$	1,051

In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $154,000 at June 30, 2020 and $176,000 at December 31, 2019. 31

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)									Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
	3 Months Ended				6 Months Ended				3 Months Ended				6 Months Ended
	June 30,				June 30,				June 30,				June 30,
	2020		2019		2020		2019		2020		2019		2020		2019
Residential mortgage:
Residential mortgage loans - first lien	$	1,398	$	970	$	1,315	$	977	$	35	$	8	$	43	$	18
Residential mortgage loans - junior lien		391		289		387		290		13		0		13		2
Home equity lines of credit		65		0		65		0		1		0		2		0
Total residential mortgage		1,854		1,259		1,767		1,267		49		8		58		20
Commercial:
Commercial loans secured by real estate		3,771		1,722		2,079		2,582		12		7		16		17
Commercial and industrial		4,460		1,241		3,666		1,546		19		8		20		34
Commercial construction and land		678		0		993		0		1		0		13		0
Loans secured by farmland		422		1,533		469		1,471		7		18		24		19
Agricultural loans		76		626		76		639		2		12		2		24
Other commercial loans		25		0		37		0		0		0		1		0
Total commercial		9,432		5,122		7,320		6,238		41		45		76		94
Consumer		0		0		0		6		0		0		0		0
Total	$	11,286	$	6,381	$	9,087	$	7,511	$	90	$	53	$	134	$	114

Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans, including impaired loans, is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. 32

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)		June 30,2020						December 31,2019
		Past Due						Past Due
		90+ Days and						90+ Days and
	****	Accruing		****	Nonaccrual		****	Accruing		****	Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens		$	1,545		$	5,888		$	878		$	4,679
Residential mortgage loans - junior liens			59			344			53			326
Home equity lines of credit			243			273			71			73
1-4 Family residential construction			0			39			0			0
Total residential mortgage			1,847			6,544			1,002			5,078
Commercial:
Commercial loans secured by real estate			558			7,482			107			1,148
Commercial and industrial			135			4,227			15			1,051
Commercial construction and land			0			50			0			1,311
Loans secured by farmland			188			421			43			565
Other commercial			0			0			0			49
Total commercial			881			12,180			165			4,124
Consumer			84			39			40			16

Totals		$	2,812		$	18,763		$	1,207		$	9,218

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. 33

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The table below presents a summary of the contractual aging of loans as of June 30, 2020 and December 31, 2019:


(In Thousands)		As of June 30, 2020											As of December 31, 2019
	****	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
Residential mortgage:
Residential mortgage loans - first liens		$	484,129		$	5,111		$	3,974	$	493,214		$	499,024		$	7,839	$	3,778	$	510,641
Residential mortgage loans - junior liens			25,482			4			146		25,632			27,041			83		379		27,503
Home equity lines of credit			31,246			337			243		31,826			33,115			452		71		33,638
1-4 Family residential construction			15,621			0			0		15,621			14,758			40		0		14,798
Total residential mortgage			556,478			5,452			4,363		566,293			573,938			8,414		4,228		586,580

Commercial:
Commercial loans secured by real estate			291,728			245			1,331		293,304			299,640			737		850		301,227
Commercial and industrial			116,429			67			3,706		120,202			126,221			16		137		126,374
Small Business Administration -
Paycheck Protection Program			97,103			0			0		97,103			0			0		0		0
Political subdivisions			43,134			0			0		43,134			53,570			0		0		53,570
Commercial construction and land			39,947			351			50		40,348			33,505			0		50		33,555
Loans secured by farmland			11,159			52			222		11,433			11,455			666		130		12,251
Multi-family (5 or more) residential			32,699			0			0		32,699			31,070			0		0		31,070
Agricultural loans			3,800			74			0		3,874			4,318			1		0		4,319
Other commercial loans			16,553			26			0		16,579			16,535			0		0		16,535
Total commercial			652,552			815			5,309		658,676			576,314			1,420		1,167		578,901
Consumer			16,205			124			115		16,444			16,496			189		56		16,741
Totals		$	1,225,235		$	6,391		$	9,787	$	1,241,413		$	1,166,748		$	10,023	$	5,451	$	1,182,222

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at June 30, 2020 and December 31, 2019 is as follows:


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Total
June 30, 2020 Nonaccrual Totals		$	10,521		$	1,267		$	6,975		$	18,763
December 31, 2019 Nonaccrual Totals		$	3,840		$	1,134		$	4,244		$	9,218

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, 2020 and December 31, 2019 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, 2020 Totals		$	172		$	93		$	338		$	452		$	1,055
December 31, 2019 Totals		$	889		$	0		$	0		$	1,737		$	2,626

At June 30, 2020 and December 31, 2019, 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, 2020 and 2019 are as follows:


	Three Months Ended			Three Months Ended
	June 30, 2020			June 30, 2019
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
(Balances in Thousands)	Loans	Investment		Loans	Investment
Commercial and industrial,
Interest only payments for a nine-month period	1	$	240	0	$	0


(Balances in Thousands)	Six Months Ended				Six Months Ended
	June 30, 2020				June 30, 2019
		****	Post-			****	Post-
	Number		Modification		Number		Modification
	of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment
Residential mortgage - first liens,
Reduced monthly payments and extended maturity date	0		$	0	1		$	271
Residential mortgage - junior liens:
Reduced monthly payments and extended maturity date	0			0	1			18
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted	1			30	0			0
Commercial and industrial:
Reduced monthly payments and extended maturity date	0			0	8			177
Interest only payments for a nine-month period	1			240	0			0
Agricultural loans,
Reduced monthly payments and extended maturity date	0			0	1			84
Total	2		$	270	11		$	550

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

All of the loans for which TDRs were granted in the table above in the six-month period ended June 30, 2019 are associated with one relationship.

In the three-month and six-month periods ended June 30, 2020 and 2019, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months.

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,		Dec. 31,
	2020		2019
Foreclosed residential real estate	$	118	$	292

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,		Dec. 31,
	2020		2019
Residential real estate in process of foreclosure	$	1,502	$	1,717

GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles, net are as follows:


(In Thousands)	****	June 30,		****	December 31,
		2020			2019
Gross amount		$	3,495		$	3,495
Accumulated amortization			(2,372)			(2,248)
Net		$	1,123		$	1,247

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


(In Thousands)	3 Months Ended				6 Months Ended
	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
Amortization expense	$	62	$	73	$	124	$	75

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At June 30, 2020 and December 31, 2019, the carrying value of goodwill is $28,388,000.

Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. In 2020, the COVID-19 pandemic led to government-imposed emergency restrictions that substantially limited the operation of non-essential businesses and the activities of individuals. These restrictions had significant adverse effects on macroeconomic conditions. After a period when the virus appeared to have subsided in Pennsylvania and throughout many parts of the US, the number of cases and mortality levels have increased in recent weeks. Broader US stock market valuations decreased significantly in the latter part of the first quarter and early second quarter 2020 but more recently have bounced back to levels consistent with pre-COVID-19 conditions. Bank stock valuations have lagged, reflecting market concerns about potential credit losses and the effects of a substantial drop in interest rates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In light of the adverse circumstances resulting from COVID-19, management determined it necessary to evaluate goodwill for impairment at June 30, 2020. 36

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The average closing price (trading price) of the Corporation’s common stock was $20.24 per share for the month of June 2020, down from an average closing price of $26.05 in the fourth quarter 2019. The average closing price for the last 10 trading days of the second quarter 2020 (June 17 through June 30, 2020) was $20.14 per share. In comparison, the book value per share of the Corporation’s common stock at June 30, 2020 was $18.53 per share. In testing goodwill for impairment as of June 30, 2020, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded its carrying value. Accordingly, there was no goodwill impairment at June 30, 2020.

BORROWED FUNDS AND SUBORDINATED DEBT

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


(In Thousands)	****	June 30,		****	Dec. 31,
		2020			2019
FHLB-Pittsburgh borrowings		$	12,200		$	84,292
Customer repurchase agreements			2,204			1,928
Total short-term borrowings		$	14,404		$	86,220

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


(In Thousands)	****	June 30,		****	Dec. 31,
		2020			2019
Overnight borrowing		$	0		$	64,000
Other short-term advances			12,200			20,292
Total short-term FHLB-Pittsburgh borrowings		$	12,200		$	84,292

At June 30, 2020, other short-term advances included five advances totaling $12,200,000 with a weighted-average interest rate of 1.59%.

The Corporation had available credit with other correspondent banks totaling $45,000,000 at June 30, 2020 and December 31, 2019. These lines of credit are primarily unsecured. No amounts were outstanding at June 30, 2020 or December 31, 2019.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At June 30, 2020, the Corporation had available credit in the amount of $14,605,000 on this line with no outstanding advances. At December 31, 2019, the Corporation had available credit in the amount of $14,244,000 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 $15,092,000 at June 30, 2020 and $14,728,000 at December 31, 2019.

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, 2020 and December 31, 2019. The carrying value of the underlying securities was $2,240,000 at June 30, 2020 and $1,951,000 at December 31, 2019. 37

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $759,623,000 at June 30, 2020 and $778,877,000 at December 31, 2019. 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) were $8,671,000 at June 30, 2020 and $10,131,000 at December 31, 2019. 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, 2020. The Corporation’s total credit facility with FHLB-Pittsburgh was $571,597,000 at June 30, 2020, including an unused (available) amount of $486,093,000. At December 31, 2019, the Corporation’s total credit facility with FHLB-Pittsburgh was $552,546,000, including an unused (available) amount of $416,127,000.

LONG-TERM BORROWINGS

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


(In Thousands)	****	June 30,		****	Dec. 31,
		2020			2019
Loans matured in 2020 with a weighted-average rate of 2.71%		$	0		$	5,069
Loans maturing in 2021 with a weighted-average rate of 1.63%			20,000			6,000
Loans maturing in 2022 with a weighted-average rate of 1.90%			22,355			20,000
Loans maturing in 2023 with a weighted-average rate of 1.63%			22,500			20,500
Loans maturing in 2024 with a weighted-average rate of 1.27%			7,536			0
Loan maturing in 2025 with a rate of 4.91%			513			558
Total long-term FHLB-Pittsburgh borrowings		$	72,904		$	52,127

At June 30, 2020 and December 31, 2019, the Corporation has outstanding subordinated debt agreements with par values totaling $6,500,000, maturing April 1, 2027, which may be redeemed at par beginning April 1, 2022. The agreements have fixed annual interest rates of 6.50%. At June 30, 2020 and December 31, 2019, the carrying value of the subordinated debt on the consolidated balance sheets is $6,500,000.

STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the first quarter 2020, the Corporation awarded 48,284 shares of restricted stock under the Stock Incentive Plan and 7,580 shares of restricted stock under the Independent Directors Stock Incentive Plan. The 2020 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and include 30,381 time-based awards with a total fair value of $801,000 at the date of grant and 17,903 performance-based awards with a total fair value of $343,000 at date of grant. The 2020 restricted stock issued under the Independent Directors Stock Incentive Plan are time-based awards, vesting over one year, with a total fair value of $200,000 at the date of grant.

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, 2020 is estimated to total $893,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $230,000 in the second quarter 2020 and $202,000 in the second quarter 2019. Total stock-based compensation expense attributable to restricted stock awards amounted to $424,000 in the six-month period ended June 30, 2020 and $431,000 in the six-month period ended June 30, 2019.

CONTINGENCIES

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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets at fair value. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. FASB topic 820, “Fair Value Measurements and Disclosures” establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs used in determining valuations into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. 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 through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets 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 becoming active or inactive, changes in the availability of quoted prices, or changes in the availability of other market data.

At June 30, 2020 and December 31, 2019, assets measured at fair value and the valuation methods used are as follows:


		June 30, 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
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies		$	0		$	11,673	$	0	$	11,673
Obligations of states and political subdivisions:
Tax-exempt			0			91,643		0		91,643
Taxable			0			39,784		0		39,784
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			51,520		0		51,520
Residential collateralized mortgage obligations			0			89,435		0		89,435
Commercial mortgage-backed securities			0			48,133		0		48,133
Total available for sale debt Securities			0			332,188		0		332,188
Marketable equity security			1,003			0		0		1,003
Servicing rights			0			0		1,284		1,284
Total recurring fair value measurements		$	1,003		$	332,188	$	1,284	$	334,475

Nonrecurring fair value measurements
Impaired loans with a valuation allowance		$	0		$	0	$	12,189	$	12,189
Valuation allowance			0			0		(1,956)		(1,956)
Impaired loans, net			0			0		10,233		10,233
Foreclosed assets held for sale			0			0		1,593		1,593
Total nonrecurring fair value measurements		$	0		$	0	$	11,826	$	11,826

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


		December 31, 2019
	****	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
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies		$	0		$	17,000	$	0	$	17,000
Obligations of states and political subdivisions:
Tax-exempt			0			70,760		0		70,760
Taxable			0			36,303		0		36,303
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			59,210		0		59,210
Residential collateralized mortgage obligations			0			114,723		0		114,723
Commercial mortgage-backed securities			0			48,727		0		48,727
Total available-for-sale debt securities			0			346,723		0		346,723
Marketable equity security			979			0		0		979
Servicing rights			0			0		1,277		1,277
Total recurring fair value measurements		$	979		$	346,723	$	1,277	$	348,979

Nonrecurring fair value measurements
Impaired loans with a valuation allowance		$	0		$	0	$	3,375	$	3,375
Valuation allowance			0			0		(1,051)		(1,051)
Impaired loans, net			0			0		2,324		2,324
Foreclosed assets held for sale			0			0		2,886		2,886
Total nonrecurring fair value measurements		$	0		$	0	$	5,210	$	5,210

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. 40

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At June 30, 2020 and December 31, 2019, 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
		6/30/20		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				6/30/20
Servicing rights		$	1,284	Discounted cash flow	Discount rate		12.50	%	Rate used through modeling period
					Loan prepayment speeds		285.00	%	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
		12/31/19		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				12/31/19
Servicing rights		$	1,277	Discounted cash flow	Discount rate		12.50	%	Rate used through modeling period
					Loan prepayment speeds		183.00	%	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, 2020		****	June 30, 2019		****	June 30, 2020		****	June 30, 2019
Servicing rights balance, beginning of period		$	1,226		$	1,347		$	1,277		$	1,404
Originations of servicing rights			328			46			403			66
Unrealized losses included in earnings			(270)			(71)			(396)			(148)
Servicing rights balance, end of period		$	1,284		$	1,322		$	1,284		$	1,322

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using 41

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q 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.42

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At June 30, 2020 and December 31, 2019, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:


(In Thousands, Except	****									Weighted
Percentages)				Valuation						Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		6/30/20		6/30/20		6/30/20		Technique	Inputs	6/30/20

Impaired loans:
Residential mortgage loans -
first and junior liens		$	1,520	$	164	$	1,355	Sales comparison	Discount to appraised value	31	%
Commercial:
Commercial loans secured by real estate			6,754		494		6,261	Sales comparison	Discount to appraised value	38	%
Commercial and industrial			3,580		1,264		2,316	Liquidation of assets	Discount to appraised value	35	%
Loans secured by farmland			335		34		302	Sales comparison	Discount to appraised value	42	%
Total impaired loans		$	12,189	$	1,956	$	10,234
Foreclosed assets held for sale -
real estate:
Residential (1-4 family)		$	118	$	0	$	118	Sales comparison	Discount to appraised value	55	%
Land			70		0		70	Sales comparison	Discount to appraised value	53	%
Commercial real estate			1,405		0		1,405	Sales comparison	Discount to appraised value	38	%
Total foreclosed assets held for sale		$	1,593	$	0	$	1,593

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


(In Thousands, Except	****									Weighted
Percentages)		Valuation								Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		12/31/19		12/31/19		12/31/19		Technique	Inputs	12/31/19	****

Impaired loans:
Residential mortgage loans -
first and junior liens		$	732	$	176	$	556	Sales comparison	Discount to appraised value	30	%
Commercial:
Commercial and industrial			106		89		17	Sales comparison	Discount to appraised value	69	%
Commercial and industrial			798		60		738	Liquidation of accounts receivable	Discount to borrower's financial statement value	15	%
Commercial construction and land			1,261		678		583	Sales comparison	Discount to appraised value	47	%
Loans secured by farmland			478		48		430	Sales comparison	Discount to appraised value	46	%
Total impaired loans		$	3,375	$	1,051	$	2,324
Foreclosed assets held for sale -
real estate:
Residential (1-4 family)		$	292	$	0	$	292	Sales comparison	Discount to appraised value	46	%
Land			70		0		70	Sales comparison	Discount to appraised value	53	%
Commercial real estate			2,524		0		2,524	Sales comparison	Discount to appraised value	39	%
Total foreclosed assets held for sale		$	2,886	$	0	$	2,886

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. 44

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)		Fair Value		June 30, 2020						December 31, 2019
		Hierarchy		Carrying			Fair			Carrying			Fair
	****	Level	****	Amount		****	Value		****	Amount		****	Value
Financial assets:
Cash and cash equivalents		Level 1		$	73,812		$	73,812		$	31,122		$	31,122
Certificates of deposit		Level 2			3,830			4,078			4,080			4,227
Restricted equity securities (included in Other Assets)		Level 2			8,861			8,861			10,321			10,321
Loans, net		Level 3			1,230,387			1,236,040			1,172,386			1,181,000
Accrued interest receivable		Level 2			6,326			6,326			5,001			5,001

Financial liabilities:
Deposits with no stated maturity		Level 2			1,039,401			1,039,401			877,965			877,965
Time deposits		Level 2			341,777			344,959			374,695			376,738
Short-term borrowings		Level 2			14,404			14,271			86,220			86,166
Long-term borrowings		Level 2			72,904			74,545			52,127			52,040
Accrued interest payable		Level 2			312			312			311			311

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
---	---
●	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) OUTBREAK

The Corporation’s Pandemic Committee has been very active since March 2020, providing frequent communication with employees and clients by telephone, video conference, email and digital tools, while substantially limiting business travel. Since the pandemic began, the Committee instituted measures to protect the health of employees and clients, including temporarily operating branch locations on a drive-through only basis and transitioning a significant portion of the Corporation’s employees to remote work. Currently all branches are open for walk-in traffic though some branches are running on reduced hours. Many employees who were working from home have returned to the offices where social distancing allows. No furloughs or layoffs of employees have been made to date.

Emergency restrictions on the activities of businesses and individuals have resulted in significant adverse economic effects and a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In the first six months of 2020, the Corporation increased the allowance for loan losses $646,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable. 46

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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. These efforts have been designed to assist borrowers as they deal with the current 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 and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at June 30, 2020. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Most of the modifications under the program became effective In March or April 2020 and provided a deferral of interest or principal and interest for 90 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status in June or July 2020. Through June 30, 2020, 706 loans with a total outstanding balance at the time of modification of $202,062,000 have been modified under this program with 541 loans with outstanding balances of $158,718,000 remaining on deferral at June 30, 2020. As shown in Note 7 to the unaudited consolidated financial statements, 198 of the loans remaining on deferral at June 30, 2020 with outstanding balances $117,424,000 were commercial loans. By July 31, 2020, the number of loans on deferral (excluding loans acquired pursuant to the Covenant acquisition on July 1, 2020) had dropped to 78 with total outstanding balances of $29,618,000, including commercial loans of $22,488,000. A breakdown of these commercial loans by industry is as follows:


	Deferrals Remaining			Deferrals Remaining
	As of June 30,2020			As of July 31,2020
(Dollars in Thousands)	Number			Number
	of	Recorded		of	Recorded
Commercial Loans Modified - Summary	Loans	Investment		Loans	Investment
Lessors of nonresidential buildings (except miniwarehouses)	36	$	34,649	4	$	2,352
Accommodation and food services - hotels	14		29,496	4		11,342
Residential property managers	7		8,108	1		100
Lessors of residential buildings & dwellings	14		8,021	3		3,227
Real estate rental and leasing - other	3		4,644	0		0
Accommodation and food services - other	18		4,500	1		104
Commercial printing (except screen and books)	1		3,460	0		0
Transportation and warehousing	10		3,371	0		0
Manufacturing	4		3,199	0		0
Retail trade	6		3,027	2		2,689
Powder metallurgy part manufacturing	7		2,788	0		0
Arts, entertainment, and recreation	6		2,491	0		0
Other services (except public administration)	11		2,048	2		1,037
Finance and insurance	2		1,859	1		1,197
Health care and social assistance	7		1,472	1		17
Agriculture, forestry, fishing and hunting	24		1,457	2		57
Construction	14		1,329	1		214
Educational services	5		623	1		105
Information	1		593	0		0
Mining	4		146	0		0
Administrative and support and waste management and remediation services	3		91	1		47
Public administration	1		52	0		0
	198	$	117,424	24	$	22,488

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) through the Small Business Administration (SBA) and Treasury Department on April 3, 2020. Under the PPP, the Corporation 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.

As of June 30, 2020, the recorded investment in PPP loans was $97,103,000, including contractual principal balances of $100,120,000, reduced by net deferred origination fees of $3,017,000. Net deferred origination fees on PPP loans are recognized in interest income as a yield adjustment (accretion over the term of the loans). Accretion of $337,000 from fees received on PPP loans was included in interest and fees on (taxable) loans in the consolidated statements of income in the three-month and six-month periods ended June 30, 2020.

Capital Strength

While it is difficult to estimate the future impact of COVID-19, the Corporation, including the principal subsidiary, 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 the acquisition of Covenant Financial, Inc. as well as 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, 2020 of 10.63% is more than double the well-capitalized threshold of 5%, an excess capital amount of $93.4 million. Similarly, the total capital to risk-weighted assets ratio at June 30, 2020 is 17.20%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $78.6 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”).

PENDING AND COMPLETED BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Business Combination – Acquisition of Monument Bancorp, Inc.

On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc.(“Monument.”) Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into the Corporation and Monument Bank was merged into C&N Bank.

EARNINGS OVERVIEW

Net income was $0.39 per diluted share in the second quarter 2020, as compared to $0.30 per share in the first quarter 2020 and $0.27 in the second quarter 2019. For the six months ended June 30, 2020, net income per diluted share was $0.70 as compared to $0.67 per share for the first six months of 2019. Earnings for the second quarter 2020 and June 30, 2020 year-to-date and the comparative periods in 2019 were impacted by nonrecurring merger-related expenses related to the Monument transaction in 2019 and the Covenant transaction in 2020 described earlier. 50

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table provides a reconciliation of the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses and realized gains and losses on securities. Management believes disclosure of unaudited second quarter and six-months ended June 30, 2020 and 2019 earnings results, adjusted to exclude the impact of these items, provides useful information for comparative purposes.

RECONCILIATION OF NET INCOME AND DILUTED EARNINGS PER SHARE TO NON-U.S. GAAP MEASURE



	2^nd^Quarter 2020								2nd Quarter 2019
	Income		Diluted		Income		Diluted
(Dollars In Thousands, Except Per Share Data)	Before		Income		Earnings		Before		Income		Earnings
(Unaudited)	Income		Tax		per		Income		Tax		per
	Tax		Provision		Net		Common		Tax		Provision		Net		Common
	Provision		(1)		Income		Share		Provision		(1)		Income		Share
Results as Presented Under U.S. GAAP	$	6,693	$	1,255	$	5,438	$	0.39	$	4,342	$	693	$	3,649	$	0.27
Add: Merger-Related Expenses		983		200		783		3,301		673		2,628
Net Gains on Available-for-Sale Debt
Securities		0		0		0				(7)		(1)		(6)
Adjusted Earnings, Excluding Effect of Merger-
Related Expenses and Net Gains on Available-
for Sale Debt Securities (Non-U.S. GAAP)	$	7,676	$	1,455	$	6,221	$	0.45	$	7,636	$	1,365	$	6,271	$	0.46


	****	6 Months Ended June 30, 2020								6 Months Ended June 30, 2019
		Income		Diluted		Income		Diluted
		Before		Income		Earnings		Before		Income		Earnings
		Income		Tax		per		Income		Tax		per
		Tax		Provision		Net		Common		Tax		Provision		Net		Common
		Provision		(1)		Income		Share		Provision		(1)		Income		Share
Results as Presented Under U.S. GAAP		$	11,675	$	2,071	$	9,604	$	0.70	$	10,413	$	1,674	$	8,739	$	0.67
Add: Merger-Related Expenses			1,124		229		895		3,612		739		2,873
Net Gains on Available-for-Sale Debt
Securities			0		0		0				(7)		(1)		(6)
Adjusted Earnings, Excluding Effect of Merger-
Related Expenses and Net Gains on Available-
for Sale Debt Securities (Non-U.S. GAAP)		$	12,799	$	2,300	$	10,499	$	0.76	$	14,018	$	2,412	$	11,606	$	0.89

(1) Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision of merger-related expenses is adjusted for the estimated nondeductible portion of the expenses. 51

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Additional highlights related to the Corporation’s second quarter and June 30, 2020 year-to-date unaudited earnings results as compared to the first quarter 2020 and comparative periods of 2019 are presented below.

Second Quarter 2020 as Compared to Second Quarter 2019

Second quarter 2020 net income was $5,438,000, and excluding the impact of merger-related expenses, adjusted (non-U.S. GAAP) earnings were $6,221,000. In comparison, second quarter 2019 net income was $3,649,000, and excluding merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings were $6,271,000. Other significant variances were as follows:

●	The credit for loan losses (reduction in expense) was $176,000 in the second quarter 2020 as compared to a credit of $4,000 in the second quarter 2019. 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 had been recorded at March 31, 2020. In total, the credit for loan losses in the second quarter 2020 included a net credit of $255,000 from the impact of a reduction in outstanding loans, excluding PPP loans; a net credit of $143,000 related to specific loans (net decrease in specific allowances on loans of $271,000 partially offset by net charge-offs of $128,000); a credit of $22,000 in the net charge-off factors used to estimate the allowance; and a charge of $244,000 attributable to increases in qualitative factors. In comparison, the net credit for loan losses in the second quarter 2019 included a reduction from changes in historical loss factors of $322,000 and a reduction of $149,000 related to specific allowances on loans, partially offset by an increases attributable to loan growth of $382,000 and an increase from qualitative factors of $85,000.
●	Second quarter 2020 net interest income of $14,246,000 was slightly higher than the second quarter 2019 total of $14,205,000. The net interest margin of 3.65% in the second quarter 2020 was down from 3.89% in the second quarter 2019. The average yield on earning assets of 4.22% in the second quarter 2020 was down 0.46% from the second quarter 2019, while the average rate paid on interest-bearing liabilities of 0.83% was lower by 0.29% from the second quarter 2019 level. Average outstanding loans in the second quarter 2020 of $1.231 billion were up $126.2 million (11.4%) from the corresponding second quarter 2019 amount. The average balance of PPP loans was $77.8 million in the second quarter 2020, as C&N participated in the PPP from its inception in early April 2020. Excluding PPP loans, average outstanding loans were 4.4% higher in the second quarter 2020 as compared to the second quarter 2019. Average total deposits of $1.349 billion in the second quarter 2020 were up $79.9 million from the second quarter 2019, with much of the growth attributable to PPP activity.
---	---
●	Total noninterest income for the second quarter 2020 was up $679,000 from the second quarter 2019 total. Significant variances included the following:
---	---
o	Net gains from sales of loans of $1,564,000 for the second quarter 2020 were up $1,343,000 from the total for the second quarter 2019. The increase reflects an increase in volume of mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates.
---	---
o	Service charges on deposit accounts of $831,000 in the second quarter 2020 were down $446,000 from the second quarter 2019 amount, as the volume of consumer and business overdraft activity fell.
---	---
o	Net revenue from loan servicing fees decreased $193,000, as net fees were negative $158,000 (a decrease in revenue) in the second quarter 2020 as compared to net revenue of $35,000 in the second quarter 2019. The fair value of mortgage servicing rights decreased $270,000 in the second quarter 2020, as compared to a decrease of $71,000 in the second quarter 2019, reflecting market assumptions that prepayments will increase due to lower interest rates.
---	---

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

●	Noninterest expense, excluding merger-related expenses, increased $852,000 in the second quarter 2020 over the second quarter 2019 amount. Significant variances included the following:
o	Pensions and other employee benefits expense increased $394,000, mainly due to increased health care expenses from C&N’s partially self-insured plan.
---	---
o	Professional fees expense increased $133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
---	---
o	Salaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense.
---	---
o	Data processing expenses increased $78,000(8.1%), including the impact of increases in software licensing costs associated with lending, trust and other functions.
---	---
o	Pennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity.
---	---

Six Months Ended June 30, 2020 as Compared to Six Months Ended June 30, 2019

Net income for the six-month period ended June 30, 2020 was $9,604,000, or $0.70 per diluted share, while net income for the first six months of 2019 was $8,739,000, or $0.67 per share. Excluding the impact of merger-related expenses and net securities gains, adjusted (non-U.S. GAAP) earnings for the first six months of 2020 would be $10,499,000 or $0.76 per share as compared to similarly adjusted earnings of $11,606,000 or $0.89 per share for the first six months of 2019. Other significant variances were as follows:

●

For the first six months of 2020, the provision for loan losses was $1,352,000, an increase in expense of $2,313,000 as compared to the credit for loan losses of $961,000 recorded in the first six months of 2019. In 2020, the provision includes the effects of recording a specific allowance of $1,193,000 on a commercial loan in the first quarter, partially offset by the benefit from recording a charge-off of $107,000 in the second quarter 2020 on a commercial loan for which the previously-established allowance had been $674,000. In total, the provision for the first six months of 2020 included a net charge of $1,067,000 related to specific loans (net increase in specific allowances on loans of $905,000 and net charge-offs of $162,000); a charge of $646,000 attributable to increases in qualitative factors; a credit of $272,000 from the impact of a reduction in outstanding loans, excluding PPP loans; and a credit of $89,000 in the net charge-off experience factors used to estimate the allowance. The credit for loan losses in the first six months of 2019 included a benefit from eliminating specific allowances on commercial loans that were no longer considered impaired.

●

Net interest income was up $2,608,000 (10.1%) for the first six months of 2020 over the same period in 2019, reflecting the benefits of growth related to the Monument acquisition. The net interest margin was 3.73% for the first six months of 2020, down from 3.96% in 2019. The average yield on earning assets was 0.21% lower in 2020 as compared to 2019, while the average rate paid on interest-bearing liabilities was 0.01% lower in comparing the same periods. Average outstanding loans of $1.2 billion for the first six months of 2020 were up $234.7 million (24.3%) from the corresponding total for the first six months of 2019, reflecting the impact of the Monument acquisition which closed April 1, 2019 as well as significant loan growth in the last three quarters of 2019. Average total deposits of $1.304 billion for the first six months of 2020 were up $158.8 million from the 2019 total, reflecting the impact of the Monument acquisition, PPP-related activity and other factors.

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●	Total noninterest income, excluding realized securities gains, for the first six months of 2020 was up $1,554,000 from the total for the first six months of 2019. Significant variances included the following:
o	Net gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates.
---	---
o	Other noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings.
---	---
o	Interchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes.
---	---
o	Trust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019.
---	---
o	Service charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020.
---	---
o	Net revenue from loan servicing fees decreased $235,000, as net fees were negative $172,000 (a decrease in revenue) in the first six months of 2020 as compared to net revenue of $63,000 in the first six months of 2019. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019.
---	---
●	Noninterest expense, excluding merger-related expenses, increased $3,068,000 for the six months ended June 30, 2020 over the total for the first six months of 2019. Significant variances included the following:
---	---
o	Total salaries and wages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan.
---	---
o	Data processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.
---	---
o	Professional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
---	---
o	Other noninterest expense increased $254,000. Within this category, significant variances included the following:
---	---
●	Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program.
---	---
●	Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to certain information returns.
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●	Expenses related to other real estate properties decreased $244,000 and collection expenses decreased $215,000. The reduction in both of these expense categories resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019.
●	FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund.
---	---

More detailed information concerning fluctuations in the Corporation’s earnings results and other financial information are provided in other sections of MD&A.

TABLE I – QUARTERLY FINANCIAL DATA


	For the Three Months Ended:
(Dollars In Thousands, Except Per Share Data)	June 30,		March 31,		Dec. 31,		Sept. 30,		June 30,		March 31,
(Unaudited)	2020		2020		2019		2019		2019		2019
Interest income	$	16,513	$	17,037	$	17,290	$	17,277	$	17,139	$	13,065
Interest expense		2,267		2,755		2,999		3,000		2,934		1,350
Net interest income		14,246		14,282		14,291		14,277		14,205		11,715
(Credit) provision for loan losses		(176)		1,528		652		1,158		(4)		(957)
Net interest income after (credit) provision for
loan losses		14,422		12,754		13,639		13,119		14,209		12,672
Noninterest income		5,528		5,281		5,066		4,963		4,849		4,406
Net gains on securities		0		0		3		13		7		0
Merger-related expenses		983		141		281		206		3,301		311
Other noninterest expenses		12,274		12,912		11,834		11,486		11,422		10,696
Income before income tax provision		6,693		4,982		6,593		6,403		4,342		6,071
Income tax provision		1,255		816		1,135		1,096		693		981
Net income	$	5,438	$	4,166	$	5,458	$	5,307	$	3,649	$	5,090
Net income attributable to common shares	$	5,405	$	4,146	$	5,431	$	5,281	$	3,630	$	5,063
Basic earnings per common share	$	0.39	$	0.30	$	0.40	$	0.39	$	0.27	$	0.41
Diluted earnings per common share	$	0.39	$	0.30	$	0.40	$	0.39	$	0.27	$	0.41

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.

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate and reasonable. Analytical information related to the Corporation’s aggregate loans and the related allowance for loan losses is summarized by loan segment and classes of loans in Note 7 to the unaudited consolidated financial statements. Additional discussion of the Corporation’s allowance for loan losses is provided in a separate section later in MD&A. 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. 55

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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.

As described in Note 6 to the unaudited consolidated financial statements, management evaluates securities for other-than-temporary impairment (OTTI). In making that 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. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.

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, 2020 and 2019. 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, 2020 and 2019

For the three-month periods, fully taxable equivalent net interest income was $14,483,000 in 2020, which was $14,000 (0.1%) higher than in 2019. Interest income was $653,000 lower in 2020 as compared to 2019, while interest expense was lower by $667,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.65% in 2020 as compared to 3.89% in 2019, 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 3.39% in 2020 from 3.56% in 2019. The average yield on earning assets of 4.22% was 0.46% lower in 2020 as compared to 2019, while the average rate on interest-bearing liabilities decreased 0.29% between periods.

Accretion and amortization of purchase accounting-related adjustments from marking financial instruments to fair value had a positive effect on net interest income in the second quarter 2020 of $285,000, including an increase in income on loans of $299,000 partially offset by increases in interest expense on time deposits of $14,000. The net positive impact to the second quarter 2020 net interest margin from accretion and amortization of purchase accounting adjustments was 0.08%. In comparison, the net positive impact to the second quarter 2019 net interest margin from purchase accounting adjustments was 0.06%. 56

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INTEREST INCOME AND EARNING ASSETS

Interest income totaled $16,750,000 in 2020, a decrease of $653,000 (3.8%) from 2019. Interest and fees from loans receivable decreased $76,000, or 0.5%, in 2020 as compared to 2019. Table IV shows the decrease in interest on loans includes $1,163,000 attributable to a decrease in average rate, offset by an increase of $1,087,000 related to an increase in average volume. The average balance of loans receivable increased $126,198,000 (11.4%) to $1,231,441,000 in 2020 from $1,105,243,000 in 2019. The average balance of PPP loans originated in the second quarter of 2020 was $77,832,000. Excluding PPP loans, average loans in the second quarter 2020 exceeded the second quarter 2019 by $48,366,000, or 4.4%, reflecting the effects of significant loan growth in the third and fourth quarters of 2019. The average yield on loans in the second quarter of 2020 was 4.79%, down from 5.35% in the second quarter 2019, as rates on variable rate loans and rates on recent new loan originations have decreased due to decreases in market interest rates that occurred in the latter part of 2019 and first quarter of 2020. The average yield on loans in the second quarter 2020 was also affected by the comparatively low average yield on PPP loans of 2.79%.

Interest income from available-for-sale debt securities decreased $478,000 (19.2%) in 2020 from 2019. Total average available-for-sale debt securities (at amortized cost) in 2020 decreased to $326,069,000 from $362,969,000 in 2019. The average yield on available-for-sale debt securities was 2.48% for 2020, down from 2.75% in 2019. The decrease in average yield on available-for-sale debt securities is mainly the result of higher-yielding tax-exempt municipal bonds being called or maturing throughout 2019, increased amortization of premiums on mortgage-backed securities due to accelerated prepayments of principal caused by falling interest rates and recently purchased securities with lower market yields.

For the three-month period, income from interest-bearing due from banks totaled $41,000 in 2020, a decrease of $108,000 (72.5%) from $149,000 in 2019. Although the average balance increased $15,401,000, the average yield on interest-bearing due from banks dropped to 0.44% in 2020 from 2.67% in 2019, consistent with the decrease in market rates.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the three-month periods, interest expense decreased $667,000 to $2,267,000 in 2020 from $2,934,000 in 2019. Interest expense on deposits decreased $579,000, as the average rate on interest-bearing deposits decreased to 0.72% in 2020 from 0.97% in 2019. The decrease in average rates on deposits includes decreases of 0.28% on time deposits, 0.27% on interest checking accounts, 0.08% on money market accounts and 0.05% on saving accounts.

Total average deposits (interest-bearing and noninterest-bearing) amounted to $1,349,093,000 in 2020, an increase of $79,875,000 (6.3%) from 2019. The increase in average deposits included increases in noninterest-bearing demand deposits of $52,173,000, interest checking of $41,446,000, money market of $16,349,000 and savings of $10,011,000. Increases in demand and other nonmaturity deposits resulted from funding provided for PPP loans, stimulus deposits from the federal government and customers’ seeking “safe havens” in the form of FDIC-insured deposits during the COVID-19 pandemic. These volume increases were partially offset by a decrease in average time deposits of $40,104,000, as the Corporation has experienced some run-off of higher-cost time deposits.

Interest expense on total borrowed funds decreased $88,000 in 2020 as compared to 2019. The average balance of total borrowed funds increased to $99,261,000 in the second quarter 2020 from $79,446,000 in the second quarter 2019, while the average rate on borrowed funds decreased to 1.96% in the second quarter 2020 from 2.88% in the second quarter 2019.

Interest expense on short-term borrowings decreased $164,000 to $64,000 in 2020 from $228,000 in 2019. The average balance of short-term borrowings decreased to $19,884,000 in 2020 from $37,279,000 in 2019. The average rate on short-term borrowings decreased to 1.30% in 2020 from 2.45% in 2019, reflecting the impact of lower short-term market rates in 2020. 57

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Interest expense on long-term borrowings increased $85,000 to $313,000 in 2020 from $228,000 in 2019. The average balance of long-term borrowings was $72,917,000 in 2020, up from an average balance of $35,167,000 in 2019. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2020 and 2019 consisted mainly of FHLB advances with terms longer than 12 months at origination. The average rate on long-term borrowings was 1.73% in 2020 compared to 2.60% in the second quarter of 2019.

Six-Month Periods Ended June 30, 2020 and 2019

For the six-month periods, fully taxable equivalent net interest income was $28,989,000 in 2020, $2,504,000 (9.5%) higher than in 2019. Interest income was $3,242,000 higher in 2020 as compared to 2019, while interest expense was higher by $738,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.73% in 2020 as compared to 3.96% in 2019, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.46% in 2020, down from 3.66% in 2019. The overall growth in net interest income, despite margin compression, resulted mainly from the infusion of loans, deposits and borrowings from Monument.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $34,011,000 in 2020, an increase of $3,242,000 (10.5%) from 2019. Interest and fees on loans receivable increased $4,302,000, or 16.9%, to $29,714,000 in 2020 from $25,412,000 in 2019. Table IV shows the increase in interest on loans includes an increase of $5,717,000 attributable to volume and a decrease of $1,415,000 related to average rate. The average balance of loans receivable increased $234,691,000 (24.3%) to $1,199,963,000 in 2020 from $965,272,000 in 2019. The increase in average balance reflects the Corporation’s purchase of Monument on April 1, 2019 and the effects of significant loan growth over the last three quarters of 2019. The fully taxable equivalent yield on loans in 2020 was 4.98% compared to 5.31% in 2019 as current rates on variable rate loans and rates on recent new loan originations have decreased, consistent with decreases in market interest rates over the past six months. The reduction in fully taxable equivalent yield on loans was also affected by PPP loans with an average balance of $38,916,000 at an average rate of 2.79% in 2020, with no comparative amounts in 2019.

Interest income on available-for-sale debt securities totaled $4,144,000 in 2020, a decrease of $928,000 from the total for 2019. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $330,538,000 in 2020, a decrease of $31,914,000 (8.8%) from 2019. The average yield on available-for-sale debt securities decreased to 2.52% in 2020 from 2.82% in 2019.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $738,000 to $5,022,000 in 2020 from $4,284,000 in 2019. Table III shows that the overall cost of funds on interest-bearing liabilities decreased slightly to 0.92% in 2020 from 0.93% in 2019.

Interest expense on deposits increased $523,000 in 2020 over 2019. Total average deposit balances (interest-bearing and noninterest-bearing) increased 13.9%, to $1,304,669,000 in 2020 from $1,145,831,000 in 2019. The increase in average balance on deposits was across all categories, reflecting the impact of the Monument acquisition on April 1, 2019 as well as the effects in 2020 of PPP-related funding, stimulus funding and customers seeking FDIC-insured funding during the COVID-19 pandemic. The average rate on interest-bearing deposits increased slightly to 0.80% in 2020 from 0.79% in 2019.

Interest expense on borrowed funds increased $215,000 in 2020 as compared to 2019. Total average borrowed funds increased $42,239,000 to $107,354,000 in 2020 from $65,115,000 in 2019. The increase in average borrowed funds includes the impact of borrowings originated to fund loan growth in the last three quarters of 2019. The average rate on total borrowed funds was 2.03% in 2020 compared to 2.69% in 2019. The decrease in the average rate on borrowed funds in 2020 reflects the impact of decreases in market rates over the course of 2020. 58

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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)	2020		2019		(Decrease)		2020		2019		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	41	$	149	$	(108)	$	122	$	265	$	(143)
Available-for-sale debt securities:
Taxable		1,380		1,826		(446)		2,968		3,660		(692)
Tax-exempt		631		663		(32)		1,176		1,412		(236)
Total available-for-sale debt securities		2,011		2,489		(478)		4,144		5,072		(928)
Loans receivable:
Taxable		13,586		14,098		(512)		28,047		24,046		4,001
Paycheck Protection Program (Taxable)		540		0		540		540		0		540
Tax-exempt		552		656		(104)		1,127		1,366		(239)
Total loans receivable		14,678		14,754		(76)		29,714		25,412		4,302
Other earning assets		20		11		9		31		20		11
Total Interest Income		16,750		17,403		(653)		34,011		30,769		3,242

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		202		319		(117)		445		546		(101)
Money market		232		252		(20)		495		430		65
Savings		54		74		(20)		118		113		5
Time deposits		1,296		1,718		(422)		2,881		2,327		554
Total interest-bearing deposits		1,784		2,363		(579)		3,939		3,416		523
Borrowed funds:
Short-term		64		228		(164)		262		307		(45)
Long-term		313		228		85		608		446		162
Subordinated debt		106		115		(9)		213		115		98
Total borrowed funds		483		571		(88)		1,083		868		215
Total Interest Expense		2,267		2,934		(667)		5,022		4,284		738

Net Interest Income	$	14,483	$	14,469	$	14	$	28,989	$	26,485	$	2,504

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% 59

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Table III - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)		3 Months				3 Months				6 Months				6 Months
		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of
		6/30/2020		Return/		6/30/2019		Return/		6/30/2020		Return/		6/30/2019		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			37,799	0.44	%		22,398	2.67	%		28,600	0.86	%		21,358	2.50	%
Available-for-sale debt securities,
at amortized cost:
Taxable		$	244,019	2.27	%	$	289,041	2.53	%	$	254,588	2.34	%	$	285,443	2.59	%
Tax-exempt			82,050	3.09	%		73,928	3.60	%		75,950	3.11	%		77,009	3.70	%
Total available-for-sale debt securities			326,069	2.48	%		362,969	2.75	%		330,538	2.52	%		362,452	2.82	%
Loans receivable:
Taxable			1,094,432	4.99	%		1,035,672	5.46	%		1,101,275	5.12	%		894,208	5.42	%
Paycheck Protection Program (Taxable)			77,832	2.79	%		0	0.00	%		38,916	2.79	%		0	0.00	%
Tax-exempt			59,177	3.75	%		69,571	3.78	%		59,772	3.79	%		71,064	3.88	%
Total loans receivable			1,231,441	4.79	%		1,105,243	5.35	%		1,199,963	4.98	%		965,272	5.31	%
Other earning assets			2,206	3.65	%		1,423	3.10	%		1,833	3.40	%		1,257	3.21	%
Total Earning Assets			1,597,515	4.22	%		1,492,033	4.68	%		1,560,934	4.38	%		1,350,339	4.59	%
Cash			18,960				20,325				18,501				18,629
Unrealized gain/loss on securities			12,574				(101)				10,375				(2,352)
Allowance for loan losses			(11,471)				(8,378)				(10,743)				(8,856)
Bank premises and equipment			18,230				16,214				17,981				15,367
Intangible Assets			29,543				30,040				29,575				21,045
Other assets			49,502				49,935				49,386				46,573
Total Assets		$	1,714,853			$	1,600,068			$	1,676,009			$	1,440,745

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		$	260,177	0.31	%	$	218,731	0.58	%	$	243,623	0.37	%	$	208,872	0.53	%
Money market			215,441	0.43	%		199,092	0.51	%		208,066	0.48	%		188,042	0.46	%
Savings			183,933	0.12	%		173,922	0.17	%		176,452	0.13	%		165,354	0.14	%
Time deposits			343,257	1.52	%		383,361	1.80	%		362,439	1.60	%		305,769	1.53	%
Total interest-bearing deposits			1,002,808	0.72	%		975,106	0.97	%		990,580	0.80	%		868,037	0.79	%
Borrowed funds:
Short-term			19,844	1.30	%		37,279	2.45	%		32,363	1.63	%		26,666	2.32	%
Long-term			72,917	1.73	%		35,167	2.60	%		68,491	1.79	%		34,929	2.57	%
Subordinated debt			6,500	6.56	%		7,000	6.59	%		6,500	6.59	%		3,520	6.59	%
Total borrowed funds			99,261	1.96	%		79,446	2.88	%		107,354	2.03	%		65,115	2.69	%
Total Interest-bearing Liabilities			1,102,069	0.83	%		1,054,552	1.12	%		1,097,934	0.92	%		933,152	0.93	%
Demand deposits			346,285				294,112				314,089				277,794
Other liabilities			15,891				15,454				14,981				13,210
Total Liabilities			1,464,245				1,364,118				1,427,004				1,224,156
Stockholders' equity, excluding
other comprehensive income/loss			240,434				235,733				240,576				218,175
Accumulated other comprehensive income/loss			10,174				217				8,429				(1,586)
Total Stockholders' Equity			250,608				235,950				249,005				216,589
Total Liabilities and Stockholders' Equity		$	1,714,853			$	1,600,068			$	1,676,009			$	1,440,745
Interest Rate Spread				3.39	%			3.56	%			3.46	%			3.66	%
Net Interest Income/Earning Assets				3.65	%			3.89	%			3.73	%			3.96	%

Total Deposits (Interest-bearing
and Demand)		$	1,349,093			$	1,269,218			$	1,304,669			$	1,145,831
(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)		3 Months Ended 6/30/20 vs. 6/30/19						6 Months Ended 6/30/20 vs. 6/30/19
		Change in		Change in		Total		Change in		Change in		Total
		Volume		Rate		Change		Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks		$	75	$	(183)	$	(108)	$	70	$	(213)	$	(143)
Available-for-sale debt securities:
Taxable			(273)		(173)		(446)		(372)		(320)		(692)
Tax-exempt			69		(101)		(32)		(18)		(218)		(236)
Total available-for-sale debt securities			(204)		(274)		(478)		(390)		(538)		(928)
Loans receivable:
Taxable			645		(1,157)		(512)		5,387		(1,386)		4,001
Paycheck Protection Program (Taxable)			540		0		540		540		0		540
Tax-exempt			(98)		(6)		(104)		(210)		(29)		(239)
Total loans receivable			1,087		(1,163)		(76)		5,717		(1,415)		4,302
Other earning assets			7		2		9		10		1		11
Total Interest Income			965		(1,618)		(653)		5,407		(2,165)		3,242

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking			50		(167)		(117)		82		(183)		(101)
Money market			21		(41)		(20)		48		17		65
Savings			5		(25)		(20)		8		(3)		5
Time deposits			(95)		(327)		(422)		452		102		554
Total interest-bearing deposits			(19)		(560)		(579)		590		(67)		523
Borrowed funds:
Short-term			(71)		(93)		(164)		58		(103)		(45)
Long-term			182		(97)		85		331		(169)		162
Subordinated debt			(9)		0		(9)		98		0		98
Total borrowed funds			102		(190)		(88)		487		(272)		215
Total Interest Expense			83		(750)		(667)		1,077		(339)		738

Net Interest Income		$	882	$	(868)	$	14	$	4,330	$	(1,826)	$	2,504
(1)	Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s 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)	3 Months Ended
	June 30,					$	%
	2020		2019			Change	Change
Trust and financial management revenue	$	1,565	$	1,583	$	(18)	-1.1	%
Brokerage revenue		343		361		(18)	-5.0	%
Insurance commissions, fees and premiums		52		48		4	8.3	%
Service charges on deposit accounts		831		1,277		(446)	-34.9	%
Service charges and fees		84		89		(5)	-5.6	%
Interchange revenue from debit card transactions		718		699		19	2.7	%
Net gains from sales of loans		1,564		221		1,343	607.7	%
Loan servicing fees, net		(158)		35		(193)	-551.4	%
Increase in cash surrender value of life insurance		98		99		(1)	-1.0	%
Other noninterest income		431		437		(6)	-1.4	%
Total noninterest income, excluding realized gains on securities, net	$	5,528	$	4,849	$	679	14.0	%

Total noninterest income shown in Table V in the second quarter 2020 was up $679,000 from the second quarter 2019 total. Significant variances included the following:

●	Net gains from sales of loans of $1,564,000 for the second quarter 2020 were up $1,343,000 from the total for the second quarter 2019. The increase reflects an increase in volume of residential mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans totaled $51.0 million in the second quarter 2020 as compared to $6.6 million in the second quarter 2019.
●	Service charges on deposit accounts of $831,000 in the second quarter 2020 were down $446,000 from the second quarter 2019 amount, as the volume of consumer and business overdraft activity fell.
---	---
●	Net revenue from loan servicing fees decreased $193,000. The fair value of mortgage servicing rights decreased $270,000 in the second quarter 2020, as compared to a decrease of $71,000 in the second quarter 2019, reflecting market assumptions that prepayments will increase due to lower interest rates.
---	---

TABLE VI – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	6 Months Ended
	June 30,					$	%
	2020		2019			Change	Change
Trust and financial management revenue	$	3,044	$	2,943	$	101	3.4	%
Brokerage revenue		676		668		8	1.2	%
Insurance commissions, fees and premiums		85		78		7	9.0	%
Service charges on deposit accounts		2,081		2,527		(446)	-17.6	%
Service charges and fees		147		168		(21)	-12.5	%
Interchange revenue from debit card transactions		1,449		1,342		107	8.0	%
Net gains from sales of loans		1,879		308		1,571	510.1	%
Loan servicing fees, net		(172)		63		(235)	-373.0	%
Increase in cash surrender value of life insurance		202		191		11	5.8	%
Other noninterest income		1,418		967		451	46.6	%
Total noninterest income, excluding realized gains on securities, net	$	10,809	$	9,255	$	1,554	16.8	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total noninterest income, excluding realized gains on securities, net, shown in Table VI increased $1,554,000 for the first six months of 2020 compared to 2019. Significant variances included the following:

●	Net gains from sales of loans totaled $1,879,000 in the first six months of 2020, an increase of $1,571,000 over the total for the first six months of 2019. As noted above, the increase reflects an increase in volume of residential mortgage loans sold, due mainly to increased refinancing activity resulting from falling interest rates. Proceeds from sales of residential mortgage loans of $61.8 million in the first six months of 2020 were 6.8 times the comparative 2019 amount of $9.1 million.
●	Other noninterest income totaled $1,418,000, an increase of $451,000 over 2019. Income from realization of tax credits was $351,000 higher in the first six months of 2020 as compared to 2019. Also, dividend income from Federal Home Loan Bank stock was up $99,000, reflecting a higher average balance of stock held due to increased borrowings.
---	---
●	Interchange revenue from debit card transactions totaled $1,449,000 for the first six months of 2020, an increase of $107,000 (8.0%), reflecting an increase in transaction volumes.
---	---
●	Trust and financial management revenue of $3,044,000 was $101,000 (3.4%) higher in the first six months of 2020 as compared to 2019, reflecting the impact of fees from new business growth in 2019.
---	---
●	Service charges on deposit accounts of $2,081,000 in the first six months of 2020 were down $446,000 (17.6%) from the total for the first six months of 2019, as the volume of consumer and business overdraft activity fell significantly in the second quarter 2020.
---	---
●	Net revenue from loan servicing fees decreased $235,000. The fair value of mortgage servicing rights decreased $396,000 in the first six months of 2020, as compared to a decrease of $148,000 in the first six months of 2019.
---	---

NONINTEREST EXPENSE

TABLE VII - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	3 Months Ended
	June 30,					%
	2020		2019		Change	Change
Salaries and wages	$	5,364	$	5,276		1.7	%
Pensions and other employee benefits		1,619		1,225		32.2	%
Occupancy expense, net		664		665		-0.2	%
Furniture and equipment expense		311		333		-6.6	%
Data processing expenses		1,040		962		8.1	%
Automated teller machine and interchange expense		275		277		-0.7	%
Pennsylvania shares tax		423		347		21.9	%
Professional fees		464		331		40.2	%
Telecommunications		213		176		21.0	%
Directors' fees		178		141		26.2	%
Other noninterest expense		1,723		1,689		2.0	%
Total noninterest expense, excluding merger-related expenses		12,274		11,422		7.5	%
Merger-related expenses		983		3,301		-70.2	%
Total noninterest expense	$	13,257	$	14,723		-10.0	%

All values are in US Dollars.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

As shown in Table VII, total noninterest expense, excluding merger-related expenses, increased $852,000 (7.5%) for the three months ended June 30, 2020 over the total for the three months ended June 30, 2019. The most significant variances include the following:

●	Pensions and other employee benefits expense increased $394,000, mainly due to increased health care expenses from the Corporation’s partially self-insured plan.
●	Professional fees expense increased $133,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
---	---
●	Salaries and wages expense increased $88,000 (1.7%), reflecting the net impact of several factors, including: an increase in number of personnel to 337 full-time equivalent (FTEs) from 332 at June 30, 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and a slight reduction in incentive compensation expense.
---	---
●	Data processing expenses increased $78,000 (8.1%), including the impact of increases in software licensing costs associated with lending, trust and other functions.
---	---
●	Pennsylvania shares tax expense increased $76,000 (21.9%), reflecting the impact of an increase in C&N Bank’s stockholder’s equity.
---	---

TABLE VIII - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	6 Months Ended
	June 30,					%
	2020		2019		Change	Change
Salaries and wages	$	10,704	$	9,769		9.6	%
Pensions and other employee benefits		3,657		2,843		28.6	%
Occupancy expense, net		1,409		1,322		6.6	%
Furniture and equipment expense		669		634		5.5	%
Data processing expenses		2,058		1,765		16.6	%
Automated teller machine and interchange expense		572		466		22.7	%
Pennsylvania shares tax		845		694		21.8	%
Professional fees		843		553		52.4	%
Telecommunications		419		340		23.2	%
Directors' fees		348		324		7.4	%
Other noninterest expense		3,662		3,408		7.5	%
Total noninterest expense, excluding merger-
related expenses		25,186		22,118		13.9	%
Merger-related expenses		1,124		3,612		-68.9	%
Total noninterest expense	$	26,310	$	25,730		2.3	%

All values are in US Dollars.

As shown in Table VIII, total noninterest expense, excluding merger-related expenses, increased $3,068,000 (13.9%) for the six months ended June 30, 2020 over the total for the first six months of 2019. The most significant variances include the following:

●

Total salaries and wages and benefits expenses increased $1,749,000, reflecting: inclusion of the former Monument operations for six months in 2020 as compared to three months in 2019; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; a slight reduction in incentive compensation expense; and an increase in health care expense due to higher claims on C&N’s partially self-insured plan.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

●	Data processing expenses increased $293,000, including the impact of increases in software licensing costs associated with lending, trust and other functions.
●	Professional fees expense increased $290,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
---	---
●	Other noninterest expense increased $254,000. Within this category, significant variances included the following:
---	---
o	Donations expense increased $427,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program.
---	---
o	Other operational losses increased $337,000, including an estimated accrual of $300,000 for penalties related to certain information returns.
---	---
o	Expenses related to other real estate properties decreased $244,000 and collection expenses decreased $215,000. The reduction in both of these expense categories resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019.
---	---
o	FDIC assessments expense decreased $81,000, as a significant portion of the assessed amounts for the first two quarters of 2020 were offset by credits based on the funding level of the insurance fund.
---	---

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 2020 was $2,071,000, which was $397,000 higher than the provision for the first six months of 2019 of $1,674,000. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first six months of 2020 compared to 16.1% in the first six months of 2019. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first six months of 2020 and 2019 principally because of the effects of tax-exempt interest income. The higher effective tax rate in the first six months of 2020 as compared to 2019 resulted mainly from a reduction in tax-exempt interest income and nondeductible penalties. 65

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at June 30, 2020 and December 31, 2019 represents the following temporary difference components:


	****	June 30,		****	December 31,
(In Thousands)		2020			2019
Deferred tax assets:
Allowance for loan losses		$	2,353		$	2,080
Purchase accounting adjustments on loans			497			640
Operating leases liability			333			344
Other deferred tax assets			1,816			2,173
Total deferred tax assets			4,999			5,237

Deferred tax liabilities:
Unrealized holding gains on securities			3,048			934
Defined benefit plans - ASC 835			64			49
Bank premises and equipment			977			763
Core deposit intangibles			245			272
Right-of-use assets from operating leases			333			344
Other deferred tax liabilities			239			257
Total deferred tax liabilities			4,906			2,619
Deferred tax asset, net		$	93		$	2,618

At June 30, 2020, the net deferred tax asset was $93,000, down from $2,618,000 at December 31, 2019. The most significant change in temporary difference components was a net increase of $2,114,000 in the deferred tax liability resulting from appreciation in available-for-sale debt securities attributable to lower interest rates.

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, including taxable income in prior carryback years, as well as future taxable income.

Management believes the recorded net deferred tax asset at June 30, 2020 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 MD&A. 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 MD&A. Other significant balance sheet items, including the allowance for loan losses and stockholders’ equity, are discussed in separate sections of MD&A. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding standby letters of credit at June 30, 2020. Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2020. 66

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Net loans outstanding (excluding mortgage loans held for sale) were $1,230,387,000 at June 30, 2020, up 4.9% from $1,172,386,000 at December 31, 2019 and up $121.9 million or 11.0% from $1,108,483,000 at June 30, 2019. As presented in Table XII, total outstanding commercial loans were $79.8 million higher at June 30, 2020 from December 31, 2019, including an increase in PPP loans of $97.1 million. Residential mortgage loans were $20.3 million lower at June 30, 2020 as compared to December 31, 2019, reflecting large amounts of refinancing activity occurring due to lower interest rates. While residential mortgage loans outstanding (on-balance sheet) decreased in the first six months of 2020, the volume of residential mortgage loans originated and sold increased dramatically, resulting in an increase of $1.6 million in revenue from sales of residential mortgage loans.

While the Corporation’s lending activities are primarily concentrated in its market area, 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 $63,057,000 at June 30, 2020, down from $64,633,000 at December 31, 2019 and $66,289,000 at June 30, 2019. At June 30, 2020, the balance of participation loans outstanding includes a total of $46,346,000 to businesses located outside of the Corporation’s market area. Also, included within participation loans outstanding 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 outstanding totaled $10,184,000 at June 30, 2020 and $9,947,000 at December 31, 2019.

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. Prior to the April 2019 merger, Monument Bank had participated in the MPF Original program. 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, 2020, the Corporation’s activity under the MPF Direct Program was minimal.

For loan sales originated and sold under these 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, 2020, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,744,000, and the corresponding total outstanding balance repurchased at December 31, 2019 was $1,770,000. 67

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At June 30, 2020, outstanding balances of loans sold and serviced through these programs totaled $210,778,000, including loans sold through the MPF Xtra program of $119,393,000 and loans sold through the Original program of $91,385,000. In addition, the outstanding balance of loans sold under the MPF Original program by Monument totaled $17,568,000. The loans sold by Monument are not serviced by the Corporation; however, the Corporation has assumed the credit enhancement obligation on these loans (as discussed in the next paragraph). At December 31, 2019, outstanding balances of loans sold and serviced through these programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original program of $73,739,000. 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, 2020 and December 31, 2019.

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, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,266,000, and the Corporation has recorded a related allowance for credit losses of $283,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the related allowance for credit losses was $333,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

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 is 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 $11,026,000 at June 30, 2020, up from $9,836,000 at December 31, 2019. Table X shows total specific allowances on impaired loans increased $905,000 to $1,956,000 at June 30, 2020 from $1,051,000 at December 31, 2019. This net increase included the impact of a specific allowance of $1,193,000 on a commercial loan with an outstanding balance of $3,500,000 being recorded in the first quarter 2020. At June 30, 2020, the specific allowance remained at $1,193,000. The increase in specific allowances on impaired loans at June 30, 2020 also included allowances totaling $504,000 related to three commercial loan relationships with an aggregate recorded investment of $7,576,000 that management identified as impaired in the second quarter 2020. The impact of these increases was partially offset by elimination of an allowance of $674,000 at December 31, 2019 on a commercial loan that was repaid for less than the full principal balance, resulting in a $107,000 charge-off in the second quarter 2020. In addition, there was a commercial loan with an outstanding balance of $798,000 and a specific allowance of $60,000 at December 31, 2019 that was no longer considered impaired at June 30, 2020 due to improved circumstances with the underlying business. 68

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Loans acquired from Monument that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $441,000 at April 1, 2019 and $305,000 at June 30, 2020. 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 $878,000 at June 30, 2020 and $1,216,000 at December 31, 2019. 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. At June 30, 2020, it was determined that five purchased loans to two borrowers with recorded investments totaling $6,075,000 (included in the total of $7,576,000 of loans identified as impaired in the second quarter 2020 noted above) were found to be impaired. Specific allowances totaling $350,000 were recorded on these loans at June 30, 2020, based on the excess of the recorded investments in the loans over the estimated value of the related real estate collateral, net of selling costs. Purchased performing loans with an aggregate recorded investment of $228,590,000 at June 30, 2020 were excluded from the loan pools for which the general component of the allowance for loan losses was calculated.

The (credit) provision for loan losses by segment in the three-month and six-month periods ended June 30, 2020 and 2019 are as follows:


(In Thousands)	3 Months Ended				6 Months Ended
	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
Residential mortgage	$	(65)	$	3	$	133	$	78
Commercial		(124)		(51)		1,194		(1,200)
Consumer		13		44		25		75
Unallocated		0		0		0		86

Total	$	(176)	$	(4)	$	1,352	$	(961)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


	3 Months		3 Months		6 Months		6 Months
Residential mortgage segment	Ended		Ended		Ended		Ended
(In thousands)	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
(Decrease) increase in total specific allowance on
impaired loans, adjusted for the effect of net
charge-offs	$	(32)	$	31	$	(17)	$	99

(Decrease) increase in collectively determined
portion of the allowance attributable to:
Loan (reduction) growth		(126)		54		(140)		56
Changes in historical loss experience factors		(42)		2		(82)		7
Changes in qualitative factors		135		(84)		372		(84)
Total (credit) provision for loan losses -
Residential mortgage segment	$	(65)	$	3	$	133	$	78


	3 Months		3 Months		6 Months		6 Months
Commercial segment	Ended		Ended		Ended		Ended
(In thousands)	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
(Decrease) increase in total specific allowance on
impaired loans, adjusted for the effect of net
charge-offs	$	(134)	$	(196)	$	1,041	$	(1,303)

(Decrease) increase in collectively determined
portion of the allowance attributable to:
Loan (reduction) growth		(117)		310		(110)		324
Changes in historical loss experience factors		14		(314)		(7)		(312)
Changes in qualitative factors		113		149		270		91
Total (credit) provision for loan losses -
Commercial segment	$	(124)	$	(51)	$	1,194	$	(1,200)


	3 Months		3 Months		6 Months		6 Months
Consumer segment	Ended		Ended		Ended		Ended
(In thousands)	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
Increase in total specific allowance on
impaired loans, adjusted for the effect of net
charge-offs	$	23	$	16	$	43	$	44

(Decrease) increase in collectively determined
portion of the allowance attributable to:
Loan (reduction) growth		(12)		18		(22)		18
Changes in historical loss experience factors		6		(10)		0		0
Changes in qualitative factors		(4)		20		4		13
Total provision for loan losses -
Consumer segment	$	13	$	44	$	25	$	75

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


	3 Months		3 Months		6 Months		6 Months
Total - All segments	Ended		Ended		Ended		Ended
(In thousands)	June 30,		June 30,		June 30,		June 30,
	2020		2019		2020		2019
(Decrease) increase in total specific allowance on
impaired loans, adjusted for the effect of net
charge-offs	$	(143)	$	(149)	$	1,067	$	(1,160)

Increase (decrease) in collectively determined
portion of the allowance attributable to:
Loan (reduction) growth		(255)		382		(272)		398
Changes in historical loss experience factors		(22)		(322)		(89)		(305)
Changes in qualitative factors		244		85		646		20
Sub-total		(176)		(4)		1,352		(1,047)
Unallocated		0		0		0		86
Total (credit) provision for loan losses -
All segments	$	(176)	$	(4)	$	1,352	$	(961)

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 (reduction) 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 decrease in loans outstanding (excluding loans specifically evaluated for impairment) for the period.

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

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 1.74% at June 30, 2020, up from 0.88% at December 31, 2019, and nonperforming assets as a percentage of total assets was 1.33% at June 30, 2020, up from 0.80% at December 31, 2019. At June 30, 2020, these ratios were affected by the net impact of classification as nonperforming of the commercial loans with specific allowances referred to above.

Table XI presents data at June 30, 2020 and at the end of each of the years ended December 31, 2015 through 2019. Table XI shows that total nonperforming loans as a percentage of loans of 1.74% at June 30, 2020, though up from December 31, 2019, was lower than the corresponding year-end ratio from 2015 through 2018. Similarly, the June 30, 2020 ratio of total nonperforming assets as a percentage of assets of 1.33% was lower than the corresponding ratio from 2016 through 2018 and slightly higher than the level at December 31, 2015 of 1.31%.

Total impaired loans of $14,280,000 at June 30, 2020 are up $8,794,000 from the corresponding amount at December 31, 2019 of $5,486,000. The increase in impaired loans includes the net impact of classification as impaired of the commercial loans referred to above in the discussion of specific allowances. 71

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Total nonperforming assets of $23,168,000 at June 30, 2020 are $9,857,000 higher than the corresponding amount at December 31, 2019, summarized as follows:

●Total nonaccrual loans at June 30, 2020 of $18,763,000 was $9,545,000 higher than the corresponding December 31, 2019 total of $9,218,000. Similar to the discussions above related to impaired loans and nonperforming assets, this increase reflects the impact of net changes in classification as impaired of the commercial loans subject to specific allowances described above.

●Total loans past due 90 days or more and still accruing interest amounted to $2,812,000 at June 30, 2020, an increase of $1,605,000 from the total at December 31, 2019. The increase includes an $845,000 increase on residential mortgages and $451,000 from loans secured by commercial real estate. Management has evaluated the loans within this category and determined they are well secured and in the process of collection at June 30, 2020.

●Foreclosed assets held for sale consisted of real estate and totaled $1,593,000 at June 30, 2020, a decrease of $1,293,000 from $2,886,000 at December 31, 2019. Of this decrease, $1,134,000 related to the sale of a commercial real estate property in the first quarter of 2020. At June 30, 2020, the Corporation held eight such properties for sale, with total carrying values of $118,000 related to residential real estate, $70,000 of land and $1,405,000 related to commercial real estate. At December 31, 2019, the Corporation held ten such properties for sale, with total carrying values of $292,000 related to residential real estate, $70,000 of land and $2,524,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.

Over the period 2015-2019 and the first six months of 2020, 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, 2020. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

Tables IX through XII present historical data related to loans and the allowance for loan losses. 72

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TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES


(Dollars In Thousands)																							****
		June 30,			June 30,				Years Ended December 31,
	****	2020		****	2019		****	****	2019		****	2018		****	2017		****	2016		****	2015		****
Balance, beginning of year		$	9,836		$	9,309			$	9,309		$	8,856		$	8,473		$	7,889		$	7,336
Charge-offs:
Residential mortgage			0			(107)				(190)			(158)			(197)			(73)			(217)
Commercial			(124)			(6)				(6)			(165)			(132)			(597)			(251)
Consumer			(70)			(66)				(183)			(174)			(150)			(87)			(94)
Total charge-offs			(194)			(179)				(379)			(497)			(479)			(757)			(562)
Recoveries:
Residential mortgage			5			6				12			8			19			3			1
Commercial			0			3				6			317			4			35			214
Consumer			27			22				39			41			38			82			55
Total recoveries			32			31				57			366			61			120			270
Net charge-offs			(162)			(148)				(322)			(131)			(418)			(637)			(292)
Provision (credit) for loan losses			1,352			(961)				849			584			801			1,221			845
Balance, end of period		$	11,026		$	8,200			$	9,836		$	9,309		$	8,856		$	8,473		$	7,889
Net charge-offs as a % of
average loans			0.01	%		0.02	%			0.03	%		0.02	%		0.05	%		0.09	%		0.04	%

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES


(In Thousands)		June 30,			As of December 31,
	****	2020		****	2019		****	2018		****	2017		****	2016		****	2015
ASC 310 - Impaired loans		$	1,956		$	1,051		$	1,605		$	1,279		$	674		$	820
ASC 450 - Collective segments:
Commercial			4,066			3,913			3,102			3,078			3,373			3,103
Residential mortgage			4,156			4,006			3,870			3,841			3,890			3,417
Consumer			263			281			233			159			138			122
Unallocated			585			585			499			499			398			427
Total Allowance		$	11,026		$	9,836		$	9,309		$	8,856		$	8,473		$	7,889

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TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)


(Dollars In Thousands)		June 30,			As of December 31,														****
	****	2020		****	2019		****	2018		****	2017		****	2016		****	2015		****
Impaired loans with a valuation allowance		$	12,189		$	3,375		$	4,851		$	4,100		$	3,372		$	1,933
Impaired loans without a valuation allowance			2,091			2,111			4,923			5,411			7,488			8,041
Total impaired loans		$	14,280		$	5,486		$	9,774		$	9,511		$	10,860		$	9,974
Total loans past due 30-89 days and still accruing		$	5,124		$	8,889		$	7,142		$	9,449		$	7,735		$	7,057
Nonperforming assets:
Total nonaccrual loans		$	18,763		$	9,218		$	13,113		$	13,404		$	8,736		$	11,517
Total loans past due 90 days or more and still accruing			2,812			1,207			2,906			3,724			6,838			3,229
Total nonperforming loans			21,575			10,425			16,019			17,128			15,574			14,746
Foreclosed assets held for sale (real estate)			1,593			2,886			1,703			1,598			2,180			1,260
Total nonperforming assets		$	23,168		$	13,311		$	17,722		$	18,726		$	17,754		$	16,006
Loans subject to troubled debt restructurings (TDRs):
Performing		$	265		$	889		$	655		$	636		$	5,803		$	1,186
Nonperforming			790			1,737			2,884			3,027			2,874			5,178
Total TDRs		$	1,055		$	2,626		$	3,539		$	3,663		$	8,677		$	6,364

Total nonperforming loans as a % of loans			1.74	%		0.88	%		1.94	%		2.10	%		2.07	%		2.09	%
Total nonperforming assets as a % of assets			1.33	%		0.80	%		1.37	%		1.47	%		1.43	%		1.31	%
Allowance for loan losses as a % of total loans			0.89	%		0.83	%		1.12	%		1.09	%		1.13	%		1.12	%
Allowance for loan losses as a % of nonperforming loans			51.11	%		94.35	%		58.11	%		51.70	%		54.40	%		53.50	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type


(In Thousands)		June			December 31,
	****	2020		****	2019		****	2018		****	2017		****	2016		****	2015
Residential mortgage:
Residential mortgage loans - first liens		$	493,214		$	510,641		$	372,339		$	359,987		$	334,102		$	304,783
Residential mortgage loans - junior liens			25,632			27,503			25,450			25,325			23,706			21,146
Home equity lines of credit			31,826			33,638			34,319			35,758			38,057			39,040
1-4 Family residential construction			15,621			14,798			24,698			26,216			24,908			21,121
Total residential mortgage			566,293			586,580			456,806			447,286			420,773			386,090
Commercial:
Commercial loans secured by real estate			293,304			301,227			162,611			159,266			150,468			154,779
Commercial and industrial			120,202			126,374			91,856			88,276			83,854			75,196
Small Business Administration - Paycheck
Protection Program			97,103			0			0			0			0			0
Political subdivisions			43,134			53,570			53,263			59,287			38,068			40,007
Commercial construction and land			40,348			33,555			11,962			14,527			14,287			5,122
Loans secured by farmland			11,433			12,251			7,146			7,255			7,294			7,019
Multi-family (5 or more) residential			32,699			31,070			7,180			7,713			7,896			9,188
Agricultural loans			3,874			4,319			5,659			6,178			3,998			4,671
Other commercial loans			16,579			16,535			13,950			10,986			11,475			12,152
Total commercial			658,676			578,901			353,627			353,488			317,340			308,134
Consumer			16,444			16,741			17,130			14,939			13,722			10,656
Total			1,241,413			1,182,222			827,563			815,713			751,835			704,880
Less: allowance for loan losses			(11,026)			(9,836)			(9,309)			(8,856)			(8,473)			(7,889)
Loans, net		$	1,230,387		$	1,172,386		$	818,254		$	806,857		$	743,362		$	696,991

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, 2020, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $49,736,000.

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $15,092,000 at June 30, 2020. 75

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The Corporation’s outstanding, available, and total credit facilities at June 30, 2020 and December 31, 2019 are as follows:


		Outstanding						Available						Total Credit
(In Thousands)	****	June 30,		****	Dec. 31,		****	June 30,		****	Dec. 31,		****	June 30,		****	Dec. 31,
		2020			2019			2020			2019			2020			2019
Federal Home Loan Bank of Pittsburgh		$	85,504		$	136,424		$	486,093		$	416,122		$	571,597		$	552,546
Federal Reserve Bank Discount Window			0			0			14,605			14,244			14,605			14,244
Other correspondent banks			0			0			45,000			45,000			45,000			45,000
Total credit facilities		$	85,504		$	136,424		$	545,698		$	475,366		$	631,202		$	611,790

At June 30, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $12,200,000, long-term borrowings of $72,904,000 and a letter of credit of $400,000. At December 31, 2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $52,127,000. 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, 2020, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $164,652,000.

Management believes the Corporation is well-positioned to meet its short-term and long-term obligations, including the impact of additional lending opportunities and other potential cash requirements arising from the Covenant merger.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Details concerning capital ratios at June 30, 2020 and December 31, 2019 are presented below. As a small bank holding company, the Corporation is not subject to consolidated capital requirements at June 30, 2020; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. Management believes, as of June 30, 2020, 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, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels. 76

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In October 2019, the Federal Reserve Board, FDIC and Office of the Comptroller of the Currency finalized a rule that provides qualifying community banking organizations an option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy. In 2020, C&N Bank has not elected the community bank leverage ratio (“CBLR”) framework. The decision to continue to measure capital adequacy using previously existing risk-based and leverage capital requirements reflects concerns that reliance on the leverage ratio as a single measurement could, in certain circumstances, limit the ability to grow or encourage taking excessive risk. C&N Bank could elect the CBLR framework in the future.


(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, 2020:
Total capital to risk-weighted assets:
Consolidated		$	232,614		21.32	%	N/A		N/A		N/A		N/A		N/A		N/A		$	114,568		≥10.5	%
C&N Bank			187,731		17.20	%	87,323		≥8	%	114,611		≥10.5	%	109,153		≥10	%		114,611		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			214,805		19.69	%	N/A		N/A		N/A		N/A		N/A		N/A			92,746		≥8.5	%
C&N Bank			176,422		16.16	%	65,492		≥6	%	92,780		≥8.5	%	87,323		≥8	%		92,780		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			214,805		19.69	%	N/A		N/A		N/A		N/A		N/A		N/A			76,379		≥7	%
C&N Bank			176,422		16.16	%	49,119		≥4.5	%	76,407		≥7.0	%	70,950		≥6.5	%		76,407		≥7	%
Tier 1 capital to average assets:
Consolidated			214,805		12.82	%	N/A		N/A		N/A		N/A		N/A		N/A			134,034		≥8	%
C&N Bank			176,422		10.63	%	66,381		≥4	%	N/A		N/A		82,976		≥5	%		132,762		≥8	%

December 31, 2019:
Total capital to risk-weighted assets:
Consolidated		$	228,057		20.70	%	N/A		N/A		N/A		N/A		N/A		N/A		$	115,689		≥10.5	%
C&N Bank			205,863		18.75	%	87,817		≥8	%	115,260		≥10.5	%	109,771		≥10	%		115,260		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			211,388		19.19	%	N/A		N/A		N/A		N/A		N/A		N/A			93,653		≥8.5	%
C&N Bank			195,694		17.83	%	65,863		≥6	%	93,306		≥8.5	%	87,817		≥8	%		93,306		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			211,388		19.19	%	N/A		N/A		N/A		N/A		N/A		N/A			77,126		≥7	%
C&N Bank			195,694		17.83	%	49,397		≥4.5	%	76,840		≥7.0	%	71,351		≥6.5	%		76,840		≥7	%
Tier 1 capital to average assets:
Consolidated			211,388		13.10	%	N/A		N/A		N/A		N/A		N/A		N/A			129,126		≥8	%
C&N Bank			195,694		12.24	%	63,940		≥4	%	N/A		N/A		79,925		≥5	%		127,879		≥8	%

While it is difficult to estimate the future impact of COVID-19, the Corporation’s and C&N Bank’s capital ratios at June 30, 2020 are at levels that demonstrate the capacity to absorb the acquisition of Covenant as well as significant losses if they arise while continuing to meet the requirements to be considered well capitalized.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. As described in more detail below, C&N Bank is 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. 77

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To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At June 30, 2020, 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, 2020, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 9.20%.

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 (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $11,472,000 at June 30, 2020 and $3,511,000 at December 31, 2019. Changes in accumulated other comprehensive income (loss) 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, 2020.

Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $239,000 at June 30, 2020 and $180,000 at December 31, 2019. 78

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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. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale debt securities and changes in underfunded or overfunded defined benefit plans. Fluctuations in interest rates significantly affect fair values of available-for-sale debt securities, and accordingly have an effect on Other Comprehensive Income (Loss) in each period.

Comprehensive Income totaled $7,675,000 for the second quarter 2020 as compared to $7,722,000 in the second quarter 2019. For the three months ended June 30, 2020, Comprehensive Income included: (1) Net Income of $5,438,000, which was $1,789,000 higher than in the second quarter 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $2,242,000 as compared to Other Comprehensive Income of $4,079,000 in the second quarter 2019; and (3) Other Comprehensive Loss from defined benefit plans of ($5,000) as compared to ($6,000) for the second quarter 2019.

For the six months ended June 30, 2020, Comprehensive Income totaled $17,624,000 as compared to $16,341,000 in the first six months of 2019. For the six months ended June 30, 2020, Comprehensive Income included: (1) Net Income of $9,604,000, which was $865,000 higher than net income for the first six months of 2019; (2) Other Comprehensive Income from available-for-sale debt securities of $7,961,000 as compared to Other Comprehensive Income of $7,445,000 from net unrealized gains on available-for-sale debt securities in the first six months of 2019; and (3) Other Comprehensive Income from defined benefit plans of $59,000 for the six months ended June 30, 2020 as compared to Other Comprehensive Income of $157,000 for the first six months of 2019.

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.

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

Except for the risk factor described immediately below, there have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 20, 2020.

Coronavirus Outbreak- In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. Since first being reported in China, the coronavirus has spread to additional countries including the United States. 79

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In response, many state and local governments, including the Commonwealth of Pennsylvania, have instituted emergency restrictions that have substantially limited the operation of non-essential businesses and the activities of individuals. It has been widely reported that these restrictions have resulted in significant adverse effects for many different types of businesses, particularly those in the travel, hospitality and food and beverage industries, among many others, and has resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect interest income and, therefore, earnings. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the impact of the coronavirus outbreak, and there is no guarantee that the Corporation’s efforts to address the adverse impacts of the coronavirus will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and actions taken to contain the coronavirus or its impact, among others.

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments; branch or office closures and business interruptions; and efforts to integrate the businesses of the Corporation and Covenant (acquired July 1, 2020).

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

Issuer Purchases of Equity Securities

The following table sets forth a summary of the purchases by the Corporation of its common stock during the second quarter 2020.


	****		****			****	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, 2020		0		$	0		0		600,000
May 1 - 31, 2020		0		$	0		0		600,000
June 1 - 30, 2020		0		$	0		0		600,000

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Note to Table: Effective April 21, 2016, the Corporation’s Board of Directors approved a treasury stock repurchase program. Under this stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation’s common stock. The Board of Directors’ April 21, 2016 authorization provides that: (1) the treasury stock repurchase program 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 new 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 Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6. Exhibits

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	Not applicable

10.	Material Contracts:

10.1	Employment Agreement dated May 18, 2020 between the Corporation and Janice E. Ward	Filed herewith

10.2	Change in Control Agreement dated June 27, 2020 between the Corporation and Janice E. Ward	Filed herewith

10.3	Indemnification Agreement dated June 27, 2020 between the Corporation and Janice E. Ward	Filed herewith

10.4	Indemnification Agreement dated July 1, 2020 between the Corporation and Stephen Dorwart	Filed herewith

10.5	Indemnification Agreement dated July 1, 2020 between the Corporation and Robert Loughery	Filed herewith

15.	Letter re: unaudited interim information	Not applicable

18.	Letter re: change in accounting principles	Not applicable

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

23.	Consents of experts and counsel	Not applicable

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q


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, 2020	By: /s/ J. Bradley Scovill
Date	President and Chief Executive Officer
August 6, 2020	By: /s/ Mark A. Hughes
Date	Treasurer and Chief Financial Officer

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made as of this 18^th^ day of May, 2020, between CITIZENS & NORTHERN CORPORATION, a Pennsylvania business corporation (the “Corporation”), CITIZENS & NORTHERN BANK (the “Bank”), a Pennsylvania chartered bank, and JANICE E. WARD, ESQ., CFP, 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, on the terms and conditions set forth in this Agreement.

2. Duties of Executive. Executive shall serve as the Executive Vice President and Director of the Trust Department 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, the Trust Department 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 her 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 two (2) year period

(the “Employment Period”) beginning on the date first mentioned above and, if not previously terminated pursuant to the terms of this Agreement, ending on June 15, 2022. Unless written notice of nonrenewal is given by the Bank on or before January 17, 2022 and by January 17 of each successive calendar year thereafter, the Employment Period shall be automatically extended an additional twelve (12) months.

(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) upon written notice from the Board of Directors of the Corporation to Executive. 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 her 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 her 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

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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 her 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 she 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 her 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

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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 Thousand Dollars ($200,000) 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 her performance. Such bonus may, but need not be, determined in accordance with any incentive bonus programs for executive officers as approved 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 granted 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

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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 her, 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

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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 her 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 her 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

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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.

(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 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

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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 her 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 her termination of employment, or, if Bank cannot provide such benefits because Executive is no longer an employee, a

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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 her 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 trust 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 thirty-five (35) mile radius of the legal or principal executive office of the Corporation or the Bank and any branch banking or other office of the Bank (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

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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 eighteen (18) 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 eighteen (18) 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 her 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, the Executive shall not make any public statements which disparage the Corporation or Bank. Notwithstanding the foregoing, nothing in this Section shall prohibit Executive 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 her 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,

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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.

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

(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.

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13. Indemnification; Liability Insurance. The Corporation and the Bank shall indemnify the Executive, to the fullest extent permitted by Pennsylvania law, with respect to any threatened, pending or contemplated action, suit or proceeding brought against Executive by reason of the fact that she 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

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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.

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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.

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(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 her 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 her 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) her spouse if he survives her, or (ii) to her estate if her spouse does not survive her, 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]

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

ATTEST:	CITIZENS & NORTHERN
	CORPORATION

	By:	/s/ J. Bradley Scovill
Secretary

ATTEST:	CITIZENS & NORTHERN BANK

	By:	/s/ J. Bradley Scovill
Secretary


WITNESS:		EXECUTIVE


		/s/ Janice E. Ward

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EXHIBIT A

Separation Agreement and General Release

THIS SEPARATION AGREEMENT AND GENERAL RELEASE (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 ____________________________, 2020 (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;

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(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 she has not assigned any claim that she purports to release hereunder and that she 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 she 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.

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

IN WITNESS WHEREOF, the Executive, acknowledging that she is acting of her 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:			Title:

Date:			Date:

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Exhibit10.2

CHANGE IN CONTROL AGREEMENT

THIS CHANGE IN CONTROL AGREEMENT (“Agreement”) is entered into as of the 27th day of June, 2020, by and among CITIZENS & NORTHERN CORPORATION, a Pennsylvania corporation (the “Corporation”), CITIZENS & NORTHERN BANK, a Pennsylvania bank (the “Bank”), and Janice E. Ward, an employee of the Corporation and/or the Bank and/or of a subsidiary of either (the “Employee”). The Corporation and the Bank are collectively referred to herein as the “Employer.”

WHEREAS, the Employer wishes to assure itself of the continuity of the Employee’s services in the event of any actual change in control of the Corporation; and

WHEREAS, the Employer and the Employee accordingly desire to enter into this Agreement on the terms and conditions set forth below;

NOW, THEREFORE, in consideration of the premises and mutual covenants set forth herein, it is hereby agreed by and between the parties as follows:

1. TERM OF AGREEMENT. The “Term” of this Agreement shall commence on the date hereof and shall continue through December 31, 2020; provided, however, that on such date and on each December 31 thereafter, the Term of this Agreement shall automatically be extended for one additional year unless, not later than the preceding January 1 either party shall have given written notice to the other that such party does not wish to extend the Term; and provided, however, that if a Change in Control (as defined in Section 3 below) shall have occurred during the original or any extended Term of this Agreement, the Term of this Agreement shall continue for a period of twenty-four (24) calendar months commencing with the calendar month in which such Change in Control occurs and shall end upon the expiration of such 24 month period.

2. EMPLOYMENT AFTER A CHANGE IN CONTROL. If the Employee is in the employ of the Bank on the date of a Change in Control, the Bank hereby agrees to continue the Employee in its employ for the period commencing on the date of the Change in Control and ending on the last day of the Term of this Agreement (the “Employment Period”). During the Employment Period, the Employee shall hold such position with the Bank and exercise such authority and perform such employment duties as are commensurate with the Employee’s position, authority and duties immediately prior to the Change in Control. The Employee agrees that during the Employment Period the Employee shall devote full business time exclusively to the Employee’s duties and perform such duties faithfully and efficiently; provided, however, that nothing in this Agreement shall prevent either (i) the Employee from voluntarily resigning from employment upon at least sixty (60) days’ written notice to the Bank under circumstances which do not constitute a Termination (as defined below in Section 5), or (ii) the Bank terminating the Employee for “Cause” as defined in Section 5 hereof or for any other reason or no reason.

3. CHANGE IN CONTROL. For purposes of this Agreement, a “Change in Control” means the happening of any of the following: the merger of the Corporation into, or the consolidation of the Corporation with, another entity; the sale or other disposition of all or substantially all of the Corporation’s assets; or the liquidation of the Corporation; provided, however, that a Change in Control shall not be deemed to have occurred by reason of a transaction, or a substantially concurrent or otherwise related series of transactions, upon the completion of which 50 percent or more of the beneficial ownership of the voting power of the Corporation (or of the surviving corporation or corporation directly or indirectly controlling the Corporation) is held by (i) employee benefit plans of the Corporation ; or (ii) an “Affiliate” of the Corporation (as defined in the Securities Exchange Act of 1934, as amended).

4. COMPENSATION DURING THE EMPLOYMENT PERIOD. During the Employment Period, the Employee shall be compensated as follows:

a. The Employee shall receive compensation which is not less than compensation paid by the Employer to the Employee immediately prior to the Employment Period; and

b. The Employee shall be eligible to participate in the Employer employee benefit plans which are not materially less favorable to the Employee than the Employer employee benefit plans in which the Employee participated in immediately prior to the Employment Period.

5. TERMINATION. For purposes of this Agreement, the term “Termination” shall mean termination of the employment of the Employee during the Employment Period either (i) by the Employer, for any reason other than death, Disability (as defined below), or Cause (as described below), or (ii) by resignation of the Employee upon the occurrence of one or more of the following events:

a. A significant change in the nature or scope of the Employee’s authorities or duties from those described in Section 2 above, a breach of any of the provisions of Section 4 above, or the breach by the Employer of any other provision of this Agreement;

b. The relocation of the Employee’s office to a location more than 35 miles from the location of the Employee’s office immediately prior to the Employment Period;

c. A reasonable determination by the Employee that, as a result of a Change in Control and a change in circumstances thereafter significantly affecting the nature and scope of Employee’s authorities and duties from those described in Section 2 above, the Employee is unable to exercise the authorities, powers, functions or duties associated with the Employee’s position as contemplated by Section 2 above; or

d. The failure of the Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement as contemplated in Section 15 below.

The date of the Employee’s Termination under this Section 5 shall be the date specified by the Employee or the Employer, as the case may be, in a written notice to the other party complying with the requirements of Section 11 below. For purposes of this Agreement, the Employee shall be considered to have a “Disability” during the period in which the Employee is unable, by reason of a medically determinable physical or mental impairment, to engage in the material and substantial duties of the Employee’s regular occupation, which condition is expected to be permanent. For purposes of this Agreement, the term “Cause” means, in the reasonable judgment of the Board of Directors of the Employer, (i) the willful and continued failure by the Employee to substantially perform the Employee’s duties with the Employer after written notification by the Employer, or (ii) the willful engaging by the Employee in conduct which is demonstrably injurious to the Employer, monetarily or otherwise, or (iii) the engaging by the Employee in egregious misconduct involving moral turpitude. For purposes of this Agreement, no act, or failure to act, on the Employee’s part shall be deemed “willful” unless done, or omitted to be done, by the Employee not in good faith and without reasonable belief that such action was in the best interest of the Employer.

6. SEVERANCE PAYMENTS. In the event of a Termination described in Section 5 above, in lieu of the amounts otherwise payable under Section 4 above, the Employee shall be entitled to receive (i) Employer-paid COBRA premiums (relating to the Employee’s group medical insurance continuation premiums) for a period of eighteen (18) months after the date of Termination, and (ii) a lump sum payment in cash no later than thirty (30) business days after the date of Termination equal to the sum of:

a. the Employee’s unpaid salary, accrued vacation pay and unreimbursed business expenses through and including the date of Termination; and

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b. an amount equal to one times the Employee’s base salary in effect immediately prior to the date of Termination.

7. EXCESS PARACHUTE PAYMENT LIMITATION. Notwithstanding any other provision of this Agreement, if the sum of the payments to the Employee described in this Agreement and in any other agreement, program, or plan between the Employee and the Employer (or an affiliate of the Employer) attributable to the same Change in Control constitute “excess parachute payments” (as defined in Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (“Code”)), the Employer shall reduce the amounts otherwise payable to the Employee under this Agreement so that the Employee’s total “parachute payment” (as defined in Code Section 280G(b)(2)(A)) under this Agreement and any other agreements, programs, or plans shall be One Thousand Dollars ($1,000) less than the amount that would be an “excess parachute payment.”

8. WITHHOLDING. All payments to the Employee under this Agreement will be subject to all applicable withholding of state and federal taxes.

9. CONFIDENTIALITY AND NON-SOLICITATION. The Employee agrees that:

a. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or except to the extent that the Employee has express authorization from the Employer, the Employee agrees to keep secret and confidential all non-public information concerning the Employer (or any entity controlled by the Employer) which was acquired by or disclosed to the Employee during the course of the Employee’s employment with the Employer (or any entity controlled by the Employer), and not to disclose the same, either directly or indirectly, to any other person, firm or business entity or to use it in any way.

b. While the Employee is employed by the Employer (or any entity controlled by the Employer) and for a period of twelve (12) months after the date of the Employee’s Termination or other termination of employment with the Employer, the Employee covenants and agrees that Employee will not, whether for Employee or for any other person, business, partnership, association, firm, company or corporation, initiate contact with, solicit, divert or take away any of the customers (entities or individuals from which the Employer or any entity controlled by the Employer receives payment for services) of the Employer (or any entity controlled by the Employer) or employees of the Employer (or any entity controlled by the Employer) in existence from time to time during Employee’s employment with the Employer (or any entity controlled by the Employer) and at the time of such initiation, solicitation or diversion.

10. MITIGATION AND SET-OFF. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise. The Employer shall not be entitled to set off against the amounts payable to the Employee under this Agreement any amounts earned by the Employee in other employment after termination of employment with the Employer, or any amounts which might have been earned by the Employee in other employment had he sought such other employment.

11. NOTICES. Any notice of Termination of the Employee’s employment by the Employer or the Employee for any reason under Section 5 above shall be upon no less than fifteen (15) days’ and no greater than forty-five (45) days’ advance written notice to the other party. Any notices, requests, demand and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Employee at the last address the Employee has filed in writing with the Employer or, in the case of the Employer, to the attention of the Secretary of the Employer, at its principal executive offices.

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12. NON-ALIENATION. The Employee shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this Agreement; and no amounts payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. Nothing in this Section 12 shall limit the Employee’s rights or powers to dispose of the Employee’s property by Last Will and Testament or limit any rights or powers which the Employee’s executor or administrator would otherwise have. This Agreement shall inure to the benefit of and be enforceable by the Employee’s personal or legal representatives, executors, administrators, successors, heirs, designees, devisees, and legatees. If the Employee should die while any amount is still payable to the Employee hereunder had the Employee continued to live, all such amounts shall be paid in accordance with the terms of this Agreement to the Employee’s designees, devisees, or legatee, or if there are none, to the Employee’s estate.

13. GOVERNING LAW. The provisions of this Agreement shall be construed in accordance with the laws of the State of Pennsylvania, without application of conflict of laws provisions thereunder.

14. AMENDMENT. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, except as specifically provided in Section 15 hereto, so long as the Employee lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof.

15. SUCCESSORS TO THE EMPLOYER. This Agreement shall be binding upon and inure to the benefit of the Employer and any successor of the Employer. The Employer shall 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 Employer to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no succession had taken place.

16. EMPLOYMENT STATUS. Nothing herein contained shall be deemed to create an employment agreement between the Employer and the Employee, providing for the employment of the Employee by the Employer for any fixed period of time. The Employee’s employment with the Employer is terminable at will by the Employer or the Employee, and each shall have the right to terminate the Employee’s employment with the Employer at any time, with or without Cause, subject to (i) the notice provisions of this Agreement, and (ii) the Employer’s obligation to provide severance payments if and as required by Section 6. Upon a termination of the Employee’s employment prior to the date of a Change in Control, there shall be no rights of the Employee under this Agreement.

17. 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 Employee, 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

Page 4 of 6

any Internal Revenue Service or Department rules or other guidance issued thereunder), the Corporation may, in consultation with the Employee, 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 Employee 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 Employee’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 Employee 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 Employee 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 Employee on the first business day of the seventh month following her separation from service (the "Delayed Payment Date") and (ii) in the event any equity compensation awards held by the Employee that vest upon termination of the Employee’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 Employee 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 Employee’s separation from service occurs. If the Employee 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 Employee in writing for this purpose, or in the absence of any such designation, to (i) her spouse if he survives her, or (ii) to her estate if her spouse does not survive her, on the first to occur of the Delayed Payment Date or 30 days after the date of the Employee’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.

18. SEVERABILITY. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect.

19. SURVIVAL. Notwithstanding any other provision of this Agreement to the contrary, Sections 9, 15 and 17 shall survive the termination of this Agreement and the termination of the Employee’s employment with the Employer.

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20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, any one of which shall be deemed the original without reference to the others.

IN WITNESS WHEREOF, the Employee and the Employer have executed this Agreement as of the day and year first above written, but on the dates indicated below each.

	EMPLOYEE:

	Signature:	/s/ Janice E. Ward

	Printed Name:	Janice E. Ward
	Address:	487 Pecks Road
		Pittsfield, MA 01201

	Date:	06-27-2020


	CORPORATION:

	CITIZENS & NORTHERN CORPORATION

	By:	/s/ J. Bradley Scovill

	Title:	President & CEO

	Date:	06-27-2020


	BANK:

	CITIZENS & NORTHERN BANK

	By:	/s/ J. Bradley Scovill

	Title:	President & CEO

	Date:	06-27-2020

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Exhibit 10.3

INDEMNIFICATION AGREEMENT

This Agreement made this 27th day of June, 2020, 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 Janice E. Ward**,** 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;

(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.

(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

(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;

(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:

	(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:
		Janice E. Ward
		487 Pecks Road
		Pittsfield, MA 01201

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.

INDEMNITEE		CITIZENS & NORTHERN CORPORATION

By:	/s/ Janice E. Ward	By:	/s/ J. Bradley Scovill

Title:	Executive Vice President and Chief	Title:	President and Chief Executive
	Wealth Management Officer		Officer

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.)

Exhibit 10.4

INDEMNIFICATION AGREEMENT

This Agreement made this 16^th^ day of July, 2020, 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 Stephen M. Dorwart**,** a director, officer or representative (as hereinafter defined) of the Company (the “Indemnitee”);