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 March 31, 2022

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

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)


PENNSYLVANIA		23-2451943
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Trading Symbol		Name of Each Exchange on Which Registered
Common Stock Par Value $1.00		CZNC		NASDAQ Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ⌧ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ◻ Accelerated filer ⌧ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ◻

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ⌧

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Common Stock ($1.00 par value)	15,605,135 Shares Outstanding on May 4, 2022

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

CITIZENS & NORTHERN CORPORATION

Index


Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) – March 31, 2022 and December 31, 2021			Page 3
Consolidated Statements of Income (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021			Page 4

Consolidated Statements of Comprehensive (Loss) Income (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021			Page 5
Consolidated Statements of Cash Flows (Unaudited) – Three-month Periods Ended March 31, 2022 and 2021			Page 6
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month Periods March 31, 2022 and 2021			Page 7
Notes to Unaudited Consolidated Financial Statements			Pages 8 – 33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 34 – 55
Item 3. Quantitative and Qualitative Disclosures About Market Risk			Pages 55 – 57

Item 4. Controls and Procedures			Page 57
Part II. Other Information			Pages 57 – 59
Signatures			Page 60

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)


	****	March 31,		****	December 31,
		2022			2021
ASSETS
Cash and due from banks:
Noninterest-bearing		$	19,471		$	16,729
Interest-bearing			94,875			88,219
Total cash and due from banks			114,346			104,948
Available-for-sale debt securities, at fair value			532,913			517,679

Loans receivable			1,538,190			1,564,849
Allowance for loan losses			(14,271)			(13,537)
Loans, net			1,523,919			1,551,312

Bank-owned life insurance			30,804			30,669
Accrued interest receivable			7,507			7,235
Bank premises and equipment, net			21,169			20,683
Foreclosed assets held for sale			531			684
Deferred tax asset, net			11,818			5,887
Goodwill			52,505			52,505
Core deposit intangibles, net			3,206			3,316
Other assets			31,653			32,730
TOTAL ASSETS		$	2,330,371		$	2,327,648

LIABILITIES
Deposits:
Noninterest-bearing		$	552,255		$	521,206
Interest-bearing			1,408,697			1,403,854
Total deposits			1,960,952			1,925,060
Short-term borrowings			2,357			1,803
Long-term borrowings - FHLB advances			20,581			28,042
Senior notes, net			14,717			14,701
Subordinated debt, net			33,031			33,009
Accrued interest and other liabilities			22,525			23,628
TOTAL LIABILITIES			2,054,163			2,026,243

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; no shares issued			0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares;
issued 16,030,172 and outstanding 15,718,723 at March 31, 2022;
issued 16,030,172 and outstanding 15,759,090 at December 31, 2021			16,030			16,030
Paid-in capital			142,991			144,453
Retained earnings			145,073			142,612
Treasury stock, at cost; 311,449 shares at March 31, 2022 and 271,082
shares at December 31, 2021			(7,708)			(6,716)
Accumulated other comprehensive (loss) income			(20,178)			5,026
TOTAL STOCKHOLDERS' EQUITY			276,208			301,405
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	2,330,371		$	2,327,648

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

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

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)


	****	Three Months Ended
		March 31,		March 31,
		2022		2021
INTEREST INCOME
Interest and fees on loans:
Taxable		$	18,549	$	19,491
Tax-exempt			454		439
Income from available-for-sale debt securities:
Taxable			1,969		1,113
Tax-exempt			722		642
Other interest and dividend income			79		69
Total interest and dividend income			21,773		21,754
INTEREST EXPENSE
Interest on deposits			910		1,278
Interest on short-term borrowings			1		15
Interest on long-term borrowings - FHLB advances			49		134
Interest on senior notes, net			118		0
Interest on subordinated debt, net			363		244
Total interest expense			1,441		1,671
Net interest income			20,332		20,083
Provision for loan losses			891		259
Net interest income after provision for loan losses			19,441		19,824
NONINTEREST INCOME
Trust revenue			1,786		1,626
Brokerage and insurance revenue			522		326
Service charges on deposit accounts			1,235		1,015
Interchange revenue from debit card transactions			963		881
Net gains from sale of loans			382		1,064
Loan servicing fees, net			210		248
Increase in cash surrender value of life insurance			135		150
Other noninterest income			588		1,472
Realized gains on available-for-sale debt securities, net			2		0
Total noninterest income			5,823		6,782
NONINTEREST EXPENSE
Salaries and employee benefits			10,607		8,895
Net occupancy and equipment expense			1,411		1,304
Data processing and telecommunications expense			1,623		1,380
Automated teller machine and interchange expense			384		337
Pennsylvania shares tax			488		491
Professional fees			489		547
Other noninterest expense			1,884		2,755
Total noninterest expense			16,886		15,709
Income before income tax provision			8,378		10,897
Income tax provision			1,483		2,110
NET INCOME		$	6,895	$	8,787
EARNINGS PER COMMON SHARE - BASIC		$	0.44	$	0.55
EARNINGS PER COMMON SHARE - DILUTED		$	0.44	$	0.55

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

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

Consolidated Statements of Comprehensive (Loss) Income

(In Thousands) (Unaudited)


	****	Three Months Ended
		March 31,		March 31,
	****	2022		2021
Net income		$	6,895	$	8,787

Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities			(32,025)		(6,114)
Reclassification adjustment for (gains) realized in income			(2)		0
Other comprehensive loss on available-for-sale debt securities			(32,027)		(6,114)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			133		(5)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(11)		(4)
Other comprehensive income (loss) on pension and postretirement obligations			122		(9)

Other comprehensive loss before income tax			(31,905)		(6,123)
Income tax related to other comprehensive loss			6,701		1,287

Net other comprehensive loss			(25,204)		(4,836)

Comprehensive (loss) income		$	(18,309)	$	3,951

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)


	****	Three Months Ended
		March 31,		March 31,
		2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,895	$	8,787
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			891		259
Realized gains on available-for-sale debt securities, net			(2)		0
Net amortization of securities			714		488
Increase in cash surrender value of life insurance			(135)		(150)
Depreciation and amortization of bank premises and equipment			507		553
Net accretion of purchase accounting adjustments			(340)		(818)
Stock-based compensation			368		341
Deferred income taxes			770		462
Increase in fair value of servicing rights			(2)		(75)
Gains on sales of loans, net			(382)		(1,064)
Origination of loans held for sale			(14,752)		(32,478)
Proceeds from sales of loans held for sale			13,661		30,727
Increase in accrued interest receivable and other assets			(963)		(2,190)
(Decrease) increase in accrued interest payable and other liabilities			(1,663)		891
Other			81		(20)
Net Cash Provided by Operating Activities			5,648		5,713
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit			0		(1,250)
Proceeds from calls and maturities of available-for-sale debt securities			18,746		17,093
Purchase of available-for-sale debt securities			(62,949)		(34,494)
Redemption of Federal Home Loan Bank of Pittsburgh stock			337		584
Purchase of Federal Home Loan Bank of Pittsburgh stock			(282)		(473)
Net decrease in loans			26,807		29,936
Proceeds from bank owned life insurance			0		287
Proceeds from sales of premises and equipment			0		495
Purchase of premises and equipment			(993)		(239)
Proceeds from sale of foreclosed assets			139		0
Other			75		70
Net Cash (Used in) Provided by Investing Activities			(18,120)		12,009
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits			35,952		103,793
Net increase (decrease) in short-term borrowings			554		(10,211)
Repayments of long-term borrowings - FHLB advances			(7,380)		(4,024)
Sale of treasury stock			141		77
Purchases of treasury stock			(3,380)		(157)
Common dividends paid			(4,017)		(3,912)
Net Cash Provided by Financing Activities			21,870		85,566
INCREASE IN CASH AND CASH EQUIVALENTS			9,398		103,288
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			95,848		96,017
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	105,246	$	199,305
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of certificates of deposit		$	0	$	750
Increase in accrued purchase of available-for-sale debt securities		$	3,770	$	6,245
Assets acquired through foreclosure of real estate loans		$	0	$	134
Interest paid		$	1,116	$	2,193
Income taxes paid		$	46	$	47

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

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

Consolidated Statements of Changes in Stockholders’ Equity

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


														Accumulated
														Other
	Common	****	Treasury	****	Common		****	Paid-in		****	Retained		****	Comprehensive		****	Treasury
Three Months Ended March 31, 2022	Shares	****	Shares	****	Stock		****	Capital		****	Earnings		****	Income (Loss)		****	Stock		****	Total
Balance, December 31, 2021	16,030,172	****	271,082		$	16,030		$	144,453		$	142,612		$	5,026		$	(6,716)		$	301,405
Net income												6,895									6,895
Other comprehensive loss, net															(25,204)						(25,204)
Cash dividends declared on common stock, .28 per share												(4,434)									(4,434)
Shares issued for dividend reinvestment plan			(16,134)						12									405			417
Shares issued from treasury and redeemed related to exercise of stock options			(7,024)						(34)									175			141
Restricted stock granted			(78,243)						(1,932)									1,932			0
Forfeiture of restricted stock			6,072						124									(124)			0
Stock-based compensation expense									368												368
Purchase of restricted stock for tax withholding			6,054															(153)			(153)
Treasury stock purchases			129,642															(3,227)			(3,227)
Balance, March 31, 2022	16,030,172	****	311,449		$	16,030		$	142,991		$	145,073		$	(20,178)		$	(7,708)		$	276,208

Three Months Ended March 31, 2021
Balance, December 31, 2020	15,982,815	****	70,831		$	15,983		$	143,644		$	129,703		$	11,795		$	(1,369)		$	299,756
Net income												8,787									8,787
Other comprehensive loss, net															(4,836)						(4,836)
Cash dividends declared on common stock, .27 per share												(4,314)									(4,314)
Shares issued for dividend reinvestment plan	19,475					19			383												402
Shares issued from treasury and redeemed related to exercise of stock options			(5,414)						(28)									105			77
Restricted stock granted	10,989		(63,402)			11			(1,240)									1,229			0
Forfeiture of restricted stock			3,791						73									(73)			0
Stock-based compensation expense									341												341
Purchase of restricted stock for tax withholding			7,659															(157)			(157)
Balance, March 31, 2021	16,013,279	****	13,465		$	16,013		$	143,173		$	134,176		$	6,959		$	(265)		$	300,056

All values are in US Dollars.

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

Table of Contents

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

Recently Issued But Not Yet Effective Accounting Pronouncements

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

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

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

PER SHARE DATA

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

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


(In Thousands, Except Share and Per Share Data)		Three Months Ended
		March 31,		March 31,
		2022		2021
Basic
Net income		$	6,895	$	8,787
Less: Dividends and undistributed earnings allocated to participating securities			(60)		(65)
Net income attributable to common shares		$	6,835	$	8,722
Basic weighted-average common shares outstanding			15,645,474		15,850,217
Basic earnings per common share (a)		$	0.44	$	0.55
Diluted
Net income attributable to common shares		$	6,835	$	8,722
Basic weighted-average common shares outstanding			15,645,474		15,850,217
Dilutive effect of potential common stock arising from stock options			3,701		4,234
Diluted weighted-average common shares outstanding			15,649,175		15,854,451
Diluted earnings per common share (a)		$	0.44	$	0.55
Weighted-average nonvested restricted shares outstanding			138,141		118,442
(a)	Basic and diluted earnings per share under the two-class method are determined on net income reported on the consolidated statements of income, less earnings allocated to non-vested restricted shares with nonforfeitable dividends (participating securities).
---	---

Anti-dilutive stock options are excluded from earnings per share calculations. There were no anti-dilutive instruments in the three-month periods ended March 31, 2022 and 2021.

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

COMPREHENSIVE (LOSS) INCOME

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


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended March 31, 2022	****		****
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities		$	(32,025)		$	6,726		$	(25,299)
Reclassification adjustment for (gains) realized in income			(2)			0			(2)
Other comprehensive loss from available-for-sale debt securities			(32,027)			6,726			(25,301)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			133			(27)			106
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(11)			2			(9)
Other comprehensive income on unfunded retirement obligations			122			(25)			97
Total other comprehensive loss		$	(31,905)		$	6,701		$	(25,204)


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
Three Months Ended March 31, 2021	****		****
Available-for-sale debt securities,
Unrealized holding losses on available-for-sale debt securities		$	(6,114)		$	1,285		$	(4,829)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses			(5)			1			(4)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(4)			1			(3)
Other comprehensive loss on unfunded retirement obligations			(9)			2			(7)
Total other comprehensive loss		$	(6,123)		$	1,287		$	(4,836)

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


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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)	****	Unrealized		****	****		****	Accumulated
		(Losses)			Unfunded			Other
		Gains			Retirement			Comprehensive
		on Securities			Obligations			(Loss) Income
Three Months Ended March 31, 2022	****		****
Balance, beginning of period		$	4,809		$	217		$	5,026
Other comprehensive (loss) income during three months ended March 31, 2022			(25,301)			97			(25,204)
Balance, end of period		$	(20,492)		$	314		$	(20,178)

Three Months Ended March 31, 2021		****	****
Balance, beginning of period		$	11,676		$	119		$	11,795
Other comprehensive loss during three months ended March 31, 2021			(4,829)			(7)			(4,836)
Balance, end of period		$	6,847		$	112		$	6,959

CASH AND DUE FROM BANKS

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


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
Cash and cash equivalents		$	105,246		$	95,848
Certificates of deposit			9,100			9,100
Total cash and due from banks		$	114,346		$	104,948

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

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at March 31, 2022 or December 31, 2021. 11

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SECURITIES

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


(In Thousands)	****	March 31, 2022
					Gross			Gross
					Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of the U.S. Treasury		$	38,152		$	0		$	(1,658)		$	36,494
Obligations of U.S. Government agencies			24,455			150			(1,197)			23,408
Bank holding company debt securities			24,942			0			(899)			24,043
Obligations of states and political subdivisions:
Tax-exempt			149,140			963			(6,470)			143,633
Taxable			73,732			293			(4,396)			69,629
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			112,122			107			(5,661)			106,568
Residential collateralized mortgage obligations			45,628			4			(1,764)			43,868
Commercial mortgage-backed securities			90,682			119			(5,531)			85,270
Total available-for-sale debt securities		$	558,853		$	1,636		$	(27,576)		$	532,913


(In Thousands)	****	December 31, 2021
					Gross			Gross
	****			****	Unrealized			Unrealized
	****	Amortized		****	Holding		****	Holding		****	Fair
	****	Cost		****	Gains		****	Losses		****	Value

Obligations of the U.S. Treasury		$	25,058		$	52		$	(198)		$	24,912
Obligations of U.S. Government agencies			23,936			563			(408)			24,091
Bank holding company debt securities			18,000			18			(31)			17,987
Obligations of states and political subdivisions:
Tax-exempt			143,427			4,749			(148)			148,028
Taxable			72,182			1,232			(649)			72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			98,048			705			(572)			98,181
Residential collateralized mortgage obligations			44,015			437			(205)			44,247
Commercial mortgage-backed securities			86,926			1,548			(1,006)			87,468
Total available-for-sale debt securities		$	511,592		$	9,304		$	(3,217)		$	517,679

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


March 31, 2022		Less Than 12 Months						12 Months or More						Total
(In Thousands)		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
	****	Value		****	Losses		****	Value		****	Losses		****	Value		****	Losses
Obligations of the U.S. Treasury		$	36,494		$	(1,658)		$	0		$	0		$	36,494		$	(1,658)
Obligations of U.S. Government agencies			4,812			(61)			11,363			(1,136)			16,175			(1,197)
Bank holding company debt securities			21,043			(899)			0			0			21,043			(899)
Obligations of states and political subdivisions:
Tax-exempt			104,057			(6,341)			1,719			(129)			105,776			(6,470)
Taxable			46,674			(3,692)			5,814			(704)			52,488			(4,396)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			98,253			(5,374)			3,737			(287)			101,990			(5,661)
Residential collateralized mortgage obligations			41,916			(1,764)			0			0			41,916			(1,764)
Commercial mortgage-backed securities			67,400			(4,568)			7,153			(963)			74,553			(5,531)
Total temporarily impaired available-for-sale debt securities		$	420,649		$	(24,357)		$	29,786		$	(3,219)		$	450,435		$	(27,576)


December 31, 2021		Less Than 12 Months						12 Months or More						Total
(In Thousands)		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
	****	Value		****	Losses		****	Value		****	Losses		****	Value		****	Losses
Obligations of the U.S. Treasury		$	18,886		$	(198)		$	0		$	0		$	18,886		$	(198)
Obligations of U.S. Government agencies			9,735			(264)			4,856			(144)			14,591			(408)
Bank holding company debt securities			12,969			(31)			0			0			12,969			(31)
Obligations of states and political subdivisions:
Tax-exempt			17,852			(141)			549			(7)			18,401			(148)
Taxable			31,261			(517)			3,277			(132)			34,538			(649)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			71,451			(572)			0			0			71,451			(572)
Residential collateralized mortgage obligations			15,117			(205)			0			0			15,117			(205)
Commercial mortgage-backed securities			52,867			(1,006)			0			0			52,867			(1,006)
Total temporarily impaired available-for-sale debt securities		$	230,138		$	(2,934)		$	8,682		$	(283)		$	238,820		$	(3,217)

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


(In Thousands)		Three Months Ended
		March 31,		March 31,
	****	2022		2021
Gross realized gains from sales		$	2	$	0
Gross realized losses from sales			0		0
Net realized gains		$	2	$	0

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)		March 31, 2022
		Amortized			Fair
	****	Cost		****	Value
Due in one year or less		$	12,457		$	12,483
Due from one year through five years			77,304			75,288
Due from five years through ten years			86,104			82,906
Due after ten years			134,556			126,530
Sub-total			310,421			297,207
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			112,122			106,568
Residential collateralized mortgage obligations			45,628			43,868
Commercial mortgage-backed securities			90,682			85,270
Total		$	558,853		$	532,913

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. In the table above, mortgage-backed securities and collateralized mortgage obligations are shown in one period.

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

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

A summary of information management considered in evaluating debt and equity securities for OTTI at March 31, 2022 is provided below.

Debt Securities

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

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for 14

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

LOANS

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

Summary of Loans by Type

(In Thousands)


	****	March 31,		****	December 31,
		2022			2021
Commercial:
Commercial loans secured by real estate		$	585,677		$	569,840
Commercial and industrial			159,793			159,073
Paycheck Protection Program - 1st Draw			887			1,356
Paycheck Protection Program - 2nd Draw			11,490			25,508
Political subdivisions			81,975			81,301
Commercial construction and land			37,258			60,579
Loans secured by farmland			12,507			11,121
Multi-family (5 or more) residential			53,141			50,089
Agricultural loans			2,588			2,351
Other commercial loans			14,827			17,153
Total commercial			960,143			978,371
Residential mortgage:
Residential mortgage loans - first liens			481,119			483,629
Residential mortgage loans - junior liens			22,572			23,314
Home equity lines of credit			39,649			39,252
1-4 Family residential construction			16,945			23,151
Total residential mortgage			560,285			569,346
Consumer			17,762			17,132
Total			1,538,190			1,564,849
Less: allowance for loan losses			(14,271)			(13,537)
Loans, net		$	1,523,919		$	1,551,312

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

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in Northcentral Pennsylvania, the Southern tier of New York State, Southeastern Pennsylvania and Southcentral Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. 15

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

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


(In Thousands)	Three Months Ended
	March 31,		March 31,
	2022		2021
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(637)	$	718
Amortization recognized in interest income		(248)		(366)
Adjustments to gross amortized cost of loans at end of period	$	(885)	$	352
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(3,335)	$	(5,979)
Accretion recognized in interest income		553		797
Adjustments to gross amortized cost of loans at end of period	$	(2,782)	$	(5,182)

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


(In Thousands)		March 31,			December 31,
	****	2022		****	2021
Outstanding balance		$	5,966		$	9,802
Carrying amount			3,983			6,558

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of March 31, 2022 and December 31, 2021, management determined that no allowance for credit losses related to unfunded loan commitments was required.

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


Three Months Ended March 31, 2022		December 31, 2021		****	****								****	March 31, 2022
(In Thousands)	****	Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	Balance
Allowance for Loan Losses:	****		****
Commercial:
Commercial loans secured by real estate		$	4,405		$	0		$	0		$	612		$	5,017
Commercial and industrial			2,723			(150)			0			268			2,841
Commercial construction and land			637			0			0			(246)			391
Loans secured by farmland			115			0			0			14			129
Multi-family (5 or more) residential			215			0			0			152			367
Agricultural loans			25			0			0			2			27
Other commercial loans			173			0			0			(23)			150
Total commercial			8,293			(150)			0			779			8,922
Residential mortgage:
Residential mortgage loans - first liens			3,650			0			1			159			3,810
Residential mortgage loans - junior liens			184			0			0			(3)			181
Home equity lines of credit			302			0			15			(11)			306
1-4 Family residential construction			202			0			0			(54)			148
Total residential mortgage			4,338			0			16			91			4,445
Consumer			235			(30)			7			25			237
Unallocated			671			0			0			(4)			667
Total Allowance for Loan Losses		$	13,537		$	(180)		$	23		$	891		$	14,271

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q


Three Months Ended March 31, 2021		December 31, 2020		****	****								****	March 31, 2021
(In Thousands)	****	Balance		****	Charge-offs		****	Recoveries		****	Provision (Credit)		****	Balance
Allowance for Loan Losses:	****		****
Commercial:
Commercial loans secured by real estate		$	3,051		$	0		$	0		$	299		$	3,350
Commercial and industrial			2,245			0			14			(72)			2,187
Commercial construction and land			454			0			0			22			476
Loans secured by farmland			120			0			0			(9)			111
Multi-family (5 or more) residential			236			0			0			19			255
Agricultural loans			34			0			0			(8)			26
Other commercial loans			168			0			0			(9)			159
Total commercial			6,308			0			14			242			6,564
Residential mortgage:
Residential mortgage loans - first liens			3,524			0			1			(18)			3,507
Residential mortgage loans - junior liens			349			0			0			(15)			334
Home equity lines of credit			281			0			1			(1)			281
1-4 Family residential construction			99			0			0			(21)			78
Total residential mortgage			4,253			0			2			(55)			4,200
Consumer			239			(11)			12			(20)			220
Unallocated			585			0			0			92			677
Total Allowance for Loan Losses		$	11,385		$	(11)		$	28		$	259		$	11,661

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

In determining the larger loan relationships for detailed assessment under the specific allowance component, the Corporation uses an internal risk rating system. Under the risk rating system, the Corporation classifies problem or potential problem loans as “Special Mention,” “Substandard,” or “Doubtful” on the basis of currently existing facts, conditions and values. Substandard loans include those characterized by the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans that do not currently expose the Corporation to sufficient risk to warrant classification as Substandard or Doubtful, but possess weaknesses that deserve management’s close attention, are deemed to be Special Mention. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table that follows. 18

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


March 31, 2022	****									Purchased
(In Thousands)				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate		$	547,705	$	18,000	$	16,098	$	0	$	3,874	$	585,677
Commercial and Industrial			144,864		11,030		3,860		0		39		159,793
Paycheck Protection Program - 1st Draw			887		0		0		0		0		887
Paycheck Protection Program - 2nd Draw			11,490		0		0		0		0		11,490
Political subdivisions			81,975		0		0		0		0		81,975
Commercial construction and land			36,496		714		48		0		0		37,258
Loans secured by farmland			11,319		287		901		0		0		12,507
Multi-family (5 or more) residential			52,274		0		867		0		0		53,141
Agricultural loans			2,054		0		534		0		0		2,588
Other commercial loans			14,826		1		0		0		0		14,827
Total commercial			903,890		30,032		22,308		0		3,913		960,143
Residential Mortgage:
Residential mortgage loans - first liens			466,862		7,548		6,640		0		69		481,119
Residential mortgage loans - junior liens			22,182		57		332		0		1		22,572
Home equity lines of credit			38,961		59		629		0		0		39,649
1-4 Family residential construction			16,945		0		0		0		0		16,945
Total residential mortgage			544,950		7,664		7,601		0		70		560,285
Consumer			17,713		0		49		0		0		17,762
Totals		$	1,466,553	$	37,696	$	29,958	$	0	$	3,983	$	1,538,190


December 31, 2021	****									Purchased
(In Thousands)				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Commercial:
Commercial loans secured by real estate		$	538,966	$	10,510	$	16,220	$	0	$	4,144	$	569,840
Commercial and Industrial			142,775		10,841		4,694		0		763		159,073
Paycheck Protection Program - 1st Draw			1,356		0		0		0		0		1,356
Paycheck Protection Program - 2nd Draw			25,508		0		0		0		0		25,508
Political subdivisions			81,301		0		0		0		0		81,301
Commercial construction and land			59,816		715		48		0		0		60,579
Loans secured by farmland			10,011		186		924		0		0		11,121
Multi-family (5 or more) residential			47,638		0		873		0		1,578		50,089
Agricultural loans			1,802		0		549		0		0		2,351
Other commercial loans			17,150		3		0		0		0		17,153
Total commercial			926,323		22,255		23,308		0		6,485		978,371
Residential Mortgage:
Residential mortgage loans - first liens			469,044		7,981		6,534		0		70		483,629
Residential mortgage loans - junior liens			22,914		114		283		0		3		23,314
Home equity lines of credit			38,652		59		541		0		0		39,252
1-4 Family residential construction			23,151		0		0		0		0		23,151
Total residential mortgage			553,761		8,154		7,358		0		73		569,346
Consumer			17,092		0		40		0		0		17,132
Totals		$	1,497,176	$	30,409	$	30,706	$	0	$	6,558	$	1,564,849

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


March 31, 2022	****	Loans:						Allowance for Loan Losses:
(In Thousands)
		Individually		Collectively				Individually		Collectively
		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate		$	10,593	$	575,084	$	585,677	$	658	$	4,359	$	5,017
Commercial and industrial			664		159,129		159,793		72		2,769		2,841
Paycheck Protection Program - 1st Draw			0		887		887		0		0		0
Paycheck Protection Program - 2nd Draw			0		11,490		11,490		0		0		0
Political subdivisions			0		81,975		81,975		0		0		0
Commercial construction and land			48		37,210		37,258		0		391		391
Loans secured by farmland			82		12,425		12,507		0		129		129
Multi-family (5 or more) residential			0		53,141		53,141		0		367		367
Agricultural loans			60		2,528		2,588		0		27		27
Other commercial loans			0		14,827		14,827		0		150		150
Total commercial			11,447		948,696		960,143		730		8,192		8,922
Residential mortgage:
Residential mortgage loans - first liens			523		480,596		481,119		0		3,810		3,810
Residential mortgage loans - junior liens			35		22,537		22,572		0		181		181
Home equity lines of credit			0		39,649		39,649		0		306		306
1-4 Family residential construction			0		16,945		16,945		0		148		148
Total residential mortgage			558		559,727		560,285		0		4,445		4,445
Consumer			0		17,762		17,762		0		237		237
Unallocated													667

Total		$	12,005	$	1,526,185	$	1,538,190	$	730	$	12,874	$	14,271

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2021	****	Loans:						Allowance for Loan Losses:
(In Thousands)
		Individually		Collectively				Individually		Collectively
		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate		$	10,926	$	558,914	$	569,840	$	669	$	3,736	$	4,405
Commercial and industrial			2,503		156,570		159,073		71		2,652		2,723
Paycheck Protection Program - 1st Draw			0		1,356		1,356		0		0		0
Paycheck Protection Program - 2nd Draw			0		25,508		25,508		0		0		0
Political subdivisions			0		81,301		81,301		0		0		0
Commercial construction and land			0		60,579		60,579		0		637		637
Loans secured by farmland			83		11,038		11,121		0		115		115
Multi-family (5 or more) residential			1,578		48,511		50,089		0		215		215
Agricultural loans			0		2,351		2,351		0		25		25
Other commercial loans			0		17,153		17,153		0		173		173
Total commercial			15,090		963,281		978,371		740		7,553		8,293
Residential mortgage:
Residential mortgage loans - first liens			630		482,999		483,629		0		3,650		3,650
Residential mortgage loans - junior liens			14		23,300		23,314		0		184		184
Home equity lines of credit			0		39,252		39,252		0		302		302
1-4 Family residential construction			0		23,151		23,151		0		202		202
Total residential mortgage			644		568,702		569,346		0		4,338		4,338
Consumer			0		17,132		17,132		0		235		235
Unallocated													671

Total		$	15,734	$	1,549,115	$	1,564,849	$	740	$	12,126	$	13,537

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


(In Thousands)		March 31, 2022									December 31, 2021
		Unpaid									Unpaid
		Principal			Recorded			Related			Principal			Recorded			Related
	****	Balance		****	Investment		****	Allowance		****	Balance		****	Investment		****	Allowance
With no related allowance recorded:
Commercial loans secured by real estate		$	6,253		$	4,137		$	0		$	6,600		$	4,458		$	0
Commercial and industrial			3,199			592			0			5,213			2,431			0
Residential mortgage loans - first liens			637			523			0			656			630			0
Residential mortgage loans - junior liens			142			35			0			124			14			0
Loans secured by farmland			82			82			0			83			83			0
Agricultural loans			60			60			0			0			0			0
Construction and other land loans			48			48			0			0			0			0
Multi-family (5 or more) residential			0			0			0			2,734			1,578			0
Total with no related allowance recorded			10,421			5,477			0			15,410			9,194			0

With a related allowance recorded:
Commercial loans secured by real estate			6,456			6,456			658			6,468			6,468			668
Commercial and industrial			72			72			72			72			72			72
Total with a related allowance recorded			6,528			6,528			730			6,540			6,540			740
Total		$	16,949		$	12,005		$	730		$	21,950		$	15,734		$	740

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)					Interest Income Recognized on
	Average Investment in Impaired Loans				Impaired Loans on a Cash Basis
	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Commercial:
Commercial loans secured by real estate	$	10,735	$	12,203	$	129	$	143
Commercial and industrial		1,626		1,082		4		12
Commercial construction and land		48		49		1		1
Loans secured by farmland		82		84		0		1
Multi-family (5 or more) residential		789		1,596		0		61
Agricultural loans		63		69		2		2
Total commercial		13,343		15,083		136		220
Residential mortgage:
Residential mortgage loans - first lien		565		2,451		7		37
Residential mortgage loans - junior lien		37		437		1		5
Home equity lines of credit		0		18		1		0
Total residential mortgage		602		2,906		9		42
Total	$	13,945	$	17,989	$	145	$	262

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


(In Thousands)		March 31, 2022						December 31, 2021
		Past Due						Past Due
		90+ Days and						90+ Days and
	****	Accruing		****	Nonaccrual		****	Accruing		****	Nonaccrual
Commercial:
Commercial loans secured by real estate		$	1,217		$	10,593		$	738		$	10,885
Commercial and industrial			788			376			30			2,299
Commercial construction and land			0			47			0			48
Loans secured by farmland			0			81			28			83
Multi-family (5 or more) residential			0			0			0			1,578
Agricultural loans			60			0			65			0
Total commercial			2,065			11,097			861			14,893
Residential mortgage:
Residential mortgage loans - first liens			1,139			3,638			1,144			4,005
Residential mortgage loans - junior liens			76			2			69			3
Home equity lines of credit			102			167			102			82
Total residential mortgage			1,317			3,807			1,315			4,090
Consumer			47			41			43			16
Totals		$	3,429		$	14,945		$	2,219		$	18,999

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $3,983,000 at March 31, 2022 and $6,558,000 at December 31, 2021 are classified as nonaccrual. 22

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)		As of March 31, 2022											As of December 31, 2021
	****	Current &		****			****					****	Current &		****
		Past Due			Past Due			Past Due					Past Due			Past Due		Past Due
		Less than			30-89			90+					Less than			30-89		90+
		30 Days			Days			Days		Total			30 Days			Days		Days		Total
Commercial:
Commercial loans secured by real estate		$	579,837		$	192		$	5,648	$	585,677		$	563,658		$	762	$	5,420	$	569,840
Commercial and industrial			159,613			75			105		159,793			158,188			72		813		159,073
Paycheck Protection Program - 1st Draw			145			0			742		887			1,339			17		0		1,356
Paycheck Protection Program - 2nd Draw			11,490			0			0		11,490			25,508			0		0		25,508
Political subdivisions			81,975			0			0		81,975			81,301			0		0		81,301
Commercial construction and land			37,083			128			47		37,258			60,509			70		0		60,579
Loans secured by farmland			12,426			0			81		12,507			11,010			0		111		11,121
Multi-family (5 or more) residential			53,141			0			0		53,141			48,532			0		1,557		50,089
Agricultural loans			2,528			0			60		2,588			2,279			7		65		2,351
Other commercial loans			14,827			0			0		14,827			17,153			0		0		17,153
Total commercial			953,065			395			6,683		960,143			969,477			928		7,966		978,371

Residential mortgage:
Residential mortgage loans - first liens			473,710			5,142			2,267		481,119			475,637			5,038		2,954		483,629
Residential mortgage loans - junior liens			22,457			39			76		22,572			23,229			16		69		23,314
Home equity lines of credit			39,314			233			102		39,649			38,830			279		143		39,252
1-4 Family residential construction			16,945			0			0		16,945			23,151			0		0		23,151
Total residential mortgage			552,426			5,414			2,445		560,285			560,847			5,333		3,166		569,346
Consumer			17,626			48			88		17,762			17,001			72		59		17,132
Totals		$	1,523,117		$	5,857		$	9,216	$	1,538,190		$	1,547,325		$	6,333	$	11,191	$	1,564,849

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at March 31, 2022 and December 31, 2021 is as follows:


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Total
March 31, 2022 Nonaccrual Totals		$	7,169		$	1,989		$	5,787		$	14,945
December 31, 2021 Nonaccrual Totals		$	8,800		$	1,227		$	8,972		$	18,999

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


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Nonaccrual		****	Total
March 31, 2022 Totals		$	243		$	36		$	60		$	3,894		$	4,233
December 31, 2021 Totals		$	248		$	40		$	65		$	5,452		$	5,805

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

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


(Balances in Thousands)	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
		Post-			Post-
	Number	Modification		Number	Modification
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Residential mortgage - first liens,
Reduced monthly payments and extended maturity date	0	$	0	1	$	12
Consumer,
Reduced monthly payments and extended maturity date	0		0	1		24
Total	0	$	0	2	$	36

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


(Balances in Thousands)	Three Months Ended			Three Months Ended
	March 31, 2022			March 31, 2021
	Number			Number
	of	Recorded		of	Recorded
	Loans	Investment		Loans	Investment
Commercial loans secured by real estate	0	$	0	1	$	3,392
Total	0	$	0	1	$	3,392

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The carrying amount of foreclosed residential real estate properties held as a result of obtaining physical possession (included in foreclosed assets held for sale in the unaudited consolidated balance sheets) is as follows:


(In Thousands)	March 31,		December 31,
	2022		2021
Foreclosed residential real estate	$	256	$	256

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


(In Thousands)	March 31,		December 31,
	2022		2021
Residential real estate in process of foreclosure	$	1,547	$	1,260

GOODWILL AND OTHER INTANGIBLE ASSETS

Information related to core deposit intangibles is as follows:


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
Gross amount		$	6,639		$	6,639
Accumulated amortization			(3,433)			(3,323)
Net		$	3,206		$	3,316

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


(In Thousands)	Three Months Ended
	March 31,		March 31,
	2022		2021
Amortization expense	$	110	$	134

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

BORROWED FUNDS

SHORT-TERM BORROWINGS

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


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
FHLB-Pittsburgh borrowings		$	0		$	0
Customer repurchase agreements			2,357			1,803
Total short-term borrowings		$	2,357		$	1,803

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At March 31, 2022, the Corporation had available credit in the amount of $12,429,000 on this line with no outstanding advances. At December 31, 2021, the 25

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

LONG-TERM BORROWINGS – FHLB ADVANCES

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


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
Loans maturing in 2022 with a weighted-average rate of 0.58%		$	8,050		$	15,452
Loans maturing in 2023 with a weighted-average rate of 0.73%			7,093			7,119
Loan maturing in 2024 with a rate of 0.75%			5,090			5,099
Loan maturing in 2025 with a rate of 4.91%			348			372
Total long-term FHLB-Pittsburgh borrowings		$	20,581		$	28,042

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

SENIOR NOTES

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

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

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


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026		$	14,717		$	14,701
Total carrying value		$	14,717		$	14,701

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SUBORDINATED DEBT

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

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

The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Subordinated Notes totaling $26,000 in the first quarter 2022 was included in interest expense in the unaudited consolidated statements of income.

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


(In Thousands)	****	March 31,		****	December 31,
		2022			2021
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemed at par in April 2022		$	6,500		$	6,500
Agreement with a par value of $2,000,000; bearing interest at 6.50% with an effective interest rate of 5.60%; maturing in July 2027 and redeemable at par in July 2022			2,004			2,008
Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026			24,527			24,501
Total carrying value		$	33,031		$	33,009

STOCK-BASED COMPENSATION PLANS

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


(Dollars in Thousands)	****		****	Aggregate
				Grant
				Date
		Number of		Fair
		Shares		Value
1st quarter 2022 awards:
Time-based awards to independent directors		9,588		$	240
Time-based awards to employees		51,638			1,293
Performance-based awards to employees		17,017			426
Total		78,243		$	1,959

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, 2022 is estimated 27

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

CONTINGENCIES

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

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

The aggregate notional amount of interest rate swaps was $122,138,000 at March 31, 2022 and $123,904,000 at December 31, 2021. There were no interest rate swaps originated in the first quarter 2022 or first quarter 2021. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at March 31, 2022. The net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $317,000 in the first quarter 2022 as compared to a reduction in interest income on loans of $338,000 in the first quarter 2021.

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


(In Thousands)	At March 31, 2022								At December 31, 2021
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	61,069	$	137	$	61,069	$	137	$	61,547	$	3,104	$	61,547	$	3,104

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

The Corporation’s agreement with its derivative counterparty provides that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of $3,965,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at March 31, 2022.

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

The Corporation measures certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB topic 820, “Fair 28

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

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

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


		March 31, 2022
	****	Quoted		****
		Prices			Other
		in Active			Observable		Unobservable		Total
		Markets			Inputs		Inputs		Fair
(In Thousands)		(Level 1)			(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	36,494		$	0	$	0	$	36,494
Obligations of U.S. Government agencies			0			23,408		0		23,408
Bank holding company debt securities			0			24,043		0		24,043
Obligations of states and political subdivisions:
Tax-exempt			0			143,633		0		143,633
Taxable			0			69,629		0		69,629
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			106,568		0		106,568
Residential collateralized mortgage obligations			0			43,868		0		43,868
Commercial mortgage-backed securities			0			85,270		0		85,270
Total available-for-sale debt securities			36,494			496,419		0		532,913
Marketable equity security			926			0		0		926
Servicing rights			0			0		2,429		2,429
Interest rate swap agreements, assets			0			137		0		137
Total recurring fair value measurements, assets		$	37,420		$	496,556	$	2,429	$	536,405

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	137	$	0	$	137

Nonrecurring fair value measurements, assets:
Impaired loans, net		$	0		$	0	$	5,798	$	5,798
Foreclosed assets held for sale			0			0		531		531
Total nonrecurring fair value measurements, assets		$	0		$	0	$	6,329	$	6,329

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q


		December 31, 2021
	****	Quoted		****
		Prices			Other
		in Active			Observable		Unobservable		Total
		Markets			Inputs		Inputs		Fair
(In Thousands)		(Level 1)			(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	24,912		$	0	$	0	$	24,912
Obligations of U.S. Government agencies			0			24,091		0		24,091
Bank holding company debt securities			0			17,987		0		17,987
Obligations of states and political subdivisions:
Tax-exempt			0			148,028		0		148,028
Taxable			0			72,765		0		72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			98,181		0		98,181
Residential collateralized mortgage obligations			0			44,247		0		44,247
Commercial mortgage-backed securities			0			87,468		0		87,468
Total available-for-sale debt securities			24,912			492,767		0		517,679
Marketable equity security			971			0		0		971
Servicing rights			0			0		2,329		2,329
Interest rate swap agreements, assets			0			3,104		0		3,104
Total recurring fair value measurements, assets		$	25,883		$	495,871	$	2,329	$	524,083

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities		$	0		$	3,104	$	0	$	3,104

Nonrecurring fair value measurements, assets:
Impaired loans, net		$	0		$	0	$	5,800	$	5,800
Foreclosed assets held for sale			0			0		684		684
Total nonrecurring fair value measurements, assets		$	0		$	0	$	6,484	$	6,484

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. 30

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


	****	Fair Value at
		3/31/2022		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				3/31/2022
Servicing rights		$	2,429	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
					Loan prepayment speeds		193.00	%	Weighted-average PSA
					Servicing fees		0.25	%	of loan balances
							4.00	%	of payments are late
							5.00	%	late fees assessed
						$	1.94		Miscellaneous fees per account per month
					Servicing costs	$	6.00		Monthly servicing cost per account
						$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
							1.50	%	of loans more than 30 days delinquent
							3.00	%	annual increase in servicing costs


	****	Fair Value at
		12/31/2021		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				12/31/2021
Servicing rights		$	2,329	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
					Loan prepayment speeds		209.00	%	Weighted-average PSA
					Servicing fees		0.25	%	of loan balances
							4.00	%	of payments are late
							5.00	%	late fees assessed
						$	1.94		Miscellaneous fees per account per month
					Servicing costs	$	6.00		Monthly servicing cost per account
						$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
							1.50	%	of loans more than 30 days delinquent
							3.00	%	annual increase in servicing costs

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

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


(In Thousands)		Three Months Ended
	****	March 31, 2022		****	March 31, 2021
Servicing rights balance, beginning of period		$	2,329		$	1,689
Originations of servicing rights			98			192
Unrealized gain included in earnings			2			75
Servicing rights balance, end of period		$	2,429		$	1,956

Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed 31

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

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


(Dollars In Thousands)	****									Weighted
				Valuation						Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		3/31/2022		3/31/2022		3/31/2022		Technique	Inputs	3/31/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate		$	6,456	$	658	$	5,798	Sales comparison	Discount to appraised value	27	%
Commercial and industrial			72		72		0	Liquidation of assets	Discount to appraised value	100	%
Total impaired loans		$	6,528	$	730	$	5,798
Foreclosed assets held for sale - real estate:
Commercial real estate		$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)			256		0		256	Sales comparison	Discount to appraised value	53	%
Total foreclosed assets held for sale		$	531	$	0	$	531


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

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

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation. 32

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)		Fair Value		March 31, 2022						December 31, 2021
		Hierarchy		Carrying			Fair			Carrying			Fair
	****	Level	****	Amount		****	Value		****	Amount		****	Value
Financial assets:
Cash and cash equivalents		Level 1		$	105,246		$	105,246		$	95,848		$	95,848
Certificates of deposit		Level 2			9,100			8,911			9,100			9,142
Restricted equity securities (included in Other Assets)		Level 2			9,508			9,508			9,562			9,562
Loans, net		Level 3			1,523,919			1,533,430			1,551,312			1,573,955
Accrued interest receivable		Level 2			7,507			7,507			7,235			7,235

Financial liabilities:
Deposits with no stated maturity		Level 2			1,691,457			1,691,457			1,639,167			1,639,167
Time deposits		Level 2			269,495			269,902			285,893			286,962
Short-term borrowings		Level 2			2,357			1,956			1,803			1,603
Long-term borrowings		Level 2			20,581			20,518			28,042			28,347
Senior debt		Level 2			14,717			14,429			14,701			15,016
Subordinated debt		Level 2			33,031			30,293			33,009			33,171
Accrued interest payable		Level 2			633			633			205			205

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

●	changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
●	changes in general economic conditions
---	---
●	the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses
---	---
●	the effect of the novel coronavirus (COVID-19) and related events
---	---
●	legislative or regulatory changes
---	---
●	downturn in demand for loan, deposit and other financial services in the Corporation’s market area
---	---
●	increased competition from other banks and non-bank providers of financial services
---	---
●	technological changes and increased technology-related costs
---	---
●	information security breach or other technology difficulties or failures
---	---
●	changes in accounting principles, or the application of generally accepted accounting principles
---	---
●	failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions
---	---

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

EARNINGS OVERVIEW

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

●

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

●

The provision for loan losses was $891,000 in the first quarter 2022 as compared to $259,000 in the first quarter 2021. The first quarter 2022 provision included a net charge of $147,000 related to specific loans (net charge-offs of $157,000 offset by a net decrease in specific allowances on loans of $10,000), an increase of $748,000 in the collectively determined portion of the allowance and a decrease of $4,000 in the unallocated portion of the allowance. The increase in the collectively determined

---

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

TABLE I – QUARTERLY FINANCIAL DATA


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

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses– A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Management believes the allowance for loan losses is adequate and reasonable. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

Fair Value of Available-For-Sale Debt Securities– Another material estimate is the calculation of fair values of the Corporation’s debt securities. For most of the Corporation’s debt securities, the Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing fair values, the valuation service and the brokers use estimates of cash flows, based on historical performance of similar instruments in similar interest rate environments. Based on experience, management is aware that estimated fair values of debt securities tend to vary among brokers and other valuation services. 36

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month periods ended March 31, 2022 and 2021. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended March 31, 2022 and 2021

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

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

INTEREST INCOME AND EARNING ASSETS

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

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

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

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

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

Income from interest-bearing due from banks totaled $67,000 in 2022, an increase of $17,000 from 2021. The average yield on interest-bearing due from banks was 0.32% in 2022 and 0.22% in 2021. The average balance of interest-bearing due from banks was $84,115,000 in the first quarter 2022 as compared to $92,619,000 in the first quarter 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve. 37

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

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

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

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

Interest expense on long-term borrowings (FHLB advances) decreased $85,000 to $49,000 in 2022 from $134,000 in 2021. The average balance of long-term borrowings was $26,102,000 in 2022, down from an average balance of $52,847,000 in 2021. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 0.76% in 2022 compared to 1.03% in 2021.

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

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

More information regarding the terms of borrowed funds is provided in Note 8 to the unaudited consolidated financial statements. 38

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE


	Three Months Ended
	March 31,				Increase/
(In Thousands)	2022		2021		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	67	$	50	$	17
Available-for-sale debt securities:
Taxable		1,969		1,113		856
Tax-exempt		905		801		104
Total available-for-sale debt securities		2,874		1,914		960
Loans receivable:
Taxable		17,974		17,493		481
Paycheck Protection Program - 1st Draw		38		1,812		(1,774)
Paycheck Protection Program - 2nd Draw		537		186		351
Tax-exempt		573		553		20
Total loans receivable		19,122		20,044		(922)
Other earning assets		12		19		(7)
Total Interest Income		22,075		22,027		48

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		194		221		(27)
Money market		262		306		(44)
Savings		61		55		6
Time deposits		393		696		(303)
Total interest-bearing deposits		910		1,278		(368)
Borrowed funds:
Short-term		1		15		(14)
Long-term - FHLB advances		49		134		(85)
Senior notes, net		118		0		118
Subordinated debt, net		363		244		119
Total borrowed funds		531		393		138
Total Interest Expense		1,441		1,671		(230)

Net Interest Income	$	20,634	$	20,356	$	278

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%. 39

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table III - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)		Three Months				Three Months
		Ended		Rate of		Ended		Rate of
		3/31/2022		Return/		3/31/2021		Return/
		Average		Cost of		Average		Cost of
		Balance		Funds %		Balance		Funds %
EARNING ASSETS
Interest-bearing due from banks		$	84,115	0.32	%	$	92,619	0.22	%
Available-for-sale debt securities, at amortized cost:
Taxable			390,301	2.05	%		217,733	2.07	%
Tax-exempt			144,334	2.54	%		117,532	2.76	%
Total available-for-sale debt securities			534,635	2.18	%		335,265	2.32	%
Loans receivable:
Taxable			1,445,353	5.04	%		1,428,721	4.97	%
Paycheck Protection Program - 1st Draw			1,049	14.69	%		104,367	7.04	%
Paycheck Protection Program - 2nd Draw			17,800	12.24	%		34,197	2.21	%
Tax-exempt			83,659	2.78	%		67,301	3.33	%
Total loans receivable			1,547,861	5.01	%		1,634,586	4.97	%
Other earning assets			1,983	2.45	%		2,851	2.70	%
Total Earning Assets			2,168,594	4.13	%		2,065,321	4.33	%
Cash			20,703				23,796
Unrealized (loss) gain on securities			(2,508)				12,890
Allowance for loan losses			(13,783)				(11,739)
Bank-owned life insurance			30,720				30,154
Bank premises and equipment			21,043				21,348
Intangible assets			55,765				56,288
Other assets			44,952				44,628
Total Assets		$	2,325,486			$	2,242,686

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		$	419,130	0.19	%	$	355,993	0.25	%
Money market			456,904	0.23	%		406,841	0.31	%
Savings			249,165	0.10	%		213,437	0.10	%
Time deposits			277,405	0.57	%		370,555	0.76	%
Total interest-bearing deposits			1,402,604	0.26	%		1,346,826	0.38	%
Borrowed funds:
Short-term			1,746	0.23	%		14,365	0.42	%
Long-term - FHLB advances			26,102	0.76	%		52,847	1.03	%
Senior notes, net			14,709	3.25	%		0	0.00	%
Subordinated debt, net			32,948	4.47	%		16,543	5.98	%
Total borrowed funds			75,505	2.85	%		83,755	1.90	%
Total Interest-bearing Liabilities			1,478,109	0.40	%		1,430,581	0.47	%
Demand deposits			529,077				484,286
Other liabilities			24,046				27,930
Total Liabilities			2,031,232				1,942,797
Stockholders' equity, excluding accumulated other comprehensive (loss) income			295,996				289,591
Accumulated other comprehensive (loss) income			(1,742)				10,298
Total Stockholders' Equity			294,254				299,889
Total Liabilities and Stockholders' Equity		$	2,325,486			$	2,242,686
Interest Rate Spread				3.73	%			3.86	%
Net Interest Income/Earning Assets				3.86	%			4.00	%

Total Deposits (Interest-bearing and Demand)		$	1,931,681			$	1,831,112
(1)	Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
---	---
(2)	Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.
---	---
(3)	Rates of return on earning assets and costs of funds are presented on an annualized basis.
---	---

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)		Three Months Ended 3/31/22 vs. 3/31/21
		Change in		Change in		Total
		Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks		$	(5)	$	22	$	17
Available-for-sale debt securities:
Taxable			871		(15)		856
Tax-exempt			172		(68)		104
Total available-for-sale debt securities			1,043		(83)		960
Loans receivable:
Taxable			205		276		481
Paycheck Protection Program - 1st Draw			(2,723)		949		(1,774)
Paycheck Protection Program - 2nd Draw			(128)		479		351
Tax-exempt			121		(101)		20
Total loans receivable			(2,525)		1,603		(922)
Other earning assets			(5)		(2)		(7)
Total Interest Income			(1,492)		1,540		48

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking			35		(62)		(27)
Money market			35		(79)		(44)
Savings			9		(3)		6
Time deposits			(153)		(150)		(303)
Total interest-bearing deposits			(74)		(294)		(368)
Borrowed funds:
Short-term			(9)		(5)		(14)
Long-term - FHLB advances			(56)		(29)		(85)
Senior notes, net			118		0		118
Subordinated debt, net			193		(74)		119
Total borrowed funds			246		(108)		138
Total Interest Expense			172		(402)		(230)

Net Interest Income		$	(1,664)	$	1,942	$	278
(1)	Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.
---	---
(2)	The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.
---	---

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE V – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Three Months Ended
	March 31,					$	%
	2022		2021			Change	Change
Trust revenue	$	1,786	$	1,626	$	160	9.8	%
Brokerage and insurance revenue		522		326		196	60.1	%
Service charges on deposit accounts		1,235		1,015		220	21.7	%
Interchange revenue from debit card transactions		963		881		82	9.3	%
Net gains from sales of loans		382		1,064		(682)	(64.1)	%
Loan servicing fees, net		210		248		(38)	(15.3)	%
Increase in cash surrender value of life insurance		135		150		(15)	(10.0)	%
Other noninterest income		588		1,472		(884)	(60.1)	%
Realized gains on available-for-sale debt securities, net		2		0		2		%
Total noninterest income	$	5,823	$	6,782	$	(959)	(14.1)	%

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

NONINTEREST EXPENSE

TABLE VI - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Three Months Ended
	March 31,					%
	2022		2021		Change	Change
Salaries and employee benefits	$	10,607	$	8,895		19.2	%
Net occupancy and equipment expense		1,411		1,304		8.2	%
Data processing and telecommunications expense		1,623		1,380		17.6	%
Automated teller machine and interchange expense		384		337		13.9	%
Pennsylvania shares tax		488		491		(0.6)	%
Professional fees		489		547		(10.6)	%
Other noninterest expense		1,884		2,755		(31.6)	%
Total noninterest expense	$	16,886	$	15,709		7.5	%

All values are in US Dollars.

Total noninterest expense in the first quarter 2022 increased $1,177,000 (7.5%) from the first quarter 2021 total. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first three months of 2022 was $1,483,000, which was $627,000 lower than the provision for the first three months of 2021. The effective tax rate (tax provision as a percentage of pre-tax income) was 17.7% in the first three months of 2022 compared to 19.4% in the first three months of 2021. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first three months of 2022 and 2021 principally because of the effects of tax-exempt interest income, state income taxes and other permanent differences. 42

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


	****	March 31,		****	December 31,
(In Thousands)		2022			2021
Deferred tax assets:
Unrealized holding losses on securities		$	5,448		$	0
Allowance for loan losses			3,124			2,935
Purchase accounting adjustments on loans			1,237			1,621
Deferred compensation			1,060			965
Operating leases liability			762			821
Net operating loss carryforward			748			778
Accrued incentive compensation			129			529
Other deferred tax assets			1,473			1,766
Total deferred tax assets			13,981			9,415

Deferred tax liabilities:
Unrealized holding gains on securities			0			1,278
Defined benefit plans - ASC 835			82			57
Bank premises and equipment			425			460
Core deposit intangibles			702			725
Right-of-use assets from operating leases			762			821
Other deferred tax liabilities			192			187
Total deferred tax liabilities			2,163			3,528
Deferred tax asset, net		$	11,818		$	5,887

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

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SECURITIES

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

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


(Dollars In Thousands)		March 31, 2022						December 31, 2021						December 31, 2020
		Amortized			Fair			Amortized			Fair		****	Amortized			Fair
	****	Cost		****	Value		****	Cost		****	Value			Cost		****	Value
Obligations of the U.S. Treasury		$	38,152		$	36,494		$	25,058		$	24,912		$	12,184		$	12,182
Obligations of U.S. Government agencies			24,455			23,408			23,936			24,091			25,349			26,344
Bank holding company debt securities			24,942			24,043			18,000			17,987			0			0
Obligations of states and political subdivisions:
Tax-exempt			149,140			143,633			143,427			148,028			116,427			122,401
Taxable			73,732			69,629			72,182			72,765			45,230			47,452
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			112,122			106,568			98,048			98,181			36,853			38,176
Residential collateralized mortgage obligations			45,628			43,868			44,015			44,247			56,048			57,467
Commercial mortgage-backed securities			90,682			85,270			86,926			87,468			42,461			45,310
Total Available-for-Sale Debt Securities		$	558,853		$	532,913		$	511,592		$	517,679		$	334,552		$	349,332

Aggregate Unrealized (Loss) Gain					$	(25,940)					$	6,087					$	14,780
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost						(4.6)	%					1.2	%					4.4	%
Market Yield on 5-Year U.S. Treasury Obligations (a)						2.42	%					1.26	%					0.36	%

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

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

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

Management reviewed the Corporation’s holdings as of March 31, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. 44

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the Net Interest Income section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at March 31, 2022, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2022.

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

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

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $46,083,000 at March 31, 2022, down from $54,372,000 at December 31, 2021. At March 31, 2022, the balance of participation loans outstanding includes a total of $25,767,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $6,742,000 at March 31, 2022 and $7,469,000 at December 31, 2021.

The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through March 31, 2022, the Corporation’s activity under the MPF Direct Program has been minimal. 45

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At March 31, 2022, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,557,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2021 was $1,571,000.

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

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At March 31, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,998,000, and the Corporation has recorded a related allowance for credit losses in the amount of $660,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $90,000 for the three months ended March 31, 2022 and $115,000 for the three months ended March 31, 2021. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $25,000 was recorded in the three months ended March 31, 2022 with a provision for losses of $30,000 in the three months ended March 31, 2021. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was $8,907,000 at March 31, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $215,000 at March 31, 2022 and $457,000 at December 31, 2021. In the three months ended March 31, 2022, the Corporation recorded a reduction in other noninterest expense of $242,000 representing amounts realized on SBA claims in excess of prior estimates, with no corresponding expense or reduction in expense in the first quarter 2021.

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type


(In Thousands)		March 31,			December 31,
	****	2022		****	2021		****	2020		****	2019		****	2018		****	2017
Commercial:
Commercial loans secured by real estate		$	585,677		$	569,840		$	531,810		$	301,227		$	162,611		$	159,266
Commercial and industrial			159,793			159,073			159,577			126,374			91,856			88,276
Paycheck Protection Program - 1st Draw			887			1,356			132,269			0			0			0
Paycheck Protection Program - 2nd Draw			11,490			25,508			0			0			0			0
Political subdivisions			81,975			81,301			53,221			53,570			53,263			59,287
Commercial construction and land			37,258			60,579			42,874			33,555			11,962			14,527
Loans secured by farmland			12,507			11,121			11,736			12,251			7,146			7,255
Multi-family (5 or more) residential			53,141			50,089			55,811			31,070			7,180			7,713
Agricultural loans			2,588			2,351			3,164			4,319			5,659			6,178
Other commercial loans			14,827			17,153			17,289			16,535			13,950			10,986
Total commercial			960,143			978,371			1,007,751			578,901			353,627			353,488
Residential mortgage:
Residential mortgage loans - first liens			481,119			483,629			532,947			510,641			372,339		$	359,987
Residential mortgage loans - junior liens			22,572			23,314			27,311			27,503			25,450			25,325
Home equity lines of credit			39,649			39,252			39,301			33,638			34,319			35,758
1-4 Family residential construction			16,945			23,151			20,613			14,798			24,698			26,216
Total residential mortgage			560,285			569,346			620,172			586,580			456,806			447,286
Consumer			17,762			17,132			16,286			16,741			17,130			14,939
Total			1,538,190			1,564,849			1,644,209			1,182,222			827,563			815,713
Less: allowance for loan losses			(14,271)			(13,537)			(11,385)			(9,836)			(9,309)			(8,856)
Loans, net		$	1,523,919		$	1,551,312		$	1,632,824		$	1,172,386		$	818,254		$	806,857

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

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

The allowance for loan losses was $14,271,000 at March 31, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $730,000 at March 31, 2022, down slightly from $740,000 at December 31, 2021. Table IX also shows the increase in the allowance in 2022 is mainly related to commercial loans, as the collectively evaluated portion of the allowance related to the commercial segment increased to $8,192,000 at March 31, 2022 from $7,553,000 at December 31, 2021. The net increase in the collectively determined portion of the allowance includes increases related to management’s updated assessments of purchased performing loans. The impact of changes in the collectively determined portion of the allowance related to purchased performing loans is included in “Changes in loan volume” in the accompanying analysis of the provision. 47

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table X shows the allowance for loan losses totaled 0.93% of gross loans outstanding at March 31, 2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.11% at March 31, 2022, in line with ratios from the previous years.

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


	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Commercial	$	779	$	242
Residential mortgage		91		(55)
Consumer		25		(20)
Unallocated		(4)		92
Total	$	891	$	259

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


Commercial segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	140	$	193
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		577		142
Changes in historical loss experience factors		62		(49)
Changes in qualitative factors		0		(44)
Total provision for loan losses - Commercial segment	$	779	$	242


Residential mortgage segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Decrease in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(16)	$	(10)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		68		(7)
Changes in historical loss experience factors		(10)		(38)
Changes in qualitative factors		49		0
Total provision for loan losses - Residential mortgage segment	$	91	$	(55)


Consumer segment	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	23	$	(1)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		0		(10)
Changes in historical loss experience factors		(3)		(10)
Changes in qualitative factors		5		1
Total provision for loan losses - Consumer segment	$	25	$	(20)

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q


Total - All segments	Three Months Ended
	March 31,		March 31,
(In Thousands)	2022		2021
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	147	$	182
Increase (decrease) in collectively determined portion of the allowance attributable to:
Changes in loan volume		645		125
Changes in historical loss experience factors		49		(97)
Changes in qualitative factors		54		(43)
Sub-total		895		167
Unallocated		(4)		92
Total provision for loan losses - All segments	$	891	$	259

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

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

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

In the three months ended March 31, 2022, net charge-offs were $157,000, including recoveries of $23,000 and charge-offs of $180,000. Table VIII shows the average rate of net charge-offs as a percentage of loans was 0.01% in the three months ended March 31, 2022, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. Total nonperforming loans as a percentage of outstanding loans was 1.19% at March 31, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.81% at March 31, 2022, down from 0.94% at December 31, 2021. Table X presents data at the end of each of the years ended December 31, 2017 through 2021. Table X shows that total nonperforming loans as a percentage of loans of 1.19% at March 31, 2022, though up from December 31, 2019, was lower than the corresponding year-end ratio for all other years presented. Similarly, the March 31, 2022 ratio of total nonperforming assets as a percentage of assets of 0.81% was lower than the corresponding ratio for all years presented except December 31, 2019.

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

Over the period 2017-2021 and the first three months of 2022, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as 49

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

of March 31, 2022. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

Tables VIII through X present historical data related to loans and the allowance for loan losses.

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES


(Dollars In Thousands)		Three Months Ended																					****
		March 31,			March 31,				Years Ended December 31,
	****	2022		****	2021		****	****	2021		****	2020		****	2019		****	2018		****	2017		****
Balance, beginning of year		$	13,537		$	11,385			$	11,385		$	9,836		$	9,309		$	8,856		$	8,473
Charge-offs:
Commercial			(150)			0				(1,464)			(2,343)			(6)			(165)			(132)
Residential mortgage			0			0				(11)			0			(190)			(158)			(197)
Consumer			(30)			(11)				(100)			(122)			(183)			(174)			(150)
Total charge-offs			(180)			(11)				(1,575)			(2,465)			(379)			(497)			(479)
Recoveries:
Commercial			0			14				22			16			6			317			4
Residential mortgage			16			2				6			44			12			8			19
Consumer			7			12				38			41			39			41			38
Total recoveries			23			28				66			101			57			366			61
Net (charge-offs) recoveries			(157)			17				(1,509)			(2,364)			(322)			(131)			(418)
Provision for loan losses			891			259				3,661			3,913			849			584			801
Balance, end of period		$	14,271		$	11,661			$	13,537		$	11,385		$	9,836		$	9,309		$	8,856
Net charge-offs as a % of average loans			0.01	%		0.00	%			0.09	%		0.16	%		0.03	%		0.02	%		0.05	%

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES


(In Thousands)		March 31,			As of December 31,
	****	2022		****	2021		****	2020		****	2019		****	2018		****	2017
ASC 310 - Impaired loans - individually evaluated		$	730		$	740		$	925		$	1,051		$	1,605		$	1,279
ASC 450 - Collectively evaluated:
Commercial			8,192			7,553			5,545			3,913			3,102			3,078
Residential mortgage			4,445			4,338			4,091			4,006			3,870			3,841
Consumer			237			235			239			281			233			159
Unallocated			667			671			585			585			499			499
Total Allowance		$	14,271		$	13,537		$	11,385		$	9,836		$	9,309		$	8,856

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE X - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)


(Dollars In Thousands)		March 31,			As of December 31,														****
	****	2022		****	2021		****	2020		****	2019		****	2018		****	2017		****
Impaired loans with a valuation allowance		$	6,528		$	6,540		$	8,082		$	3,375		$	4,851		$	4,100
Impaired loans without a valuation allowance			1,494			2,636			2,895			1,670			4,923			5,411
Purchased credit impaired loans			3,983			6,558			6,841			441			0			0
Total impaired loans		$	12,005		$	15,734		$	17,818		$	5,486		$	9,774		$	9,511
Total loans past due 30-89 days and still accruing		$	3,868		$	5,106		$	5,918		$	8,889		$	7,142		$	9,449
Nonperforming assets:
Purchased credit impaired loans		$	3,983		$	6,558		$	6,841		$	441		$	0		$	0
Other nonaccrual loans			10,962			12,441			14,575			8,777			13,113			13,404
Total nonaccrual loans			14,945			18,999			21,416			9,218			13,113			13,404
Total loans past due 90 days or more and still accruing			3,429			2,219			1,975			1,207			2,906			3,724
Total nonperforming loans			18,374			21,218			23,391			10,425			16,019			17,128
Foreclosed assets held for sale (real estate)			531			684			1,338			2,886			1,703			1,598
Total nonperforming assets		$	18,905		$	21,902		$	24,729		$	13,311		$	17,722		$	18,726
Loans subject to troubled debt restructurings (TDRs):
Performing		$	279		$	288		$	166		$	889		$	655		$	636
Nonperforming			3,954			5,517			7,285			1,737			2,884			3,027
Total TDRs		$	4,233		$	5,805		$	7,451		$	2,626		$	3,539		$	3,663

Total nonperforming loans as a % of loans			1.19	%		1.36	%		1.42	%		0.88	%		1.94	%		2.10	%
Total nonperforming assets as a % of assets			0.81	%		0.94	%		1.10	%		0.80	%		1.37	%		1.47	%
Allowance for loan losses as a % of total loans			0.93	%		0.87	%		0.69	%		0.83	%		1.12	%		1.09	%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)			1.11	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for loan losses as a % of nonperforming loans			77.67	%		63.80	%		48.67	%		94.35	%		58.11	%		51.70	%

(a) Credit adjustment on purchased non-impaired loans at end of period		$	2,783		$	3,335		$	5,979		$	1,216		$	0		$	0
Allowance for loan losses			14,271			13,537			11,385			9,836			9,309			8,856
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)		$	17,054		$	16,872		$	17,364		$	11,052		$	9,309		$	8,856
Total loans receivable		$	1,538,190		$	1,564,849		$	1,644,209		$	1,182,222		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans at end of period			2,783			3,335			5,979			1,216			0			0
Total (2)		$	1,540,973		$	1,568,184		$	1,650,188		$	1,183,438		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)			1.11	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At March 31, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $85,775,000. The Corporation’s cash position at March 31, 2022 was elevated in comparison to historical (pre-pandemic) levels as growth in deposits and funds received from repayment of loans have outpaced loan originations, purchases of securities, repayments of borrowings and other uses of cash.

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of $12,817,000 at March 31, 2022.

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


		Outstanding						Available						Total Credit
(In Thousands)	****	March 31,		****	December 31,		****	March 31,		****	December 31,		****	March 31,		****	December 31,
		2022			2021			2022			2021			2022			2021
Federal Home Loan Bank of Pittsburgh		$	26,382		$	33,311		$	731,429		$	723,557		$	757,811		$	756,868
Federal Reserve Bank Discount Window			0			0			12,429			13,642			12,429			13,642
Other correspondent banks			0			0			45,000			45,000			45,000			45,000
Total credit facilities		$	26,382		$	33,311		$	788,858		$	782,199		$	815,240		$	815,510

At March 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $20,348,000 and letters of credit totaling $6,034,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At March 31, 2022, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $328,909,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at March 31, 2022; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies. 52

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Details concerning capital ratios at March 31, 2022 and December 31, 2021 are presented below. Management believes, as of March 31, 2022, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at March 31, 2022 and December 31, 2021 exceed the Corporation’s Board policy threshold levels.


(Dollars in Thousands)															Minimum To Be								****
											Minimum To Maintain				Well								****
							Minimum				Capital Conservation				Capitalized Under				Minimum To Meet				****
							Capital				Buffer at Reporting				Prompt Corrective				the Corporation's				****
		Actual					Requirement				Date				Action Provisions				Policy Thresholds				****
	****	Amount		****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount		****	Ratio	****
March 31, 2022:
Total capital to risk-weighted assets:
Consolidated		$	288,530		18.23	%	N/A		N/A		N/A		N/A		N/A		N/A		$	166,142		≥10.5	%
C&N Bank			256,215		16.26	%	126,278		≥8	%	165,740		≥10.5	%	157,848		≥10	%		165,740		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			240,568		15.20	%	N/A		N/A		N/A		N/A		N/A		N/A			134,496		≥8.5	%
C&N Bank			241,284		15.29	%	94,709		≥6	%	134,171		≥8.5	%	126,278		≥8	%		134,171		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			240,568		15.20	%	N/A		N/A		N/A		N/A		N/A		N/A			110,762		≥7	%
C&N Bank			241,284		15.29	%	71,032		≥4.5	%	110,494		≥7.0	%	102,601		≥6.5	%		110,494		≥7	%
Tier 1 capital to average assets:
Consolidated			240,568		10.59	%	N/A		N/A		N/A		N/A		N/A		N/A			181,748		≥8	%
C&N Bank			241,284		10.70	%	90,215		≥4	%	N/A		N/A		112,769		≥5	%		180,430		≥8	%

December 31, 2021:
Total capital to risk-weighted assets:
Consolidated		$	287,614		18.21	%	N/A		N/A		N/A		N/A		N/A		N/A		$	165,846		≥10.5	%
C&N Bank			252,606		16.04	%	126,012		≥8	%	165,390		≥10.5	%	157,514		≥10	%		165,390		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			240,433		15.22	%	N/A		N/A		N/A		N/A		N/A		N/A			134,256		≥8.5	%
C&N Bank			238,434		15.14	%	94,509		≥6	%	133,887		≥8.5	%	126,012		≥8	%		133,887		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			240,433		15.22	%	N/A		N/A		N/A		N/A		N/A		N/A			110,564		≥7	%
C&N Bank			238,434		15.14	%	70,881		≥4.5	%	110,260		≥7.0	%	102,384		≥6.5	%		110,260		≥7	%
Tier 1 capital to average assets:
Consolidated			240,433		10.53	%	N/A		N/A		N/A		N/A		N/A		N/A			182,683		≥8	%
C&N Bank			238,434		10.52	%	90,688		≥4	%	N/A		N/A		113,360		≥5	%		181,376		≥8	%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of its common stock. In the first quarter 2022, 129,867 shares were repurchased for a total cost of $3,227,000, at an average price of $24.85 per share. Cumulatively through March 31, 2022, 428,926 shares have been repurchased for a total cost of $10,639,000, at an average price of $24.80 per share.

Future dividend payments and repurchases of common stock will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile. 53

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At March 31, 2022, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:


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

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


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

At March 31, 2022, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 8.23%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to $20,492,000 at March 31, 2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000 at December 31, 2021. The decrease in stockholders’ equity in the first quarter 2022 from the change in accumulated other comprehensive (loss) income resulted from an increase in interest rates. Changes in accumulated other comprehensive (loss) income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. The securities section of Management’s Discussion and Analysis and Note 5 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at March 31, 2022.

INFLATION

Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic and government policies, have led to high inflation. The annual inflation rate for the 12-month period ended March 31, 2022, based on changes in the Consumer Price Index, was 8.5%. The 8.5% increase was the largest 12-month advance since 1981. 54

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

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

INTEREST RATE RISK

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

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

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

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES


March 31, 2022 Data
(In Thousands)	Period Ending March 31, 2023

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	101,995	$	17,804		$	84,191		19.5	%	25.0	%
+300		95,469		14,798			80,671		14.5	%	20.0	%
+200		89,022		11,793			77,229		9.6	%	15.0	%
+100		82,584		8,788			73,796		4.7	%	10.0	%
0		76,265		5,783			70,482		0.0	%	0.0	%
-100		72,037		4,664			67,373		(4.4)	%	10.0	%
-200		69,795		4,238			65,557		(7.0)	%	15.0	%

	Market Value of Portfolio Equity at March 31, 2022

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	498,635		10.0	%		50.0	%
+300		488,691		7.8	%		45.0	%
+200		478,667		5.6	%		35.0	%
+100		466,970		3.0	%		25.0	%
0		453,227		0.0	%		0.0	%
-100		435,057		(4.0)	%		25.0	%
-200		409,709		(9.6)	%		35.0	%

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q


December 31, 2021 Data
(In Thousands)	Period Ending December 31, 2022

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	98,839	$	18,142		$	80,697		19.1	%	25.0	%
+300		92,438		15,061			77,377		14.2	%	20.0	%
+200		86,112		11,981			74,131		9.4	%	15.0	%
+100		79,740		8,900			70,840		4.5	%	10.0	%
0		73,536		5,760			67,776		0.0	%	0.0	%
-100		70,118		4,820			65,298		(3.7)	%	10.0	%
-200		68,824		4,503			64,321		(5.1)	%	15.0	%

	Market Value of Portfolio Equity at December 31, 2021

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	471,951		14.1	%		50.0	%
+300		459,810		11.1	%		45.0	%
+200		447,354		8.1	%		35.0	%
+100		431,856		4.4	%		25.0	%
0		413,767		0.0	%		0.0	%
-100		388,721		(6.1)	%		25.0	%
-200		365,331		(11.7)	%		35.0	%

ITEM 4. CONTROLS AND PROCEDURES

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

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 22, 2022.

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

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation is authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. As of March 31, 2022, 428,926 shares have been repurchased under the repurchase program. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that: (1) the treasury stock repurchase program, as amended to increase the repurchase authorization to 1,000,000 shares, shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Company's Dividend Reinvestment and Stock Purchase Plan and its equity compensation program.

The following table sets forth a summary of the purchases by the Corporation of its common stock during the first quarter 2022.


	****		****			****	Total Number of	****	Maximum
							Shares		Number of
							Purchased		Shares that May
							as Part of		Yet
							Publicly		be Purchased
		Total Number		Average			Announced		Under
		of Shares		Price Paid			Plans		the Plans or
Period		Purchased		per Share			or Programs		Programs
January 1 - 31, 2022		10,000		$	25.00		309,059		690,941
February 1 - 28, 2022		23,413		$	24.88		332,472		667,528
March 1 - 31, 2022		96,454		$	24.83		428,926		571,074

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6. Exhibits

3.1	Articles of Incorporation	Filed herewith

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

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

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

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

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

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

31.1	Certification of Chief Executive Officer	Filed herewith

31.2	Certification of Chief Financial Officer	Filed herewith

32.	Section 1350 certifications	Filed herewith

101.	Interactive data file	Filed herewith

104.	Cover page interactive data file	Filed herewith

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

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

	CITIZENS & NORTHERN CORPORATION
May 6, 2022	By: /s/ J. Bradley Scovill
Date	President and Chief Executive Officer
May 6, 2022	By: /s/ Mark A. Hughes
Date	Treasurer and Chief Financial Officer

Exhibit 3.1

ARTICLES OF INCORPORATION

CITIZENS & NORTHERN CORPORATION

(conformed – as amended through May 2, 2022)

FIRST. The name of the Corporation is Citizens & Northern Corporation.

SECOND. The location and post office address of its registered office in this Commonwealth is 90-92 Main Street, Wellsboro, Pennsylvania 16901.

THIRD. The corporation is incorporated under the provisions of the Business Corporation Law, the Act approved May 5, 1933, P.L. 364, as amended. The purpose of the Corporation is and it shall have unlimited power to engage in and to do any lawful act concerning any or all lawful business for which corporations may be incorporated under such Act.

FOURTH. The term of the Corporation’s existence is perpetual.

FIFTH. The total number of shares of all classes of the capital stock that the Corporation has the authority to issue is 30,030,000, of which 30,000,000 shall be common stock, $1.00 par value per share, and 30,000 shall be preferred stock, $1,000.00 par value per share. The shares may be issued by the Corporation from time to time as authorized by the board of directors without the approval of the stockholders except as otherwise provided in this Article FIFTH or to the extent that such approval is required by governing law, rule or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value per share. Neither promissory notes nor further services shall constitute payment or part payment for the issuance of shares of the Corporation. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor or services actually performed for the Corporation or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the board of directors of the Corporation, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and non-assessable. In the case of a stock dividend, the part of the surplus of the Corporation that is transferred to stated capital upon the issuance of shares as a share dividend shall be deemed to be the consideration for their issuance.

Nothing contained in this Article FIFTH (or in any supplementary sections hereto) shall entitle the holders of any class of a series of capital stock to vote as a separate class or a series or to more than one vote per share; provided, that this restriction on voting separately by class or series shall not apply; (i) to any provision that would authorize the holders of preferred stock, voting as a class or series, to elect some members of the board of directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock, (ii) to any provision that would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Corporation with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) or properties or business in exchange for

securities of a corporation other than the Corporation if the preferred stock is exchanged for securities of such other corporation; (iii) to any amendment that would adversely change the specific terms of any class or series of capital stock as set forth in this Article FIFTH (or in any supplementary sections hereto), including any amendment that would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment that increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving Corporation in a merger or consolidation for the Corporation, shall not be considered to be such an adverse change.

A description of the different classes and series of the Corporation’s capital stock and a statement of the designations, and the relative rights, preferences and limitations of the shares of each class of and series of capital stock are as follows:

Common Stock. Except as provided in this Article FIFTH (or in any supplementary sections hereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holders.

Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to the dividends, out of any assets legally available for the payment of dividends.

In the event of any liquidation, dissolution, or winding up of the Corporation, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Corporation available for distribution remaining after: (i) payment or provision for payment of the Corporation’s debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Corporation. Each share of common stock shall have the same relative rights as and be identical in all respects with all other shares of common stock.

Preferred Stock.The board of directors is hereby authorized from time to time to provide by resolution for the issuance of shares of preferred stock for purposes of permitting the Corporation to participate in the TARP Capital Purchase Program (the “Program”) instituted by the United States Department of Treasury pursuant to the Emergency Economic Stabilization Act of 2008. Such preferred shares shall have only such voting rights, preferences, limitations and special rights, if any, as are necessary to enable the Corporation to participate in the Program, and shall be fixed by resolution of the board of directors.

Prior to the issuance of any preferred shares, a certificate, setting forth a copy of the resolution or resolutions of the board of directors, fixing and determining the rights and preferences thereof, shall be filed with the Commonwealth of Pennsylvania Department of State (“Department of State”) in the manner prescribed by the laws of the Commonwealth of Pennsylvania.

SIXTH. Each holder of record of Common Stock shall have the right to one vote for each share of Common Stock standing in his name on the books of the Corporation. A shareholder shall not be entitled to cumulate his votes for the election of directors.

SEVENTH. Proposals that a shareholder desires to submit at an annual or special meeting of the shareholders shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders provided, however, that if less than twenty-one (21) days notice of any meeting is given to shareholders then such proposal shall be mailed or delivered to the President of the Corporation not less than the seventh day following the day on which the notice of meeting was mailed. Any such proposal, and the purpose thereof, shall be set forth in full and shall include the name and address of the notifying shareholder and the number of shares held. Shareholder proposals not made in accordance herewith may, in the discretion of the chairman of the meeting, be disregarded.

EIGHTH. The management, control, and government of the Corporation shall be vested in a Board of Directors consisting of not less than five (5) nor more then twenty-five (25) members in number, to be fixed annually by the Board of Directors in connection with the election of directors at the Corporation’s annual meeting of shareholders. At times other than to fix the number of directors to be elected at the annual meeting, the Board may increase the size of the Board, but only by one (1) if the number of directors last elected by shareholders was fifteen (15) or less; or by up to two (2) if the number of directors last elected by shareholders was sixteen (16) or more, except that with the approval of at least 75% of the members of the entire Board of Directors a larger increase in the number of directors may be made, but in no event shall the number of directors ever exceed twenty-five (25).

NINTH. The directors of the Corporation shall be divided into three classes: Class I, Class II, and Class III. Each Class shall be as nearly equal in number as possible. The term of office of each Class shall be three (3) years, except for the initial Board of Directors whose terms shall be as follows: the term of office of the initial Class I directors shall expire at the annual election of directors by the shareholders of the Corporation in 1988; the term of office of the initial Class II directors shall expire at the annual election of directors by the shareholders of the Corporation in 1989; and the term of office of the initial Class III directors shall expire at the annual election of directors by the shareholders of the Corporation in 1990, so that, after the expiration of each such initial term, the terms of office of one class of directors shall expire each year when their respective successors have been duly elected by the shareholders and qualified. At each annual election of directors by the shareholders of the Corporation held during and after 1988, the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed. If a vacancy occurs on the Board of Directors of the Corporation, a majority of the remaining directors shall have the exclusive power to fill the vacancy by electing a director to hold office for the unexpired term in respect of which the vacancy occurred.

TENTH. Nomination for election to the Board of Directors may be made by the Board of Directors or by any shareholder of any outstanding class of capital stock of the Corporation entitled to cast a vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of the Corporation, shall be made in writing and shall be delivered or mailed to the President of the Corporation not less than fourteen (14) days nor more than fifty (50) days prior to any meeting of shareholders called for the election on directors provided, however, that if less than twenty-one (21) days notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Corporation not later than the close of business on the seventh day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (i) the name and address of each proposed nominee; (ii) the principal occupation of each proposed nominee; (iii) the total number of shares of capital stock of the Corporation that will be voted for the proposed nominee; (iv) the name and residence address of the notifying shareholder; and (v) the number of shares of capital stock of the Corporation owned by the notifying shareholder. Nominations not made in accordance herewith may, in the discretion of the chairman of the meeting, be disregarded and upon instructions from the chairman, the vote tellers may disregard all votes cast for each such nominee.

ELEVENTH. No holder of any class of capital stock of the Corporation shall have preemptive rights, and the Corporation shall have the right, upon the affirmative vote of 66-2/3% of the members of the entire Board of Directors of the Corporation acting at a meeting duly called and held for such specific purpose, to issue and to sell to any person or persons any shares of its capital stock or any option warrant or right to acquire capital stock, or any securities having conversion or option rights, without first offering such share, options, warrants, rights, or securities to any holders of any class of capital stock of the Corporation.

TWELFTH. The affirmative vote of shareholders of Common Stock entitled to cast 75% of the votes that all shareholders are entitled to cast shall be required to approve any of the following transactions:

(i)any merger or consolidation of the Corporation with or into any other corporation;

(ii)any share exchange in which a corporation, person, or entity acquires the issued or outstanding shares of capital stock of the Corporation pursuant to a vote of shareholders;

(iii)any sale, lease, exchange, or other transfer of all, or substantially all, of the assets of the Corporation to any other corporation, person or entity; or

(iv)any transaction similar to, or having similar effect as, any of the foregoing transactions.

In addition, if, in any such case, as of the record date for the determination of shareholders entitled to notice of and to vote on any such transaction, such other corporation, person, or entity is the beneficial owner, directly or indirectly, of more than five percent (5%) of the shares of Common Stock of the Corporation issued, outstanding, and entitled to vote as of such record date

(the “Acquiring Entity”), then the affirmative vote of Remaining Shareholders entitled to cast 75% of the votes that all Remaining Shareholders are entitled to cast thereon shall also be required to approve any such transaction. All shareholders of the Corporation other than the Acquiring Entity (and any other shareholders “affiliated with” the Acquiring Entity as the Board of Directors of the Corporation may determine) are defined as Remaining Shareholders. An affirmative vote as provided in the foregoing provisions shall be in lieu of the vote of the shareholders otherwise required by law.

The Board of Directors of the Corporation shall have the power and duty to determine, on the basis of information known to the Board, (a) if and when a corporation, person, or entity becomes an Acquiring Entity, (b) which shareholders of the Corporation shall be deemed Remaining Shareholders, and (c) if any transaction is similar to, or has a similar effect as, any of the transactions identified above in this ARTICLE TWELFTH. Any such determinations shall be conclusive and binding for all purposes of these ARTICLES.

The Corporation may voluntarily liquidate and/or dissolve only if the proposed liquidation and/or dissolution is approved by the affirmative vote of shareholders entitle to cast 75% of the votes that all shareholders are entitled to cast thereon.

The provisions of this ARTICLE TWELFTH shall not apply to any transaction that is approved in advance at a meeting of the Board of Directors of the Corporation duly called and held for such specific purpose, but only in the event that such transaction is approved at such meeting by 66-2/3% of the continuing Directors, defined as follows: (i) those directors who were elected as directors prior to the time that the Acquiring Entity became a beneficial owner, directly or indirectly, of more than ten percent (10%) of the outstanding shares of Common Stock of the Corporation, and (ii) those directors elected as directors by the Remaining Shareholders or by the other Continuing Directors.

THIRTEENTH. If any person or group of persons (as those terms are defined in the Securities Exchange Act of 1934 for purposes of determining persons or groups who would be required to file a statement on Schedule 13-D pursuant to such Act with respect to the acquisition or ownership of shares of a corporation subject to such Act) becomes the beneficial owner of 30% or more of the outstanding Common Stock of the Corporation (a “Control Person”) in a transaction or series of transactions, then prompt notice that 30%of the outstanding Common Stock of the Corporation has been acquired by the Control Person shall be given by the Control Person to each shareholder of record of the Corporation. If the Control Person so requests, the Corporation shall, at the option of the Corporation and at the expense of the Control Person, either furnish a list of all such shareholders to the Control Person or mail the notice to all such shareholders.

After 30% of the outstanding Common Stock of the Corporation has been acquired by the Control Person, any holder of Common Stock of the Corporation may, prior to or within a reasonable time after the notice required above is given, which time period may be specified in the notice, make written demand on the Control Person for payment of the amount provided below with respect to the Common Stock of the Corporation held by the shareholder, and the Control Person shall agree to pay that amount to the shareholder upon surrender of the share certificate or certificates representing such shares. The demand of the shareholder shall state the number, of

shares of Common Stock owned by him with respect to which the demand is made. Nothing contained in this section shall preclude a Control Person subject to this section from offering, whether in such notice or otherwise, to purchase Common Stock of the Corporation at a price other than that provided below, and nothing contained in this section shall preclude any shareholder from agreeing to sell his Common Stock at that or any other price to any person.

A shareholder making written demand as set forth above shall be entitled to receive cash for each of his shares of Common Stock in an amount equal to the fair value of each such share of Common Stock as of the day prior to the date on which the Control Person acquires 30% of the Corporation’s outstanding Common Stock, taking into account all relevant factors, including an increment representing a proportion of any value payable for acquisition of control of the Corporation. Either the Control Person or the shareholder may proceed under subsections F through I of section 515 of the Pennsylvania Business Corporation Law for a determination of the fair value of such shares. The date of notice of the acquisition of 30% of the Corporation’s outstanding Common Stock, or if no notice is give, the date of written demand made by the shareholder, shall be deemed to be the effective date of the plan, the shareholders who make written demand shall be deemed to be the dissenting shareholder, and the Control Person shall be deemed to be the Corporation for purposes of those subsections.

Notwithstanding the foregoing, the provisions of this ARTICLE THIRTEENTH shall not apply if 66-2/3% or more of the members of the entire Board of Directors of the Corporation approve in advance the acquisition of beneficial ownership by such Control Person of 30% of the Corporation’s outstanding Common Stock.

FOURTEENTH. No action required to be taken or that may be taken at any annual or special meeting of shareholders of the Corporation may be taken without a meeting, and the power of the shareholders of the Corporation to consent in writing to action without a meeting is specifically denied. The presence, in person or by proxy, of shareholders entitled to cast at least 50% of the votes that all shareholders are entitled to cast shall constitute a quorum of shareholders at any annual or special meeting of shareholders of the Corporation.

FIFTEENTH. The authority to make, amend, alter, change, or repeal the By-laws of the Corporation is hereby expressly and solely granted to and vested in the Board of Directors of the Corporation, subject always to the power of the shareholders to make, amend, alter, change, or repeal the By-laws of the Corporation by the affirmative vote of shareholders of Common Stock of the Corporation entitled to cast 75% of the votes that all shareholders are entitled to cast thereon; except that the By-laws may not be amended to increase the directors’ exposure to liability or decrease the indemnification available for directors, officers and others except by the affirmative vote of 75% of the entire Board of Directors or by the affirmative vote of shareholders of Common Stock of the Corporation entitled to cast 75% of the votes that all shareholders are entitled to cast thereon.

SIXTEENTH. The Board of Directors of the Corporation, when evaluating any offer of another party to (a) make a tender or exchange offer for any equity security of the Corporation, (b) merge or consolidate the Corporation with another corporation, (c) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, or (d) engage in any transaction similar to, or having similar effects as, any of the foregoing transactions, may, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation the social and economic effects of the proposed transaction in the depositors, employees, suppliers, customers, and other constituents of the Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located, the business reputation of the other party, and the Board of Directors’ evaluation of the then value of the Corporation in a freely negotiated sale and of the future prospects of the Corporation as an independent entity.

SEVENTEENTH. The Corporation reserves the right to amend, alter, change, or repeal any provision contained in its Articles of Incorporation in the manner now or hereafter prescribed by statute and all rights conferred upon shareholders and directors herein are hereby granted subject to this reservation provided, however, that the provisions set forth in this ARTICLE SEVENTEENTH and in ARTICLES EIGHTH, NINTH, TWELFTH, THIRTEENTH, FOURTEENTH, FIFTEENTH, and SIXTEENTH of these Articles of Incorporation may not be repealed, altered, or amended, in any respect whatsoever, unless such repeal, alteration, or amendment is approved by either:

(a)	the affirmative vote of shareholders of Common Stock entitled to cast 75% of the votes entitled to be cast thereon and 75% of the votes entitled to be cast by the Remaining Shareholders (as defined in ARTICLE TWELFTH),

(b)	the affirmative vote of 66-2/3% of the members of the Board of Directors of the Corporation who are Continuing Directors (as defined in ARTICLE TWELFTH) and the affirmative vote of shareholders of Common Stock entitled to cast a majority of the votes that all shareholders are entitled to cast thereon.

EIGHTEENTH. The Incorporator of the Corporation is William K. Francis, whose post office address is 56 Pearl Street, Wellsboro, Pennsylvania 16901, and who has subscribed to one (1) share of the Common Stock of the Corporation.

NINETEENTH. Any or all classes and series of shares, or any part thereof, may be represented by uncertificated shares, except that shares represented by a certificate that is issued and outstanding shall continue to be represented thereby until the certificate is surrendered to the Corporation

CERTIFICATE OF DESIGNATIONS

FIXED RATE CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A

CITIZENS & NORTHERN CORPORATION

Citizens & Northern Corporation, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Corporation"), in accordance with the provisions of Section 1522(b) of the Pennsylvania Business Corporation Law of 1988, as amended, does hereby certify:

The board of directors of the Corporation (the "Board of Directors") or an applicable committee of the Board of Directors, in accordance with the Articles of Incorporation and Bylaws of the Corporation and applicable law, adopted the following resolution on January 9, 2009 creating a series of 26,440 shares of Preferred Stock of the Corporation designated as "Fixed Rate Cumulative Perpetual Preferred Stock, Series A”.

RESOLVED, that pursuant to the provisions of the Articles of Incorporation and Bylaws of the Corporation and applicable law, a series of Preferred Stock, par value $1,000.00 per share, of the Corporation be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:

Part 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Corporation a series of preferred stock designated as the "Fixed Rate Cumulative Perpetual Preferred Stock, Series A*"* (the "Designated Preferred Stock"). The authorized number of shares of Designated Preferred Stock shall be 26,440.

Part 2. Standard Provisions. The Standard Provisions contained in Annex A attached hereto are incorporated herein by reference in their entirety and shall be deemed to be a part of this Certificate of Designations to the same extent as if such provisions had been set forth in full herein.

Part 3. Definitions. The following terms are used in this Certificate of Designations (including the Standard Provisions in Annex A hereto) as defined below:

(a)"Common Stock" means the common stock, par value $1.00 per share, of the Corporation.

UST Seq. #419

(b)"Dividend Payment Date" means February 15, May 15, August 15 and

November 15 of each year.

(c)"Junior Stock" means the Common Stock and any other class or series of stock of the Corporation the terms of which expressly provide that it ranks junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation.

(d)"Liquidation Amount" means $1,000.00 per share of Designated Preferred Stock.

(e)"Minimum Amount" means $6,610,000.00.

(f)"Parity Stock" means any class or series of stock of the Corporation (other than Designated Preferred Stock) the terms of which do not expressly provide that such class or series will rank senior or junior to Designated Preferred Stock as to dividend rights and/or as to rights on liquidation, dissolution or winding up of the Corporation (in each case without regard to whether dividends accrue cumulatively or non-cumulatively).

(g)"Signing Date" means January 16, 2009.

Part 4. Certain Voting Matters. Holders of shares of Designated Preferred Stock will be entitled to one vote for each such share on any matter on which holders of Designated Preferred Stock are entitled to vote, including any action by written consent.

IN WITNESS WHEREOF, Citizens & Northern Corporation has caused this Certificate of Designations to be signed by its President and Chief Executive Officer this 12^th^ day of January, 2009.

CITIZENS & NORTHERN CORPORATION

By: /s/ Craig G. Litchfield

Craig G. Litchfield, President &CEO

UST Seq. #419

ANNEX A

STANDARD PROVISIONS

Section 1.General Matters. Each share of Designated Preferred Stock shall be identical in all respects to every other share of Designated Preferred Stock. The Designated Preferred Stock shall be perpetual, subject to the provisions of Section 5 of these Standard Provisions that form a part of the Certificate of Designations. The Designated Preferred Stock shall rank equally with Parity Stock and shall rank senior to Junior Stock with respect to the payment of dividends and the distribution of assets in the event of any dissolution, liquidation or winding up of the Corporation.

Section 2.Standard Definitions. As used herein with respect to Designated Preferred Stock:

(a)"Applicable Dividend Rate" means (i) during the period from the Original Issue Date to, but excluding, the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 5% per annum and (ii) from and after the first day of the first Dividend Period commencing on or after the fifth anniversary of the Original Issue Date, 9% per annum.

(b)"Appropriate Federal Banking Agency" means the "appropriate Federal banking agency" with respect to the Corporation as defined in Section 3(q) of the Federal Deposit Insurance Act (12 U.S.C. Section 1813(q)), or any successor provision.

(c)"Business Combination" means a merger, consolidation, statutory share exchange or similar transaction that requires the approval of the Corporation's stockholders.

(d)"Business Day" means any day except Saturday, Sunday and any day on which banking institutions in the State of New York generally are authorized or required by law or other governmental actions to close.

(e)"Bylaws" means the bylaws of the Corporation, as they may be amended from time to time.

(f)"Certificate of Designations" means the Certificate of Designations or comparable instrument relating to the Designated Preferred Stock, of which these Standard Provisions form a part, as it may be amended from time to time.

(g)"Charter" means the Corporation's certificate or articles of incorporation, articles of association, or similar organizational document.

(h)"Dividend Period" has the meaning set forth in Section 3(a).

UST Seq. #419 A-1

(i)"Dividend Record Date" has the meaning set forth in Section 3(a).

(j)"Liquidation Preference" has the meaning set forth in Section 4(a).

(k)"Original Issue Date" means the date on which shares of Designated Preferred Stock are first issued.

(1)"Preferred Director" has the meaning set forth in Section 7(b).

(m)"Preferred Stock" means any and all series of preferred stock of the Corporation, including the Designated Preferred Stock.

(n)"Qualified Equity Offering" means the sale and issuance for cash by the Corporation to persons other than the Corporation or any of its subsidiaries after the Original Issue Date of shares of perpetual Preferred Stock, Common Stock or any combination of such stock, that, in each case, qualify as and may be included in Tier 1 capital of the Corporation at the time of issuance under the applicable risk-based capital guidelines of the Corporation's Appropriate Federal Banking Agency (other than any such sales and issuances made pursuant to agreements or arrangements entered into, or pursuant to financing plans which were publicly announced, on or prior to October 13, 2008).

(o)"Share Dilution Amount" has the meaning set forth in Section 3(b).

(p)"Standard Provisions" mean these Standard Provisions that form a part of the Certificate of Designations relating to the Designated Preferred Stock.

(q)"Successor Preferred Stock" has the meaning set forth in Section 5(a).

(r)"Voting Parity Stock" means, with regard to any matter as to which the holders of Designated Preferred Stock are entitled to vote as specified in Sections 7(a) and 7(b) of these Standard Provisions that form a part of the Certificate of Designations, any and all series of Parity Stock upon which like voting rights have been conferred and are exercisable with respect to such matter.

Section 3.Dividends.

(a)Rate. Holders of Designated Preferred Stock shall be entitled to receive, on each share of Designated Preferred Stock if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors, but only out of assets legally available therefor, cumulative cash dividends with respect to each Dividend Period (as defined below) at a rate per annum equal to the Applicable Dividend Rate on (i) the Liquidation Amount per

A-2 UST Seq. #419

share of Designated Preferred Stock and (ii) the amount of accrued and unpaid dividends for any prior Dividend Period on such share of Designated Preferred Stock, if any. Such dividends shall begin to accrue and be cumulative from the Original Issue Date, shall compound on each subsequent Dividend Payment Date (i.e., no dividends shall accrue on other dividends unless and until the first Dividend Payment Date for such other dividends has passed without such other dividends having been paid on such date) and shall be payable quarterly in arrears on each Dividend Payment Date, commencing with the first such Dividend Payment Date to occur at least 20 calendar days after the Original Issue Date. In the event that any Dividend Payment Date would otherwise fall on a day that is not a Business Day, the dividend payment due on that date will be postponed to the next day that is a Business Day and no additional dividends will accrue as a result of that postponement. The period from and including any Dividend Payment Date to, but excluding, the next Dividend Payment Date is a "Dividend Period", provided that the initial Dividend Period shall be the period from and including the Original Issue Date to, but excluding, the next Dividend Payment Date.

Dividends that are payable on Designated Preferred Stock in respect of any Dividend Period shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The amount of dividends payable on Designated Preferred Stock on any date prior to the end of a Dividend Period, and for the initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months, and actual days elapsed over a 30-day month.

Dividends that are payable on Designated Preferred Stock on any Dividend Payment Date will be payable to holders of record of Designated Preferred Stock as they appear on the stock register of the Corporation on the applicable record date, which shall be the 15th calendar day immediately preceding such Dividend Payment Date or such other record date fixed by the Board of Directors or any duly authorized committee of the Board of Directors that is not more than 60 nor less than 10 days prior to such Dividend Payment Date (each, a "Dividend Record Date"). Any such day that is a Dividend Record Date shall be a Dividend Record Date whether or not such day is a Business Day.

Holders of Designated Preferred Stock shall not be entitled to any dividends, whether payable in cash, securities or other property, other than dividends (if any) declared and payable on Designated Preferred Stock as specified in this Section 3 (subject to the other provisions of the Certificate of Designations).

(b)Priority of Dividends. So long as any share of Designated Preferred Stock remains outstanding, no dividend or distribution shall be declared or paid on the Common Stock or any other shares of Junior Stock (other than dividends payable solely in shares of Common Stock) or Parity Stock, subject to the immediately following paragraph in the case of Parity Stock, and no Common Stock, Junior Stock or Parity Stock shall be, directly or indirectly, purchased, redeemed or otherwise acquired for consideration by the Corporation or any of its subsidiaries unless all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above,

A-3 UST Seq. #419

dividends on such amount), on all outstanding shares of Designated Preferred Stock have been or are contemporaneously declared and paid in full (or have been declared and a sum sufficient for the payment thereof has been set aside for the benefit of the holders of shares of Designated Preferred Stock on the applicable record date). The foregoing limitation shall not apply to (i) redemptions, purchases or other acquisitions of shares of Common Stock or other Junior Stock in connection with the administration of any employee benefit plan in the ordinary course of business (including purchases to offset the Share Dilution Amount (as defined below) pursuant to a publicly announced repurchase plan) and consistent with past practice, provided that any purchases to offset the Share Dilution Amount shall in no event exceed the Share Dilution Amount; (ii) purchases or other acquisitions by a broker-dealer subsidiary of the Corporation solely for the purpose of market-making, stabilization or customer facilitation transactions in Junior Stock or Parity Stock in the ordinary course of its business; (iii) purchases by a broker- dealer subsidiary of the Corporation of capital stock of the Corporation for resale pursuant to an offering by the Corporation of such capital stock underwritten by such broker-dealer subsidiary; (iv) any dividends or distributions of rights or Junior Stock in connection with a stockholders' rights plan or any redemption or repurchase of rights pursuant to any stockholders' rights plan; (v) the acquisition by the Corporation or any of its subsidiaries of record ownership in Junior Stock or Parity Stock for the beneficial ownership of any other persons (other than the Corporation or any of its subsidiaries), including as trustees or custodians; and (vi) the exchange or conversion of Junior Stock for or into other Junior Stock or of Parity Stock for or into other Parity Stock (with the same or lesser aggregate liquidation amount) or Junior Stock, in each case, solely to the extent required pursuant to binding contractual agreements entered into prior to the Signing Date or any subsequent agreement for the accelerated exercise, settlement or exchange thereof for Common Stock. "Share Dilution Amount" means the increase in the number of diluted shares outstanding (determined in accordance with generally accepted accounting principles in the United States, and as measured from the date of the Corporation's consolidated financial statements most recently filed with the Securities and Exchange Commission prior to the Original Issue Date) resulting from the grant, vesting or exercise of equity-based compensation to employees and equitably adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction.

When dividends are not paid (or declared and a sum sufficient for payment thereof set aside for the benefit of the holders thereof on the applicable record date) on any Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within a Dividend Period related to such Dividend Payment Date) in full upon Designated Preferred Stock and any shares of Parity Stock, all dividends declared on Designated Preferred Stock and all such Parity Stock and payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) shall be declared pro rata so that the respective amounts of such dividends declared shall bear the same ratio to each other as all accrued and unpaid dividends per share on the shares of Designated Preferred Stock (including, if applicable as provided in Section 3(a) above, dividends on such amount) and all

A-4 UST Seq. #419

Parity Stock payable on such Dividend Payment Date (or, in the case of Parity Stock having dividend payment dates different from the Dividend Payment Dates, on a dividend payment date falling within the Dividend Period related to such Dividend Payment Date) (subject to their having been declared by the Board of Directors or a duly authorized committee of the Board of Directors out of legally available funds and including, in the case of Parity Stock that bears cumulative dividends, all accrued but unpaid dividends) bear to each other. If the Board of Directors or a duly authorized committee of the Board of Directors determines not to pay any dividend or a full dividend on a Dividend Payment Date, the Corporation will provide written notice to the holders of Designated Preferred Stock prior to such Dividend Payment Date.

Subject to the foregoing, and not otherwise, such dividends (payable in cash, securities or other property) as may be determined by the Board of Directors or any duly authorized committee of the Board of Directors may be declared and paid on any securities, including Common Stock and other Junior Stock, from time to time out of any funds legally available for such payment, and holders of Designated Preferred Stock shall not be entitled to participate in any such dividends.

Section 4.Liquidation Rights

(a)Voluntary or Involuntary Liquidation. In the event of any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Designated Preferred Stock shall be entitled to receive for each share of Designated Preferred Stock, out of the assets of the Corporation or proceeds thereof (whether capital or surplus) available for distribution to stockholders of the Corporation, subject to the rights of any creditors of the Corporation, before any distribution of such assets or proceeds is made to or set aside for the holders of Common Stock and any other stock of the Corporation ranking junior to Designated Preferred Stock as to such distribution, payment in full in an amount equal to the sum of (i) the Liquidation Amount per share and (ii) the amount of any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount), whether or not declared, to the date of payment (such amounts collectively, the "Liquidation Preference").

(b)Partial Payment. If in any distribution described in Section 4(a) above the assets of the Corporation or proceeds thereof are not sufficient to pay in full the amounts payable with respect to all outstanding shares of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as to such distribution, holders of Designated Preferred Stock and the holders of such other stock shall share ratably in any such distribution in proportion to the full respective distributions to which they are entitled.

(c)Residual Distributions. If the Liquidation Preference has been paid in full to all holders of Designated Preferred Stock and the corresponding amounts payable with respect of any other stock of the Corporation ranking equally with Designated Preferred Stock as UST Seq. #419

A-5

to such distribution has been paid in full, the holders of other stock of the Corporation shall be entitled to receive all remaining assets of the Corporation (or proceeds thereof) according to their respective rights and preferences.

(d)Merger, Consolidation and Sale of Assets Not Liquidation. For purposes of this Section 4, the merger or consolidation of the Corporation with any other corporation or other entity, including a merger or consolidation in which the holders of Designated Preferred Stock receive cash, securities or other property for their shares, or the sale, lease or exchange (for cash, securities or other property) of all or substantially all of the assets of the Corporation, shall not constitute a liquidation, dissolution or winding up of the Corporation.

Section 5.Redemption.

(a)Optional Redemption. Except as provided below, the Designated Preferred Stock may not be redeemed prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date. On or after the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, out of funds legally available therefor, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption.

Notwithstanding the foregoing, prior to the first Dividend Payment Date falling on or after the third anniversary of the Original Issue Date, the Corporation, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem, in whole or in part, at any time and from time to time, the shares of Designated Preferred Stock at the time outstanding, upon notice given as provided in Section 5(c) below, at a redemption price equal to the sum of (i) the Liquidation Amount per share and (ii) except as otherwise provided below, any accrued and unpaid dividends (including, if applicable as provided in Section 3(a) above, dividends on such amount) (regardless of whether any dividends are actually declared) to, but excluding, the date fixed for redemption; provided that (x) the Corporation (or any successor by Business Combination) has received aggregate gross proceeds of not less than the Minimum Amount (plus the "Minimum Amount" as defined in the relevant certificate of designations for each other outstanding series of preferred stock of such successor that was originally issued to the United States Department of the Treasury (the "Successor Preferred Stock") in connection with the Troubled Asset Relief Program Capital Purchase Program) from one or more Qualified Equity Offerings (including Qualified Equity Offerings of such successor), and (y) the aggregate redemption price of the Designated Preferred Stock (and any Successor Preferred Stock) redeemed pursuant to this paragraph may not exceed the aggregate net cash proceeds received by the Corporation (or any successor by Business Combination) from such Qualified Equity Offerings (including Qualified Equity Offerings of such successor).

UST Seq. #419

A-6

The redemption price for any shares of Designated Preferred Stock shall be payable on the redemption date to the holder of such shares against surrender of the certificate(s) evidencing such shares to the Corporation or its agent. Any declared but unpaid dividends payable on a redemption date that occurs subsequent to the Dividend Record Date for a Dividend Period shall not be paid to the holder entitled to receive the redemption price on the redemption date, but rather shall be paid to the holder of record of the redeemed shares on such Dividend Record Date relating to the Dividend Payment Date as provided in Section 3 above.

(b)No Sinking Fund. The Designated Preferred Stock will not be subject to any mandatory redemption, sinking fund or other similar provisions. Holders of Designated Preferred Stock will have no right to require redemption or repurchase of any shares of Designated Preferred Stock.

(c)Notice of Redemption. Notice of every redemption of shares of Designated Preferred Stock shall be given by first class mail, postage prepaid, addressed to the holders of record of the shares to be redeemed at their respective last addresses appearing on the books of the Corporation. Such mailing shall be at least 30 days and not more than 60 days before the date fixed for redemption. Any notice mailed as provided in this Subsection shall be conclusively presumed to have been duly given, whether or not the holder receives such notice, but failure duly to give such notice by mail, or any defect in such notice or in the mailing thereof, to any holder of shares of Designated Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Designated Preferred Stock. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any other similar facility, notice of redemption may be given to the holders of Designated Preferred Stock at such time and in any manner permitted by such facility. Each notice of redemption given to a holder shall state: (1) the redemption date; (2) the number of shares of Designated Preferred Stock to be redeemed and, if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price; and (4) the place or places where certificates for such shares are to be surrendered for payment of the redemption price.

(d)Partial Redemption. In case of any redemption of part of the shares of Designated Preferred Stock at the time outstanding, the shares to be redeemed shall be selected either pro rata or in such other manner as the Board of Directors or a duly authorized committee thereof may determine to be fair and equitable. Subject to the provisions hereof, the Board of Directors or a duly authorized committee thereof shall have full power and authority to prescribe the terms and conditions upon which shares of Designated Preferred Stock shall be redeemed from time to time. If fewer than all the shares represented by any certificate are redeemed, a new certificate shall be issued representing the unredeemed shares without charge to the holder thereof.

(e)Effectiveness of Redemption. If notice of redemption has been duly given and if on or before the redemption date specified in the notice all funds necessary for the redemption have been deposited by the Corporation, in trust for the pro rata benefit of the

UST Seq. #419A-7

holders of the shares called for redemption, with a bank or trust company doing business in the Borough of Manhattan, The City of New York, and having a capital and surplus of at least $500 million and selected by the Board of Directors, so as to be and continue to be available solely therefor, then, notwithstanding that any certificate for any share so called for redemption has not been surrendered for cancellation, on and after the redemption date dividends shall cease to accrue on all shares so called for redemption, all shares so called for redemption shall no longer be deemed outstanding and all rights with respect to such shares shall forthwith on such redemption date cease and terminate, except only the right of the holders thereof to receive the amount payable on such redemption from such bank or trust company, without interest. Any funds unclaimed at the end of three years from the redemption date shall, to the extent permitted by law, be released to the Corporation, after which time the holders of the shares so called for redemption shall look only to the Corporation for payment of the redemption price of such shares.

(f)Status of Redeemed Shares. Shares of Designated Preferred Stock that are

redeemed, repurchased or otherwise acquired by the Corporation shall revert to authorized but unissued shares of Preferred Stock (provided that any such cancelled shares of Designated Preferred Stock may be reissued only as shares of any series of Preferred Stock other than Designated Preferred Stock).

Section 6.Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Section 7.Voting Rights.

(a)General. The holders of Designated Preferred Stock shall not have any voting rights except as set forth below or as otherwise from time to time required by law.

(b)Preferred Stock Directors. Whenever, at any time or times, dividends payable on the shares of Designated Preferred Stock have not been paid for an aggregate of six quarterly Dividend Periods or more, whether or not consecutive, the authorized number of directors of the Corporation shall automatically be increased by two and the holders of the Designated Preferred Stock shall have the right, with holders of shares of any one or more other classes or series of Voting Parity Stock outstanding at the time, voting together as a class, to elect two directors (hereinafter the "Preferred Directors" and each a "Preferred Director") to fill such newly created directorships at the Corporation's next annual meeting of stockholders (or at a special meeting called for that purpose prior to such next annual meeting) and at each subsequent annual meeting of stockholders until all accrued and unpaid dividends for all past Dividend Periods, including the latest completed Dividend Period (including, if applicable as provided in Section 3(a) above, dividends on such amount), on all outstanding shares of Designated Preferred Stock have been declared and paid in full at which time such right shall terminate with respect to the Designated Preferred Stock, except as herein or by law expressly provided, subject to revesting in the event of each and every subsequent default of the character above mentioned; provided that it shall be a qualification for election for any Preferred Director that UST Seq. #419A-8

the election of such Preferred Director shall not cause the Corporation to violate any corporate governance requirements of any securities exchange or other trading facility on which securities of the Corporation may then be listed or traded that listed or traded companies must have a majority of independent directors. Upon any termination of the right of the holders of shares of Designated Preferred Stock and Voting Parity Stock as a class to vote for directors as provided above, the Preferred Directors shall cease to be qualified as directors, the term of office of all Preferred Directors then in office shall terminate immediately and the authorized number of directors shall

be reduced by the number of Preferred Directors elected pursuant hereto. Any Preferred Director may be removed at any time, with or without cause, and any vacancy created thereby may be filled, only by the affirmative vote of the holders a majority of the shares of Designated Preferred Stock at the time outstanding voting separately as a class together with the holders of shares of Voting Parity Stock, to the extent the voting rights of such holders described above are then exercisable. If the office of any Preferred Director becomes vacant for any reason other than removal from office as aforesaid, the remaining Preferred Director may choose a successor who shall hold office for the unexpired term in respect of which such vacancy occurred.

(c)Class Voting Rights as to Particular Matters. So long as any shares of Designated Preferred Stock are outstanding, in addition to any other vote or consent of stockholders required by law or by the Charter, the vote or consent of the holders of at least 66 2/3% of the shares of Designated Preferred Stock at the time outstanding, voting as a separate class, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, shall be necessary for effecting or validating:

(i)Authorization of Senior Stock. Any amendment or alteration of the Certificate of Designations for the Designated. Preferred Stock or the Charter to authorize or create or increase the authorized amount of, or any issuance of, any shares of, or any securities convertible into or exchangeable or exercisable for shares of, any class or series of capital stock of the Corporation ranking senior to Designated Preferred Stock with respect to either or both the payment of dividends and/or the distribution of assets on any liquidation, dissolution or winding up of the Corporation;

(ii)Amendment of Designated Preferred Stock. Any amendment, alteration or repeal of any provision of the Certificate of Designations for the Designated Preferred Stock or the Charter (including, unless no vote on such merger or consolidation is required by Section 7(c)(iii) below, any amendment, alteration or repeal by means of a merger, consolidation or otherwise) so as to adversely affect the rights, preferences, privileges or voting powers of the Designated Preferred Stock; or

A-9 UST Seq. #419

(iii)Share Exchanges, Reclassifications, Mergers and Consolidations. Any consummation of a binding share exchange or reclassification involving the Designated Preferred Stock, or of a merger or consolidation of the Corporation with another corporation or other entity, unless in each case (x) the shares of Designated Preferred Stock remain outstanding or, in the case of any such merger or consolidation with respect to which the Corporation is not the surviving or resulting entity, are converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such shares remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, and limitations and restrictions thereof, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers, and limitations and restrictions thereof, of Designated Preferred Stock immediately prior to such consummation, taken as a whole;

provided, however, that for all purposes of this Section 7(c), any increase in the amount of the authorized Preferred Stock, including any increase in the authorized amount of Designated Preferred Stock necessary to satisfy preemptive or similar rights granted by the Corporation to other persons prior to the Signing Date, or the creation and issuance, or an increase in the authorized or issued amount, whether pursuant to preemptive or similar rights or otherwise, of any other series of Preferred Stock, or any securities convertible into or exchangeable or exercisable for any other series of Preferred Stock, ranking equally with and/or junior to Designated Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and the distribution of assets upon liquidation, dissolution or winding up of the Corporation will not be deemed to adversely affect the rights, preferences, privileges or voting powers, and shall not require the affirmative vote or consent of, the holders of outstanding shares of the Designated Preferred Stock.

(d)Changes after Provision for Redemption. No vote or consent of the holders of Designated Preferred Stock shall be required pursuant to Section 7(c) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such Section, all outstanding shares of the Designated Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been deposited in trust for such redemption, in each case pursuant to Section 5 above.

(e)Procedures for Voting and Consents. The rules and procedures for calling and conducting any meeting of the holders of Designated Preferred Stock (including, without limitation, the fixing of a record date in connection therewith), the solicitation and use of proxies at such a meeting, the obtaining of written consents and any other aspect or matter with regard to such a meeting or such consents shall be governed by any rules of the Board of Directors or any duly authorized committee of the Board of Directors, in its discretion, may adopt from time to

UST Seq. #419

A-10

time, which rules and procedures shall conform to the requirements of the Charter, the Bylaws, and applicable law and the rules of any national securities exchange or other trading facility on which Designated Preferred Stock is listed or traded at the time.

Section 8.Record Holders. To the fullest extent permitted by applicable law, the Corporation and the transfer agent for Designated Preferred Stock may deem and treat the record holder of any share of Designated Preferred Stock as the true and lawful owner thereof for all purposes, and neither the corporation nor such transfer agent shall be affected by any notice to the contrary.

Section 9.Notices. All notices or communications in respect of Designated Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in this Certificate of Designations, in the Charter or Bylaws or by applicable law. Notwithstanding the foregoing, if shares of Designated Preferred Stock are issued in book-entry form through The Depository Trust Corporation or any similar facility, such notices may be given to the holders of Designated Preferred Stock in any manner permitted by such facility.

Section 10.No Preemptive Rights. No shares of Designated Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Corporation, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated, issued or granted.

Section 11.Replacement Certificates. The Corporation shall replace any mutilated certificate at the holder’s expense upon surrender of that certificate to the Corporation. The Corporation shall replace certificates that become destroyed, stolen or lost at the holder’s expense upon delivery to the Corporation of reasonably satisfactory evidence that the certificate has been destroyed, stolen or lost, together with any indemnity that may be reasonably required by the Corporation.

Section 12.Other Rights. The shares of Designated Preferred Stock shall not have any rights, preferences, privileges or voting powers or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Charter or as provided by applicable law.

A-11

UST Seq. #419

Exhibit 31.1

CERTIFICATION

I, J. Bradley Scovill, certify that:

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

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

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

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

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

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

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

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

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

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

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


May 6, 2022	By:	/s/ J. Bradley Scovill
Date		President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION

I, Mark A. Hughes, certify that:

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

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

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

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

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

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

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

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

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

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

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


May 6, 2022	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

Exhibit 32

SECTION 1350 CERTIFICATIONS

In connection with the Quarterly Report of Citizens & Northern Corporation (the “Corporation”) on Form 10-Q for the quarterly period ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to each of the undersigned’s best knowledge and belief:

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

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


May 6, 2022	By:	/s/ J. Bradley Scovill
Date		President and Chief Executive Officer

May 6, 2022	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

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

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